Companies are in a constant battle with one another to innovate and capture market share. As they do so, it is important for them to engage in two competing behaviours: exploration and exploitation.

Exploration is about discovering new opportunities and enhancing learning. This kind of activity is characterised by knowledge creation, risk taking, experimentation, and innovation. In contrast, exploitation leverages existing knowledge and technologies to commercialise established products or product extensions or enter new markets at lower costs. This kind of activity is focused on product or market refinements, efficiency improvements, and, as Levinthal and March described it, the “use and development of things already known.”

Companies strive to attain the appropriate balance between exploration and exploitation but are often compelled to act within constraints that create tendencies toward one or the other. Researchers have shown that corporate governance mechanisms can incentivise exploratory behaviour. For example, companies can structure their executive compensation packages to encourage exploration or stack their boards with individuals who support exploratory activities. What we don’t know is how certain shareholders might encourage, or hinder, exploratory behaviour by companies they own.

Viewing exploratory joint ventures through the lens of the contracts they demand, we theorised that when it comes to exploration or exploitation, all shareholders are not created equal. In a recent article, we found that dedicated investors, whom some have called “high-quality investors,” enable formation of exploratory joint ventures, and their influence is especially profound when there are transient investors who also own appreciable shares of the company.

Powerful shareholders, like Carl Icahn and George Soros, can and do influence the strategies of firms in their portfolios. However, their influence is less obvious when outcomes are difficult to predict from the beginning. This is likely to be the case for exploratory behaviour because, despite its upside potential, exploration is associated with considerable uncertainty, complexity, and long payback periods. Many shareholders may be unable to evaluate the latent potential of such activity at the outset, and thus they may be commensurately uncertain about exploratory behaviour.

Research has shown that support for exploration can be affected by the type of investor, with short-term or “transient” institutional investors favouring exploitation and long-term or “dedicated” institutional investors more likely to be champions of exploration. These findings show investor makeup can have huge implications for the types of activities companies undertake—but what happens when organisations are made up of both types of investors?

It could be that they just cancel each other out or that the dedicated investors can never gain traction because they are always countered by the transient investors. We suggest and find, though, that it is the dedicated investors that predominate when both are present. Stated differently, the transient investors appear to look to the dedicated investors for guidance, and they follow the lead of the dedicated investors. After all, the dedicated investors know much more about the company and its long-term plans and investments because these are the investors that are in it for the long haul.

Dedicated investors are especially amenable to exploration because of their ability to study, learn, and understand the consequences of such behaviour. These investors are known for maintaining concentrated holdings in a small number of firms for an extended period of time, and for being relatively impervious to short-term earnings. These characteristics make dedicated investors well suited to being closely connected to managers at firms where they are invested, which facilitates exploratory behaviour.

In contrast, transient investors are known for holding diverse stakes in a wide range of firms, frequently moving in and out of individual stocks, and being extremely sensitive to short-term earnings. These characteristics make transient investors concerned about exploratory behaviour because they are not well attuned to its benefits for the company and they may not be around long enough to reap its rewards.

We tested our ideas in the context of joint ventures among publicly-traded companies in the United States. Joint ventures are an integral component of the competitive landscape and a tool that many firms use to create value. This is an apropos venue for evaluating shareholder influence because of the clear difference between exploratory and exploitative joint ventures.

Exploratory joint ventures involve significantly more experimentation and change relative to exploitative joint ventures. In exploratory joint ventures, exchange hazards from partner opportunism are compounded by heightened risks arising from task and market uncertainties, in part because there is a possibility of failure due to a partner’s action (or non-action). Exploratory joint ventures bring together partners with synergistic capabilities but not always with an end in mind. As such, contractual arrangements between them need to be intentionally fluid to allow the JV to pivot in response to new discoveries and changing conditions.

Exploitative joint ventures are just the opposite. They have relatively low uncertainty, which reduces the need for updating of exploitative joint venture contracts. Most of the information in exploitative JV strategies is known, so combining this information is generally contractible before the deal is struck. Contract completeness is more likely because residual rights and obligations can be specified in advance.

Strategy scholars have long contemplated how managers approach the difficult task of forming exploratory joint ventures.  The ability to do so is challenging because decisions are difficult to reverse (owing to sizeable outlays) and outcomes are largely dependent on a partner. In this study, we uncovered a key constraint on how managers choose between strategies of exploration or exploitation, empirically examining this in the context of joint venture establishment.



  • This blog post is based on the author’s paper “Shareholder Influence on Joint Venture Exploration,” with Wei Shi, Robert Hoskisson, and Balaji Koka , Journal of Management.
  • The post expresses the views of its author(s), not the position of LSE Business Review or the London School of Economics.
  • Featured image by geralt, under a Pixabay licence
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Brian Connelly is professor and Luck Eminent Scholar at Auburn University’s Harbert College of Business and is editor-elect for the Journal of Management. His research interests reside at the intersection of corporate governance and competitive dynamics. He holds a PhD in management from Texas A&M University and has two decades of experience in engineering and international business with companies such as Westinghouse and Hughes.