How does frugal innovation help young firms in the US? The moderating roles of venture capital investment and debt financing

Abstract

This study examines the effects of frugal innovation on firm performance among young firms located in the U.S. Though frugal innovation is a concept that originated from innovation practices among emerging market firms, firms in the developed economies have absorbed a frugal mindset and are regularly exercising frugal innovation. We develop a framework for frugal innovation by building on entrepreneurial bricolage theory. One of our research findings shows that young firms in the U.S. find frugal innovation useful in gaining firm performance. In addition, interaction effects on firm performance are tested; those between frugal innovation and venture capital (VC) equity financing and frugal innovation and debt financing are found to be significant. Both moderators are found to weaken the positive effects on firm performance. These findings are interesting because we had initially hypothesized that the interaction effect on firm performance of frugal innovation and VC equity financing would be positive while the moderator that includes debt financing would be negative. This paper contributes to the innovation and entrepreneurship literature by empirically testing frugal innovation, a concept which has not been quantitatively studied thus far. In addition, the study establishes a link between frugal innovation and entrepreneurial bricolage.