Resolving the Commitment vs. Flexibility Trade-Off: The Role of Resource Accumulation Lags

Abstract

We examine how time-consuming resource accumulation influences the classic strategy trade-off between commitment and flexibility. In particular, using data from the worldwide petrochemical industry during the period 1975 to 1995, we study the impact of new plants’ time-to-build on firms’ decisions to invest under uncertainty. Our results suggest a nontrivial positive effect of resource accumulation lags on investment. Contradicting conventional wisdom, we show that competition may be fiercer in industries where firms accumulate resources more slowly and that uncertainty is not always a disincentive for investment. The robustness of these results is only mitigated for extremely long resource accumulation lags.