The Financing of Explorative and Exploitative Activities: A Comparative Study of the Finnish Post-IPO High-Tech Companies

Companies that engage in explorative activities face challenges of organizing the financing to balance time asymmetry between expenses and incomes. Investments in explorative activities may bind relatively significant amount of resources while earnings from these activities are uncertain. Exploitation, indeed, often has an opposite impacts. It often generates operating cash flows that form an independent source of finance. In addition, level of uncertainty in exploitative activities is lower. This study is conducted by examining first the existing literature on exploration/exploitation, business models, and then financing models. Extant research points out the knowledge gap in the relationship between explorative/exploitative activities and financing models. This relationship is studied by conducting the comparative cross-case study. Case companies that provide the empirical data for this study have been selected from among the Finnish listed IT and biotech companies, containing BasWare Oyj, Biotie Therapies Oyj, Okmetic Oyj, SSH Communications Security Oyj, and Tekla Oyj. This study begins by constructing an analytical framework to analyze how firms fund their explorative and exploitative activities. To construct the framework, business operations have been categorized into two dimensions: business model and product/technology. Both of these dimensions contain explorative and exploitative activities. The object of this study is to explore how firms fund different combinations of activities, in particular, in which situations they are likely to use existing or new equity, debt, and operating cash flow as sources of finance. The findings of this study reveal that explorative activities on the business model dimension such as acquisitions are financed by existing and new equity. Operating cash flow mainly funds exploitative activities on this dimension. According to the findings, explorative activities on the product/technology dimension are often funded by operating cash flow if it is adequate and available. Exploitative activities on product/technology dimension seems to be mainly funded by operating cash flow but also debt funding has been used. Keywords: Business model, financing model, exploitation, exploration, strateg