How Resource Challenges Can Improve Firm Innovation Performance: Identifying Coping Strategies Stav Rosenzweig and Amir Grinstein Researchers recently suggested that challenges in the form of adversities and constraints can actually promote individuals, teams and firms. However, it remains unclear how such chal- lenges elicit positive innovation performance. Moreover, we still cannot distinguish between the conditions under which challenges enhance or hinder firm innovation performance. In this paper, we review the literature on coping with a specific and central type of challenge – resource challenge, such as a lack of financial or human resources – and propose an underlying mechanism through which firms can benefit from resource challenges. The paper presents an integrative conceptual framework and looks at the key constructs that explain the effects of resource challenges on firm innovation performance. Further, it proposes two key strategies for coping with resource challenges: simplification-focus and compensation. Introduction F ounded in 2001, the Massachusetts-based firm A123Systems had as its goal the devel- opment of efficient batteries that would become the preferred, next-generation power source on the American market. However, the firm faced multiple resource challenges, not the least of which was the immigrant status of its two founders, who lacked substantial financial resources and initially could only employ a small number of workers. Moreover, upon its founding, the firm entered a global ‘death race’. The participants were competing for the ultimate prize: to be the first developer of the most promising next technology. Sooner than anyone expected, however, and before the other competitors, the newcomer A123Systems developed a battery with ten times the lifespan of conventional batteries and twice the power. By 2009, Black & Decker power tools and electric cars manufacturers Chrysler and Volvo used A123Systems’ bat- teries (Herman & Smith, 2010). Did A123Systems achieve this remarkable innova- tion performance despite the fierce human, financial and time challenges the firm faced? Or did it achieve it because of these resource challenges? A growing, multidisciplinary body of research has recently emerged to support the notion that challenges, in the form of adver- sities and constraints, may be highly beneficial to individuals, teams and firms. In particular, research suggests that resource challenges may positively influence innovation and innovation-related performance (e.g., Esty & Porter, 2005; Gibbert, Hoegl & Välikangas, 2006; Hoegl, Gibbert & Mazursky, 2008; Filippetti & Archibugi, 2011). Nevertheless, many scholars and practitioners view this premise as unrealistic (e.g., Hyytinen & Toivanen, 2005; Penney & Spector, 2005; Maine, 2008; Gomez & Vargas, 2009; Rider, 2009; Ynalvez & Shrum, 2011). Key to this con- troversy is the lack of clarification in the litera- ture of what mechanism enables firms to benefit from resource challenges (Caniëls & Rietzschel, 2013). Specifically, the precise con- ditions under which resource challenges can enhance or hinder firm innovation perfor- mance are not clear and we do not know what the effective strategies for coping with resource challenges are. CREATIVITY AND INNOVATION MANAGEMENT 110 Volume 25 Number 1 2016 © 2015 John Wiley & Sons Ltd 10.1111/caim.12122