Dominance and Innovation

38 Pages Posted: 3 Feb 2010

See all articles by Chander K. Velu

Chander K. Velu

University of Cambridge - Judge Business School

Sriya Iyer

University of Cambridge

Date Written: January 28, 2010

Abstract

Do dominant or less dominant firms innovate more? Theoretically it has been shown that within an asymmetric mixed strategy game of a patent race, the less dominant firm invests more than the dominant firm. But the empirical data on patent races is divided. In this paper, we argue that the decisions that concern strategic choice in innovation may be influenced by expected relative returns. Our approach, which we call the returns-based beliefs approach, is based upon subjective probabilities. It combines a decision analytic solution concept and Luce’s (1959) probabilistic choice model. In particular, we show how the use of the returns-based beliefs approach provides support for the thesis that dominant firms invest more in R&D within an asymmetric mixed strategy game. Consequently, we argue that the returns-based beliefs approach is more in line with recent empirical studies of innovation. We also provide empirical evidence using UK R&D data across a range of industries from 2001-2006 that shows that firms’ spending on R&D is related more to their own profitability than that of their competitors, which is consistent with the returns-based beliefs approach. We discuss the managerial implications of our theoretical approach and the empirical findings.

Suggested Citation

Velu, Chander K. and Iyer, Sriya, Dominance and Innovation (January 28, 2010). Available at SSRN: https://ssrn.com/abstract=1543908 or http://dx.doi.org/10.2139/ssrn.1543908

Chander K. Velu (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Sriya Iyer

University of Cambridge ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

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