Recalls, Innovation, and Competitor Response: Evidence from Medical Device Firms
Harvard Business School Working Paper 19-028
49 Pages Posted: 12 Oct 2018 Last revised: 31 Mar 2019
Date Written: September 13, 2018
Innovation and new product development are the lifeblood of firms in R&D-intensive industries, yet malfunctioning products can cause immense damage. Product failures thus create managerial challenges and opportunities for focal firms and their competitors. Focal firm failures often result in sales de-creases and cost increases associated with remedial public relations and manufacturing activities. Competitor firm failures, however, can create market opportunities and elicit strategic responses by focal firms. We develop theory and provide empirical evidence of how innovative activity changes in response to product recalls in the U.S. medical device industry. Focal firm recalls slow incremental innovation while competitor firm recalls accelerate incremental and major innovation. Recall prevention and remediation efforts are thus more important than previously suggested, due to significant competitor responses.
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