Unbundling Competitive Heterogeneity: Incentive Structures & Capability Influences on Technological Innovation

Abstract

Many studies argue that the continual creation of new ideas by small and young firms steadily destroys the competitive positions of their larger, more established rivals. Despite this attention, empirical results relating firm size to innovation remain exceedingly fragile. This paper proposes three reasons for the empirical inconsistencies in the literature - that small and large firms differ in their: stock of technological experiences, use of own- and partner-firm experiences, and abilities to translate own- and partner-firm experiences into innovation activity. Results from a ten-year study of 463 semiconductor firms demonstrate that the mixed findings generated from prior work are partially attributed to these three general propositions. In particular, the benefits of operating experience developed internally and accessed through co-development partners diminish as a firm increases in size. The findings broadly support the notion that differences in the incentives and abilities of small and large firms give rise to heterogeneity in the firms' innovation activity.

Keywords: innovation, capabilities, firm size, experience, alliances

JEL Classification: O31, L23, L22, L63