8 R&D Mythbusters (part A – Myths 1 – 4)

Innovation

Innovation (Photo credit: Seth1492)

 

Myth 1: Asset Mass Efficiency

– The idea with AME was posited by Dierickx and Cool in 1989 in that accumulated R&D spending would enhance productivity in R&D spending, taking on the notion of “success breeds success”. However, this is not true because this means that market entrants can never catch up with innovation. This has been debunked because the truth is that obsolescence is so high that entrants need to only take 3 years to catch up with market leaders if they matched R&D spend. What this implies is that the Red Queen Effect would be seen, where incumbents have to work hard to maintain their R&D leadership position.

Myth 2: Absorptive Capacity

– Advanced by Levinthal and Cohen (1990), this argument posits that past R&D spend enhances firms’ ability to capitalize on spillover effects from the R&D of other firms. However, the truth is that it is higher returns that create incentives for greater investment into R&D, not past R&D spend. Those spending more on R&D seem to make poorer use of spillovers because they probably are at the forefront. This implies that innovative firms should not spend effort trying to gain knowledge from competitors. On the other hand, imitative firms should position themselves to capably capitalize on R&D spillovers.

Myth 3: Spillovers/Imitation inhibits Innovation

– This view posits that spillovers may inhibit innovation because there will be a tendency to imitate and therefore reduce the incentive to innovate. Statistics show that in the leading 25 R&D industries, innovation is highest among those with the highest spillover rates. What this implies for innovative firms is that they have to develop mechanisms to milk the maximum mileage for their innovation before imitation kicks in, and the best mechanisms thus far lie in branding, marketing, and distribution/manufacturing that maximizes the scale economies.

Myth 4: Concentrated Industries are Optimal for Innovation

– This myth believes that the industry that is concentrated spurs innovation. What has been observed is that highly competitive industries actually increase the probability of imitation and reduces the returns to innovation. However, the truth is that imitation eats away at profits and therefore it behooves firms to instead innovate. This means that it is not the industry, but rather the fact that imitation in itself affects profits negatively rather than positively, that firms choose to innovate.

Source: Anne Marie Knott, Associate Professor of Strategy, Olin Business School, Washington University in St Louis, in “Innovation and Growth: What Do We Know? (2013)”

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