The effect of industry leaders’ exploratory innovation on competitor performance

This paper examines the effect of an industry leader’s exploratory innovation, defined as the innovation embodying novel knowledge relative to the firm’s extant knowledge, on the performance of its direct competitors. We argue that an industry leader’s exploratory innovation can benefit its competitors, resulting in an average increase in competitors’ sales. The benefit can come from advantageous inter-industry structure, higher perceived status through association, and expanded knowledge pool. The extent of benefit, however, is conditional on the number of competitors in the industry as well as the level of competitors' financial slack and Return on Assets (ROA). Using data on the U.S. computer sector, we find support for our hypotheses. This study suggests that while an industry leader’s exploratory innovation is intended to further its own interests, it also affects the plight of its direct competitors.