Navigating innovation pathways: collaborative innovation, licensing partnership, or pure competition?

To maintain competitive advantages, high-tech firms must continuously conduct technological innovations to enhance product quality and performance. This study presents an analytical model to examine the strategic innovation decisions of two competing firms that offer substitutable products. We highlight three primary technological innovation mechanisms, i.e., competitive innovation, collaborative innovation, and licensing partnership. We find that collaborative innovation consistently yields the most significant innovation outcomes. Conversely, licensing partnership can lead to reduced investments of the competing firms if innovation efficiency is low. Interestingly, our findings diverge from the anticipated belief that firms would lean towards collaborative innovation when facing higher uncertainty in innovations. Specifically, if innovation efficiency is relatively low due to high uncertainty, firms prefer competitive innovation to collaborative innovation. Collaborative innovation will only take the lead when innovation efficiency is relatively high. Moreover, we find that while the licensing partnership mechanism may harm firms by leading to underinvestment among competitors, it can also outperform other innovation mechanisms under moderate innovation uncertainty level and high innovation spillovers. By incorporating an extension to an asymmetric market setting, we find that the key results of our basic model remain robust.