Competition in the Search for Innovation: Getting Ahead by Falling Behind

Abstract

Firms innovate by combining elements of their knowledge resources to identify combinations that are both novel and valuable. Prior research has argued that because larger resource bundles provide more elements for recombination, innovative performance increases in the size of a firm’s resource portfolio. At the same time, there are also empirical accounts of firms with inferior resources being highly innovative. Under what circumstances is investment in resources warranted, and what impact does this investment have on firms that are competing for valuable innovations? We address this question through a formal set-theoretic model. We show that the benefit of acquiring resources is contingent on both the competitive environment as well as firms’ internal search capability. In particular, our analysis demonstrates that acquiring resources imposes opportunity costs, leading to overvaluation of external resources. Moreover, we show that under a broad range of conditions, firms with inferior resources may actua...