Invention or incremental improvement? Simulation modeling and empirical testing of firm patenting behavior under performance aspiration

Abstract

This paper explores how firms determine their patenting strategy when faced with different performance situations. Patenting strategy in this study is defined in terms of either engaging more in inventions with more risk and higher profit or in more incremental improvements with less risk and lower profit. We develop two game-theoretical models to analyze how different kinds of performance discrepancies encountered by a firm influence the evolution of the firm's propensity toward a patenting strategy. Then, an empirical analysis of 1921 listed companies in China is conducted to test the propositions derived from the two game-theoretical models. The results reveal the decision-making pattern of a firm's patenting strategy. Specifically, a firm with performance higher than its aspiration will prefer to engage more in invention-type patents, while a firm with lower performance than its aspiration will invest more in incremental improvement patents. Additionally, all else being equal, the patenting strategy more likely to succeed will be more appealing to firms, no matter what kinds of performance gaps they have.