Uncertainty and the Dynamics of Technological Competition

Abstract

We show that the effect of uncertainty on innovation depends on a firm’s competitive position. In R&D races, the gap in the rate of innovation, rather than the absolute rate, determines the winner. As a result, to the extent that leaders become cautious and slow their innovation, periods of uncertainty provide an opportune window for laggards to challenge leaders and decrease their dominance. We present evidence that uncertainty in economic policy increases the rate of innovation by laggards relative to leaders, with stronger effects in industries that depend more heavily on government spending and those that better approximate the features of R&D races. This study introduces competitive interactions as a novel channel through which uncertainty affects innovation and technological competition beyond prior considerations of real options effects. More generally, it provides a firm-level, uncertainty-based account of short- to mid-term fluctuations in competitive dynamism and industry concentration.