Use Your Broken Part into My Art? Industry Peers’ Failures in Competitive Markets and Firm Innovatio

Abstract

In competitive settings, the ability to attend to failures in the environment can help firms identify market opportunities or threats without the drawbacks of in-house experimentation, particularly under conditions of uncertainty. In this paper, we build theory about how firms make inferences based on their industry peers’ failures and how such inferences may affect firms’ innovative output. While existing studies primarily focus on failures as a foundation for experiential learning, especially as it pertains to strategic behavior such as mergers and acquisitions or R&D, how managers interpret failures happening outside the firm has received comparatively less attention. We contribute to this area of research by examining the effect on a firm’s innovative output not only of failures by other firms, but also of their geographical location and underlying cause. In particular, we hypothesize that firms are more likely to pursue product innovations when others’ failures are more geographically dispersed, yet refrain from doing so when they are causally complex. Firms’ own production experience may also strengthen firms’ perceived risk in innovation when failures in the environment are causally complex. Building on firm-level data on product recalls and new product introductions in the medical device industry from 2003 through 2017, we find support for our arguments.