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The impact of emerging market competition on innovation and business strategy: Evidence from Canada

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  • Yang, Mu-Jeung
  • Li, Nicholas
  • Lorenz, Kueng

Abstract

Does intensifying emerging market competition boost or inhibit innovation? We estimate how a representative panel of Canadian firms adjusts innovation activities, business strategies, and exit in response to large increases in Chinese import competition. Our analysis shows that the innovation response of firms depends on the type of innovation: on average, product innovation incentives are stimulated by competition while process innovation incentives decline. We develop a theory that combines these different innovation types with partially irreversible innovation strategy choices to derive novel performance implications in response to competition. Consistent with this theory, we find that firms that initially pursue process innovation strategies and survive have higher profits ex-post, but are ex-ante more likely to exit. In contrast, firms that initially pursue product innovation strategies have higher profits if they survive, without significant impact on exit. Both empirical patterns are consistent with our theory, which suggests that innovator performance depends on the balance of innovation incentive effects and competitive failure risk.

Suggested Citation

  • Yang, Mu-Jeung & Li, Nicholas & Lorenz, Kueng, 2021. "The impact of emerging market competition on innovation and business strategy: Evidence from Canada," Journal of Economic Behavior & Organization, Elsevier, vol. 181(C), pages 117-134.
  • Handle: RePEc:eee:jeborg:v:181:y:2021:i:c:p:117-134
    DOI: 10.1016/j.jebo.2020.10.026
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    Cited by:

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    3. Muhammad Zafar Yaqub & Abdullah Alsabban, 2023. "Industry-4.0-Enabled Digital Transformation: Prospects, Instruments, Challenges, and Implications for Business Strategies," Sustainability, MDPI, vol. 15(11), pages 1-33, May.
    4. Ruiyang Hu & Chen Yin & Zhijie Zheng & Sili Zhou, 2024. "Unlocking Innovation: The Impact of Free Trade Zones on Corporate Innovation in China," Working Papers 202414, University of Macau, Faculty of Business Administration.
    5. Chiu, Ya-Ling & Luo, Jinbo & Boscaljon, Brian L., 2024. "The Mist of corporate innovation," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 602-624.
    6. Liu, Yunqiang & Liu, Sha & Shao, Xiaoyu & He, Yanqiu, 2022. "Policy spillover effect and action mechanism for environmental rights trading on green innovation: Evidence from China's carbon emissions trading policy," Renewable and Sustainable Energy Reviews, Elsevier, vol. 153(C).

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    More about this item

    Keywords

    Chinese competition; Innovation; Business strategy; Commitment; Exit; Risk;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • F1 - International Economics - - Trade
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L6 - Industrial Organization - - Industry Studies: Manufacturing
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics

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