The Relationships between Foreign Competition, Absorptive Capacity and Pioneering Innovation: An Empirical Investigation in Canada

Abstract

The relationship between competition and innovation has drawn great attention from economists and strategic management researchers. However, the empirical evidences for this relationship remain inconsistent. On the one hand, the Schumpeterian viewpoint credits that the large firms with substantial monopoly market power have resources and incentives to innovate. On the other hand, it is also possible for a monopolist to have incentives to suppress subsequent innovation. It is suggested by Baldwin and Scott (1987) and Tang (2006) that the relationship between competition and innovation is dependent on the competition context and specific type of innovation activities. In this study, we investigate the relationship between foreign competition and pioneering innovation and consider the moderating role of absorptive capacity for this relationship, using the Canadian Innovation Data. We found a U-shaped relationship between foreign competition and pioneering innovation, where the likelihood of pioneering innovation decreases when foreign competition increases at the low to moderate level; however, the likelihood of pioneering innovation starts increasing when foreign competition continues to increase at the high level. We also found evidence that absorptive capacity may positively moderate the relationship between foreign competition and pioneering innovation.