Beyond the finish line: How losing in patent race drives post‐race innovation

A‐Sung Hong

Strategic Management Journal, 2024, vol. 45, issue 5, 968-993

Abstract: Research Summary Although patent races of leading technology firms have garnered significant attention in the prior literature, it remains unclear how the outcome of a patent race affects subsequent firm‐level innovation. Drawing on agency theory, we propose that losing a patent race drives firms to pursue more technological innovation than winning due to managerial concerns. To investigate the mechanism, we hypothesize that the positive impact of a lost race on a firm's innovation is more pronounced when more shareholders hold near‐term investment horizons and when a CEO is less protected against the pressure of shareholders. By constructing a unique dataset of simultaneous patent applications, we find evidence consistent with the proposed theory. Managerial Summary This study explores the impact of a patent race on the subsequent innovation of leading technology firms. We find that losing firms tend to pursue more innovation after the race, surpassing the winner in terms of innovation. This finding is particularly pronounced when top managers are more pressured by the shareholders. Specifically, we show that the positive effect of a lost race is especially evident in publicly listed companies with a higher ratio of short‐term institutional investors and where CEOs have less protection from shareholder pressures in the public market. This research underscores how a setback in a technology competition can act as a catalyst to change innovation dynamics among competitors at the technology frontiers.

Date: 2024
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