Actualizing innovation effort: The impact of market knowledge diffusion in a dynamic system of competition

Abstract

This study focuses on the dynamic process that governs the impact of market knowledge diffusion on innovation effort and its subsequent effect on firm performance. First, the author proposes that three aspects of market knowledge (knowledge level, knowledge change, and extent of shared knowledge about customers and competitors) influence innovation effort. In so doing, she explicitly models the dynamic process of competition, including heterogeneity in interdependence of innovation across competitors, firm-specific inertial tendency in innovation, and feedback effects reflected in satisfaction with past performance. Second, within a partial adjustment model of performance, the author studies the role of shared market knowledge and firm size in the translation of innovation effort into firm performance over time. She tests the conceptual framework with longitudinal quasi field experiments based on a Markstrat simulation exercise, including a main experiment and three validation studies. The results reveal a dynamic system in which some aspects of market knowledge diffusion propel innovation, whereas satisfaction with past performance hinders innovation effort. Furthermore, the results show that innovation effort, by itself, does not affect firm performance. In the context of the study, total shared market knowledge helps smaller firms actualize better returns from their innovation effort than larger firms.