Innovation, Institutions and Industry Evolution: Historical Lessons for a Multi-directional World

Richard A. Hunt (Colorado School of Mines)
Lauren Ortiz-Hunt (Smith College)

Abstract: In this study, we develop and empirically test the theory that new industry entrants hold advantages over incumbents in the shift from unidirectional to multi-directional revenue streams. Using a Cobb-Douglas production function, modified to isolate returns to innovation, we examine data from three separate contexts: steamships on western U.S. rivers (1810-1860), satellite-based Internet services (1962–2010), and food waste recycling (1995-2015). The results reveal that while incumbents often attempt to stretch existing technologies to fit emerging circumstances, entrepreneurial innovators achieve greater success by approaching multi-directional value creation as a distinct challenge, one requiring new technologies, organizational forms and business models. While existing theories have primarily attributed incumbent inertia to a firm’s inability perceive and pursue radical innovations, our results also suggest that existing firms are simply unwilling to pursue innovations that are likely to erode the marginal profitability of their respective business models. Ironically, rather than protecting incumbents’ financial interests, we find that “marginal reasoning” can lead to diminished performance and even extinction. Our proposed framework and empirical findings have implications for a diverse array of multi-directional frontiers, including: social networking, commercial space travel, distance education, and medical treatments using nanoscale technologies.

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