Underinvestment and incompetence as responses to radical innovation: Evidence from the photolithographic alignment equipment industry

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Citation: William J. Abernathy, Kim B. Clark (1985) Underinvestment and incompetence as responses to radical innovation: Evidence from the photolithographic alignment equipment industry. Research Policy (RSS)
DOI (original publisher): 10.1016/0048-7333(85)90021-6
Semantic Scholar (metadata): 10.1016/0048-7333(85)90021-6
Sci-Hub (fulltext): 10.1016/0048-7333(85)90021-6
Internet Archive Scholar (fulltext): Underinvestment and incompetence as responses to radical innovation: Evidence from the photolithographic alignment equipment industry
Tagged: Economics (RSS) Business (RSS), Organization Theory (RSS), Innovation (RSS)

Summary (Abstract)

Henderson's article is framed as an analysis trying to deal with two competing theories about the failure of established firms in the face of new technologies (i.e., Schumpeterian "creative destruction").

  1. A theory from neo-classical economics that entrants replace incumbents during periods of technological change because they have greater strategic incentives to invest in existing competences.
  2. An observation from organizational theory that incumbents fail because their research efforts are ultimately less productive than that of entrants.

Both theories tend to have qualitative similar predictions -- established firms will dominate incremental innovation and new entrants will dominant radical innovation -- but only as long as innovations that are radical or innovative in an economic sense is also radical or innovative in an organizational sense. Henderson attempts to disentangle these effects and explore the "off-diagonals."

She builds on empirical work from the photolithographic aligner industry. Her dataset includes a series of innovation which were all incremental in the economic sense but both radical and incremental in the organizational sense. to offer two basic conclusions:

  • Incumbents invest in incremental innovation at a higher rate than new entrants (a conclusion that is essential in-line with the neo-classical economic model);
  • In line with the organizational theory model (and her more interesting result), she shows that established firms also invest heavily in new technologies, but are less successful in their ability to take advantage of it.

In her second point, Henderson basically argues (as the title suggests) that incumbent firms tend to invest but to do so showing incompetence and at a lower level than they might want to. In terms of innovations were economically incremental, firms invested more than entrants but were much less effective due to misaligned or misplaced capabilities and the inability to recognize and work with radical competence-destroying innovations.

Theoretical and Practical Relevance

Henderson's article has been cited nearly 500 times in the 17 years since it was published and is a very highly cited article in the literature on the management of technological innovation. It is usually cited not due to its disentanglement of the two types of innovation but as an example of how incumbent firms struggle with innovation in line with Abernathy and Clark (1985) and many of the articles in its tradition.