The relationships between foreign competition, absorptive capacity and pioneering innovation: An empirical investigation in Canada

This study investigates the likelihood that firms generate pioneering innovations under different levels of foreign competition in domestic market, meanwhile taking the effects of technological distance between the focal innovative firms and their suppliers into account. We argue that the relationship between foreign competition and pioneering innovation has a U-shaped relationship. On the one hand, when foreign competition is low, firms may seek new technological and market opportunities based on organizational slack. When foreign competition intensifies, domestic firms will immediately be engaged in the competition by reducing the cost, improving efficiency or quickly adapt latest practices in the industry in reaction to the foreign competition, which will distract firms’ incentive to bring about pioneering innovation. On the other hand, when foreign competition is fierce, firms have to undertake pioneering innovation to “escape the competition”. In this case, the possibility of undertaking pioneering innovation may again increase. We also predict that the U-shaped relationship between foreign competition and pioneering innovations will be more evident and the slope will be steeper when technological distance between the innovative focal firms and their suppliers is large.
Keyword: Competition; foreign competition; pioneering; innovation; absorptive capacity