Demand-Driven Innovation and Spillover Effects on Adjacent Technological Domains: Evidence from Electric Vehicle Technologies

Abstract

Strategy and innovation scholars have long emphasized the crucial role of demand in driving technological progress within a domain. However, relatively less is known about how changes in demand conditions within a domain impact the technological progress in other domains. In this study, I argue that an increase in demand for innovation within a domain can have negative implications for the innovation progress of firms in adjacent domains, because it intensifies competition for knowledge workers, a critical resource for innovation. Empirically, I exploit an unexpected environmental policy shock that led to an exogenous increase in demand for electric vehicle (EV) technologies. I find that, following an increase in innovation activities within the EV domain, firms in adjacent domains suffered a significant decline in innovation in their own core technological domains and in their ability to explore new technological domains. This negative effect is stronger for firms in other growing (rather than declining) technological domains (e.g., renewable energy domains). Further analyses suggest that this occurred because firms in adjacent domains were more likely to lose knowledge workers to firms in the EV domain. These findings, which highlight that market and technological changes in seemingly unrelated areas can indirectly impact firms’ capabilities through competition for innovation resources, have important implications for managers and policymakers.