INDUSTRY STUDIES ASSOCATION WORKING PAPER SERIES The Effect of Market Leadership in Business Process Innovation: The Case(s) of E-Business Adoption

This paper empirically investigates how market leadership influences firm propensity to adopt new business process innovations. Using a unique data set spanning roughly 35,000 plants in 86 U.S. manufacturing industries, I study the adoption of frontier e-business practices during the early diffusion of the commercial internet. Theory predicts that firms with greater market share will be more likely to adopt innovations that build on their existing strengths, while they will resist more radical technological advances. While prior work primarily focuses on product innovation, I extend the logic into the business process setting to find that leaders were far more likely to adopt the incremental innovation of internetbased e-buying. However, they were commensurately less likely to adopt the more strategically sensitive and complex practice of e-selling. This pattern is remarkably robust, holding across a wide range of industries and controlling for factors such as productivity and related technological capabilities. The results are explicated by a framework I develop for understanding the drivers of this behavior and making it possible to classify business process innovations as radical or not. While greater market share promotes adoption of all types of business process innovations, this effect is outweighed by additional co-invention and coordination costs whenever a technological advance address strategically sensitive and complex business processes that must also span the firm boundary. JEL classifications: L21, O33, D24, M15 * Harvard Business School, 431 Morgan Hall, Boston, MA 02153. Thanks are due to Shane Greenstein, Scott Stern, Rebecca Henderson , Alfonso Gambardella, Steve Kahl, Juan Alcacer, participants of the Colloquium on Competition and Competitiveness, and numerous others I met while on the job market. I am indebted to T. Lynn Riggs and other members of the Center for Economic Studies for their support. The research in this paper was conducted while the author was a Special Sworn Status researcher of the U.S. Census Bureau at the Chicago Census Research Data Center. Research results and conclusions expressed are those of the author and do not necessarily reflect the views of the Census Bureau. This paper has been screened to insure that no confidential data are revealed. Support for this research at the Chicago RDC from NSF (awards no. SES-0004335 and ITR-0427889) is also gratefully acknowledged. In addition, I am grateful for financial support from the Census Bureau’s Dissertation Fellowship program and the State Farm Companies Foundation Dissertation Award. All errors are my own.