How Collaborative Outsourcing Impacts Innovation Adoption by Weak and Strong Incumbents

Existing research fails to explain why firms with weaker capabilities sometimes reach innovation adoption levels similar to those of their stronger competitors when competence-enhancing innovations enter their industry. This paper argues that differential benefits from collaborative outsourcing may help explain this puzzle. Firms with weaker capabilities sometimes benefit more from collaborative outsourcing owing to greater marginal benefit from using partners’ resources and greater openness to learning from partners. We test our prediction using survey and archival data on Internet banking activities of 153 U.S. banks spanning 1995-2002. The results show that collaborative outsourcing sometimes helps weaker firms adopt competence-enhancing innovations, but with substantial limits on this assistance. Collaborative outsourcing assists firms weaker on marketing capabilities to adopt innovations at similar levels as stronger firms. By contrast, collaborative outsourcing does not help overcome advantages of firms with stronger technical capabilities, while firms with recent experience in related novel services may actually gain additional benefits from collaborative outsourcing.