Learning across Peer Firms and Innovation Waves

This paper presents a model where …rms learn from each other’s innovation„and innovation by one …rm spurs subsequent innovations by peer …rms, leading to the emergence of innovation waves. In our model, innovation of a …rm reaches peer …rms competing in similar markets. Peer …rms receiving the innovation can either expropriate it, or learn from it to generate a subsequent innovation. As an innovation reaches a greater number of peer …rms, each peer …rm’s expropriation incentives decline while its incentives to generate a subsequent innovation increase. In addition, as the intensity of the innovation transmission across peer …rms gets larger, expropriation incentives decline even further. Hence, perhaps surprisingly, as the innovation travels to a greater number of peer …rms at a greater speed, and becomes easier to be expropriated, it becomes less desirable to expropriate it. Our results are consistent with the empirical evidence presented in Matray (2014) that innovation by one …rm spurs innovation by neighboring peer …rms, and …rms innovate by building on previous technologies produced by peer …rms. Our model predicts that a concentrated mass of interconnected …rms that both compete and learn from each other as well as a speedy ‡ow of ideas from one …rm to another are necessary conditions for innovation waves to emerge. Finally, our analysis has implications for the innovation output of a …rm and industry after a merger wave. A wave of consolidating mergers in an industry will reduce the number of …rms, and increase each …rm’s incentive to expropriate a given innovation, with a negative e¤ect on incentives to invest in innovation in