Dynamics of technological innovation: incumbents' adaptation and capability sourcing on the internet

Prior research has demonstrated that strong incumbents have advantages in adopting competence-enhancing innovations. Accumulated experience and prior resources provide strong incumbents with the ability to recognize and act on innovation opportunities. Although weaker incumbents often lag behind in competence-enhancing innovations, sometimes they approach or surpass initially stronger firms. This dissertation compares how initial capabilities and firms' strategic sourcing decisions influence a firm's extent of innovation adoption. Specifically, this dissertation investigates collaborative outsourcing as a potential strategy and mechanism for weaker capability incumbents to keep pace with stronger firms in innovation adoption. It challenges path-dependence as a sole driver in the adoption of competence-enhancing innovations and proposes that a firm's strategic sourcing decisions made during adoption matter for innovation outcomes. I test the predictions in the context of transactional Internet banking adoption spanning 1995–2002. I conducted a survey among senior executives responsible for their bank's Internet banking operations in late 2001 and early 2002. A total of 224 U.S. banks participated in the study, which represents a survey response rate of thirty percent. Additionally, I collected secondary financial data on these banks from yearly regulatory Reports on Condition and Income. I applied two-stage Heckman sample selection models for the statistical analyses with Poisson and Tobit regressions as second-stage models. The results demonstrate that initial capabilities strongly influence both innovation adoption and the decision to outsource. Nevertheless, strategic sourcing decisions subsequent to adoption enable some weaker incumbents to keep pace with stronger firms. Hence, weaker incumbents can sometimes keep pace by outsourcing innovation adoption activities and collaborating closely with their external partners.