Foreign Competition and Innovation: The Mediating Role of Imitation
| DOI | http://doi.org/10.1111/1467-8551.12236 |
| Date | 01 July 2018 |
| Author | Xiaohui Liu,Tianjiao Xia |
| Published date | 01 July 2018 |
British Journal of Management, Vol. 29, 464–482 (2018)
DOI: 10.1111/1467-8551.12236
Foreign Competition and Innovation: The
Mediating Role of Imitation
Tianjiao Xia1and Xiaohui Liu1,2
1School of Business and Economics, Loughborough University, Leicestershire, LE11 3TU, UK, and 2School of
International Business, Southwestern University of Finance and Economics, Chengdu, China
Corresponding author email: X.Liu2@lboro.ac.uk
This study examinesthe extent to which foreign competition aects the innovation perfor-
mance of domestic firms through imitation, given firms’ absorptive capacity. In analysing
longitudinal firm-level data from the UK, we find a mediating eect of imitation on the
relationship between foreigncompetition and local firms’ innovation performance, and an
inverted U-shaped relationshipbetween imitation and the innovation performance of local
firms. Our findings further reveal that absorptivecapacity moderates the mediating eect
of imitation, diminishing innovation gains at moderate levels of imitation and mitigating
the diminishing innovation performance at high levels of imitation.
Introduction
It is well established that competition breedsinno-
vation (Aghion et al., 2005). Without competition,
firms have less incentive to keep trying out new
ideas and finding what works best amongst these
ideas. However, competition may also induce imi-
tation and can impact innovation indirectly chan-
nelled through imitation (Aghion et al., 2001). Im-
itation is considered a ‘smart’ strategy (Lieberman
and Asaba, 2006; Shenkar, 2010) as imitators do
not have to take on the same level of risk and un-
certainty as the initial innovators. On the produc-
tion side, they can copy, emulate or reverse engi-
neer the product design or service delivery of an
innovator. On the market side, the imitators can
learn from the innovators about consumers’ ap-
petite for a particular product or service (Johnson,
Scholes and Whittington, 2008). Recent studies
have shown that imitators can help generate fur-
ther innovation, because they may have valu-
able information or ideas not available to the
We gratefully acknowledge Associate Editor, Professor
Douglas Cumming and three anonymous reviewers for
their constructive and insightful comments.
original innovator (Bessen and Maskin, 2009;
Cappelli, Czarnitzki and Kraft, 2014).
Despite its innovation-enhancing eect, imi-
tation may also discourage a firm’s incentive to
innovate. Although the rewards of imitation are
not as high as those of innovation, picking lower
hanging fruit is a safer strategy than innovationfor
firms with a priority to survive rather than thrive
(Hurmelinna-Laukkanen and Olander, 2014;
Ross and Sharapov, 2015). Equally, at a higher
level of competition, an increase in competition is
more likely to reduce the rateof innovation, as the
followers’ rewards for catching up with the leader
via innovation may fall due to a decreased market
share (Li and Vanhaverbeke, 2009; Schumpeter,
1950). This suggests the possibility of a non-linear
feedback eect of imitation on innovation at
dierent levels of competition. However, existing
research has overemphasized the direct links
between competition, imitation and innovation
separately (Damanpour, 2010; Drield, Love
and Yang, 2014; Fu, 2012). Such a focus takes no
account of the indirect eect of imitation and may
lead to an overestimation and oversimplification
of the influence of competition on innovation. We
have a limited understanding of the overall rela-
tionships between these factors and the underlying
© 2017 British Academy of Management. Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4
2DQ, UK and 350 Main Street, Malden, MA, 02148, USA.
Foreign Competition, Imitation and Innovation 465
mechanisms through which competition aects
innovation.
Moreover, imitation and innovation involve
learning that is determined by a firm’s absorp-
tive capacity (ACAP), defined as the ability
to acquire, assimilate and exploit new exter-
nal knowledge (Cohen and Levinthal, 1990).
Hurmelinna-Laukkanen and Olander (2014),
for instance, find an important indirect eect of
rivals’ ACAP on firms’ innovativeness through
changes in the strength of their appropriability
regimes based on a study of 155 Finnish firms.
However, the interrelationship between imitation,
innovation and ACAP remains underexplored in
prior studies. We know little about the conditions
under which imitation can benefit innovation.
Addressing this question may oer new insights
into the role of imitation in innovation, as existing
studies overly stressthe negative eect of imitation
or its limited novelty value, but neglect the fact
that most original thoughts are actually built on
the strength of existing ideas (Hunter, 2013).
The complex relationship between competition,
imitation and innovation has not been looked at
closely or systematically, with little fine-grained
analysis to account for the heterogeneity in the
source of competition, i.e. foreign competition.
The rapid pace of globalization in the past three
decades leads to increasingly intensified competi-
tion from foreign rivals at home (D’Aveni, 1994).
Foreigncompetition brings in a great variety of ex-
ternal knowledge to the domestic economy. The in-
stitutional contexts that shape the business models
and innovation activities of foreign rivals can vary
substantially from domestic businesses, which may
provide them with unique advantages (Jacobides
and Winter, 2012; Li and Vanhaverbeke, 2009).
This raises the bar in the battle for survival by lo-
cal firms, making their imitation and innovation
no longer a domestically isolated process. Thus, in-
creasing foreign competition not only represents
new learning opportunities for local firms,but also
raises an important research question concerning
to what extent they are able to reap innovation-
related benefits from imitating foreign rivals. Em-
pirically, while imitation has been considered an
important stepping stone for innovation in previ-
ous studies (Kale and Little, 2007; Zhou, 2006),
its mediating role has not yet been examined.
There is a missing mechanism between foreign
competition and innovation as imitationis consid-
ered an important integral part of the innovation
process (Lee and Lim, 2001). Thus, it is theoret-
ically and empirically important to examine the
overall relationship between foreign competition,
imitation and innovation by delineating whether
imitation serves as an explanatory mechanism
through which foreign competition aects innova-
tion indirectly. The potential mediating role of im-
itation may be salient in the indirect relationship
between foreign competition and innovation.
Drawingon an integrated theoretical framework
of imitation based on informationand competitive
rivalry,and organizational learning theory,we pro-
pose a positive impact of foreign competition on
imitation which in turn has an inverted U-shaped
relationship with the innovation performance of
local firms. Moreover, weargue that ACAP moder-
ates the proposed inverted U-shaped relationship
between imitation and innovation performance by
reducing the importance of imitation to innovation
performance at a moderate level of imitation and
mitigating the diminishing eect of imitation at a
high level of imitation.
Toaddress the research gaps identified above, we
make a number of contributions. First, our study
complements information-based and competitive-
rivalry-based imitation theories by exploring the
mediating eect of imitation on the foreign
competition−innovation relationship. Specifically,
we are able to articulate the conditions under
which imitation is beneficial or detrimental to lo-
cal firms’ innovation performance in the context
of foreign competition. Our finding of an inverted
U-shaped relationship between imitation and in-
novation also sheds new light on the tension be-
tween imitation and innovation.Second, our study
enriches and refines organizationallearning theory
by oering a new insight on the conditions and the
extent to which local firms can reap innovation-
related benefits through learning byimitating their
foreign counterparts’ knowledge and/or business
ideas.
Theory and hypotheses
Theoretical background
There are two main bodies of literature that at-
tempt to explain firms’ imitative behaviour in
the face of foreign competition and these are
the information-based and competitive-rivalry-
based perspectives (Anand, Mesquita and Vassolo,
2009; Lieberman and Asaba, 2006; Semadeni and
© 2017 British Academy of Management.
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