Keeping pace by Collaborating: Capability Outsourcing for Innovation Adoption

Theories of innovation emphasize that firms’ existing capabilities strongly influence which firms adopt new technology most extensively, but struggle to explain why weaker incumbents sometimes keep up with their stronger competitors when competence-enhancing innovations enter their industry. This paper studies collaborative outsourcing as a strategy for weaker incumbents to keep pace. The paper compares how a firm’s initial capabilities and strategic sourcing decisions affect innovation adoption, where outsourcing and collaboration are separate aspects of external sourcing. We expect collaboration to contribute to innovation adoption for weaker capability firms. We test our predictions using survey and secondary data on Internet banking activities from 153 U.S. banks spanning 1995-2002. Results show that collaborative outsourcing helps firms weak on marketing capabilities keep pace with stronger firms in their adoption of Internet banking innovations. However, collaborative outsourcing cannot overcome the powerful path dependent impact of firms with strong technical capabilities.