Escaping competition and competency traps: identifying how innovative search strategy enables market entry*

Innovation is usually assumed to be a crucial component of firm performance, yet the optimal strategy and progression from invention to performance remains unclear and poorly identified empirically. Likewise the idea of a fundamental tradeoff between exploration and exploitation has been extremely influential, however, the stages and causal linkages between search strategy and performance have not been established. We first demonstrate that a variety of simple patent based measures clearly load onto exploration and exploitation principal components and illustrate the temporal relationship between exploration and new market entry. To identify the effect of innovative strategy on entry and successful entry, we rely on exogenous shocks that precede exploration (non-compete enforcement switch) and exploitation (antitakeover regulatory reform). Using these exogenous shocks with different and opposite mechanisms but consistent effects on market entry, we isolate one pathway from invention to performance and demonstrate how exploration enables market entry and increased sales in new markets. Exploration strategies appear less effective when the firm’s competitors are closer in technology space; closeness in market space appears to have no effect on the impact of technology strategy.