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Abandoning Innovation in Emerging Industries

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Abandoning Innovation in Emerging Industries*

Rajshree Agarwal College of Business University of Illinois at Urbana-Champaign 350 Wohlers Hall, 1206 S. Sixth Street Champaign, IL 61822 Voice: (217) 265-5513 agarwalr@uiuc.edu Barry L. Bayus Kenan-Flagler Business School University of North Carolina CB 3490 Chapel Hill, NC 27599 Voice: (919) 962-3210 Barry_Bayus@UNC.edu Mary Tripsas Harvard Business School Soldiers Field Road Boston, MA 02163 Voice: (617) 495-8407 mtripsas@hbs.edu Preliminary Draft September, 2005

All authors contributed equally and are listed in alphabetical order. The paper has benefited from comments made by seminar participants at the Harvard Business School. All remaining errors are ours.

*

Abandoning Innovation in Emerging Industries

Abstract Existing models of industry evolution describe a smooth pattern of emergence over time in which the number of firms in an industry increases, hits a peak, decreases as a result of a shakeout, and then stabilizes as the industry reaches maturity. Although this model has been well-accepted and the basic empirical finding holds true across a range of industries, we propose that the finding is not as robust as is generally assumed. We introduce an alternative pattern of evolution in which, during the emergent stage, an industry experiences a sharp decrease in the number of firms – a “mini shakeout” – before increasing again, reaching a final peak and undergoing a major shakeout as described in the extant literature. Using panel data across multiple product innovations introduced in the 20th century, we first show the pervasiveness of the mini shakeout phenomena. We then examine why some industries are more likely to experience a mini shakeout. Finally, using detailed quantitative and qualitative data on the emergence of handheld computers and digital cameras, we investigate why some firms abandon…...

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