UCL School of Management is delighted to welcome Professor Yue Maggie Zhou, Michigan Ross, to host a research seminar discussing; Unconventional Times: Competition, Capability, and Process Innovation in the Oil and Gas Extraction Industry.

Abstract:

We examine how competition affects process innovation in competitive markets and how firm capability moderates that relationship. Existing research offers competing predictions: competition may reduce innovation by compressing rents, but it may also stimulate innovation by increasing firms’ risk of failure without innovation. We tackle this tension through an abductive approach: we first identify an empirical regularity and then develop a formal model to explain it. Using well-level and operator-level data on U.S. oil wells from 2011 to 2018, we find that greater competition is associated with lower process innovation and that this negative relationship is weaker among higher-capability firms.

These findings are robust across alternative innovation measures, matched samples, and alternative measures of competition. We then build a formal model in which firms choose innovation by trading off short-term profitability against survival. The model yields sufficient conditions under which competition reduces innovation and under which firm capability weakens this negative effect. We further examine these sufficient conditions across industries using Compustat data. Our study contributes to research on competition and innovation by explaining why competition may discourage innovation in thin-margin markets and why this effect varies systematically with firm capability.