Digital Innovation with High Costs of Entry: Evidence from Software-Driven Medical Devices

by Cirrus Foroughi and Ariel Dora Stern

Overview — Although technology shifts often allow new entrants to edge into a market, established firms seem to be maintaining leadership in the medical devices industry, where software integration is increasingly important.

Author Abstract

Does technological opportunity enable the rise of new entrants or reinforce the position of incumbents? Research on this classic topic often ignores the high costs of entry seen in some industries. We offer a novel approach to this question in the context of regulated medical technology, where the introduction of software is of growing importance and has created fresh opportunities for new product development. Pioneering a new application of supervised document classification, we consider over 35,000 new medical devices that came to market in the United States from 2002 to 2016 in order to identify predictors of digital innovation in this industry. We consider the relative importance of key factors such as geographic and within-firm capabilities and the role of financial resources. We find that location in a region of concentrated expertise and prior firm commercialization experience reinforce one another in predicting digital innovation. While venture capital funding appears to play a role in supporting innovative entrants, closer analysis suggests that this funding selects on other variables that predict digital innovation; in this regulated industry, financial resources do not substitute for existing capabilities. We conclude that incumbent firms have an advantage in innovating in this setting.

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