Author Abstract
When innovations are successfully commercialized into new products, they can create value for both consumers and firms. When products malfunction, however, they can harm consumers and disrupt firm operations. Product failures are, therefore, likely to impact firms’ subsequent innovation activities. Using 13 years of Food and Drug Administration data, we examine the effects of firm and competitor medical device recalls on subsequent new product innovation. Recalls vary by source, proximity, and severity while innovations vary in their sophistication and novelty. We use recurrent-event accelerated failure time models to examine how product failures experienced by firms and their competitors impact subsequent major and minor innovations. We find that focal firm recalls slow minor innovation, an effect that is strongest when recalls are in the same product area as innovation activity. A one standard deviation increase in the number of proximate focal firm recalls implies more than a one-year delay in minor innovation. However, competitor firm recalls lead to acceleration in both minor and major innovative activity. The relationship between competitor recalls and minor innovation is strongest when recalls are more severe, while the relationship between competitor recalls and major innovation is strongest when recalls are proximate and more severe. Just one localized, severe competitor recall leads to a one-month reduction in time to major innovation. Our results suggest that product failures influence subsequent innovation but that their impact is dependent upon recall source, proximity, and severity. The strategic and public policy implications of these results are highlighted.
Paper Information
- Full Working Paper Text
- Working Paper Publication Date: September 2018
- HBS Working Paper Number: HBS Working Paper #19-028
- Faculty Unit(s): Technology and Operations Management
