1 Preliminary: Please do not cite without permission Productivity Leadership and Strategic Investments in Innovation: The Adoption of E-Business Capabilities

I investigate whether market leadership predicts adoption of innovations and why. My empirical context is the adoption of e-business practices among U.S. Manufacturing plants in early 2000. Using detailed data from the U.S. Census of Manufactures, I construct two measures of market leadership – a conventional one based on market share and a novel one based on productivity – and investigate how leadership influences the probability of adopting I.T.- driven business process innovations. I find evidence that market leadership is, in general, positively correlated with the use of e-business practices; however, there is an important distinction between e-buying and e-selling. In e-buying, the likelihood of adoption is increasing in all measures of leadership. This result is accentuated in more concentrated markets. This empirical finding conforms to theoretical predictions by Athey and Schmutzler (2001) that leading firms will have incentives to invest in technologies that may help them maintain market dominance in oligopolistic settings. By contrast in e-selling, only market share leadership has a positive (and noisy) relationship with adoption. I hypothesize that this difference is consistent with stand-alone benefits of adoption that are increasing in output for both technologies, as well as separate strategic benefits of adopting that arise primarily in e-buying, where there may be more scope for leaders to use innovative processes to deter less-efficient rivals