Radical Innovation and R&D Competition

Empirical evidence about innovation is doubtful in showing incumbent firms\u2019 and new entrants\u2019 attitude toward radical innovations. Moreover, theoretical works exhibit divergent conclusions when investigating the incentives to innovate. Our paper emphasizes the importance of distinguishing between degrees of innovativeness when comparing an incumbent\u2019s and an entrant\u2019s incentives to invest in innovation. The model captures the peculiarity of a radical innovation along three dimension: risk, impact on the existing market and capability of opening up a new market. The results emphasize the role of substitution and complementarity between markets in determining the incentives to innovate in the radical case. Implications on innovation policy are finally discussed