When the innovator fails to capture rents from innovation

Innovating firms face the dilemma of knowing when they will be able to appropriate the rents accruing from their innovations. Only the future value of the rents creates an incentive to innovate, and all innovations that are either imitated or improved upon by competitors preempt innovator firms from capturing the rents. In this conceptual article, we observe boundary conditions under which protection ensures appropriation. A paradox emerges in that innovators benefit from networking and bandwagon effects but not from total diffusion of the knowledge. While networks are excellent vehicles for innovation, business and social ties connecting firms deepen the hazards associated with the appropriation of rents.