Remaining As A Leader or Not? Technology Spillover Answers

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1 Applied Economics and Finance Vol. 3, No. ; May 06 ISSN E-ISSN Publised by Redfame Publising URL: ttp://aef.redfame.com Remaining As A Leader or Not? Tecnology Spillover Answers Wang Tsung-Li Hung-Pin Lin & Yu-Ci Sung 3 Department of Mareting Management, Su-Te University, Kaosiung, Taiwan. Department of International Business & Trade, Su-Te University, Kaosiung, Taiwan. 3 Department of Leisure & Tourism Management, Su-Te University, Kaosiung, Taiwan. Correspondence: Hung-Pin Lin, Department of International Business & Trade, Su-Te University, Kaosiung, Taiwan. Received: January 5, 06 Accepted: January 3, 06 Available online: February 4, 06 doi:0.4/aef.v3i.357 URL: ttp://dx.doi.org/0.4/aef.v3i.357 Abstract Muc as been discussed about te advantages and disadvantages of being a first mover. However, discussion regarding te incentives encouraging a firm to remain as leader is absent in most studies. Tis paper aims to fill tis gap and provide teoretical and empirical evidences vis-à-vis te incentives of remaining as a leader, by comparing profits between leader and follower wen taing tecnology spillover and tecnological efficiency into consideration. Te findings sow tat in regard to effective tecnological efficiency: (i) under te condition of a wea (strong) tecnology spillover, retaining te position of leader firm is (not) a dominant strategy because of iger (lower) profits tan a follower; (ii) te alf-sared tecnology spillover leads to an equal profit between firms, and implies a critical time of action for te leader firm to brea te evenly-matced status by reconsidering first mover advantages; (iii) an empirical study on a data set of 35 ig-tec and non-ig-tec SMEs in manufacturing industry from 999 until 006 lends strong support to tese results and may also provide useful clues for tecnology managers or practitioners to mae better policies to benefit teir maret competitiveness. Keywords: first mover advantage (disadvantage); tecnology investment; tecnological efficiency; tecnology spillover.. Introducation Weter or not a firm sould be a leader in its field is a controversial issue, especially wen many executives assume tat te first company in a new product category will acquire an unbeatable ead start and reap long-lasting benefits, someting tat, in reality, does not always appen (Suarez and Lanzolla, 005). Existing studies ave documented te advantages and disadvantages of a first mover strategy. Suc studies ave indicated tat tis strategy leads to a series of competitive advantages (e.g. Caffee, 985; Kerin, et. al 99). Previous literature as sown tat tere are several advantages for a first mover or leader firm. For example, an incumbent brand, in regard to brand loyalty, olds demand advantages over a later brand because consumer preference rests wit te first brand tat performs adequately (Scmalensee, 98). Glazer (985) suggested tat first movers are more liely tan teir followers to ave more extensive learning, and tus better access to opportunities. Patterson (993) stressed tat a first mover could initiate te build-up of experiential raw material, and ence, develop te most advanced insigts, associations and causal maps witin a specified context. A first mover strategy may also lead to some oter advantages. suc as: establising tecnological leadersip (e.g. Kvint, 994; Luo, 995; Scnaars, 994; Senar, 990), preempting specialized assets, product or maret positioning (e.g. Allen, 993; Coen and Levintal, 994), engaging in price simming (e.g. Amir and Stepanova, 006; Ree, et. al, 99; Ree 006), using te buyer switcing costs to eance its maret sare (e.g. Stigler and Becer, 977), securing tecnological leadersip of patents or R&D tecnology (e.g. Hamel and Praalad, 994), controlling crucial or scarce resources for success in a competitive maret (e.g. Kerin, et. al, 99; Lilien and Yoon, 990; Mascareas, 99) and, finally, erecting a iger entry barrier for followers (e.g. Anderson and Engers, 994; Kvint, 994; Luo, 995; Luo and Peng, 998; Pan and Ci, 999; Senar, 990). A first mover or leader can potentially maintain its competitive advantage via its tecnological lead, tus remaining superior to later entrants, or lose its pioneering position and first mover advantage, by being outperformed by later 0

2 Applied Economics and Finance Vol. 3, No. ; 06 entrants (e.g., Robinson et. al, 99; Kalyanaram, et. al, 995; Pan and Ci, 999; Robinson, et. al, 995; Lieberman and Asaba, 006). Gal-Or (985, 987) analyzed te disadvantages of being a leader, irrespective of weter bot te first mover and later entrant were equally willing to assess demand troug maret researc. Golder and Tellis (993) reported tat only 53% of first movers survived in te maret. Kalyanaram et al. (995) also sowed te same result and suggested tat te maret entry order is not necessarily related to long-term maret performance. First movers may tae a iger ris tan later entrants wit respect to new product failure. Suc riss relate to te forecasting bias for a pioneering brand, or to te inability to eliminate uncertainty in consumer acceptance of a pioneering innovation (Hamel and Praalad, 994). Because of te substantial costs lined to ris, being a later entrant may be more beneficial tan being a first mover (Bryman, 997). A later entrant is in a better position to learn more about customer needs by using a wait-and-see strategy and tus avoiding maret uncertainty and te difficulties tat a first mover faces in regard to adapting to a rapidly canging environment (e.g., Lieberman and Montgomery, 998; Teece, 986). Being able to analyze te advantages and disadvantages of being a first mover is an important ability, allowing firms to mae educated decisions about becoming a maret leader or maret follower. However, to te best of our nowledge, te incentives or motivation to encourage a firm to become a leader or reject te temptation is absent in most studies. By constructing a model of Cournot duopoly competition and utilizing empirical evidence from a panel data analysis, tis paper aims to fill tis gap and provide a more complete understanding of a resolution of disputes vis-à-vis first mover advantages and disadvantages, wen tecnology spillover is introduced. Te role of tecnology spillover in te maret environment can act as te leader firm s intellectual property rigt, being secured troug patents, copyrigts, or government conferred status; tus imitation or free-ride action from followers can be detected troug realizing te degree of tecnology spillover (Bernstein and Nadiri 989; Bloom et al., 005). Above all, in order to for a leader firm to maintain its position, a wea tecnology spillover may encourage te leader firm to expand its innovative activities, wic in turn would lead to better tecnological efficiency and greater profit. Taing tecnology spillover into consideration not only elps innovation managers mae better decisions wit respect to tecnological efficiency, but also provides additional benefits wit respect to profit expectations. In addition, our teoretical and empirical analyses also provide clues as to wy leaders are motivated to eep teir leading position or to let it go. Te remainder of tis paper is structured as follows: In Sections and 3, we outline in greater detail ey caracteristics of eac of te first mover s advantages and disadvantages; in Sections 4 and 5, we use te ey concepts and analyze te main parts of te teoretical model. In Section 6, we provide empirical evidence to sustain te teoretical propositions. Conclusions and policy implications are discussed in Section 7.of a manuscript opens wit an introduction tat presents te specific problem under study and describes te researc strategy. Because te introduction is clearly identified by its position in te manuscript, it does not carry a eading labeling it te introduction. Before writing te introduction, consider te following questions (Bec & Sales, 00):. First Mover Advantages.. Tecnological Leadersip Leadersip in tecnological development is often synonymous wit rapid tecnological progress, displaying advanced learning processes, or acieving success in patent or R&D competition. Innovation tat embodies proprietary R&D tecnology may bestow te benefit of a timing advantage, but only if te leader as made product advances and as succeeded in securing intellectual property rigts, copyrigts, or trade secrets. Besides tis, te learning process optimizes unit production costs in conjunction wit cumulative output, and generates a sustainable cost advantage for an early or incumbent firm to maintain leadersip in its maret sare. R&D tecnology and preemptive patents also elp a leader firm dominate R&D strategy and build entry barriers tat deter rivals from entering patent competition... Preemption of Specialized Assets Preemptive assets build up incentive confidence for te first movers: tey believe tat latecomers will be unprofitable in occupying second place. Tese assets may be pysical resources tat already exist, often in conjunction wit scarce spatial resources (e.g., geograpic space, product space, self space, etc.). Tese assets are useful and relate to tecnology investment and accumulated innovation, suc as wit advanced manufacturing facilities for nanometer processes and semiconductor tecnologies, or wit unique upstream distribution cannels. Preemptive tecnology investment in plant and equipment crystallizes an incumbent firm s profits in te maret because suc investment can serve as a first mover advantage tat treatens and deters te potential second mover from joining te maret (see Allen, 993; Coen and Levintal, 994). Te first-mover can also select te most competitive nices, to limit te amount of space available for potential entrants...3 Buyer switcing costs

3 Applied Economics and Finance Vol. 3, No. ; 06 Competitive timing advantages related to switcing costs constitute anoter first mover advantage. Once te leader firm (i.e. first mover) as acquired a customer base, it as an advantage over later entrants, because tese customers may find it expensive to switc to a new product in terms of transaction costs, searc costs or learning costs. For example, some end-users wo ave grown accustomed to a single, familiar word-processing or software program may not be willing to invest time in adopting a new one. Tis means tat a late entrant must invest extra costs or resources to attract customers away from te leader firm.. First Mover Disadvantages Te mecanisms tat benefit a leader firm may also present various disadvantages. Tese disadvantages may imply second mover advantages... Free-rider Effect Te ability to free-ride on a leader firm s tecnological investment, taing advantage of any strong tecnology spillover, is an option tat is sometimes available to te second mover. For some products and services, any productivity realized by te leader firm as it proceeds down te learning curve is also made available to te second mover due to te fact tat imitation costs are muc lower tan tecnology costs (Lieberman, 987; Lieberman and Montgomery, 988; Utterbac, 994). One example is Amazon.com, launced in 995 and, today, one of te world s largest online boostores. However, Boos.com was actually founded in 99 and launced online in 99. To date, it is considered te first nown online boostore. Amazon.com availed itself of second mover advantages. It found tat web usage ad increased 00% eac year in te previous few years, so it began to advertise its web-based business at over 8,000 oter internet sites. It as since dominated te business; wile te Amazon.com brand name is instantly recognizable, Boos.com is muc less so... Tecnological or Maret Uncertainty A second mover nows tat early entry into an uncertain maret involves a ig degree of ris, so it acts quicly to gain an advantage once te uncertainty as been resolved (see Olausson and Berggren 00). If tere are no clear advantages displayed by te first mover, te riss involved may reduce te willingness of firms to introduce new tecnology until te uncertainty as been mitigated...3 Incumbent Inertia A first mover may lose its leading position and be outpaced by a second mover wen breatroug innovations appen. Te inertia tat causes loss of leadersip can be derived from several factors or circumstances. For example te first mover (i.e. te incumbent firm) may be too controlled by a specific set of fixed assets, be reluctant to cannibalize its own production line, or demonstrate wea tecnological efficiency. Tese factors mae te first mover become more organizationally inflexible, wic can iibit its ability to respond quicly to environmental canges or exogenous treats. After reviewing and understanding first mover advantages and disadvantages, te reasons or incentives for a firm to retain or release its position as a maret leader is, to te best of our nowledge, absent in most studies. Tis paper aims to fill tis gap and provide a brief review of pertinent concepts regarding te tecnology spillover perspective of a firm s strategy in te following section, wic details teoretical and empirical evidence..3 Tecnomogy Spillover Perspective and First/Second Mover Advantages.3. Strong Tecnology Spillover Tecnology spillover is an external innovative activity, wereby information of a firm s ongoing innovative activity leas to its competitors. Suc information can benefit competitors by improving teir efficiency in searcing for innovation. Bloom et al. (005) proposed tat firm performance is affected by two countervailing spillovers : a positive effect from tecnology spillovers and negative business effects from maret rivals stealing. In general, te closer te firms are to one anoter (including geograpically, tecnically, or in terms of product differentiation), te greater te tecnology spillover (for example, see Amir, 000; Carlino, 00, Jovan, 0). Hence, eac firm as incentives to restrict its tecnology expenditure and await an opportunity to imitate, tereby availing itself of a second mover s advantages. Te ability to free-ride on a leader firm s tecnology investment, wic includes any strong tecnology spillover, is sometimes available to te second mover. For some products and services, any productivity realized by te leader firm as it proceeds down te learning curve is also made available to te second mover due to te fact tat imitation costs are muc lower tan tecnology costs (Lieberman, 987; Lieberman and Montgomery, 988; Utterbac, 994). For example, Tellis and Golder (996) sowed tat in many cases, te firms tat dominated te maret were not te first movers but te second movers into te maret. It can be conjectured tat due to te strong spillover effect from te first movers, second movers are able to minimize trial and error by accessing information troug te observation of te first movers experiences or tecnological

4 Applied Economics and Finance Vol. 3, No. ; 06 activities..3. Wea Tecnology Spillover If a tecnology expenditure leads to a very ig spillover, intellectual property rigts can often be used to temporarily maintain te profitability of a first mover s ideas; tese rigts can be secured troug patents, copyrigts, scarce resources, or governmental protection (e.g. Kerin, et al., 99; Lilien and Yoon, 990; Mascareas, 99). Wit suc protections, te tecnology spillover is made extremely wea, even wen firms are intense rivals. A state of wea spillover prevents exploitation by rival firms. In suc cases, a firm tat is a tecnological leader as incentives to expand its innovative activities and maintain its first mover advantages. Lerner (00) and Moser (005) found tat a wea tecnology spillover (i.e. a sound patent system) may stimulate R&D and innovation. Additionally, Lanjouw and Cocburn (000) and Arora et al. (008) sowed tat innovations are concentrated in some indicated industries once te tecnology spillover is relatively wea, tus imitation can be easily detected. Terefore, it can be argued tat te degree of tecnology spillover plays an important role in agents decision on te timing investment of teir activities. Muc of te current literature tat deals wit te crucial factor, tecnology spillover, does not provide an answer as to ow muc tecnology spillover is involved in deciding weter or not to coose a leader or follower position. A firm may focus only on te learning or imitating aspect of te first mover or second mover advantage witout considering te timing of wen to be a leader or a follower. In tis paper we construct a simple Cournot duopoly model according to D Aspremont and Jacquemin (988). Togeter wit tecnological efficiency, it is considered able to illustrate wy a firm sould continue to retain a position of leader in order to maintain its first mover advantages, wile expecting wea spillover and dominating profit. On te oter and, we also prove tat a leader firm may be unprofitable and inferior to a follower wen first mover disadvantages and strong tecnology spillover are expected. Tese findings are also consistent wit our empirical evidence were leader firms in ig-tec and follower firms in non-ig-tec SMEs manufacturing industries are studied.. Metod and Model: Cournot Duopoly Competition In a Cournot duopoly competition, it is supposed tat tere are two firms: Firm is te leader and Firm is te follower. Te linear demand of omogeneous production is specified as p a b ( q q ), and te decision variables of tecnology investment are x i for Firm i, i,. Te constant unit cost of production c i depends on x i, wic taes te form of ci c ( xi x j ) i, j,, i j. For simplicity, we discuss te conditions of tecnology spillover briefly, as wea spillover ( 0 ), alf-sared spillover ( 0. 5 ) and strong spillover ( ) (Grilices,979, Bernstein and Nadiri, 983 and Qiu, 997). Firm i s tecnology cost is quadratic and given by: x i. Te coefficient captures tecnology efficiency wic measures te extent to wic tecnology investment ( x ) contributes to firm s profit ( ), and notes tat te lower te value of, te better te tecnological efficiency tat is acieved in a firm s profit function. Firms coose teir respective levels of tecnological investment, and te leader cooses te best R&D investment (i.e. one tat maximizes profit based on te follower s best R&D investment response function, see Smit, 006, Hartmann et al., 006, Mitcell and Hamilton, 007, and Tubbs, 007). Solving by bacward induction, we examine weter te leader as a first profit advantage by taing te tecnology investment plan ( x ) based on is rival s response in te first stage. Beginning wit te second stage, firms coose output q i to maximize profit. We ten ave te Cournot Nas equilibrium output and profits denoted as q x, ), q ( x, ) and x, ), ( x, ), respectively. In te first stage, Firm i cooses ( x i to maximize its profit: ( a b ( ( x, ) q ( x, )) c q ( x, ) x j xi i i ( x, ) q i i. () Te following two first-order conditions of Equation () become: / x 0, x R ( x ) and / x 0, x R ( x ), were a c A 0. () Because we suppose tat Firm is te leader and Firm te follower, Equation () expresses te R&D best response function as R i ( x j ) of bot Firms and. To derive te equilibrium, in te second stage, we substitute Firm s reaction function R ( x ) into Firm s profit function ( x, s), wereupon we maximize te first-order condition of x to obtain x (, ) and x (, ) by substituting x ( s, ) into Firm s tecnology best response function R ), we ten ave x (, ). Inserting x (, ) and x (, ) into bot firms profit function yields ( x (, te final profit of Firms and, as denoted by (, ) and ), respectively. Te best metod by wic to determine weter Firm prefers to remain as a leader is to compare its profit to tat of Firm (, ) (, ) ). For simplicity, we discuss our noted conditions of wea spillover ( 0 ), alf-sared ( 3

5 Applied Economics and Finance Vol. 3, No. ; 06 spillover ( 0. 5), and strong spillover ( ) in te following propositions.. Proposition : Retain te position of leader: Competitively iger profit wit wea tecnology spillover ( 0 ) and iger tecnological efficiency. Proof of Proposition : Note tat te profit comparison wit a wea tecnology spillover between te leader and te follower is given by: ( b ) 0 48b A ( b )(4 3 ) / (3) Equation (3) sows tat te incentive for te leader to maintain its position as maret leader is verified as, wen 4 /(3b). Intuitively, 0 indicates a wea tecnology spillover and implies tat a firm benefits only from its own tecnology investment in cost reduction. Hence, weter Firm, as a maret leader, sould retain its position of maret leader depends on te degree of regarding a wea tecnology spillover. Recalling tat tecnological efficiency ( ) represents ow muc tecnology investment ( x ) contributes to Firm s profit ( ), it is noted tat te lower value of indicates tat better tecnological efficiency is acieved in Firm s profit function. On te oter and, wea tecnology spillover sows tat as long as te degree of is sufficiently small ( 4 /(3b) ), te tecnological efficiency will be effective, as Firm as a strong incentive to maintain its position as maret leader due to its aving iger profit tan Firm. Insigts gained by tis result are straigtforward, in tat wea tecnology spillover in te maret environment implies tat a leader firm s intellectual property rigt can often be secured troug patents, copyrigts, or government protection; tus imitation or free-ride action from a follower can be easily detected. Suc wea tecnology spillover guarantees te first mover advantages and encourages te leader to expand its innovative activities, wic in turn leads to better tecnological efficiency and profit competence. Tus, tis result encourages te leader to maintain its leading position.. Proposition : Critical time for action: alf-sared tecnology spillover ( 0.5) Proof of Proposition : Te profit comparison wit a alf-sared tecnology spillover between te leader and te follower is given by ( 5 ) 0. 0 (4) Wen te degree of spillover is alf-sared, it means tat eac firm gets alf te benefits from te oter s investment in cost reduction, and alf from its own. Tis result as no bearing on weter one sould retain a position as maret leader or become a follower, no bearing on tecnological investment, because te firms ave te same profits ( ), and noting to do wit tecnological efficiency ( ). However, even toug tere may be no difference in acting as a maret leader, te alf-sared tecnology spillover and te equal profit between firms implies tat once te external competitive environment as canged, it will be a critical time of action for te leader firm (or follower firm) to eiter cange direction or remain te same in order to gain competitive advantage. Te insigt gained ere is usually as a result of duopoly competition, especially wit firms tat could be labeled as evenly matced. Once one of te firms as a tecnological lead on its rival, it is a critical time of action for te leader firm to brea te evenly-matced status and tus eventually gain a profit advantage..3 Proposition 3: Giving up being a leader: Competitively lower profit wit strong tecnology spillover ( ) even wit iger tecnological efficiency Proof of Proposition 3: Te profit comparison wit a strong tecnology spillover between te leader and te follower is given by: ( 3 ) 8Ab (9b ) / (5) Equation (5) sows tat tis condition is verified as, wen /(9b). Intuitively, indicates tat eac firm benefits as muc from te oter firm s investment in tecnology cost reduction plans as from its own. Bot Firm s and Firm s tecnology cost reduction plans are expressed by x x ; ence, leader profitably is determined solely by te degree of. As wit proposition, evidence in Equation (5) sows tat a strong tecnology spillover and a sufficiently small degree of (i.e. /(9b) ) implies tat even toug te tecnological efficiency remains effective, Firm as a leader as no incentive to maintain its first mover position. Tis is because staying as a leader ultimately derives a competitively lower profit tan tat of Firm, by virtue of being te first to mae a tecnology investment plan. Tis result will lead Firm to reexamine te first mover disadvantage and mae Firm consider abdication of its leadersip. Te insigt from tis result is straigtforward. A strong tecnology spillover in te maret environment implies tat te ability to free-ride on a leader firm s tecnology investment is sometimes available to te follower. For some products 4

6 Applied Economics and Finance Vol. 3, No. ; 06 and services, any productivity realized by te leader firm is also made available to te second mover due to te fact tat imitation costs are muc lower tan tecnology costs (Lieberman, 987; Lieberman and Montgomery, 988; Utterbac, 994). One good duopoly example in te maret, as introduced by Zang and Marman (998), is te case of web browser competition. Netscape was te first mover in te web browser maret, wile Internet Explorer was te follower. Despite Netscape s tecnological efficiency being initially superior to tat of Internet Explorer, te strong tecnology spillover allowed Internet Explorer to ave features tat Netscape did not ave..4. Empirical Discussion Propositions and 3 can bot be tested by empirical cases. We use te data of ig-tec and non-ig tec small and medium-sized enterprises (SMEs) in te manufacturing industry to measure te significance of tecnological efficiency and tecnology spillover in te profit growt between leaders and followers. Panel data models including random and fixed effect are applied because tey ave te following advantages over traditional OLS regression models: (i) greater control of possible collinearity; and (ii) better explanation power caused by te absence of relevant independent variables to explain te dependent variables. To estimate te regressions, te dynamic panel of te tecnology spillover-profit model can be expressed in te following log-linear form: ln i, t 0 lns i, t ln E i, t i, t, (6) were, represents te ig-tec and non-ig-tec SMEs industry, respectively. ln i, t measures te difference between te logaritm to firm sales in te present period and te logaritm to firm sales in te previous period; ln S i, t is te logaritm of tecnology spillover; ln E i, t is te logaritm of tecnological efficiency wic identifies te ratio of te R&D investment to total sales; i, t is te error term. Based on te above considerations, we formulate te following ypoteses: Hypotesis : Retain te position of leader: Wea tecnology spillover and iger tecnological efficiency lead to a leader firm s greater profit growt. Hypotesis : Retain te position of follower: Strong tecnology spillover and iger tecnological efficiency lead to a follower firm s greater profit growt..5 Data source and definitions of tecnology spillover Tis study uses te Iberian Balance Seet Analysis System (SABI) database, from 999 to 006, provided by Bureau van Dij. Hig-tec and non-ig-tec SMEs in te manufacturing industry are selected according to te criteria of OECD classification (00) and Based on te OECD classification (00), ig-tec sectors are aerospace, computers, office macinery, electronics-communications, parmaceuticals and scientific instruments. Non-ig-tec sectors including te medium-ig tecnology and low tecnology sectors are: cemicals, electrical macinery, fabricated metal products, food, beverages and tobacco, motor veicles, non-electrical macinery, non-ferrous metals, non-metallic mineral products, paper and printing, petroleum refining, rubber and plastic products, sipbuilding, textiles and cloting, transport equipment, and wood and furniture. We suppose tat most of te incumbent firms for te entire period ( ) tae te first mover advantage and act as leader firms; most of te firms entering during te period ( ) are follower firms. Te summarized sample description is presented in Table. Table. Sample description Hig-tec SMEs Non-ig-tec SMEs Incumbent firms in all period (leaders) Firms entering in te period (followers) Total number of SMEs Total number of observations Following Spence (984) and Raut (995), te tecnology spillover by: S i S i of firm i in industry can be expressed R j, j i (7) 5

7 Applied Economics and Finance Vol. 3, No. ; 06 were R j is te R&D capital calculated by te discounted sum of te past R&D investment stream of firm j in industry wen te R&D capital of firm i is excluded, and we coose te value of te discounted rate as 0.85 as adopted by Grilices and Mairesse (983), and Cuneo and Mairesse (984). 3. Results Tables and 3 present te results of te panel data model regarding te profit growt determinants between leaders and followers in ig-tec and non-ig-tec SMEs firms; we ave taen into consideration te fixed and random effects model among tecnology spillover, tecnological efficiency and profit growt. Te empirical analysis presented in Table indicates te following regarding leader firms in ig-tec SMEs manufacturing industry: (i) te Hausman test below te 5% significance level suggests tat te fixed effect model sould be selected because tat Table sows tat te null ypotesis is rejected in our panel data; terefore, te fixed effect model is selected in te leader firms profit regression model; (ii) Below te 5% significance level, te null of ypotesis yields coefficient (t-statistics) value of 4.3(.0) wic sows tat te relationsip between te profit growt ( ln i, t ) and tecnological efficiency ( ln E i, t ) is positive and statistically significant; (iii) Below te % significance level, te null of ypotesis yields coefficient (t-statistics) value of -0.43(-3.7) wic sows te relationsip between te profit growt ( ln i, t ) and tecnology spillover ( ln ) is negative and statistically significant. Based on (ii) and (iii), we find tat Proposition in our teoretical model and Hypotesis are bot sustained by our empirical evidence. Table. Leader firms profit growt, tecnology spillover, and tecnological efficiency S i, t Hig-tec SMEs Non-ig-tec SMEs i, t Dependent variable: ln Dependent variable: ln i, t S i, t ln (-3.7)*** (.0) ln 4.3 (.0)** 0.03 (.98)* E i, t S i, t ln -0.3 (-.7)** (-.08) ln.0 (.44).0 (.7)** E i, t Hausman Test x () ** x (). 48 R Adjusted R (a) Te regression model is ln i, t 0 lns i, t lne i, t i, t, i leader firms. (b) Te number inside te parenteses is te t-statistics. (c) ***, **, and * represents tat te %, 5% and 0% significance level, respectively. i (d) Te critical value of x () for %, 5% and 0% significance level are 9., 5.99, and 4.6, respectively. (e) (+) mars te appropriate model wic selected troug Hausman test. In turn, Table 3 indicates te following regarding follower firms in non-ig-tec SMEs manufacturing industry, (i) te Hausman (978) specification test in Table 3 sows tat te null ypotesis is not rejected in our panel data; terefore, te random effect model is selected in follower firms profit regression model; (ii) te relationsip between te profit growt ( ln i, t ) and tecnological efficiency ( ln E i, t ) is positive and statistically significant (notes tat below te % significance level, te null of ypotesis yields coefficient (t-statistics) value of.6(3.47); (iii) te relationsip between te profit growt ( ln i, ) and tecnology spillover ln S i, t is positive and statistically significant (notes tat below te 5% significance level, te null of ypotesis yields coefficient (t-statistics) value of.07(.98).). On te basis of te empirical evidence (ii) and (iii), we find tat wit a iger tecnological efficiency, te strong tecnology spillover elps te follower to obtain better profit growt; terefore, proposition 3 and Hypotesis are bot sustained by our empirical evidence. t 6

8 Applied Economics and Finance Vol. 3, No. ; 06 Table 3. Follower firms profit growt, tecnology spillover, and tecnological efficiency Hig-tec SMEs Non-ig-tec SMEs Dependent variable: ln i, t Dependent variable: ln i, t S i, t ln -.55 (-.)**.74 (-.39) ln 3.54 (.08).03 (.78)* E i, t S i, t ln -.7 (-.79)*.07 (.98)** ln.43 (.5).6 (3.47)*** E i, t Hausman Test x () 3. 5 x (). 3 R Adjusted R (a) Te regression model is ln i, t 0 lns i, t lne i, t i, t, i follower firms. (b) Te number inside te parenteses is te t-statistics. (c) ***, **, and * represents tat te %, 5% and 0% significance level, respectively. i (d) Te critical value of x () for %, 5% and 0% significance level are 9., 5.99, and 4.6, respectively. (e) (+) mars te appropriate model wic selected troug Hausman test. 4. Discussion Tere ave been many discussions concerning first mover advantages and disadvantages. However, to te best of our nowledge, te reasons wy a firm sould eiter retain or surrender its position as maret leader are absent in most studies. Tis paper aimed to fill tis gap; it finds tat, in Cournot s duopoly competition, te crucial factors of tecnology spillover and tecnological efficiency bot play important roles in determining a leader firm s leading position and strategy. First, we sow tat despite te effectiveness of tecnological efficiency (i.e. te tecnology investment plan is beneficial to profit), strong tecnology spillover maes a leader firm decide to give up its leader position because of lower profit tan tat of te follower firm. Second, we sow tat wea tecnology spillover guarantees te effectiveness of tecnological efficiency and enables a leader firm to retain its position as maret leader because of a iger profit tan tat of te follower firm. Finally, we sow tat alf-sared tecnology spillover leads to an equal profit between firms, but implies tat it is a critical time of action for te leader firm (or follower firm). Tese teoretical results are also supported by te empirical evidence troug a panel data of ig-tec and non-ig-tec SMEs of te manufacturing industry investigation. Tey may also provide useful clues or criterion for tecnological practitioners or managers to mae better policies to benefit teir maret competitiveness. 4.. Implications for practitioners Tecnological practitioners sould also be interested in te role tat tecnology spillover plays, as evidenced in te teoretical and empirical results we ave presented, and may well be interested in te relevant application to tecnology and customer needs. 4.. Wen customer needs lead and tecnology follows It can be noted, as sown in te presentation wit regard to te mecanism of tecnological competition, tat being a leader and aving wea tecnology spillover will result in profitable outcomes. By examining te essence of a leader s tecnological competition and profits, it can be deduced tat one of te reasons tat profits are made is tat a greater maret demand can be derived from an expansion of customer needs. Tecnological practitioners seeing to grow teir businesses and maintain teir respective leader positions are advised to test te maret in advance to measure its innovation costs. Accordingly, once maret demand increases, wea tecnology spillover means te leader firm is free from te follower s free-ride or imitation; tus, effective tecnological efficiency may contribute to te profit and maret sare. 7

9 Applied Economics and Finance Vol. 3, No. ; Wen tecnology leads and customer needs follow Tecnological practitioners may wonder wat would appen if tecnology were updated at an explosive pace, wile tere was a slow response regarding customer needs. Tis as been answered by our teoretical and empirical analyses wic sow tat being a follower wit strong tecnology spillover will result in profitable outcomes. Accordingly, being a follower may be a good alternative for tecnological practitioners, given tat being a leader no longer guarantees positive economic profits, especially wen customer needs are receding. Moreover, once maret uncertainty arises as a result of an instability in customer needs, a firm may wis instead to be a follower and wait for a iger tecnology spillover (i.e. free rider effect), as suggested by te first mover disadvantages. 4. Implications for innovation managers In te presentation of tis paper, our focus as been on te degree of tecnology spillover, as evidenced by aving eiter first mover advantages or disadvantages. Our teoretical and empirical evidence ave all been related to tis. Profit expectation is te ey incentive in deciding weter or not to remain as leader. We conclude wit a brief discussion of managerial implications for innovation managers. Te innovation managers of a firm are tose wo decide weter or not to stay as a maret leader. Tey must, wen a specific investment opportunity arises, evaluate te decision value and estimate te profit difference between first mover advantages and disadvantages. Tere are several issues pertaining to te position of a pioneer, and eac must be considered by innovation managers. Te first issue is concerned wit ow a first mover firm can maintain bot its profits and its leader advantages. How can a first mover firm protect itself from a second mover s imitation, te free-rider problem, or a strong tecnology spillover? Some evidence witin tis study suggests tat patents, copyrigts, scarce resources and oter governmental protection are obvious ways of acquiring wea tecnology spillover and guaranteeing te first mover firm s dominant profit advantage in te maret. Strong patent protection implies a low possibility of imitation and a wea tecnology spillover between first and second movers. Second, innovation managers must remain aware of te incumbent inertia penomenon to prevent tem from maing te wrong decisions wen suffering from te exogenous impact of environmental canges. In general, weaer tecnology spillover usually exists in a firm wit incumbent inertia. If te incumbent firm realizes tat te maret as very wea tecnology spillover, ten weaer tecnology spillover will lead to greater arrogance on te part of te incumbent. Golder and Tellis (993) report tat only 53% of first mover firms survive in te maret; suc results warn innovation managers tat succumbing to incumbent inertia may lead to slower tecnological efficiency, greater neglect of customer needs and te opening of a window of opportunity for potential entrants. As a result, innovation managers may wis to place greater value on information pertaining to te development of new tecnology, and wis to now ow organizations strengten innovation and broaden product lines to adapt to environmental canges. Tird, wit respect to strong profit and maret-sare competition, innovation managers of first mover firms sould consider tat once a leading tecnology is introduced to te maret, it is best to increase te firm s capacity to seize and exploit te first mover advantage. Tis is especially true in fast-growing marets, and elps prevent te potential treat of maret sare loss to ambitious second movers. Moreover, wen a first mover firm as measured its tecnology investment, capacity and customer requirements adequately witin te appropriate maret nices, it appears tat setting a formidable entry barrier to late entrants will elp ensure te profit advantage of a first mover firm. Finally, te teoretical evidence in tis paper sows tat a alf-sared tecnology spillover effect will result in an evenly-matced condition, regardless of weter or not te tecnological efficiency is effective. In general, tis game essentially becomes a stalemate tat quicly becomes a prisoners dilemma. Te label prisoners' dilemma is a canonical case of a game mared in game teory tat sows wy two individuals may not cooperate, even if it appears tat it is in teir best interest to do so. It is exemplified in a situation in wic two entities could gain important benefits from cooperating or suffer from te failure to do so, yet find it merely expensive to coordinate teir activities to acieve cooperation. However, it is an opportune time to tae action for innovation managers to brea te evenly-matced condition. To brea troug te zero-profit problem, innovation managers can protect teir tecnology now-ow, eance teir patent rigts, improve teir tecnological efficiency and broadcast product differentiations. Once te firm deviates from tis matc game by enacting any tecnology breatrougs, a profitable policy expectation becomes more feasible. References Allen, B. (993). Capacity pre-commitment as an entry barrier for price-setting firms. International Journal of Industrial Organization, (), ttp://dx.doi.org/0.06/ (93)90036-c 8

10 Applied Economics and Finance Vol. 3, No. ; 06 Amir, R. (000). Modeling imperfectly appropriable R&D via spillovers. International Journal of Industrial Or ganization, 8(7), ttp://dx.doi.org/0.06/s (00) Amir, R., & Stepanova A. (006). Second-mover advantage and price leadersip in Bertrand duopoly. Games and Economic Beavior, 55(), -0. ttp://dx.doi.org/0.06/j.geb Anderson, S. P., & Engers, M. (994). Strategic investment and timing of entry. International EconomicReview, 35(4), ttp://dx.doi.org/0.307/57000 Arora, A., Ceccagnoli M., & Coen W. M. (008). R&D and te patent premium. International Journal of In dustrial Organization, 6(5), ttp://dx.doi.org/0.06/j.ijindorg Bernstein, J. I., & Nadiri M. I. (983). Does nowledge intensity matter? A dynamic analysis of researc and development, utilization and labor requirements. NBER Woring Paper, 38. Bernstein, J. I., & Nadiri M. I. (989). Researc and development and intra-industry spillovers: an empirical a pplication of dynamic duality. Review of Economic Studies, 56(), ttp://dx.doi.org/ 0.307/ Bloom, N., Scanerman M., & Reenen J. V. (005). Identifying tecnology spillovers and product maret riv alry. CEPR Discussion Paper, 49. Bryman, A.. (997). Animating te pioneer versus late entrant debate: An istorical case study. TeJournal of Management Studies, 34(3), ttp://dx.doi.org/0./ Carlino, G. A. (00). Knowledge spillovers: cities' role in te new economy. Business Review, 4(4), 7-6. t tp://dx.doi.org/0.007/s Caffee, E. (985). Tree models of strategy. Academic of Management Review, 0(), ttp://dx.doi.org/ /AMR Coen, W. M., & Levintal D. A. (994). Fortune favors te prepared firm. Management Science, 40(), 7-5. ttp://dx.doi.org/0.87/mnsc Cuneo, P., & Mairesse J. (984). Productivity and R&D at te firm level in Frenc manufacturing. University of Cicago Press, Cicago, D Aspremont, C., & Jacquemin, A. (988). Cooperative and non-cooperative R&D in duopoly wit spillovers. American Economic Review, 8(5), Gal-Or, E. (985). First mover and second mover advantages. International Economic Review, 6(3), Gal-Or, E. (987). First-mover disadvantages wit private information. Review of Economic Studies, 54(), ttp://dx.doi.org/0.307/9757 Glazer, A. (985). Te advantages of being first. American Economic Review, 75(3), ttp://dx.doi.org/ 0.307/848 Golder, P. N., & Tellis G. J. (993). Pioneer advantage: mareting logic or mareting legend? Journal of M areting Researc, 30(), ttp://dx.doi.org/0.307/3785 Grilices, Z. (979). Issues in assessing te contribution of R&D to productivity growt. Bell Journal of Econ omics, 0(), 9-6. ttp://dx.doi.org/0.307/30033 Grilices, Z., & Mairesse J. (983). Comparing productivity growt: An exploration of Frenc and U.S. indust rial and firm data. European Economic Review, (-), ttp://dx.doi.org/0.3386/w096 Hamel, G., & Praalad C K. (994). Competing for te Future. Harvard Business Scool Press, Boston. Hartmann, G., C., Myers M. B., & Rosenbloom R. S. (006). Planning your firm s R&D investment. Researc -Tecnology Management, 49(), ttp://dx.doi.org/0.080/ Hausman, J., A. (978). Specification tests in econometrics. Econometrica, 46(6), 5-7. ttp://dx.doi.org/ 0.307/9406 Jovan F., Srečo, D., & Goran P. (0). Knowledge based economy: te role of expert diaspora. Panoecono micus, 59(3), ttp://dx.doi.org/0.98/pan03369f Kalyanaram, G., Robinson W. T., & Urban G. L. (995). Order of entry: establised empirical generalizations, emerging empirical generalizations, and future researc. Mareting Science, 4(3), -. ttp://dx.doi. org/0.87/msc.4.3.g 9

11 Applied Economics and Finance Vol. 3, No. ; 06 Kerin, R. A., Varadarajan P. R., and Peterson. (99). First-mover advantages: A syntesis, conceptual framew or, and researc propositions. Journal of Mareting, 56(4), ttp://dx.doi.org/0.307/5985 Kvint, V. (994). Don t give up on Russian. Harvard Business Review, 7(), Lanjouw, J., O., & Cocburn I.. (000). Do patents matter? Empirical evidence after GATT. NBER Woring P aper, Lerner, J. (00). 50 years of patent protection. American Economic Review, 9(), -5. ttp://dx.doi.org/ 0.57/ Lieberman, M. B. (987). Te learning curve, diffusion, and competitive strategy. Strategic Management Journ al, 8(5), ttp://dx.doi.org/0.00/smj Lieberman, M. B., & Montgomery D. B. (988). First-mover advantages. Strategic Management Journal, 9(), ttp://dx.doi.org/0.00/smj Lieberman, M., B., & Montgomery David B.(998). First-mover (dis)advantages: Retrospective and lin wit te resource-based view. Strategic Management Journal, 9(), -5. ttp://dx.doi.org/ 0.00/(SI CI) (9980)9:<::AID-SMJ>3.0.CO;-W Lieberman, M. B., & Asaba S. (006). Wy do firms imitate eac oter? Academy of Management Review, 3 (), ttp://dx.doi.org/0.5465/amr Lilien, G., L., & Yoon E. (990). Te timing of competitive maret entry: An exploratory study of new indus trial products. Management Science, 36(5), ttp://dx.doi.org/0.87/mnsc Luo, Y. (995). Business strategy, maret structure, and performance of international joint ventures: Te case of joint ventures in Cina. Management International Review, 35(), Luo, Ya., & Peng M. W. (998). First mover advantages in investing in transitional economies. Tunderbird I nternational Business Review, 40(), ttp://dx.doi.org/ 0.00/tie Mascareas, B. (99). First-mover effects in multiple dynamic marets. Strategic Management Journal, 3(3), ttp://dx.doi.org/0.00/smj Mitcell, G. R., & Hamilton W. F. (007). Managing R&D as a strategic option. Researc-Tecnology Manage ment, 50(), ttp://dx.doi.org/0.080/ Moser, P. (005). How do patent laws influence innovation? Evidence from nineteent-century world's fairs. A merican Economic Review, 95(4), ttp://dx.doi.org/0.57/ Olausson, D., & Berggren C. (00). Managing uncertain, complex product development in ig-tec firms: In searc of controlled flexibility. R&D Management Journal, 40(4), ttp://dx.doi.org/0./j x Pan, Y.G., & Ci P. (999). Financial performance and survival of multinational corporations in Cina. Strate gic Management Journal, 0(4), ttp://dx.doi.org/0.00/(sici) (99904)0:4<359::aid- SMJ3>3.0.CO;-9 Patterson, W. C. (993). First-mover advantage: Te opportunity curve. Journal of Management Studies, 30(5), ttp://dx.doi.org/0./j tb0035.x Qiu. L. D. (997). On te efficiency of bertrand and cournot equilibria wit product Journal of Economic Te ory, 75(), 3-9. ttp://dx.doi.org/0.06/00-053(85) Ree, B. D., De Palma, A., Fornell C., & Tisse Ja. F. (99). Restoring te principle of minimum differenti ation in product positioning. Journal of Economics& Management Strategy, 3(), ttp://dx.doi.or g/0./j x Ree, B. D. (006). First-mover disadvantages wit idiosyncratic consumer tastes along unobservable caracteri stics. Regional Science and Urban Economics, 36(), ttp://dx.doi.org/0.06/j.regsciurbeco Robinson, W., T., Claes F., & Mary S. (99). Are maret pioneers intrinsically stronger tan later entrants? S trategic Management Journal, 3(8), ttp://dx.doi.org/0.00/smj Robinson, W., T., Kalyanaram G., & Urban G. L. (995). Order of maret entry: Establised empirical genera lizations, emerging generalizations and future researc. Mareting Science, 4(), -. ttp://dx.doi.o rg/0.87/msc.4.3.g 0

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