Chapter 11 • Sustaining Competitive Advantage
age into existence” a firm’s dynamic capabilities?
Success in developing the design is not certain, but the probability of a firm’s success is directly linked to the amount of money it spends on the project (more spending on this project, greater probability of success). Moreover, the productiv- ity of Enginola’s spending on this project and IQ’s spending are exactly the same: Starting from any given level of spending, an additional $1 spent by Enginola has exactly the same impact on its probability of winning. The following table illus- trates this. It shows the probability of winning the race if each firm’s spending equals 0, $100 million, and $200 million. The first number represents Enginola’s probability of winning the race, the second is IQ’s probability of winning, and the third is the probability that neither succeeds. Note: This is not a payoff table.
(i) each firm makes its spending decision simultaneously and noncooperatively; (ii) each seeks to maximize its expected profit; and (iii) neither firm faces any financial constraints,
which company, if any, has the greater incentive to spend money to win this “R&D race”? Of the effects discussed in the chapter (productivity effect, sunk cost effect, replacement effect, efficiency effect), which are shaping the incentives to innovate in this example?