Open to Competition? the Role of Competitive Intensity in the Legitimization of Young, Innovative Ventures

The role of emerging competition in the legitimization and growth of innovative ventures has generated some controversy. On the one hand, competition may be helpful in legitimizing new business ideas and in educating customers about new value propositions, thus helping innovative ventures overcoming liabilities of newness (Navis and Glynn, 2010). On the other hand, emerging competition is also seen as harmful as it erodes differentiation and exposes businesses to increasing price competition (Julien, Joyal, and Deshaies, 1994). In particular, young SMEs often fail to weather such competition since they cannot withstand persistent efficiency pressures and might be forced by competitive pressures to exit the product category they seek to create.

Drawing on empirical evidence from 210 young (less than 10 years old) New Zealand SMEs founded for the purpose of commercializing a new idea, this study investigates the link between emerging competition and innovative venture growth. We find an inverse u-shaped relationship between competitive intensity and businesses growth in the different business cohorts. The findings suggest that if little competition for a new business idea emerges, growth will be muted. Hence, as a market for their products or services may not evolve, there might be a hidden cost for new innovative ventures for innovation. As a general tendency, sheltered niches with very little competition may not provide the most fertile ground for business growth since the business might become captive to a less attractive part of the market. However, too much initial competition will also suppress growth. The middle ground appears to be most fertile. Building on existing literature, we argue first, that emerging competition can help young SMEs with the categorization and marketization of innovation, and second, that the competition will provoke a strategic response which can facilitate further innovative activity and growth. Our analysis further shows that this relationship only holds for new start-ups and not for other forms of young SMEs. Other forms of business creation, such as management buy-outs, are less affected by emerging competition. Entrepreneurs of these businesses may be better equipped to transfer and leverage existing resources in order to facilitate early niche creation.

The paper offers practical suggestions concerning the influence of competitive intensity on young innovative firms by empirically investigating the link between categorisation and entrepreneurial business creation. Entrepreneurs should not be disheartened by emerging competition, but be receptive to the opportunities that categorisation of their products might entail. Furthermore, the results have implications for policy makers aiming to stimulate innovative SME growth. Decisions about governmental firm support, including R&D subsidies, should not only take into account individual firm capabilities, but also the dynamics of the category development on the market level.