Eco-Innovation with Opportunity of Licensing and Threat of Imitation

Abstract

We consider the product and process innovation effort decisions a sustainable (eco) manufacturer (innovator/leader) makes in the presence of a traditional manufacturer (imitator/follower) who may procure a license or imitate innovation. While product development can be easily protected by patenting and licensing, process innovation is more difficult to protect. We find that the ignoring the potential of process imitation reduces profits for the innovating firm as the follower favors all-or-nothing imitation and many equilibrium strategies, from the leader’s perspective, are to deter copycatting behavior. We also show the eco-innovator may lose its competitive advantage through licensing its product innovation; moreover, licensing may result in more imitation. Lastly, we glean further insights by characterizing the equilibrium strategies with respect to cost-related factors.