The Impact of Startup Entry on the Innovativeness of Incumbents

Master's Thesis from the year 2017 in the subject Business economics - Company formation, Business Plans, grade: 1,0, Católica Lisbon School of Business & Economics (Strategy, Entrepreneurship and Innovation), language: English, abstract: This paper investigates the relationship between startup entrants and innovation behavior of incumbents. In specific, the insurance industry is empirically analyzed, since many technology driven insurance startups have recently entered this market. After an extensive literature review on the competition-innovation relationship, hypotheses are derived. In detail, it is expected that startup entry has a positive effect on the innovativeness of incumbents, and that this effect will eventually diminish with rising competition, therewith creating an inverted-U relationship.In addition, it is assumed that the positive effect of startup entry will be more impactful for younger incumbents. To evaluate these hypotheses, an innovation score is constructed based on companies’ annual reports. It measures innovation within six broad areas, ranging from organizational changes to new product launches. The population of this study incorporates 10 major insurance companies from Europe and the United States over a period from 2011 to 2015 and 244 InsurTech startups that entered the market in this observation period. In line with prior research, the evidence suggests that startup entrance has a curvilinear effect on incumbents’ innovativeness. Therewith, this study finds that the inverted-U relationship between competition and innovation holds, also when considering startup entry. Lastly, the findings suggest that the positive effect of startup entry is stronger for younger incumbents. In conclusion, an extensive understanding of the given relationship between startup entry and incumbents innovativeness is crucial for practitioners in order to further shift their mindset to a more proactive innovation behavior.The field of innovation is important for both practitioners and scholars. The Boston Consulting Group´s annual global survey of the state of innovation supports the importance of innovation, as 79 percent of the respondents’ ranked innovation as a top-three priority for their company. Especially in industries with (rising) competition, innovation is considered a crucial activity in order to distinguish oneself from competition. Still, evidence found in literature is contradictory as not all economic theories follow this positive competition-innovation relationship. For example, Schumpeter (1942) as well as Dixit and Stiglitz (1977) and Salop (1977) with their theories of industrial organization suggest that with rising competition, innovation should decline.