Abandoning Innovation in Emerging Industries

Existing models of industry evolution describe a smooth pattern over time in which initial growth in the number of firms is followed by a sharp decrease due to a shakeout and an eventual stabilization as the industry reaches maturity. Although this model has been well accepted and supporting empirical finding holds true across a range of industries, we propose an alternative pattern of evolution in which, during the emergent stage, a new industry experiences a sharp decrease in the number of firms—a “mini shakeout”—before increasing again, reaching a final peak and undergoing a major shakeout as described in the extant literature. Using data across multiple product innovations introduced in the twentieth century, we show the pervasiveness of the mini shakeout phenomena. Using detailed quantitative and qualitative data on the emergence of handheld computers and digital cameras, we then investigate why some firms abandon innovation before an industry even develops while others stay committed. We propose a conceptual model that highlights the role of unmet expectations and the degree of importance of the emerging industry to the focal firm in determining its likelihood of exit from the emerging industry.