The Wharton School, U. of Pennsylvania, United States
Incumbent firms face a major tradeoff when deciding to invest in emerging new technologies during a period of significant uncertainty around customer adoption: invest preemptively and valuable resources may be wasted, delay investments and an important market opportunity may be missed. In many cases, public support is often required to facilitate customer adoption of emerging technologies via subsidies, especially if these technologies can have an important societal impact. Drawing on the notion of adjustment costs that incumbents face during periods of industry change, we argue that such subsidies, in addition to spurring downstream adoption, can also help to reduce incumbents’ adjustment costs and spur preemptive upstream investments in new technologies. Further, the impact of subsidies is greater for incumbents who face a greater threat of technological obsolescence, and who are less likely to preemptively invest in the new technologies. We find support for our arguments in the context of the US electric utility industry between 2000 and 2018. The study illustrates how public subsidies that are often targeted toward demand-side adoption of emerging technologies can also have important heterogeneous supply-side effects in terms of incumbents’ investments in such technologies.
