Firm technological responses to regulatory changes: A longitudinal study in the Le Mans Prototype racing

Abstract

Highlights • Regulations, either permissive or restrictive, increase compliance costs but do not decrease firm innovation. • Permissive regulations increase technological uncertainty and thus reduce firms’ shifts of technological trajectory. • Restrictive regulations decrease technological uncertainty and thus increase firms’ shifts of technological trajectory. • Under permissive regulations, sequentially innovating core and peripheral subsystems increases performance. • Under restrictive regulations, simultaneously innovating core and peripheral subsystems increases performance (in the long run). Abstract Despite the critical role of regulations on competition and innovation, little is known about firm responses and related effects on performance under regulatory contingencies that are permissive or restrictive. By longitudinally investigating hybrid cars competing in the Le Mans Prototype racing (LMP1), we counter-intuitively suggest that permissive regulations increase technological uncertainty and thus decrease the firms’ likelihood of shifting their technological trajectory, while restrictive regulations lead to the opposite outcome. Further, we suggest that permissive regulations favour firms that innovate their products by sequentially upgrading core and peripheral subsystems, while restrictive regulations (in the long term) favour firms upgrading them simultaneously. Implications for theory and practice are discussed.