Market Demand, Competition for Knowledge Workers, and Impact on Invention: Evidence from Electric Vehicle Technologies

Strategy and innovation scholars have long emphasized the positive role of market demand in driving innovation within a technological domain. This study sheds light on an indirect negative spillover effect of market demand on technological progress: whereas increased downstream market demand within a domain generally drives increased technological progress in that domain (i.e., the demand-relevant domain), it may also adversely affect the technological progress of firms in adjacent domains. This occurs because the increased technological progress within the demand-relevant domain, driven by the downstream market demand, can intensify competition for skilled knowledge workers—a critical innovation resource whose supply is often inelastic in the short term. Empirically, I test these arguments by exploiting an unexpected environmental policy shock—the zero emission vehicle (ZEV) mandate—which led to an exogenous increase in demand for electric vehicle (EV) technologies. Following the ZEV mandate, I find evidence of increased inventive activities in the EV domain by EV firms. However, firms in adjacent (non-EV) domains were more likely to lose knowledge workers to EV firms following the ZEV mandate. Consequently, these affected firms produced 22% fewer inventions, particularly in their core technological areas, and became 19% less likely to explore new technological areas. Notably, affected firms in growing technological domains, such as renewable energy, and smaller, younger firms were more adversely (or at least equally) impacted. Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2023.18181 .