Reverse engineering and innovation: empirical evidence from firm-level data

Abstract Reverse engineering (RE) allows firms to learn about critical components and design features of competitors’ technologies. From an innovation strategy point of view, relying on RE involves a trade-off between acquiring others’ knowledge rather cheap and quickly, and being trapped into a follower strategy that rests on technology developments propelled by other firms. This paper aims to explore which type of firms use RE, and which type of innovation results from an RE-based knowledge acquisition strategy. Using data from the German part of the Community Innovation Survey (CIS), we find that RE is more often used by firms that operate under fierce price competition and have stronger financial constraints. RE using firms obtain higher product innovation output compared to firms with other knowledge acquisition strategies, though their innovations have a low degree of novelty (i.e., imitations). The market success of these innovations seem to rest on a price advantage, based on higher cost savings from process innovation.