To characterize the nature of innovation, we draw on foundational theories of scientific and technological change 2,29,30 , which distinguish between two types of breakthroughs. First, some contributions improve existing streams of knowledge, and therefore consolidate the status

Previous literature offers conflicting findings on how restrictiveness of the regulatory environment—the amount of rules that prohibit specific activities—will affect the innovation output of firms. One camp suggests that increases in restrictiveness circumscribe the range of activities in which firms can engage and therefore decrease their innovation. The other camp believes that restrictiveness can lead firms to seek out creative alternatives, which could potentially increase their innovation. In order to reconcile these opposing views, we develop a new theory on regulation and innovation. Our theory has two components. First, we suggest that dynamism—variation in restrictiveness over time—interacts with restrictiveness to impact firm’s search behavior. Second, we propose that changes in restrictiveness and dynamism— through their effect on search—shape the nature of innovation that firms produce. To evaluate these ideas, we utilize data on U.S. federal regulations and the patents of 1,411 public U.S. firms from 1973 to 2009. We find that when dynamism is low, firms are more likely to search for new components as restrictiveness increases. This leads to a greater output of destabilizing innovation but a lesser output of consolidating innovation.

When firms engage in lobbying, their intended outcome is a regulatory change that benefits them. However, prior literature suggests that there may also be an unintended outcome of lobbying—the leakage of knowledge to competitors. In this paper, I explore when the intended and the unintended outcomes are more likely by theorizing about the relationship between lobbying and innovation. I predict that innovations that are novel are more likely to benefit from the intended regulatory changes. However, innovations that use knowledge uniquely possessed by a few firms are more likely to be compromised by the leakage of knowledge that happens during lobbying. I use new data from 1999-2013 on public U.S. firms that engaged in lobbying to federal agencies, the regulatory changes made by federal agencies, and the 16,000 patents applied for by those firms. I employ unsupervised machine learning (Doc2Vec) to measure knowledge leakage and an instrumental variable 2SLS mediation analyses to test the theory. The results suggest that the intended regulatory changes that follow lobbying can benefit innovations by facilitating wider adoption. However, unique technological knowledge that only a few firms possess may be expropriated by competitors during the process of lobbying. Overall, this paper demonstrates that fundamental aspects of innovation— such as institutional change, knowledge transfer, and technology adoption—are closely related to lobbying, a form of nonmarket activity.