Many innovative products are designed to satisfy the demand of specific target consumers; thus, the innovators will inevitably compete with each other in the product market. We investigate how a profit-maximizing principal should properly allocate her limited resources to support the innovations of multiple potentially competing innovators.

We find that, as the available resources increase, the optimal diversification of investment may first increase and then decrease. This interesting non-monotone pattern is driven by a trade-off between the risk of innovation failure and rent dissipation due to competition. When the amount of resources is small, disseminating resources to multiple agents will discourage agents from exerting effort in the innovation process due to lack of resources. As resources become abundant, although investing in more agents increases the probability that at least one agent successfully innovates, the product competition will erode profits when more agents succeed.

Management insight: It is important to allocate resources with a proper level of diversification. The resource capacity and competition intensity in the product market jointly determine the number of agents that the principal can incentivize effectively. When resources are limited, some degree of concentration is necessary to guarantee the overall success rate of innovation.