Differential effects of corporate litigation on breakthrough and incremental innovations for plaintiff and defendant firms

Purpose As the rule of law continues to strengthen in emerging economies, an increasing number of firms are turning to litigation as a means to protect their rights and interests. This study investigates the differential effects of corporate litigation on breakthrough and incremental innovation for both plaintiff and defendant firms. Furthermore, it explores the factors that may amplify these effects. Design/methodology/approach This paper analyzes panel data related to publicly listed Chinese firms from 2011 to 2022 to investigate the differential effects of corporate litigation. Findings The analyses reveal that while plaintiff firms tend to increase their breakthrough innovation following litigation, defendant firms not only enhance breakthrough innovation but also reduce incremental innovation. Furthermore, plaintiff firms increase incremental innovation only when their level of corporate social responsibility (CSR) is high. As a remedial strategy, CSR amplifies the positive effects of litigation on breakthrough innovation for both plaintiff and defendant firms. Practical implications This paper provides valuable insights into innovation strategy. Firms should recognize the potential of litigation not merely as a legal challenge but as a catalyst for innovation and strategically use it to refine their innovation approaches. Notably, both plaintiff and defendant firms can leverage legal pressures to stimulate breakthrough innovation. In addition, actively fulfilling CSR commitments can further enhance a firm’s innovation capacity, particularly under adverse circumstances. Originality/value By examining the differential effects of corporate litigation, this paper contributes to the literature on corporate litigation and innovation decisions, particularly in the context of resource allocation and reputation management under adverse conditions.