From Substitutes to Complements: Human Capital Allocation between Social and Technological Innovation

Firms face a critical trade-off when allocating scarce human capital between technological and social innovation. While the role of human capital in technological innovation is well established, its influence on social innovation and the strategic interplay between the two remain underexplored. We develop a two-stage game-theoretic model in which a firm first commits to social innovation, which differentiates the product and may generate cost-reducing spillovers to a rival, and then chooses how much human capital to invest in technological innovation that lowers its own marginal cost. The model delivers an endogenous switching mechanism whereby the strategic relationship between the two innovation types is not fixed but shifts from substitutability at low levels of commitment to complementarity once a critical threshold is surpassed. This shift is driven by the firm’s ability to establish a sufficiently high degree of differentiation that softens competition, thereby amplifying the returns to cost reduction. Our findings are robust to N-firm Cournot and Bertrand price competition, thus providing a theoretical foundation for understanding complex innovation portfolios and offering a clear rationale for allocating human capital across innovation types.