Does Product Market Competition Drive CVC Investment? Evidence from the U.S. IT Industry

Author List: Kim, Keongtae; Gopal, Anandasivam; Hoberg, Gerard;
Information Systems Research, 2016, Volume 27, Issue 2, Page 259-281.
We study the effect of product market competition on the propensity to use corporate venture capital (CVC) as a part of an information technology (IT) firm's innovation strategy. Using novel measures of product market competition based on product descriptions from firm 10-K statements and accounting for potential endogeneity, we investigate how product market competition between 1997 and 2007 relates to the magnitude of CVC spending. We first find that firms in competitive markets make higher research and development (R&D) and CVC investments. In addition, we find that increasing product market competition leads to a shift away from internal R&D spending and into CVC. These movements are significantly stronger for technology leaders, i.e., firms with deep patent stocks, in the IT industry. We also find that CVC appears to be an effective way of exploiting external knowledge for technology leaders in the IT-producing industry, but not for technology slow starters. CVC investments lead to significantly more patent applications for technology leaders but no appreciable difference for slow starters. Our results provide new insights for theories of innovation in competitive, dynamic markets, potentially as part of a portfolio that includes internal R&D as well as open innovation models.
Keywords: information technology ; product market competition ; corporate venture capital ; technology leadership ; innovation ; econometrics ; text analysis
Algorithm:

List of Topics

#271 0.277 technology investments investment information firm firms profitability value performance impact data higher evidence diversification industry payoff return findings decisions greater
#242 0.178 market competition competitive network markets firms products competing competitor differentiation advantage competitors presence dominant structure share using incumbent make important
#89 0.105 product products quality used characteristics examines role provide goods customization provides offer core sell key potential stronger insights design initial
#2 0.086 leadership leaders effective leader roles authority assume slow responsibility structure recognize responsibilities look size inevitable attain trend held articulate dominate
#209 0.070 results study research information studies relationship size variables previous variable examining dependent increases empirical variance accounting independent demonstrate important addition
#210 0.064 innovation innovations innovative organizing technological vision disruptive crowdsourcing path implemented explain base opportunities study diversity taking actors practice shape creation
#262 0.054 impact data effect set propensity potential unique increase matching use selection score results self-selection heterogeneity evidence measure associated estimate leads
#37 0.053 intelligence business discovery framework text knowledge new existing visualization based analyzing mining genetic algorithms related techniques large proposed novel artificial