How Does Software-Based Innovation in IT Industry Impact Firm Performance and Market Structure

Project: Research

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Today many industries are disrupted by software. Many industrial-age products such as cars, cameras, and books have become smarter and more connected as digital capabilities run on software are embedded into those products. For instance, in today’s cars, software operates the engines, take drivers to destinations, manages safety features, and connects each car to mobile networks. And the creation of software-powered driverless cars is already under way at Google and other major car companies. Photography was also eaten by software long ago. It’s virtually impossible to purchase a mobile phone that doesn’t include a smart camera powered by software, and photos are easily uploaded to the Internet for sharing and permanent archiving. Essentially, this suggests that “software is eating the world,” as Andreessen, a famous venture capitalist in the Silicon Valley, noted recently.Despite the huge potential effect of software-based innovation on firm and industry, we have known little about how the rise of software-based innovation affects the firm performance as well as the structure of industry. If the innovation process has become more dependent on software skills and capabilities, the firms better able to use software knowledge in their innovation process are likely to benefit more than others. In addition, software-based innovation has the potential to reshape industry structure. Software programming tools and Internet-based services make it easy to launch new software-based startups in many industries globally. With lower entry costs and a vastly expanded market for online services, new software-powered startups may dampen the market leadership of incumbent firms and increase turbulence in the industry. All of these potential impacts indicate that we must take a close look at the software-based innovation and its impacts on firm and industry.To examine the impact of software-based innovation on firm and industry, we confine our sample to IT firms (e.g., IT hardware, electronics, and semiconductors) except software firms. We then use the patents data to measure the level of software-based innovation of a firm in the IT industries. Simply speaking, we first identify the population of software patents and then construct measures based on software patents as a proxy for software intensity used in the firm’s innovation process. We will examine the impact of these measures on firm performance as well as market structures by conducting quantitative analyses. Finally, we will speculate on what might drive these impacts.Our study can have several implications for practice and research. Although widely discussed in practice-oriented articles, the software-based innovation has received very little attention from business scholars or economists. Our study will provide evidence on the economic importance of this phenomenon by studying how it affected the innovation performance of IT firms and the structure of industry. For managers, our study will inform them how they can recognize the potentials of software in their innovation and utilize the full potentials of software-based innovation.?


Project number9042416
Grant typeGRF
Effective start/end date1/12/161/09/17

    Research areas

  • innovation , software , digital innovation , market structure ,