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

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review

10 Scopus Citations
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Detail(s)

Original languageEnglish
Pages (from-to)259-281
Journal / PublicationInformation Systems Research
Volume27
Issue number2
Online published11 Apr 2016
Publication statusPublished - Jun 2016

Abstract

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.

Research Area(s)

  • information technology, product market competition, corporate venture capital, technology leadership, innovation, econometric, text analysis