Product Market Competition and Corporate Venture Capital Investment in the IT Industry: An Empirical Analysis
College of Business, City University of Hong Kong
University of Maryland - Robert H. Smith School of Business
University of Maryland - Department of Finance
May 2, 2013
We study the effect of product market competition on the propensity to use corporate venture capital (CVC) as a part of the firm’s innovation strategy in the context of the information technology (IT) firms. Using novel measures of product market competition based on product descriptions from firm 10-K statements and accounting for potential endogeneity, we investigate how the product market competition experienced by IT firms in the US during the period 1997-2007 relates to the magnitude of CVC spending. We find that firms in competitive markets tend to make more CVC investments. Moreover, this shift toward CVC accompanies a shift away from internal R&D spending. In addition, CVC appears to be an effective way of exploiting external knowledge for technology leaders in the IT industry, but not for technology laggards. From a methodological viewpoint, we show that 10-K text-based network industry classifications are more informative than three-digit SIC classifications in explaining CVC decisions. Finally, we find some evidence that CVC investment can increase ex-post innovation, thereby lending credibility to the argument that CVC may be a reasonable response to increasing product market competition. 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.
Number of Pages in PDF File: 41
Keywords: information technology, product market competition, corporate venture capital, absorptive capacity, innovation, econometrics, text analysisworking papers series
Date posted: May 3, 2013 ; Last revised: May 5, 2013
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