Category Creation in Open Business Models and Its Implications for Firm Value

Abstract

We examine the impact of firms’ open and distributed innovation (ODI) business models on their market value. Using a legitimacy lens, we argue that engaging in ODI business models implies non-conformance to existing socio-cognitive categories, thereby making it difficult for investors to evaluate its impact on firm value. We examine the effect of media communication as a countervailing strategy, and the implications for creating new categories to evaluate the firm’s innovation activities. We apply event study methodology to the complete population of firms’ announcements of open source activities, a specific form of ODI, over a ten-year period. Consistent with a legitimacy perspective, both category non-conformance and media communication, initially, have negative effects on market value. However, with the emergence of a category over time, both effects disappear. Provided that the capital market’s legitimacy requirements are met, we find that engaging in open and distributed innovation increases the market value of the firm. We discuss the implications of our findings for theories of open and distributed innovation, business models, and media communication strategies.

Keywords: Business model, legitimacy, categories, open innovation, distributed innovation, open source software

JEL Classification: O33, O32, L23, L21, L10