External Venturing and Discontinuous Strategic Renewal: An Options Perspective

Journal of Product Innovation Management, Forthcoming

45 Pages Posted: 1 Jul 2011

See all articles by Sandip Basu

Sandip Basu

City University of New York - Narendra Paul Loomba Department of Management

Anu Wadhwa

Ecole Polytechnique Fédérale de Lausanne - Management of Technology and Entrepreneurship Institute (MTEI)

Date Written: June 30, 2011

Abstract

This study examines the relationship between a firm’s venturing activities and its undertaking of strategic renewal. The study was motivated by some important gaps in the corporate entrepreneurship literature on venturing and renewal. The extant literature has not focused on the different types and dimensions of firms’ renewal activities. In particular, discontinuous renewal involving shifts in firms’ core businesses is not well understood. Moreover, the conditions that drive firms to undertake strategic renewal have not been examined. For example, it is not known how venturing increases or reduces the benefits of undertaking renewal. This study focuses on a discontinuous form of renewal involving major changes in firms’ core businesses, and examines firms’ external venturing activities which complement their internal development. We examine corporate venture capital (CVC) investments, which are direct minority equity investments made by established companies in privately held ventures. Discontinuous renewal is conceptualized as resulting from a set of related, and often sequential, managerial decisions. The first managerial decision is to initiate growth in a business that is relatively newer or smaller for the organization. The second decision is to move away, or even withdraw completely, from the current core business which enabled prior growth and prosperity for the firm and served as its primary revenue earner. Employing a real options perspective, we argue that CVC investments create growth options in new and existing businesses, but do not result in firms’ withdrawal from existing businesses. Therefore, we expect CVC activity to be negatively associated with the likelihood of a firm undertaking discontinuous renewal. We also propose that the benefits of withdrawing from existing businesses are even lower, and the costs even higher, for firms in dynamic industries and for firms that possess strong internal capabilities. The predictions of the study are tested using longitudinal data on 477 firms from the 1990 Fortune 500 list for the period 1990-2000. We find support for all our predicted hypotheses. These results help address important limitations in the corporate entrepreneurship literature. The study also contributes to the real options and organizational capabilities literatures.

Suggested Citation

Basu, Sandip and Wadhwa, Anu, External Venturing and Discontinuous Strategic Renewal: An Options Perspective (June 30, 2011). Journal of Product Innovation Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1875284

Sandip Basu (Contact Author)

City University of New York - Narendra Paul Loomba Department of Management ( email )

NY
United States

Anu Wadhwa

Ecole Polytechnique Fédérale de Lausanne - Management of Technology and Entrepreneurship Institute (MTEI) ( email )

Odyssea
Station 5
Lausanne, 1015
Switzerland

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