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

Forthcoming at Information Systems Research

59 Pages Posted: 3 May 2013 Last revised: 22 Sep 2016

Keongtae Kim

College of Business, City University of Hong Kong

Anandasivam Gopal

University of Maryland - Robert H. Smith School of Business

Gerard Hoberg

University of Southern California - Marshall School of Business

Date Written: October 28, 2015

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 during the period 1997-2007 relates to the magnitude of CVC spending. We first find that firms in competitive markets make higher 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 stock, 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 laggards. CVC investments provide significantly higher patent applications for technology leaders but no appreciable difference for laggards. 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.

Keywords: information technology, product market competition, corporate venture capital, absorptive capacity, innovation, econometrics, text analysis

Suggested Citation

Kim, Keongtae and Gopal, Anandasivam and Hoberg, Gerard, Does Product Market Competition Drive CVC Investment? Evidence from the U.S. IT Industry (October 28, 2015). Forthcoming at Information Systems Research. Available at SSRN: https://ssrn.com/abstract=2259967 or http://dx.doi.org/10.2139/ssrn.2259967

Keongtae Kim (Contact Author)

College of Business, City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Anandasivam Gopal

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Gerard Hoberg

University of Southern California - Marshall School of Business ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~hoberg/

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