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Enemies (Almost) at the Gate: New Entry Threats and R&D Investments in the U.S. IT Industry

63 Pages Posted: 24 May 2015 Last revised: 27 Feb 2017

Yang Pan

University of Maryland

Peng Huang

University of Maryland - Robert H. Smith School of Business

Anandasivam Gopal

University of Maryland - Robert H. Smith School of Business

Date Written: May 18, 2015

Abstract

The threat of new entry by startups has often been argued to influence the decisions made by incumbent firms, especially in the fast-moving information technology (IT) industry. However, empirical analysis of this relationship is limited in the literature, largely due to the absence of a reasonable measure of new entry threats. In this work, we make two contributions to this literature. First, we develop and validate a measure of these threats through text mining, using product descriptions provided by incumbent firm 10- K filings and business descriptions provided by start-ups. This novel measure of NET differs significantly from observed entry which is backward-looking and from competition, which is contemporaneous. Second, we study the R&D investment strategies of IT firms when they face new entry threats, using the theoretical lens of real options. Using a sample of U.S. IT firms over the period 1997-2013, we show that incumbent firms on average reduce R&D spending when facing greater new entry threats. More importantly, we show that the effect is not uniform – consistent with real options theory, firms that have a diversified product or technology portfolio, operate in industries with strong network effects, or face high levels of technological cumulativeness invest relatively more in R&D when facing greater new entry threats. We discuss the implications for research and practice.

Keywords: new entry threats, text mining, R&D investment, uncertainty, real options, innovation, disruptive technology

Suggested Citation

Pan, Yang and Huang, Peng and Gopal, Anandasivam, Enemies (Almost) at the Gate: New Entry Threats and R&D Investments in the U.S. IT Industry (May 18, 2015). Robert H. Smith School Research Paper No. RHS 2607674. Available at SSRN: https://ssrn.com/abstract=2607674 or http://dx.doi.org/10.2139/ssrn.2607674

Yang Pan (Contact Author)

University of Maryland ( email )

Business Education Complex
2208
Baton Rouge, LA 70803
United States

Peng Huang

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

College Park, MD 20742-1815
United States

Anandasivam Gopal

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

College Park, MD 20742-1815
United States

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