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
Date Written: May 18, 2015
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
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