Value Impacts of Software Innovation: The Role of a Focal Firm’s and Competitors’ Capabilities

58 Pages Posted: 3 Aug 2017 Last revised: 27 Aug 2019

See all articles by Sunghun Chung

Sunghun Chung

Santa Clara University - Leavey School of Business

Kunsoo Han

McGill University

Animesh Animesh

McGill University

Alain Pinsonneault

McGill University - Desautels Faculty of Management

Date Written: July 14, 2019

Abstract

While prior research has examined the role of Information Technology (IT) investments in the process and performance of innovation, there is relatively little research on the business value of software innovation itself. In particular, whether a firm’s software innovation affects the market value of the firm’s rivals, and whether the capabilities of a focal firm and its rivals matter remain unexplored. In order to advance our understanding of the value implications of software innovation, we investigate the impact of a firm’s software patents on both a firm’s own market value and rivals’ market value using data from IT industries in the US. Specifically, drawing on the resource-based view (RBV) and the dynamic capability perspectives, we conceptualize two capabilities of a focal IT firm – operations and marketing capabilities – that may enhance the potential value of software innovation by increasing the likelihood of success in commercializing the innovation. Further, we also identify a capability of rival firms – R&D capability – that may allow rival firms to imitate or develop an innovation similar to that of the focal firm, and thus may mitigate the negative impact of the focal firm’s innovation on their firm value. We quantify these capabilities by employing a stochastic frontier approach. We theorize that marketing and operations capabilities support a focal firm’s aggressive commercialization strategy for its software innovation, whereas the R&D capability of rival firms allows them to engage in a defensive strategy for dealing with fierce competition against the focal firm. Based on a large unique panel dataset consisting of 563 US firms during 2003-2012, our results indicate that a focal firm’s marketing and operations capabilities indeed strengthen the positive impact of its software patent stock on its market value. Further, we find that a focal firm’s software patent stock is negatively associated with its rivals’ market value; however, rivals’ R&D capabilities mitigate the negative impact of a firm’s software patent stock on their market value. We discuss implications for research and practice.

Keywords: software innovation, software patent, firm capability, firm value, rival, competition, stochastic frontier

JEL Classification: O34, O31, O32, C33

Suggested Citation

Chung, Sunghun and Han, Kunsoo and Animesh, Animesh and Pinsonneault, Alain, Value Impacts of Software Innovation: The Role of a Focal Firm’s and Competitors’ Capabilities (July 14, 2019). Available at SSRN: https://ssrn.com/abstract=3012418 or http://dx.doi.org/10.2139/ssrn.3012418

Sunghun Chung (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

Kunsoo Han

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Animesh Animesh

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Alain Pinsonneault

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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