Business Method Innovation in US Manufacturing and Trade

Abstract

Problem Definition. In what kinds of business method innovation do firms in the manufacturing and trade sectors engage? Does engaging in business method innovation create value for these firms? The present paper answers these questions using empirical evidence.

Methodology/Results. Using text analysis of business method patents, we show that business method innovation in the US manufacturing and trade sectors is aimed primarily at improving the business operations that support the sales of tangible products—that is, how the firm targets customers, manages product delivery, or enhances the product through service offerings. We then evaluate the effect of having business method innovation, as evidenced by patents, on a firm’s value. Leveraging the exogenous shock of the State Street ruling, which first recognized business methods as a patentable category of innovation, we identify a set of firms that possess business method patents and a matched set of comparable firms without such patents. Then, using a difference-in-differences with firm fixed effects model on the matched sample, we show that the valuation of the former set of firms increased by 9% after State Street, as measured by Tobin’s q. We further show that (1) business method innovators in the manufacturing sector gained a 7% increase, whereas business method innovators in the trade sectors gained a 25% increase; and (2) only firms with broader innovation scope—that is, business method innovations covering the range of customer targeting, product delivery, and service support of products—experienced a significant (18%) value bump.

Managerial Implications. This research provides evidence that business method innovation in the manufacturing and trade sectors primarily involves innovating in business operations that support product sales. Our work also provides empirical support for the proposition that engaging in business method innovation drives manufacturing and trade firms’ market performance.

Keywords: business methods, Tobin's q, patents, manufacturing