Corporate Spin-Offs, Product Market Competition, and Innovation

58 Pages Posted: 11 Jan 2020

See all articles by Onur Bayar

Onur Bayar

University of Texas at San Antonio, College of Business

Thomas J. Chemmanur

Boston College - Carroll School of Management

Qing Ma

University of Nottingham-Nottingham University Business School

Date Written: December 22, 2019

Abstract

We develop a theory of the interaction between product market competition, corporate spin-offs, and innovation. In our model, a conglomerate firm operates a profitable existing technology, but has access to a new technology into which it must invest to develop a commercially viable product. While new technology development has synergies with the existing firm, the new technology will cannibalize profits from the firm's existing technology if successfully developed into a viable product. We show that, in the absence of competition, the conglomerate firm has an incentive to underinvest in the new technology. The entry of a competing firm, however, defeats the above incentive, forcing the conglomerate firm to spin off its new technology division, after which the spun-off firm invests optimally in developing and commercializing the innovation. In our two-stage model, we endogenize new technology development, analyzing the interaction between competition, corporate spin-offs, and the development and commercialization of innovations.

Keywords: Innovation, Spin-offs, Acquisitions, Product market competition, Commercialization

JEL Classification: G31, G32, G34, O31, O32.

Suggested Citation

Bayar, Onur and Chemmanur, Thomas J. and Ma, Qing, Corporate Spin-Offs, Product Market Competition, and Innovation (December 22, 2019). Available at SSRN: https://ssrn.com/abstract=3508203 or http://dx.doi.org/10.2139/ssrn.3508203

Onur Bayar (Contact Author)

University of Texas at San Antonio, College of Business ( email )

The University of Texas at San Antonio
One UTSA Circle
San Antonio, TX 78249
United States
210-458-6837 (Phone)
210-458-6320 (Fax)

Thomas J. Chemmanur

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Qing Ma

University of Nottingham-Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

HOME PAGE: http://https://www.nottingham.ac.uk/business/people/lizqm.html

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