Does Product Market Competition Drive CVC Investment? Evidence from the U.S. IT Industry

Keongtae Kim (), Anandasivam Gopal () and Gerard Hoberg ()
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Keongtae Kim: College of Business, City University of Hong Kong, Kowloon, Hong Kong
Anandasivam Gopal: Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742
Gerard Hoberg: Marshall School of Business, University of Southern California, Los Angeles, California 90089

Information Systems Research, 2016, vol. 27, issue 2, 259-281

Abstract: We study the effect of product market competition on the propensity to use corporate venture capital (CVC) as a part of an information technology (IT) firm’s innovation strategy. Using novel measures of product market competition based on product descriptions from firm 10-K statements and accounting for potential endogeneity, we investigate how product market competition between 1997 and 2007 relates to the magnitude of CVC spending. We first find that firms in competitive markets make higher research and development (R&D) and CVC investments. In addition, we find that increasing product market competition leads to a shift away from internal R&D spending and into CVC. These movements are significantly stronger for technology leaders, i.e., firms with deep patent stocks, in the IT industry. We also find that CVC appears to be an effective way of exploiting external knowledge for technology leaders in the IT-producing industry, but not for technology slow starters. CVC investments lead to significantly more patent applications for technology leaders but no appreciable difference for slow starters. Our results provide new insights for theories of innovation in competitive, dynamic markets, potentially as part of a portfolio that includes internal R&D as well as open innovation models.

Keywords: information technology; product market competition; corporate venture capital; technology leadership; innovation; econometrics; text analysis (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (6)

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