Industries’ Potential for Interdependency and Profitability: A Panel of 135 Industries, 1988–1996

Gwendolyn K. Lee () and Mishari A. Alnahedh ()
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Gwendolyn K. Lee: Warrington College of Business Administration, University of Florida, Gainesville, Florida 32611
Mishari A. Alnahedh: College of Business Administration, Kuwait University, Shuwaikh, Kuwait

Strategy Science, 2016, vol. 1, issue 4, 285-308

Abstract: An industry’s potential for interdependency among productive activities is one of the central concepts in strategic management. Although theoretical models have clarified how and why industry average profitability should peak at moderate levels of interdependency, the empirical evidence so far has not supported the inverted-U-shaped relationship. By developing a measure that is based on how frequently pieces of knowledge are used jointly in technological inventions, we find strong support that confirms the predicted relationship between interdependency and industry average profitability. We also find evidence supporting an inverted-U-shaped relationship between interdependency and firm profitability. Moreover, our measure captures how the potential in interdependency may change over time within an industry. The temporal variation allows us to correct omitted variable biases, which poses concerns that weren’t raised in previous studies. The measure is created from more than 1.93 million technological patents that have been approved by the U.S. Patent and Trade Office between 1901 and 1996. Since patent data are available to the public, future studies can readily build on our measure of industries’ potential for interdependency.

Keywords: interdependency; profitability; industry characteristics; panel data; omitted variable bias (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (6)

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