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

Forthcoming at Information Systems Research

59 Pages Posted: 3 May 2013 Last revised: 22 Sep 2016

See all articles by Keongtae Kim

Keongtae Kim

The Chinese University of Hong Kong

Anandasivam Gopal

Nanyang Business School

Gerard Hoberg

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Date Written: October 28, 2015

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 during the period 1997-2007 relates to the magnitude of CVC spending. We first find that firms in competitive markets make higher 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 stock, 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 laggards. CVC investments provide significantly higher patent applications for technology leaders but no appreciable difference for laggards. 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, absorptive capacity, innovation, econometrics, text analysis

Suggested Citation

Kim, Keongtae and Gopal, Anandasivam and Hoberg, Gerard, Does Product Market Competition Drive CVC Investment? Evidence from the U.S. IT Industry (October 28, 2015). Forthcoming at Information Systems Research, Available at SSRN: https://ssrn.com/abstract=2259967 or http://dx.doi.org/10.2139/ssrn.2259967

Keongtae Kim (Contact Author)

The Chinese University of Hong Kong ( email )

908 Cheng Yu Tung Building, Chinese Univ of HK
Shatin, 11111
Hong Kong
39439284 (Phone)

Anandasivam Gopal

Nanyang Business School ( email )

S3 B2-A28 Nanyang Avenue
Singapore, 639798
Singapore

Gerard Hoberg

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

HOME PAGE: http://faculty.marshall.usc.edu/Gerard-Hoberg/

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