Technological Activities and Their Impact on the Financial Performance of the Firm: Exploitation and Exploration within and between Firms

34 Pages Posted: 17 Jan 2010

See all articles by René Belderbos

René Belderbos

University of Leuven (KUL) - Department of Managerial Economics, Strategy and Innovation; Maastricht University - Department of Organization & Strategy

Dries Faems

WHU - Otto Beisheim School of Management

Bart Leten

KU Leuven - Faculty of Business and Economics (FEB)

Bart Van Looy

KU Leuven - Department of Economics

Date Written: 2009

Abstract

This article analyzes the financial performance consequences of technology strategies categorized along two dimensions: (1) explorative versus exploitative and (2) solitary versus collaborative. The financial performance implications of firms’ positioning along these two dimensions has important managerial implications, but has received only limited attention in prior studies. Drawing on organizational learning theory and technology alliances literature, a set of hypotheses on the performance implications of firms’ technology strategies are derived. These hypotheses are tested empirically on a panel dataset (1996-2003) of 168 R&D-intensive firms based in Japan, the US and Europe and situated in five different industries (chemicals, pharmaceuticals, ICT, electronics, non-electrical machinery). Patent data are used to construct indicators of explorative versus exploitative technological activities (activities in new or existing technology domains) and collaborative versus solitary technological activities (joint versus single patent ownership). The financial performance of firms is measured via a market value indicator: Tobin’s Q index.

The analyses confirm the existence of an inverted U-shape relationship between the share of explorative technological activities and financial performance. In addition, it is observed that most sample firms do not reach the optimal level of explorative technological activities. These findings point to the relevance of creating a balance between exploitation and exploration in the context of technological activities. Moreover, they suggest that, for the majority of R&D intensive firms, reaching such a balance between exploration and exploitation implies investing additional efforts and resources in exploring new knowledge domains. The analyses also show that firms, engaging more intensively in collaboration, perform relatively stronger in explorative activities. At the same time, a negative relationship between the share of collaborative technological activities and a firm’s market value is observed. Contrary to our expectations, it is collaboration in explorative technological activities, rather than collaboration in exploitative technological activities, that leads to a reduction in firm value.

These findings question the relevance of open business models for technological activities. In particular, they suggest that the potential advantages of collaboration for (explorative) technological activities (i.e. access to complementary knowledge from other partners, sharing of technological costs and risks) might not compensate for the potential disadvantages, such as the incurred increase in coordination costs and the need to share innovation rewards across innovation partners.

Suggested Citation

Belderbos, Rene and Faems, Dries and Leten, Bart and Van Looy, Bart, Technological Activities and Their Impact on the Financial Performance of the Firm: Exploitation and Exploration within and between Firms (2009). Available at SSRN: https://ssrn.com/abstract=1537029 or http://dx.doi.org/10.2139/ssrn.1537029

Rene Belderbos (Contact Author)

University of Leuven (KUL) - Department of Managerial Economics, Strategy and Innovation ( email )

Naamsestraat 69
Leuven, B-3000
Belgium
+32 16 32 6912 (Phone)
+32 16 32 6732 (Fax)

Maastricht University - Department of Organization & Strategy ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Dries Faems

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Bart Leten

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Bart Van Looy

KU Leuven - Department of Economics ( email )

Leuven, B-3000
Belgium