Strategy,human capital investments,business‐domain capabilities,and performance: a study in the global software services industry

Research summary : In knowledge‐based industries, continuous human capital investments are essential for firms to enhance capabilities and sustain competitive advantage. However, such investments present a dilemma for firms, because human resources are mobile. Using detailed project‐level operational, financial, and human capital data from a leading multinational firm in the global IT services industry, this study finds that deliberate investments in improving general human capital can help firms develop superior capabilities and maintain high profits. This paper identifies two types of capabilities essential for success in this industry—technological and business‐domain capabilities—and provides empirical evidence justifying such investments. Theoretical and practical implications of capability‐seeking general human capital investments are discussed. Managerial summary : The primary managerial implication of this research is that capability‐seeking investments in developing general human capital through strategic learning (training and internal certifications) can enhance firm performance. Although investing in general human capital is risky, the firm considered this a strategic necessity in order to thrive in the fast paced IT services industry. By leveraging general technological skills in combination with business‐domain knowledge to address customer's business problems firms can earn and sustain higher profits. Our study also demonstrates how a developing‐country firm responded to strong competitive challenge from global rivals possessing superior capabilities by upgrading the capabilities of its employees through internal development. In doing so the firm was able to narrow the capability gap vis‐à‐vis its foreign peers and expand its business globally. Copyright © 2016 John Wiley & Sons, Ltd.     

Organizing for knowledge generation: internal knowledge networks and the contingent effect of external knowledge sourcing

Research summary : When faced with a new technological paradigm, incumbent firms can opt for internal development and/or external sourcing to obtain the necessary new knowledge. We explain how the effectiveness of external knowledge sourcing depends on the properties of internal knowledge production. We apply a social network lens to delineate interpersonal, intra‐firm knowledge networks and capture the emergence of two important firm‐level properties: the incumbent's internal potential for knowledge recombination and the level of knowledge coordination costs. We rely on firm‐level internal knowledge networks to dynamically track the emergence of these properties across 106 global pharmaceutical companies over a 25‐year time period. We find that a firm's success in developing knowledge in a new technological paradigm using external knowledge sourcing is contingent on these internal knowledge properties . Managerial summary : Incumbent firms in high‐tech industries often face competence‐destroying technological change. In their effort to adapt and develop new knowledge in a novel paradigm, incumbent firms have several corporate strategy options available to them: internal knowledge development and a wide array of external knowledge sourcing strategies, including alliances and acquisitions. In this study, we make an effort to address a critical question: How effective is external knowledge sourcing under different internal knowledge generation regimes? We find that external sourcing strategies are less effective when firms can already internally generate new knowledge or if they have high internal coordination costs. Therefore, when considering external sourcing, managers must carefully weigh the benefits of it vis‐à‐vis its commensurate costs as the benefits of external sourcing may be overstated . Copyright © 2015 John Wiley & Sons, Ltd.     

Entry into Nascent Industries: Disentangling a Firm's Capability Portfolio at the Time of Investment Versus Market Entry

Research summary : This article examines the capability antecedents of firm entry into nascent industries. Because a firm's technological investments in nascent industries typically occur before market entry, this study makes a distinction between firm capabilities at the time of market entry and at the time of initial investment. At the time of market entry, core technical capabilities and complementary assets influence the likelihood of entry. However, at the time of investment, a firm's integrative capabilities as well as the initial stocks of related technical capabilities and complementary assets become critical, as they enable endogenous development of core technical capabilities and complementary assets by the time of entry. The empirical sample consists of firms involved in field experiments in agricultural biotechnology during the period 1980–2010. Managerial summary : New product commercialization in a nascent industry typically requires access to not only core technologies of the focal industry, but also supporting commercialization assets. However, firms may not possess these critical capabilities when they first invest in the industry. Instead, empirical evidence from the context of agricultural biotechnology shows that at the time of first investment, a firm's integrative capabilities partly explain their likelihood of entry. Integrative capabilities encompass a set of practices that enable effective coordination and communication, and in turn put firms in an advantageous position to develop the needed capabilities by the time of entry. Copyright © 2017 John Wiley & Sons, Ltd.     

Joint ventures and competitive strategy

A framework for using joint ventures (and other forms of cooperative strategy) within varying competitive environments is constructed, and hypotheses are developed concerning the impact of particular industry traits upon firms' options in pursuing them. Industry examples illustrate the framework's hypotheses. In this framework, demand traits suggest what types of cooperative strategies are needed. Competitor traits suggest how firms will respond to these needs for cooperation. Since joint ventures can be inherently unstable organizational forms, it is important for managers to (1) select the right cooperative strategy option and (2) modify the autonomy from (and coordination with) sponsoring firms that ventures enjoy as their industry structures evolve. Familiarity with cooperative strategy options is important because (1) as growth slows, (2) as markets shrink or become crowded, (3) as industries become global, or (4) as technological change accelerates to speeds where individual firms cannot recover their initial investments, managers will have less margin for error. If managers do not learn how to use cooperative strategies advantageously their firms may encounter difficulties in delivering adequate value to their customers, replenishing their base of skills, and/or safeguarding their abilities to increase long-term shareholder value.     

Agglomeration and the choice between acquisitions and alliances: An information economics perspective

Research summary : This research extends agglomeration theory by joining it with information economics research to better understand the determinants of firms' organizational governance choices. We argue that co‐location in a common geographic cluster fosters lower levels of information asymmetry between exchange partners and thus leads firms to employ acquisitions rather than alliances for their external corporate development activities. We further extend agglomeration theory by arguing that the impact of sharing a cluster location on acquisitions versus alliances strengthens with the level and dissimilarity of the exchange partners' knowledge‐based resources as well as with the intra‐cluster geographic proximity of the partners. Evidence from a sample of over 1,100 alliance and acquisition transactions in the U.S. semiconductor industry provides support for our hypotheses. Managerial summary : This paper investigates the role of geographical clustering for firms' external corporate development activities in acquisitions and alliances. We explain how better information is likely to be available among firms co‐located in the same cluster. This suggests that managers should have less need to use alliances over acquisitions as a means of reducing the risk of adverse selection (e.g., overpaying for acquisitions). Our investigation of over 1,100 transactions in the U.S. semiconductor industry shows that common cluster co‐location increases the probability of acquisition relative to alliance. Our arguments and evidence also indicate that the information‐related benefits of cluster co‐location are even more impactful when the parties have more divergent technology bases, possess larger stocks of knowledge‐based resources, or are located in closer geographic proximity. Copyright © 2015 John Wiley & Sons, Ltd.     

Technological acquisitions and the innovation performance of acquiring firms: a longitudinal study

This paper examines the impact of acquisitions on the subsequent innovation performance of acquiring firms in the chemicals industry. We distinguish between technological acquisitions, acquisitions in which technology is a component of the acquired firm's assets, and nontechnological acquisitions: acquisitions that do not involve a technological component. We develop a framework relating acquisitions to firm innovation performance and develop a set of measures for quantifying the technological inputs a firm obtains through acquisitions. We find that within technological acquisitions absolute size of the acquired knowledge base enhances innovation performance, while relative size of the acquired knowledge base reduces innovation output. The relatedness of acquired and acquiring knowledge bases has a nonlinear impact on innovation output. Nontechnological acquisitions do not have a significant effect on subsequent innovation output. Copyright © 2001 John Wiley & Sons, Ltd.     

Services,industry evolution,and the competitive strategies of product firms

Services of different types have become increasingly important for product firms. While these firms mainly focus on products, managers and researchers lack a comprehensive framework to understand when to make significant investments in particular kinds of services. We identify three categories of product‐related services from a product firm—smoothing and adapting services, which complement products, and substitution services, which enable customers to pay for the use of a product without buying the product itself. We develop propositions about the relative level of these different kinds of services vis‐a‐vis industry evolution, as well as suggest how these services affect industry structure. We draw upon various literatures, though we conclude that the relationship between products and services is more complex and richer than any one literature suggests. Copyright © 2014 John Wiley & Sons, Ltd.     

A study on forward and backward linkage effects in South Korea's telecom industry across generations

The primary purpose of this study is to examine the spillover effect of South Korea's telecom industry on other industries until its evolution to the 4th generation. By using Input-Output Table Data to compute Forward and Backward Linkage Effects in South Korea's telecom industry throughout Generational Changes, this study aims to analyze South Korea's telecom industry's impacts and changes on upstream and downstream industries to offer implications for its evolution to the 5th generation. This study used empirical input-output data for the period between the years 2000–2014 to conduct input-output analysis to evaluate forward and backward linkages in South Korea's telecom industry for each generation of it. The results revealed that (1) Korea's telecom industry can be defined as a dependent manufacturing industry due to its below-average forward linkage and above-average backward linkage over the whole study period, and (2) backward linkage in South Korea's telecom industry was higher than the economy-wide average value during our study period although it decreased with the industry's generational shifts. The results indicate that telecommunications companies should create new markets in which they can propagate emerging technologies of the 4IR (4th Industrial Revolution) to other industries, in order to ensure that the 5th generation telecom industry maintain its position as a key industry. On the other hand, the government should make policies to support start-ups and SMEs in telecom industry and implement structural reforms in Korea's oligopolistic telecom market.     

Growing pains: Pre‐entry experience and the challenge of transition to incumbency

We examine how entrepreneurial entry by diversifying and de novo firms in new industries leads to different levels of performance. We propose that these types of firms differ in dynamic capabilities, which help them overcome growth impediments and transition to incumbency in the industry. Growth impediments arise at larger size, older tenure levels in industry, and after technological discontinuities. Because of their prior experience, diversifying firms are better equipped to handle the challenges of impediments to growth. Meanwhile, de novo firms, ostensibly tailor‐made for the targeted industry, are more likely to stumble over these growth challenges, and eventually lag behind diversifying firms. We find support for our hypotheses using a near census of firms in the U.S. wireless telecommunications industry over the 1983–2004 period. Copyright © 2011 John Wiley & Sons, Ltd.     

Competing technologies and industry evolution: The benefits of making mistakes in the flat panel display industry

This article investigates the post‐entry implications of pre‐entry technological choices made during the uncertain period before a dominant design. Building on work on technological dynamics and organizational inertia, I argue that too early commitments to the winning technology may impede the ability to bring the best product to market, but delaying investment too long limits the ability to accumulate useful knowledge. Using data from the evolution of the flat panel display industry from 1965 to 2005, the study shows empirical support for the two theoretical mechanisms and offers the surprising result that firms starting in the losing technology before switching outperform other firms in terms of product value. Switching, while difficult behaviorally in recovering from failure, both delays difficult‐to‐reverse technological commitments and develops market knowledge. Copyright © 2013 John Wiley & Sons, Ltd.     

Which Service? How Industry Conditions Shape Firms’ Service‐Type Choices

This article studies the role of industry conditions as determinants of manufacturing and software firms’ decisions to offer services. It draws on the competence perspective on industry evolution and servitization to theorize and provide empirical evidence on how industry conditions affect firms’ choice to offer two distinct types of services—product‐oriented services and customer‐oriented services. It is argued that firms are likely to offer product‐oriented services in Schumpeterian industry environments to address high technological uncertainty by leveraging and reinforcing capabilities in the existing technology. In contrast, firms are likely to offer customer‐oriented services in non‐Schumpeterian industry environments to address value generation uncertainty by building competences in new technological or market areas. Based on longitudinal data on 410 public firms from manufacturing industries and the software industry, empirical evidence suggests that firms are indeed more likely to offer product‐oriented services in Schumpeterian industry environments, such as in the early stage of the industry life cycle and under conditions of high R&D intensity and competition, whereas they are more likely to offer customer‐oriented services in non‐Schumpeterian environments, such as in the later stages of the industry life cycle and in highly cyclical industries.     

Interplay between internal investment and alliance specialization in R&D and marketing

A firm's efforts to build its technological and marketing capabilities are not limited to internal investments but can be extended to include external knowledge acquisitions. We examine the interaction between a firm's specialization in R&D or marketing through its internal investments and its alliances in two different industrial contexts. Our results, based on secondary data sources such as Compustat and SDC Platinum from 1985 to 2009, show that the interaction effects of internal specialization and alliance specialization are contingent on the types of tasks (i.e., R&D and marketing) and the industrial context (i.e., high- and low-tech industries). Our findings indicate that a firm in a high-tech industry is able to achieve greater gains by complementing its internal focus on R&D with its external focus on marketing or by focusing on R&D both internally and externally. In contrast, a firm in a low-tech industry is able to achieve greater performance when R&D and marketing complement each other, without regard for how they are aligned through internal investments and alliances. The firm is also able to improve its performance by focusing on marketing both internally and externally. These findings provide new insights into the complementarity between internal investments and alliances.     

The influence of prior industry affiliation on framing in nascent industries: the evolution of digital cameras

New industries sparked by technological change are characterized by high uncertainty. In this paper, we explore how a firm's conceptualization of products in this context, as reflected by product feature choices, is influenced by prior industry affiliation. We study digital cameras introduced from 1991–2006 by firms from three prior industries. We hypothesize and find that: (1) prior industry experience shapes a set of shared beliefs that results in similar and concurrent firm behavior; (2) firms notice and imitate the behaviors of firms from the same prior industry; and, (3) as firms gain experience with particular features, the influence of prior industry decreases. This study extends previous research on firm entry into new domains by examining heterogeneity in firms' framing and feature‐level entry choices. Copyright © 2011 John Wiley & Sons, Ltd.     

Firms' knowledge‐sharing strategies in the global innovation system: empirical evidence from the flat panel display industry

This paper explores the relationship between firms' strategies to share knowledge with their innovation system and innovative performance. The empirical analysis showed that many firms designed strategies to share technological knowledge with competitors, and those firms that shared knowledge with their innovation system earned higher innovative performance than firms that did not share knowledge. In addition, firms that interacted with their global innovation system earned higher innovative performance than firms that interacted with only their national innovation system. These results should help managers and researchers understand how to devise technology strategies in globally integrated industries. Copyright © 2003 John Wiley & Sons, Ltd.     

Investor Reaction to Covert Corporate Political Activity

Research summary : Citizens United v. Federal Election Commission and subsequent developments created a covert channel for firms to allocate resources from corporate treasuries to political activity. Through the use of a financial market event study of an accidental disclosure of firms' contributions to a Republican nonprofit organization, I examine investors' reactions to covert investment in independent political expenditures. I find that, on average, contributing firms experienced positive abnormal returns around the disclosure event and that these abnormal returns were more positive for firms in heavily regulated industries as well as those previously making campaign contributions to candidates. However, firms that recently faced a shareholder resolution on political spending disclosure experienced negative abnormal returns, suggesting that the controversial nature of covert activity moderated investors' reactions. Managerial summary : The purpose of this study is to examine how investors reacted to an accidental disclosure of firms' investments in “dark money,” a new form of corporate political activity allowed by the U.S. Supreme Court in its Citizens United decision. I find that, on average, investors reacted positively toward firms identified as making these new political investments, especially if the firms previously engaged in electoral politics or operate in heavily regulated industries. However, this reaction turned negative if the firm recently faced a shareholder resolution asking that it voluntarily disclose all of its political investments. An implication for managers is that they should consider their firms' legal and information environments as fully as possible before committing resources to new and potentially controversial political tactics. Copyright © 2017 John Wiley & Sons, Ltd.     

Learning to let go: Social influence,learning, and the abandonment of corporate venture capital practices

Research summary: This study examines the abandonment of organizational practices. We argue that firm choices in implementing practices affect how firms experience a practice and their subsequent likelihood of abandonment. We focus on utilization of the practice and staffing (i.e. career backgrounds of managers), as two important implementation choices that firms make. The findings demonstrate that practice utilization and staffing choices not only affect abandonment likelihood directly but also condition firms' susceptibility to pressures to abandon when social referents do. Our study contributes to diffusion research by examining practice abandonment—a relatively unexplored area in diffusion research—and by incorporating specific aspects of firms' post‐adoption choices into diffusion theory. Managerial summary: When do firms shut down practices? Prior research has shown that firms learn from the actions of other firms, both adopting and abandoning practices when their peers do. But unlike adoption decisions, abandonment decisions need to account for firms' own experiences with the practice. We study the abandonment of corporate venture capital (CVC) practices in the U.S. IT industry, which has experienced waves of adoption and abandonment. We find that firms that make more CVC investments are less likely to abandon the practice, and are less likely to learn vicariously from other firms' abandonment decisions, such that they are less likely to exit CVC when other firms do. Staffing choices also matter: hiring former venture capitalists makes firms less likely to abandon CVC practices, while hiring internally makes abandonment more likely. Plus, staffing choices affect how firms learn from the environment, as CVC managers pay attention to and learn more from the actions of firms that match their work backgrounds; i.e., firms that staff CVC units with former venture capitalists are more likely to follow exit decisions of VC firms, while those that staff with internal hires are more likely to follow their industry peers. Our results suggest that firms wanting to retain CVC practices should think carefully about the implementation choices they make, as they may be inadvertently sowing seeds of abandonment. Copyright © 2015 John Wiley & Sons, Ltd.     

Competitive heterogeneity,cohorts, and persistent advantage

Research summary: Juxtaposing competing theories of whether superior profits endure, this article investigates differences in the rates at which firms' profit advantages persist following a significant regulatory change in the rules governing industry competition. Such a change creates two cohorts of firms, Entrants that lack experience in the industry and Incumbents that competed in the industry before the regulatory shift. The findings show that both cohorts' profit advantages persist, but at different rates: Superior performing Incumbents sustain an advantage longer than superior performing Entrants. This result is counterintuitive since Entrants are not constrained by a legacy of competing under the prior regime. Overall, the findings indicate that stages of a firm's development and of an industry's evolution are critical to understanding how long superior profits persist. Managerial summary: State and federal institutions employ regulations in an attempt to address market failures and to create a stable set of market and nonmarket relationships among relevant actors. A byproduct of this stability is decreased competition, and in turn, reduced incentives for firms to develop efficient operations. One might expect then that deregulation would fundamentally disrupt incumbent firms' abilities to develop and sustain a profit advantage. We find the reverse: Over time, some firms in the Incumbent cohort develop persistent, albeit temporary, profit advantages despite an onslaught of Entrants. Thus, while deregulation shakes out inefficient firms, it may strengthen, rather than threaten the profit trajectories of incumbent firms over time. Advantages developed by superior performing Entrants also endure, but for a shorter duration relative to Incumbents. Copyright © 2015 John Wiley & Sons, Ltd.     

Money secrets: How does trade secret legal protection affect firm market value? Evidence from the uniform trade secret act

Research summary : We investigate the impact of trade secret legal protection on firm market value in the context of acquisitions. On one hand, market value may increase because trade secret assets become better protected from rivals. On the other hand, market value may decrease because trade secret protection reduces information about the target and its competitors available to potential buyers, increasing uncertainty about its value. Buyers will discount their offers in expectation of being compensated for riskier deals. Using a sample of private equity investments in the United States, we find that trade secret protection has a positive effect in industries with high mobility of knowledge workers, but a negative effect in industries with (1) high resource–value uncertainty and (2) high poor‐investment risk. Managerial summary : We argue that an increase in trade secret legal protection might not unequivocally benefit firm owners when selling their business. A stronger trade secret protection increases the market value of firms in industries with high workers' mobility, but it decreases the market value of firms in industries with uncertain resource value and/or high risk of poor‐acquisition investments. Based on the contingent effect of trade secret protection, companies may want to adjust their strategic decisions, including where to locate or relocate, based in part on whether they will derive benefits or suffer losses when trade secrets are better protected. Finally, our study should help policymakers understand more fully the economic impact of government policies associated with trade secrets. Copyright © 2016 John Wiley & Sons, Ltd.     

Stock of downstream complementary assets as a catalyst for product innovation during technological change in the U.S. machine tool industry

Research summary : We investigate the effect of incumbents' stock of downstream complementary assets on their product innovation during a disruptive technological change. We theorize that a firm's stock of downstream complementary assets, by providing critical information about shifting demand conditions, will play a catalytic role in firm adaptation during such a change. Using the advent of disruptive computer numerical control machine tools in the U.S. machine tool industry during the 1970s and 1980s as the context, we find that firms with greater stocks of downstream complementary assets are likely to be product innovation leaders during such a change. Managerial summary : Disruptive changes are challenging firms across industries. We concentrate on the U.S. machine tool industry during the 1970s and 1980s when Japanese manufacturers with disruptive computer numerical control systems challenged the U.S. manufacturers. We find that, under the threat of disruption, the greater the stock of downstream complementary assets a U.S. machine tool manufacturer has, the more likely it is to be the product innovation leader with the disruptive technology. Our findings provide novel insights for managers in companies that face disruptive changes and can help them avoid the consequences of such changes as predicted by prior research. Copyright © 2016 John Wiley & Sons, Ltd.     

The effect of own-firm and other-firm experience on foreign direct investment survival in the United States, 1987–92

We argue that foreign firms operating in a host country generate information spillovers that have potential value for later foreign direct investment. We test two predictions. First, we expect foreign direct investments by firms with experience in a host country to be more likely to survive than investments made by first-time entrants. Second, foreign direct investments will be more likely to survive the greater the foreign presence in the target industry at the time of investment, subject to two contingencies. The first contingency is that the relationship will be weak or nonexistent among firms with no experience in the host country, because these firms have difficulty evaluating and taking advantage of the information spillovers. The second contingency is that the presence of other foreign firms will not affect investment survival among firms that already have a presence in the target industry and undertake expansion. These firms already possess general information about the target industries and are unlikely to gain additional benefit from information spillovers. We find supportive evidence based on the survival to 1992 among 354 U.S. investments undertaken by foreign firms in manufacturing industries during 1987. © 1997 John Wiley & Sons, Ltd.