CEO incentives,innovation, and performance in technology‐intensive firms: a reconciliation of outcome and behavior‐based incentive schemes

Building on the agency view of corporate governance, we propose that technology‐intensive firms use both outcome and behavior‐based performance criteria for rewarding CEOs. Using a sample of 206 firms from 12 U.S. manufacturing industries, we find that as technological intensity increases CEO bonuses are more closely linked to financial results and that total CEO incentives are associated with two indicators of desirable innovation behaviors: invention resonance and science harvesting. Invention resonance refers to the impact a firm's inventions have on other firms' inventions, while science harvesting reflects a firm's commitment to scientific research. As technological intensity increases, aligning bonus with financial results, total incentives with invention resonance, and total incentives with science harvesting predict firm market performance. Copyright © 2006 John Wiley & Sons, Ltd.     

Demand‐side strategy,relational advantage,and partner‐driven corporate scope: The case for client‐led diversification

Research Summary: We advance research on corporate diversification by joining insights from the demand‐side and relational views in strategy to offer a novel theory of client‐led diversification. We propose that client‐led diversification results from a combination of the customer‐driven opportunities emphasized in the demand‐side view and the creation of added value through relational assets that is a central tenet of the relational view. Furthermore, we hypothesize that suppliers’ client‐specific knowledge, clients’ relational commitment to suppliers, and growth opportunities in clients’ markets (relative to the suppliers’ own markets) will magnify the client‐led diversification effect. We test our hypotheses using a longitudinal dataset on patent law firms and their diversification into new domains of patent prosecution work for their corporate clients. Managerial Summary: Explanations of why firms diversify into new lines of business have largely concerned the redeployment of underutilized resources, with little regard to opportunities or influences stemming from firms’ existing customers. In our article, we show how the changing scope of business needs from a knowledge‐based supplier firm's set of existing clients is a central driver of supplier‐firm diversification, and this is especially the case when the level of relational assets shared between a supplier and its clients is higher. In a competitive landscape where suppliers compete intensively for the business of clients, our results show how managers can increase the likelihood of capturing additional business from its existing exchange relationships rather than bearing the risks of seeking new exchange relationships.     

Foreign‐based competition and corporate diversification strategy

Since the mid‐1980s U.S. domestic firms have faced significant increases in foreign‐based (i.e., import) competition as reductions in barriers to international commerce have resulted in markets and industries becoming increasingly global. Despite the growing and widespread importance of foreign‐based competition, the influence that such competition may exert on corporate diversification strategy is a question largely overlooked in the strategic management literature. This paper examines the impact of foreign‐based competition in a firm's core business on both the level and nature of a firm's diversification strategy at the corporate level in a panel dataset of U.S. firms over the period 1985–94. Our findings provide the first evidence that increased foreign‐based competition is indeed a statistically significant factor explaining both the reduced business‐level diversity and the increased strategic focus of U.S. firms that has been widely perceived over the past two decades. Copyright © 2005 John Wiley & Sons, Ltd.     

Multinationals' diversification and the risk-return trade-off

This paper advances a theoretical rationale to explain Bowman's paradox (1980) that firms with high returns can have low risk. Here we draw on the rich body of international management research and argue that global market diversification, which provides firms with three distinct options and opportunities over domestic firms, can explain the high return-low risk profile. We also argue that no strong theoretical rationale exists in support of either related or unrelated product diversification generating such a favorable risk-return profile. By integrating both the product and the global market dimension of diversification into our analyses and by controlling for the industry effect, this paper sheds new light on the relationship between corporate diversification and the risk-return tradeoff. The results of this research, which are based on the diversification experiences of 125 multinationals, reveal the strikingly important, though so far overlooked, role that global market diversification plays in the joint management of corporate risk and return. Global market diversification here reflects both the multiplicity of international market areas in which a firm operates and the distribution pattern of a firm's industries across these multiple areas.     

Technological Diversification, Coherence, and Performance of Firms

Technological diversification at the firm level (i.e., the expansion of a firm's technology base into a wide range of technology fields) is found to be a prevailing phenomenon in all three major industrialized regions,—the United States, Europe, and Japan—prompting the term multitechnology corporation. Whereas previous studies have provided insights into the composition of technology portfolios of multitechnology firms, little is known about the relationship between technological diversification and firms' technological performance. Against a backdrop of the technology and innovation management literature, the present article investigates the relationship between technological diversification and technological performance, taking into account the moderating role of technological coherence in firms' technology portfolios. Hereby, technological coherence is defined as the degree to which technologies in a technology portfolio are technologically related. To measure the technological coherence of portfolios, a measure of technological relatedness of technology fields is constructed based on patent citation patterns found in 450,000 European Patent Office (EPO) patent grants. Two hypotheses are presented here: (1) Technological diversification has an inverted U‐shaped relationship with technological performance; and (2) technological coherence moderates the relationship between technological diversification and technological performance positively. These hypotheses are tested empirically using a panel data set (1995–2003) on patent portfolios pertaining to 184 U.S., European, and Japanese firms. The firms selected are the largest research and development (R&D) actors in five industries: pharmaceuticals and biotechnology; chemicals; engineering and general machinery; information technology (IT) hardware (i.e., computers and communication equipment); and electronics and electrical machinery. Empirical results, obtained by fixed‐effects negative binomial regressions, support both hypotheses in the present article. Technological diversification has an inverted U‐shaped relationship with technological performance. Technological diversification offers opportunities for cross‐fertilization and technology fusion, but high levels of diversification may yield few marginal benefits as firms risk lacking sufficient levels of scale to benefit from wide‐ranging technological diversification, and firms may encounter high levels of coordination and integration costs. Further, the results show that the net benefits of technological diversification are higher in technologically coherent technology portfolios. If firms build up a technologically coherent diversified portfolio, the presence of sufficient levels of scale is ensured and coordination costs are limited. At the same time, technologically coherent diversification puts firms in a better position to benefit form cross‐fertilization between technologies. The present article clearly identifies the important role of technological coherence in technology diversification strategies of firms.     

Intra‐industry diversification and firm performance

We study how intra‐industry product diversity affects firm performance by analyzing the implications of expanding a firm's product line within its core business. We conjecture that increases in product diversity initially undermine performance because of negative transfer effects but then improve it due to economies of scope. We further theorize that this U‐shaped effect of product diversity becomes more pronounced as the firm increases the intensity of its technology investment, yet is likely to be attenuated by the firm's accumulated experience with intra‐industry diversification. Data on 156 U.S.‐based software firms operating from 1990 to 2001 furnish support for these conjectures. Our study advances emerging research on intra‐industry diversification by underscoring some of its contingent performance effects. Copyright © 2013 John Wiley & Sons, Ltd.     

Within‐business diversification in technology‐intensive industries

This study extends diversification research to a new level of analysis, examining how within‐business diversification, which occurs when firms extend existing product lines or expand into new ones, affects organizational survival. While prior research suggests that corporate‐level diversification accounts for relatively little variation in performance, within‐business diversification matters a great deal, by influencing which start‐ups survive and which firms better cope with rapid environmental change. Specifically, we find that the relationship between within‐business diversity and survival is contingent on the amount of environmental change wrought by a firm's competitors as they simultaneously diversify their own product portfolios and innovate technologically. Analysis of the population of U.S. personal computer manufacturers from the industry's founding in 1975 through 1994 supports our premise: Regardless of its effects across businesses, diversification matters a great deal within them. Copyright © 2004 John Wiley & Sons, Ltd.     

Rent appropriation of knowledge‐based assets and firm performance when institutions are weak: A study of Chinese publicly listed firms

Research summary : A firm's strategic investments in knowledge‐based assets through research and development (R&D) can generate economic rents for the firm, and thus are expected to affect positively a firm's financial performance. However, weak protection of minority shareholders, weak property rights, and ineffective law enforcement can allow those rents to be appropriated disproportionately by a firm's powerful insiders such as large owners and top managers. Recent data on Chinese publicly listed firms during 2007–2012 were used to demonstrate that the expected positive relationship between knowledge assets and performance is weaker in transition economies when a firm's ownership is highly concentrated and its managers have wide discretion. Moreover, rent appropriation by insiders was shown to vary with the levels of institutional development in which a firm operates. Managerial summary : Investing in knowledge‐based intangible assets (e.g., R&D) is an important value‐creation activity for the firm. Such value creation process can be facilitated by large shareholders and powerful managers, who can then take an advantageous position with critical insider information on these valuable intangible assets and therefore enjoy more opportunities to appropriate more value from them, leaving less value for other minority shareholders. The value distribution becomes increasingly skewed against minority shareholders when the institutional protection for them is weak. Indeed, in a large sample of Chinese publicly listed firms, we found that R&D investment becomes less positively associated with firm financial performance with the presence of large shareholders, high managerial equity, or CEO/Chairman duality, especially in Chinese provinces with weak institutional development. Copyright © 2016 John Wiley & Sons, Ltd.     

Knowledge relatedness and the performance of multibusiness firms

This study examines corporate performance effects of cross‐business knowledge synergies in multibusiness firms. It synthesizes the resource‐based view of diversification and the economic theory of complementarities to conceptualize cross‐business knowledge synergies in terms of the relatedness and the complementarity of knowledge resources across business units of the multibusiness firm. The study hypothesizes that corporate performance is improved when the firm simultaneously exploits a complementary set of related knowledge resources across its business units. In a sample of 303 multibusiness firms, the study finds that synergies arising from product knowledge relatedness, customer knowledge relatedness, or managerial knowledge relatedness do not improve corporate performance on their own. Synergies arising from the complementarity of the three types of knowledge relatedness significantly improve both market‐based and accounting‐based performance of the multibusiness corporation. Copyright © 2004 John Wiley & Sons, Ltd.     

Building product diversification through contractual R&D agreements

Firms engage in contractual R&D agreements for several reasons, including product innovation motives, firm performance goals, and technological diversification. This article demonstrates that firms also might enter into external collaborations to penetrate new markets. This study therefore explores both the effects and the strategic risks of contractual R&D agreements and their related knowledge structures for a firm's capacity to diversify into new markets. Drawing on a novel panel data set obtained from 102 Fortune high‐tech firms, the authors demonstrate that strategic alliances enable knowledge‐integrated firms to penetrate new businesses; however, these organizations should be cautious about engaging in licensing‐in agreements, which have negative effects on product diversification.     

Managing liquidity in research‐intensive firms: signaling and cash flow effects of patents and alliance activities

The effective holding and management of liquid assets is critical to success in research‐intensive industries. The primary output of invention is new knowledge. However, because of its ‘sticky’ characteristics, knowledge may not easily diffuse to external shareholders, leading to knowledge asymmetries between managers/employees and external suppliers of capital. Many valuable R&D projects may thus fail to attract external financing, limiting a firm's ability to invest in R&D. In this study, we examine how the cash flow and signaling properties of a firm's patents and certain aspects of its alliance strategy can attenuate such problems. Specifically, we suggest that a firm's R&D investments positively predict the level of its liquid asset holdings. This is due to the fact that invention‐induced knowledge asymmetries increase the firm's cost of accessing external liquid capital. However, holding cash entails opportunity costs. In this regard, we also find that patent production and certain alliance activities provide important signaling mechanisms, which reduce knowledge asymmetries between the firm and capital markets, and consequently lower the firm's need to hold liquid assets. Empirical tests were conducted using a sample of 108 U.S‐based biotechnology firms. Copyright © 2009 John Wiley & Sons, Ltd.     

The Paradox of Openness: How Product and Patenting Experience Affect R&D Sourcing in China?

External R&D sourcing may help firms compete in an environment characterized by rapid technological changes. Yet, prior studies have produced conflicting findings on how a firm's technological experience affects the extent to which the firm engages in external R&D sourcing. Although many highlight that firms with extensive technological experience are equipped with more technological knowledge, collaborative skills, and absorptive capacity, encouraging greater levels of external R&D, others suggest the opposite due to potential exchange hazards and partnership conflicts. Adopting an external partner's perspective, the current study reconsiders this “paradox of openness” by analyzing how a focal firm's product experience and patenting experience affect an external partner's tendency to provide external R&D services to the focal firm. Specifically, this study explore how a focal firm's knowledge protectiveness and tacitness embedded in its product and patenting experience influences the external partners' motivation for knowledge transfer. This study predicts that a firm's product experience increases the focal firm's external R&D sourcing because it provides high levels of knowledge tacitness and external openness and can encourage external partners to share and exchange knowledge with the focal firm. In contrast, a firm's patenting experience decreases the focal firm's external R&D sourcing because it denotes knowledge explicitness and protectiveness and may discourage external partners to share and exchange knowledge with the focal firm. This study further predicts that patenting experience has a negative moderating effect on the relationship between product experience and external R&D sourcing. Using a data set of 575 high‐tech firms in China, this study finds support for our predictions. Our findings contribute to the growing literature on the knowledge‐based view and technology entrepreneurship in emerging markets.     

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.     

Knowledge,firm boundaries,and innovation: Mitigating the incumbent's curse during radical technological change

We explore the relationship between a firm's organization and its ability to face a radical technological change. We suggest that, during such a change, the presence of both in‐house upstream knowledge and downstream market linkages, within a firm's boundary, has its advantages. We test our predictions in the context of the robotics industry where manufacturers of mechanically controlled “brawny” robots, which were valued mainly for their payload capacity, faced the advent of electrically controlled “brainy” robots that emphasized accuracy and repeatability. We find that “preadapted” firms—the ones with prior relevant technological knowledge and with access to internal users of “brainy” robots—were the innovation leaders in the emerging new technology but were laggards in the old technology. Copyright © 2014 John Wiley & Sons, Ltd.     

Mind the gap: The interplay between external and internal actions in the case of corporate social responsibility

Research summary : We explore the effect of the interplay between a firm's external and internal actions on market value in the context of corporate social responsibility (CSR). Specifically, drawing from the neo‐institutional theory, we distinguish between external and internal CSR actions and argue that they jointly contribute to the accumulation of intangible firm resources and are therefore associated with better market value. Importantly, though, we find that, on average, firms undertake more internal than external CSR actions, and we theorize that a wider gap between external and internal actions is negatively associated with market value. We confirm our hypotheses empirically, using the market‐value equation and a sample comprising 1,492 firms in 33 countries from 2002 to 2008. Finally, we discuss implications for future research and practice. Managerial summary : Companies often accumulate intangible assets by taking internally and externally oriented CSR actions. Contrary to popular beliefs, the data show that they undertake more internal than external ones: firms do more and communicate less. How does a potential gap (i.e., a misalignment) between internal and external CSR actions affect a firm's market value? We find that although together (the sum of) internal and external actions are positively associated with market value, a wider gap has negative implications. In other words, firms do not realize the full benefits of their internal actions when such actions are not externally communicated to key stakeholders, and to the investment community in particular. This negative association with market value is particularly salient in CSR‐intensive and the natural resources and extractives industries. Copyright © 2015 John Wiley & Sons, Ltd.     

Global diversification strategy and corporate profit performance

Based on a sample of 62 multinationals, this paper examines the impact of global diversification strategy on corporate profit performance by integrating the product and the international market dimensions of diversification. The results suggest that the corporate profit performance impact of related and unrelated diversification varies contingent upon the extent of a firm's international market diversification. One important lesson of this work is that both business strategy researchers and managers should review corporate diversification as having distinct yet interactive strategic dimensions—product and international market—and they would do well to recognize both the different and the joint effect of these dimensions on corporate profit performance.     

Marketing Ignorance and the Validity of Narver and Slater's MKTOR Scale in High‐Tech Russian Firms

A firm's market orientation is an important factor influencing its ability to successfully develop and introduce new products. To measure market orientation, Narver and Slater's MKTOR scale has been accepted in the literature as a valid and reliable scale. In fact, it can be considered state of the art. This study, though, challenges the validity of that scale in high‐tech industries and transition economies. As part of a larger study, the scale was used to measure the market orientation of 10 Russian high‐tech small‐ and medium‐sized enterprises, next to other measures of market orientation. These were the respondent's perceptions of their market orientation; the firm's philosophy on selling goods/services or solving customer problems; and in‐depth interview questions on goals, strategies, network ties, targeted market segments, and competitive advantage. It was found that the firms obtained high scores on the MKTOR scale but that these scores were accompanied by ideas and behaviors reflecting a low or even lacking market orientation. On a scale from 1 to 7, the firms average 6.2 on customer orientation, but at the same time, they are not aware that they do not have customer‐focused strategies and do not fully understand the chain in which they operate. Further, the average on competitor orientation is 5.4. Some firms have competitor‐oriented characteristics, but others are ignorant of their competition and believe in their technological superiority as a source of competitive advantage. Analyzing these anomalies, it is concluded that the scale requires a minimum level of marketing knowledge of respondents. Without such knowledge, the MKTOR scale is susceptible to the respondent's unconscious incapability, thereby producing invalid results. In the 10 Russian cases, the respondents did not have much experience or education in marketing, which explains why they were incapable of adequately answering the items of the MKTOR scale. The results of this study help to explain the ambivalent findings in the literature about the effect of market orientation on innovation and new product development in high‐tech sectors and transition economies. The paper concludes with suggestions on how market orientation could be better measured in such contexts. It is suggested to replace the Likert‐scale by a semantic differential scale, where statements reflecting product, production, and sales orientations are confronted with statements reflecting a market orientation. Given the importance of experience and education in marketing as positive antecedents, measures of these factors should be included in the scale as well. With these adaptations, measures of market orientation will be more factual, will require less knowledge of marketing terminology, will reduce bias caused by respondents' perceptions, and will prevent ambiguity in terminology.     

R&D Cooperation,Partner Diversity,and Innovation Performance: An Empirical Analysis

Existing literature on research and development (R&D) alliances focuses on formation motives and performance impacts of these alliances but hardly on diversity of the partners' portfolio. Cooperation with a diverse set of partners leads to learning opportunities with regard to both cooperation and innovation skills and hence is expected to enhance the firm's innovation performance. This paper examines two research questions: (1) the impact of functional and geographical diversity of R&D partners on radical and incremental innovation performance of product innovating firms, and (2) the organizational determinants of partner diversity in R&D alliances. The empirical analysis is based on data from the Dutch Community Innovation Survey, R&D and Information and Communication Technology Surveys, and Production Statistics, which lead to a representative sample of 12,811 innovating firms in the period 1994–2006. Through random‐effects panel Tobit estimates, econometric models for both research questions are estimated. The results indicate that functional and geographical diversity act through different channels. Functional diversity leads to a variety of knowledge intake and synergetic effects necessary to develop and commercialize novel products. Geographical diversity results in successful adaption of existing products to different local requirements such as technical standards, market regulations, and customer preferences. The organizational determinants of both kinds of partner diversity are prior experience, patenting, and information technology infrastructure.     

Building and leveraging competence exploitation and exploration for firm new product success

We theorize that industry conditions of collaboration intensity and innovation intensity drive the development of competence exploitation and exploration in manufacturer-manufacturer collaborations, and that such competencies can be leveraged to increase firm-level new product sales and market share, contingent on the firm's establishment of non-proprietary knowledge transfer capability. We test our model using a survey of 224 manufacturer-manufacturer collaborations. Our findings indicate that collaboration intensity drives firms to build both competence exploration and exploitation while innovation intensity drives neither. We also find that while non-proprietary knowledge capability enhances the influence of competence exploration on a firm's new product sales and market share, it dampens the firm's ability to leverage competence exploitation for firm-level new product success.     

Product Change Intensity, Product Advantage, and Market Performance: An Empirical Investigation of the PC Industry

Product change decisions, such as the frequency of new product introductions, can impact product performance characteristics, sales, and market share of several generations of products and, therefore, a firm's long‐term survival and growth. The purpose of this study was to explore the impact of a firm's product change frequency, also referred to as product change intensity. A conceptual model linking a firm's product change intensity to its product advantage—and, in turn, to its market performance—with strategic product change orientation and technology competence as moderating effects, was used as a foundation for the study's hypotheses. These were tested using hierarchical and linear regressions, based on survey data collected from 55 U.S. companies in the personal computer (PC) industry. The analysis confirmed that a PC firm's product rate of change is positively associated with its product advantage and that its product advantage, in turn, is positively associated with its market share and growth performance. However, the hypothesized moderating effects were not confirmed. Rather, a firm's product change orientation and its level of technology competence are more likely to have a direct impact on product advantage. The implications of these findings are that, in general, firms that release new products frequently will have them viewed more favorably by the market than products with lower change intensities. Also, firms with higher levels of competence in the product technology domain tend to create products with greater market attraction. Finally, more radical changes to PC product architectures may pay off better than relatively minor changes. These results may not apply to other industries due to the specific design of personal computers and the nature of this fast‐paced market. Neither do the findings necessarily apply to all firms regardless of those firms' specific product and market strategies. More research is necessary to understand how a firm's adopted strategy, and the industry in which it operates, affect the relationships demonstrated in this study.