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 stocks, 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 lead to significantly more 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.
Best Paper Proceedings, AOM Conference 2012, Tech and Innovation Management