Not invented here : managing corporate innovation in a new era

V.J.A. Vrande, van de

Research output: ThesisPhd Thesis 1 (Research TU/e / Graduation TU/e)

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Abstract

Not Invented here: Managing Corporate Innovation in a New Era External technology sourcing as a means to develop new businesses is taking a more central role in established companies. Acquiring new technologies from outside the firm which speeds up the innovation process and complements internal R&D is an important aspect of new business development within the paradigm of open innovation. It is becoming a requirement to create and sustain competitive advantage in different product markets, and to respond quickly to changing market needs and new technological opportunities. Companies that co-develop technology or in-source external technology to set up new business can choose from a myriad of different sourcing modes. Traditionally, entrepreneurial firms have emphasized strategic alliances, joint ventures, license agreements and mergers and acquisitions as means to source knowledge they do not have in-house. More recently, firms have also become aware of other options such as corporate venture capital investments and technology exploration in cooperation with research labs, universities, high-tech start-ups or other large companies. Innovating companies can choose between these external technology sourcing modes in order to react in a flexible way to new technological developments and changing market conditions. In this thesis I analyze the use of different governance modes for external technology sourcing, incorporating a broad range of governance modes, such as technology alliances, corporate venture capital investments, minority holdings, joint ventures, and mergers and acquisitions. The main research question that serves as a basis for the project is: How do companies use different governance modes for external technology sourcing? The thesis can be split up in three sub-questions, each of which is tackled in a different chapter. The first part of the thesis focuses on the effect of uncertainty on the governance choice for inter-organizational technology sourcing. I argue that uncertainty can be roughly divided into two groups: exogenous uncertainty, which is unaffected by firm's actions, and endogenous uncertainty, which is embedded in the relationship and can be reduced by actions of the firm. Exogenous uncertainty includes environmental turbulence and technological newness. When the environment is turbulent, innovating firms attach more value in keeping their options open. In addition, when an innovating firm intends to source nascent technologies, uncertainty about the future business potential of the technology is very high. Hence, under conditions of exogenous uncertainty, firms will prefer to maximize flexibility and prefer to make small (learning) investments, which facilitate reversibility of actions in combination with low degrees of financial commitments. Uncertainty may also exist within a technology sourcing relationship. For instance, when two partners have a relatively small technological overlap (i.e. when the technological distance is high) it might be difficult for the investing firm to recognize and absorb its partner's technological capabilities. On the one hand, this might lead to a preference for more integrated modes which require a higher level of integration in order to increase the efficiency of the transfer and accumulation of knowledge. On the other hand, the greater the dissimilarities in the knowledge bases, the longer it will take before uncertainty about the opportunity has resolved, making a higher level of commitment less attractive. Another indicator for endogenous uncertainty is the existence of prior cooperation between the partners. Prior cooperation can be used to overcome information asymmetry among partners, which occurs when they do not have access to all the relevant information to make an investment decision. Therefore, we expect that prior cooperation enhances the willingness of companies to enter into a relationship that involves a higher level of commitment. However, one might also argue that prior cooperation enhances the building of trust between partners, thus making a more integrated solution less favorable. The results show a clear preference for particular governance modes, depending on the type of uncertainty. Under high levels of environmental turbulence, non-equity technology alliances are clearly the most favorable option. Technological newness has a strong, negative effect on the likelihood of using M&As and joint ventures instead of non-equity alliances. However, the results also show a clear preference for the use of CVC over non-equity alliances. A larger technological distance between two firms also increases the chance to use CVC investments over non-equity alliances, whereas minority holdings are the least favored option. The strong preference for CVCs to source externally developed technology that is distant from the focal firms technology core shows the particular role CVCs play in external technology sourcing. Finally, when prior cooperation between firms exists, we find that minority holdings and joint ventures are preferred over non-equity alliances, but we find no differential effect between the use of non-equity alliances and M&As. The results furthermore suggest that exogenous uncertainty is a much more powerful driver behind governance mode decisions than relationship-specific uncertainty. A high level of environmental uncertainty leads firms to choose less integrated governance modes, such as non147 equity alliances and CVC investments, over their more integrated counterparts. Uncertainty about the future thus drives firms to make small, reversible investments. This enables firms to learn about business opportunities through small, learning investments and to put off stronger financial commitment until uncertainty about the opportunity has decreased. It is also worth noting that the existence of a continuum from less to more integrated governance modes is not confirmed. Based on the literature, I proposed a ranking from less to more integrated governance modes, ranging from non-equity alliances, corporate venture capital investments, minority holdings, joint ventures and M&As. However, the results from the ordinal and multinomial logit analyses show no support for an ordinal ranking of the different external sourcing modes as has been suggested in prior studies. In the second part of this thesis, I discuss the added value of corporate venture capital investments as a means to source new technologies and the effect on a company's subsequent innovative performance. Corporate venture capital investments are minority equity investments in young, start-up firms and during recent years, these types of investments have received increased attention both in academia as well as in business. I argue that corporate venture capital investments positively affect the innovation performance of firms, even when controlling for other modes of external knowledge sourcing. In addition, it is argued that corporate venture capital investments are complements rather than substitutes to other external sourcing modes, because they enable access to new technologies in the earliest stages of technology development, while other modes are more appropriate for later stages or less explorative technology acquisition. Using corporate venture capital investments in combination with the more traditional modes of technology sourcing will therefore positively affect the innovative performance of investing firms. The main empirical results indicate that corporate venture capital investments have a direct, positive effect on innovative output of investing firms, even when controlling for other modes of external technology sourcing. Moreover, the results support our suggestion that different governance modes are complementary. External governance modes appear to reinforce rather than substitute each other. Moreover, we see a steady increase in the coefficient of the respective interaction terms with non-equity alliances, equity alliances, and M&As, indicating that the complementarity of external technology sourcing increases when the different sourcing modes become more distinct. In other words, governance modes that are alike in terms of flexibility and the targeted knowledge can also serve as substitutes. For instance, corporate venture capital investments and non-equity alliances are both loosely-coupled governance modes that involve a high level of flexibility. The preference for one of the two modes when sourcing early stage technologies might then be contingent upon other factors, making non-equity alliances and corporate venture capital investments substitutes rather than complements. Equity alliances and M&As, on the other hand, are much more distinct from corporate venture capital investments, making substitutability less likely. The last part of the thesis is oriented towards the explorative nature of external technology sourcing. In this chapter, I analyze the effect of corporate venture capital investments, non-equity alliances, equity alliances and M&As on the generation of pioneering technologies. Pioneering technologies are technologies that are new to the world and do not refer to prior patents. When considering the creation of pioneering technologies it is thus important to look at both organizational and technological boundary-spanning. Organizational boundary-spanning can take the form of engaging in inter-organizational relationships, for instance through strategic alliances, corporate venture capital investments and mergers and acquisitions. Because different external technology sourcing modes enable access to different types of technologies, it is important to disentangle them in order to estimate their individual impact. Technological boundary-spanning, on the other hand, can be achieved through the investment in distantly related technological knowledge, or by investing in recently developed technologies. In this chapter I analyze the effect of different external technology sourcing modes on the generation of pioneering technologies. Because different governance modes facilitate access to different types of knowledge in different stages of development, I argue that they affect exploration outcomes differently as well. Strategic alliances and corporate venture capital investments, for instance, are loosely integrated governance modes that allow the focal firm to remain flexible when investing in external knowledge. Mergers and acquisitions, on the other hand, are more integrated and therefore embody a lower level of flexibility. Additionally, I link these governance modes to the newness of the technology a firm invests in and the technological distance between the investor and its partner. Both technological newness and technological distance affect the extent to which the knowledge acquired matches the absorptive capacity embedded in the organization and hence the effectiveness with which the external knowledge can be internalized. The results indicate that loosely coupled linkages such as strategic alliances (nonequity as well as equity) and corporate venture capital investment have a positive effect on the creation of breakthrough innovations. Moreover, I find that a larger technological distance between the two partnering firms increases the effect this organizational mode has on the creation of pioneering technologies, while technological newness decreases the positive effect of CVC investments and nonequity alliances on the creation of pioneering technologies. Interestingly, although corporate venture capital investments are clearly the most favorable option when investing in new technologies, the results show that the largest impact on the creation of pioneering technologies does not come from investing in CVC investments. Rather, pioneering technologies stem from collaboration through a non-equity or equity alliance. Moreover, even though CVC investments are most likely to be used for recent technologies or technologies that are on a larger technological distance, the results suggest that the effect of CVC investments on the generation of pioneering technologies is not enhanced by technological distance, nor by technological newness. In fact, CVC investments as well as non-equity alliances benefit more from investing in older technologies, indicating that recent knowledge is not necessarily related to the creation of radical technologies. To conclude, we might say that the external sourcing of knowledge is becoming more and more important in the development of new businesses. Companies therefore need to develop a set of methods or guidelines in order to efficiently in-source external technologies. The choice between different modes of governance plays an important role in this process. As shown in this study, external sourcing modes differ in their characteristics and the role they play in the innovation process. In addition, the results show that the mix of different governance modes is an important driver behind innovative performance. Each of the governance modes has advantages and disadvantages, depending on the motives that drive the external sourcing decision. Matching these motives with the appropriate governance choice is a major challenge for firms. Therefore, it is crucial for companies to have a clear view on their innovation strategy.
Original languageEnglish
QualificationDoctor of Philosophy
Awarding Institution
  • Industrial Engineering and Innovation Sciences
Supervisors/Advisors
  • Duijsters, Geert, Promotor
  • Vanhaverbeke, Wim, Promotor
Award date7 Nov 2007
Place of PublicationEindhoven
Publisher
Print ISBNs978-90-386-1155-6
DOIs
Publication statusPublished - 2007

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