Technology Conglomeration, Strategic Alliances, and Corporate Innovation

Abstract

We examine the organizational choice and innovative activity of technology conglomerates—firms that explore different technology fields with heated inventive activity. We develop a measure of firm-to-economy technological proximity to capture the extent of a firm’s technology conglomeration. We show that technology conglomerates are more likely to form alliances and that these alliances lead to higher patent output. In terms of underlying mechanisms, we show that after alliance formation, there are significant knowledge pooling and cross-fertilization between technology conglomerates and their alliance partners. Moreover, technology conglomerates produce more patents that are novel and/or with greater impact. Our findings suggest that both synergy and tolerance for failure are important motives for technology conglomerates to use alliances to accelerate corporate innovation. This paper was accepted by Gustavo Manso, finance.

Mutual Fund Bets on Market Power

“…Consequently, I analyze whether high-MPB funds are able to identify better innovators as well as companies with fewer overlap in their patent output with other firms. I find that these funds hold firms with a better track record to convert R&D expenses into sales as per Cohen et al (2013) and firms with a more unique patent output based on Li et al (2019). Finally, high-MPB funds are more likely to avoid within-portfolio competition and invest less in rival firms at the same time, which is consistent with them targeting the most promising competitor for a product.…”

“…I also calculate the Market Power Bet based on alternative definitions of market power. I define market power stocks respectively as stocks in the lowest quintile according to annual product market fluidity, the annual number of competition-related words in 10-K filings as in Li et al (2013) 12 , and the annual firm-to-economy technological proximity of Li et al (2019). The latter captures the overlap in innovation output with the rest of the economy.…”

“…I also calculate the Market Power Bet using different market power definitions. Market power stocks are, respectively, defined as stocks in the bottom quintile by annual product market fluidity, in the top quintile industries by annual fitted HHI (Hoberg and Phillips, 2010b), in the top quintile of TNIC-3 industry concentration, in the bottom quintile by annual fraction of competition-related words in 10-K filings (Li et al, 2013), or in the bottom quintile by technological proximity (Li et al, 2019). Lastly, I define Fama-French-48 industries in a year as market power industries if they are in the bottom quintile by number of firms.…”

“…Technological proximity is the value-weighted firm-to-economy technological proximity of the firms in the portfolio. Each firm's technological proximity is calculated following Li et al (2019) as the cosine similarity between its patent output, i.e., the number of patents across technology classes, and the patent output of all other publicly-listed firms in the economy. The main independent variables are the Market Power Bet (MPB ) or the MPB dummy, defined as in Table 2.…”

“…I then take the value-weighted average of the firms' ability measures in a fund portfolio to calculate the Innovative ability. Second, I calculate a firm's technological proximity to the rest of the economy followingLi et al (2019), which is the cosine similarity between a firm's patent output (number of patents across technology classes) with the patent output of other publicly-listed firms. As with Innovative ability, I calculate the value-weighted technological proximity of the firms in the fund portfolio (Technological proximity).…”