Paper Summary- Week8 Jack Tong

Paper: Kim, Keongtae, Anandasivam Gopal, and Gerard Hoberg. “Does product market competition drive CVC investment? Evidence from the US IT industry.” Information Systems Research 27, no. 2 (2016): 259-281.

The motivation of this paper is to explore how product market competition will affect the propensity for firms to use corporate venture capital (CVC) as a venue for innovations. CVC is defined as minority equity investments by established firms in start-ups, typically alongside traditional venture capitalists (VC). The primary drivers for CVC are knowledge and learning for persistent innovation and product market competition rather than financial returns. The authors collect CVC funding information from the VentureExpert data set, augmented with data from CompuStat and the National Bureau of Economic Research (NBER) patent database. The authors use a novel measure of competition based on 10-K product descriptions-The textual network industry classification (TNIC). TNIC classifications are based on the product market vocabulary in each firm’s 10-K and are updated every year. Firms using similar product market vocabularies are classified as being in the same industry, allowing for a more accurate measure of competition that captures the dynamic nature of the IT industry. The empirical results suggest that firms in competitive markets make higher research and development (R&D) and CVC investments. In addition, the results indicate 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. The authors 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 slow starters. CVC investments lead to significantly more patent applications for technology leaders but no appreciable difference for slow starters.