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Technological Resources and the Direction of Corporate Diversification: Toward an Integration of the Resource-Based View and Transaction Cost Economics. Silverman – 1999, MS. Overview. A study of how a firm’s resource base affects the choice of industries into which the firm diversifies

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silverman 1999 ms

Technological Resources and the Direction of Corporate Diversification: Toward an Integration of the Resource-Based View and Transaction Cost Economics

Silverman – 1999, MS

overview
Overview
  • A study of how a firm’s resource base affects the choice of industries into which the firm diversifies
  • Silverman (1999)integrates principles of both the Resource-based View (RBV) and Transaction Cost Economics (TCE) to develop a theory of firm diversification
  • Looks beyond methodologies used at the time to develop new sources of insight into firm behavior
rbv and diversification
RBV and Diversification
  • RBV describes the firm as a “collection of sticky and imperfectly imitable resources or capabilities that enable it to successfully compete against other firms” (see Penrose, 1959)
    • These same characteristics prevent firms from “transplanting” resources into new contexts
  • It is assumed that more “related” diversification supports more extensive exploitation of resources
    • Studies use SIC system to measure degree of industry relatedness
  • It is also assumed that R&D intensity, advertising intensity, etc. serve as proxies for underlying resources and that firms will diversify into industries with relative intensities
rbv and diversification1
RBV and Diversification
  • However, current studies depend on strong assumptions regarding the ordering and applicability of the SIC system as well as the fungibility of R&D and advertising intensity
  • Popular studies on diversification using RBV characterize resources at the industry level, and leave open the effects of firms’ repositories of expertise or technology
  • Identification of individual firms’ resources allows for greater insights into the role of resources in diversification
hypotheses
Hypotheses
  • Hypothesis 1:Ceteris paribus, a firm is more likely to diversify into a business the more applicable its existing technological resources are to that business (in absolute terms)
  • Hypothesis 2: Ceteris paribus, a firm is more likely to diversify into a business the more applicable its existing technological resources are to that business, relative to other opportunities facing the firm
  • Hypothesis 3. Ceteris paribus, a firm is more likely to diversify in to a business the more likely that contracting out its technological resources in that business is subject to high contractual hazards.
    • A: A firm is more likely to diversify into a business as the feasibility of licensing its technological resources in that business decreases
    • B: A firm is more likely to diversify into a business as the need for secrecy to appropriate returns to its technological resources in that business increases
    • C: A firm is more likely to diversify into a business as the degree of tacit knowledge associated with its technological resources in that business increase
methodology
Methodology
  • The empirical test of the hypotheses entailed estimating the entry of existing firms into new SICs during the three-year window 1982-1985 as a function of firm, industry, and resource characteristics in 1981
  • Each firm’s resource base was determined through the use of patent data
    • Issues arise where firm knowledge is not patented due to ineligibility or firm choice
    • It should also be noted that differences in the comprehensiveness of patenting may exist across firms, industries, and time
variables
Variables
  • Dependent Variable
    • Divij= 1 where firm (i) enters industry (j) during allotted time
  • Independent variables
    • AbsTechij = absolute level of firm (i) patent portfolio applicable to industry (j)
    • RelTechij = applicability of firm (i) patent portfolio to industry (j) relative to other industries
    • Royaltyj = the feasibility of licensing innovations in industry (j)
    • Secrecyj = the importance of secrecy to appropriating returns to innovation in industry (j)
    • Learningj = the importance of learning curve advantages to appropriating returns to innovation in industry (j)
results
Results
  • Hypothesis 1 was corroborated(AbsTech = significant & positive)
  • Hypothesis 2 was corroborated(RelTech = significant &positive)
  • Hypothesis 3a was corroborated(Royalty = significant &negative)
  • Hypothesis 3b was not supported(Secrecy = not statistically significant)
  • Hypothesis 3c was corroborated(Learning = significant & positive)
contributions
Contributions
  • This paper has many firsts:
    • Measures effects of firm heterogeneous technological resources via patent data on diversification
    • Examines empirically the hypothesis that firms prioritize their diversification options according to the relative applicability of their resources
    • Examines empirically the role of transaction costs on diversification in an RBV context
  • This study integrates TCE with RBV and suggests that “while conflicts between the two theories exist, the strong complementarities between them should not be ignored”
contributions1
Contributions
  • The measure developed by this study links a firm’s position to product markets where its technological strength is likely to offer commercial advantage
  • The results of this study suggest that a firm’s technological resource base significantly influences its diversification decisions (as seen through a patent portfolio lens)
    • Firms elect to enter markets where it can exploit its existing technological resources to the strongest extent
    • Firms’ diversification decisions are influenced by the severity of hazards surrounding contractual alternatives
    • The source of innovation in an industry indicates the direction of likely diversifying entry into that industry