Entrepreneurship (Fach) / When do firms undertake R&D by investing in new ventures? (Lektion)
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dushinski
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- General topic This paper explores the conditions under which established firms source innovative ideas through investment in external entrepreneurial ventures. Commonly referred to as ‘corporate venture capital’ (CVC), these investments consist of minority equity stakes in relatively new, not publicly traded companies that are seeking capital to continue operation.
- : The weaker the IP regime of a sector, the greater a firm’s investment in new ventures within that sector. The innovative benefits of CVC investment will be more pronounced the weaker the intellectual property (IP) protection of the sector invested. We define a weak IP regime as one where ventures struggle to protect their inventions from imitation through legal mechanisms such as patents. When patent protection is weak, a venture may not have the means to prohibit investors from appropriating its core knowledge. However, when firms are pursuing CVC for the pure financial gains than the opposite will hold.
- The greater the firm’s cash flow, the greater a firm’s investment in new ventures CVC investing is a considerable capital expenditure much like internal R&D. However, unlike R&D, we expect corporate venture capital to exhibit high sensitivity to firm’s cash flow. On the one hand, outsiders are likely to recognize the superior knowledge of insiders, thus leading to higher cost of financing investment via external funds. On the other hand, corporate venturing activity does not face the problems of retaining highly skilled R&D personnel.
- The greater a firm’s absorptive capacity, the greater a firm’s investment in new ventures The degree to which a firm may learn from its CVC investments will depend in part on the absorptive capacity of the firm, having an internal R&D department increases the likelihood of cooperative R&D with other firms. Thus, internal research and development provides the foundation upon which firms may learn from the ventures they invest.
- Result · Firms tend to invest in sectors similar to their core business · Some sectors went into alliances with online retailers, showing the general trend towards this new channel and sector · High quality ventures are unlikely to make an inquiry at incumbents which compete in the same market à the most ventures approaching incumbents are then of low quality nature · Internal R&D and CVC are complements rather than substitutes · After other measure was employed, there was evidence that the higher the technological standard in an industry, not only more likely but also more in total is spend for CVC