Start Date
12-13-2015
Description
We examine how firms in the U.S.-based IT industry adjust their innovation strategy based on two factors that have been under-studied in the literature: the potential new entry threats the firm faces in its product market, and the firm’s governance structure. We argue that: 1) turbulence in the product markets caused by threat from entrepreneurial startups affects the focal firm’s investments in long-term risky activities such as innovation, and 2) this relationship is moderated by the extent to which management of the firm is protected through corporate governance. While extant research has discussed the potential disruptions that incumbent firms may experience from start-ups and their technologies, the absence of acceptable measures of industry classification for startups as well as the inability to accurately gauge when they represent a credible threat has limited empirical research into this question. We contribute a new measure to identify these threats through text analyses based on product descriptions provided by incumbent firm 10-K filings and product blurbs provided by start-ups. This new measure differs significantly from approaches that use static industry classifications, which are backward-looking and do not fully account for industry evolution over time, thereby not capturing the threat of new entry. We measure the degree to which managers are protected through corporate governance using the G-Index (Gompers et al. 2003). Our analyses, performed on a sample of IT firms during the period 1997-2007, show that incumbent firms react to new entry threats by systematically reducing innovation. Moreover, more governance provisions protecting managers amplify this effect: protected managers reduce innovation to a greater extent when the firm faces intensive new entry threats. We discuss the implications for research and practice.
Recommended Citation
Pan, Yang; Huang, Peng; and Gopal, Anandasivam, "New Entry Threats, Firm Governance, and Innovation in the U.S. IT Industry" (2015). ICIS 2015 Proceedings. 16.
https://aisel.aisnet.org/icis2015/proceedings/ISstrategy/16
New Entry Threats, Firm Governance, and Innovation in the U.S. IT Industry
We examine how firms in the U.S.-based IT industry adjust their innovation strategy based on two factors that have been under-studied in the literature: the potential new entry threats the firm faces in its product market, and the firm’s governance structure. We argue that: 1) turbulence in the product markets caused by threat from entrepreneurial startups affects the focal firm’s investments in long-term risky activities such as innovation, and 2) this relationship is moderated by the extent to which management of the firm is protected through corporate governance. While extant research has discussed the potential disruptions that incumbent firms may experience from start-ups and their technologies, the absence of acceptable measures of industry classification for startups as well as the inability to accurately gauge when they represent a credible threat has limited empirical research into this question. We contribute a new measure to identify these threats through text analyses based on product descriptions provided by incumbent firm 10-K filings and product blurbs provided by start-ups. This new measure differs significantly from approaches that use static industry classifications, which are backward-looking and do not fully account for industry evolution over time, thereby not capturing the threat of new entry. We measure the degree to which managers are protected through corporate governance using the G-Index (Gompers et al. 2003). Our analyses, performed on a sample of IT firms during the period 1997-2007, show that incumbent firms react to new entry threats by systematically reducing innovation. Moreover, more governance provisions protecting managers amplify this effect: protected managers reduce innovation to a greater extent when the firm faces intensive new entry threats. We discuss the implications for research and practice.