Research Briefing Strategic Renewal

8/3/2019 Research Briefing Strategic Renewal

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Monica Riviere, PhD 2ndyear


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STARTEGIC ORIENTATION

Firms strategy in deploying its

competitive advantages across

borders :

Investment choice that lead to

superior performance

STRATEGIC RENEWAL

Firms strategy in deploying worlds

knowledge :

Investment choice to prepare for

future growth opportunities

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Established corporations seeking growth today face an increasing need to

innovate.

While some corporations try to grow through externalacquisitions, many

recognize the ultimate importance of generating organicgrowth through

innovation.C

orporationsare

searching

for

new

approaches

to

innovation(NIST, 2008)1

The capability to develop new transnational products fundamentally depends

on howproficiently MNCstransferanddeploy knowledge frommultiple

countrysources (M. Subramaniam & N Venkatraman, 2001)

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NATIONAL INSTITURE OF STANDARDS AND TECHNOLOGY US DEPARTMENT OF COMMERCE- SEEKING

INNOVATION AND STARTEGIC GROWTH >> 2008


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Research focus:Firms strategy in harnessing and internalizing new creative

capabilities present in different world hubs of scientific excellence and within

diverse sources of technology heterogeneous distributed across the world

Researchquestion:(1) what are the determining factors for MNEs to

a)opt for an R&D laboratory abroad and therefore tap into the innovative potential of scientific human talents

b)tap into the innovative potential of small nascent enterprises through international acquisition

c)relay on entrepreneurial ventures replicating venture capital at corporate level (CVC)

(2)

what is the performance associated with different choice modes.

Epistemology: Positivism

Theoriesused: Knowledge Based View and Real Option Reasoning


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Knowledge Based View Real Option Reasoning

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Uncertainty

Uncertainty in creating new avenues for future growth is measured by the distance

between the knowledge base and the knowledge invested in. The higher the

distance, the higher the uncertainty.

low high


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I. Strategicinternationalizationof R&D activitysourcing of creative inputs does not come exclusively from a central R&D laboratory, but other

over- seas R&D laboratoriesor technological affiliates can also undertake genuine knowledge

creation activity from capitalizingonthescientificheterogeneity fosteredinindividualhost

countries.. (Filippaiosa, Papanastassiouc, Pearcee, Ramaf (2009)

II. Technology/capabilityacquisitionA knowledge-asset motivated acquisition could be made toacquireatechnology in which the buyer

already has some expertise or to facilitate a firmsentryintoanewarea without having to go

through the risky and costly process of innovation on its own (AlAzzawi, 2008)

III. CorporateVenture CapitalinvestmentCVC programs in established corporations invest in and partner with entrepreneurial companies. By

doing so, established companies are able to identifyandsourcenewemergingtechnologiesfrom

entrepreneurial companies. or taking realoptions ontechnologiesand businessmodels(by

investing in a wider array of technologies or business directions than the company can pursue itself)

(NIST, 2008)

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At the countrylevel :

development climate supported by

the government

lower cost environment

growing markets

tax policies

intellectual property (IP) laws

Earlystageentrepreneurialactivity

(Global Venture Capital Survey, Deloitte

Development LLC, 2010)

A

t industry level :

- technological

opportunities (Klerorick et al.,1995)

- industry growth

opportunities

Industries with more technological

opportunities offer the good

ground for researchers and

investors to start their own

ventures (Dushnitsky et al., 2005)

rich pool of readily available

innovations

difficult for MNEs to retain key

personnel talents in their own

R&D facility

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At firmlevel:

Absorptivecapacity- R&D

expenditure relative to assets

and total R&D personnel

Technologicalproximity host

country patent citation

refers/not to prior technologicalactivity of the parent

Knowledgerelatedness

relatedness between the stock

of knowledge base and the

knowledge invested in

Control for:-International activity

-firm size

-product portfolio diversification


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Multinomial model

Investment choice = c+ 1 EA + 2 TO + 3 AC +4 TP + 5 R +

EA = entrepreneurial activity (country level)

TO = technological opportunity (industry level)

AC = absorptive capacity (firm level)

TC = technological proximity

R = knowledge relatedness

TC and R measurethe level ofUncertainty.Doesthe knowledgeinvestedin will create future

synergies, will itcreate futureavenues forgrowth?

H: MNEs investing abroad in knowledge to expand their capabilities will opt for full acquisition or

greenfield investment in form of R&D labs

H: MNEs investing abroad in knowledge to renew their capabilities will opt for CVC or partial acquisition

as the level of Uncertainty increases

H: MNEs with high level of absorptive capacity will opt for a greenfield establishment mode in industries

with low technological opportunities.

H: The propensity of acquisition increases for the industries with high technological opportunities forMNEs with high absorptive capacity.


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FromGlob

al Fo

rtune500

parent companies selected on revenue criteriaBased on continuity both in 2005 and 2010

From DBD Database: Who Owns Whom - find all the foreign affiliates

Determine the core business (CORBUS) of the parent SIC code (2 digits) and

affiliatescore business determine affiliates in R&D

FromTh

omson

One

Ban

ker database acquisitions made by parent company differentiate core business from non-core business

VentureXpert dataset- CVC investment (if any)


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Datastream Compustat financial figures (including R&D expenditures atcorporate level)

Patenting activity at corporate level and affiliates level both patent

stock and patent application

Damodarans datasite Industry growth opportunity

http://pages.stern.nyu.edu/~adamodar/

Global Innovation Index INSEAD country level compilation earlystage entrepreneurial activity

Technological opportunities= for each given sector (2-digits SIC) theaverage number ofcitation-weighted patent applications by firms in a

given year11


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Both exploratory and explanatory methods

Qualitative work to add insight on the dynamic capability

building issue Interviews 2 kept in France at IBM and Accenture

Quantitative analysis for the investment choice mode and

performance


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Heckmans procedure to control for self-selection biases

Econometric model: multinomial model for choice mode Tobins Q 2005 vs. 2010

Hedonic regression ( regress the market value of a firm on the

bundle of resources that compose the firm including measures of

knowledge & innovation)


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Technological opportunities= concept examined by Klerorick et al. (1995) toexplain cross-industry variation in R&D intensity and technological advance.Calculated following Dushnitsky et al. (2005), foreach givensector (2-digits SIC)theaveragenumber ofcitation-weighted patentapplications by firmsina givenyear

Knowledge Relatedness(following GAUTAM AHUJA1 and RIITTA KATILA - Strat.Mgmt. J., 22: 197220 (2001)

first, the list of patent numbers that appeared in both the invested in/ acquired

firms knowledge base and in the acquiring firms knowledge base is prepared.

Then, the number ofelements on this list is divided by the absolute size of

acquired knowledge base (measured as the number of cited and obtained patents

Technology proximity (following Cantwell J.A. and Noonan C. (2002) Technology sourcing byforeign-owned MNEs in Germany. An analysis using patent citations,paper presented at the 28th EIBA conference, Athens.)

themajority ofcitationsreferencethepriortechnological activities oftheparent ?

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MICHAEL MOELLER, CORNELIA STOLLA, ALEXANDER DOUJAK

http://www.doujak.eu/fileadmin/Redaktion/Downloads/Strategic_Innovation_Chapter_1.pdf

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Area of research: Global Strategy

Field of research: Knowledge Management

Aspect: Global Investment for strategic renewal

Investment choice in knowledge

creation vs. acquisition

Performance

MNESinternational

strategy

Strategicinnovation


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By scope: To expand firms existing capabilities

To renew firms existing capabilities

By the mean ofachievement

Knowledge creation

Knowledge sourcing

By the degree of equity investment

Full equity investment

Partial equity investment

By where knowledge is grounded

Technology available

Human talents available 18


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We now find ourselves in a time of economic

maturity. The development of new businesses hasbecome one of the most important tasks for

corporations seeking to maintain growth. []Now,we are focusing our efforts on business fields that are

expected to experience rapid growth in the 21st

century, such as biotechnology and afforestation,

environment and energy, high-tech fields, etc

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Firmsface the risk not having the right capability at theright time

Still far from being closed the debate on the advantages

and drawbacks of early movements, late entrants facethe risk to be outpaced by competitors entered earlier

Foreign Direct Investment (FDI) in R&D has two different motivations: doing 'adaptive' R&D

and getting access to 'state-of-the-art' knowledge. The 'adaptive' R&D modifies products,

processes and technologies according to local needs and supports foreign production

facilities. Getting access to 'state-of-the-art' knowledge means that companies invest inforeign countries with a view to benefiting from excellent, local research and

researchers (Euractiv.com from United Nations Conference on Trade and Development

2004).


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Takes into account uncertainty about future parameters that determine the value ofthe project, as well as management ability to respond to the evolution of thoseparameters

The project is modeled in terms of:

Uncertainty: the volatility in the change in value over time

Value: the starting value (spot price)- is usually proxied viamanagement's best guess ofNPV

Management ability to respond to changes in value over

time is modeled at each decision point


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Level of

uncertainty the highest, the greatest the value of

option Nature of uncertainty- exogenous vs. endogenous

Competition

Option exercise cost- ex: bargaining cost over acquisition ofa JV

Managerial flexibilities that may interact with future uncertainties

include the flexibility to expand or contract a project, the option to

delay an investment, and the option to speed up or hold up an

investment. Researchers in modern financial theory tend to agree that

option pricing theory is one of the most promising approaches to

addressing such complex investment issues (Ping & Liu, 2003)

We already have models to evaluate investment projects in emerging

technologies derived from financial methods to evaluate financial

options (NPV method)

Tong & Li, 2008


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Knowledge Based View Addresses firm performance differences

using asymmetries in knowledge and

associated competences and capabilities

(Barney, 1991; Prahalad & Hamel, 1990;

Peteraff,1993; Winter, 1995; Hederson &

Cockburn, 1994)

the costs that the RBV consider are not

those derived from opportunistic behavior

but the cost of coordination,

communication and combinations (Kogut

and Zander, 1993)- Knowledge Based

the entry mode predicted by RBV will

consider the most efficient ways to

transfer,coordinateand combineknowledge within the MNE subsidiaries

Real Option Reasoning

focuses on managing the costs associated

with uncertainty while providing access to

future opportunities (Myers, 1977)

Investment in the capability to respondprofitably to future uncertainty (Kogut,

Kulatilaka, 1995)

real [assets (the investment)] options [bear

the right but not the obligation to undertake

later business decisions]

type of options: - growth options

- switching options


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- By limiting the framework to TC explanations, the role ofglobal strategy is overlooked

- TC does not consider how firms create and compet. adv.

- - the role ofexperience, communication technologies and globalization to assist in the

problem costs associated with opportunism and assets specificity

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- Independent of opportunism, frictions between economic actors occur because ofinevitable, irreducible differences in their knowledge (Conner & Prahalad, 1996)

- Contrary to transaction cost theory (TCT) which focuses solely on the efficient

transaction of individual products (Williamson, 1975), organizational capability and

network approaches emphasize the acquisition and development ofvalue-creating

resources and capabilities as basis ofcompetition.

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Research Briefing Strategic Renewal