Chapter 2: Literature review and hypothesis development
2.1 Technological diversification
Patent can protective benefits of R&D results, so firms tend to patent in the form of published research results. Patent provides a wealth of R&D and technical information, patent information can reduce the use of research funding and research time (Narin, 1995; Narin et al., 1987; Porter and Detampel, 1995). Therefore, the information provided by the patent can find the technical information of competitors.
To identify and help firms effectively manage the allocation of R&D resources (Ernst, 1998). That is, the patent on behalf of a firm that hold the type of technical capabilities and advantages, through patent analysis to understand the different technical expertise of enterprises, while exploring the development of industrial technology-specific trajectories and corporate layout at the same time.
Product diversification has been a highly popular strategy (Rumelt, 1974), and plays a key role in the strategic behavior of large and growing industrial firms in the United States, Europe, Asia, and other parts of the industrialized world (Berry, 1975; Dyas and Thanheiser, 1976; Suzuki, 1980; McDougall and Round, 1984; Chang
and Choi, 1988; Hitt, Hoskisson, and Ireland, 1994; Hitt, Hoskisson and Kim, 1997;
Wan and Hoskisson, 2003). Product diversification strategy can yield technological diversity, e.g., technological diversification. Given the substantial research on product diversification and its assumed effects on firm outcomes (Hoskisson and Hitt, 1990).
Owing to the increasing importance of technologies to be the competitive advantage of the firms, scholars recently have paid much attention to the technological diversification issues of firm (e.g. Dibiaggio, 2004; Suzuki and Kodama, 2004; Lin et al., 2006; Garcia-Vega, 2006; Grandstrand, 1998). Nelson (1959) considered that firms that diversify their technological base are likely to benefit from new technological possibilities. Since many innovations are designed to solve unrelated problems, companies that are more diversified profit more from their own research activities, because they capture more of the social benefits of their innovations. Investments in R&D are used as competitive “weapons” (Baumol, 2002).
And technological diversification can prevent a negative lock-in effect in one particular technology, and it can sustain the evolution and business renovation of the firm. Technology diversification is suggested to be beneficial to the innovation performance in terms of economy of scope and knowledge-base view (e.g., Granstrand, 1998; Suzuki and Kodama, 2004; Turner and Fauconnier,1997; Almeida and Phene, 2004; Lin etal.,2006). Granstrand (1998) argued that the central role
played by technology diversification in the evolution of a technology-based firm from the view points of economies of scope, speed, and space. Similarly, Suzuki and Kodama (2004) suggest that taking advantage of economies of scope in technology through persistent diversification is necessary for a technology-based firm if it is to survive and to grow for a prolonged period of time.
To overcome lack of meaningful measures of innovative inputs and outputs argued by Kuznets (1962), new data sources measuring patented inventions develop from the computerization by the U.S. Patent Office (Hall et al., 1986; Jaffe, 1986; Pakes and Griliches, 1980), better measures of R&D (Bound et al., 1984;
Scherer, 1982), and stock market values of inventive output (Pakes, 1985). In addition, several researchers (e.g., Acs and Audretsch, 1988; Pakes and Griliches, 1980) have used the number of patents a firm holds as a measure of inventive activity.
The entropy measure of product diversification (Jacquemin and Berry, 1979; Palepu, 1985) was employed to measure technological diversification. This index has become increasingly popular in strategic management research (e.g., Baysinger and Hoskisson, 1989; Hill, Hitt and Hoskisson, 1992; Hitt el al., 1996;
Palepu, 1985). Also, it has been reported to generate estimates of product diversification similar to those based on Rumelt‟s (1974) subjective categorization
methods and to evidence construct validity (Hoskisson, Hitt, Johnson and Moesel,
1993). The entropy measure of diversification (TD) has two components, related diversification (RD) and unrelated diversification (UD), so that TD=RD+UD. Related diversification (RD) is defined as the diversification arising from operating in four-digit segments within a two-digit industry group (arising out of operating in several segments within an industry group). Unrelated diversification is defined as diversification arising from operating between two-digit industry groups. Researchers use SIC codes to define the industry segments and groups, treating two-digit SIC industries as the industry groups and fourdigit SIC industries as the industry segments (Baysinger and Hoskisson, 1989; Palepu, 1985).
Combining the entropy measure of diversification and technological diversity proposed by Miller (2006), argued that firm‟s knowledge base interacts with its product market activity, can concern by creating a measure of technological diversity based on citation-weighted patents. The measure indicates a firm‟s opportunity for corporate diversification based on economies of scope in valuable knowledge assets. The result shown that a large sample of firms shows the positive relationship between diversification based on technological diversity and market-based measures of performance, controlling for R&D intensity and capital intensity as further indicators of the type of assets underlying diversification.
The role of innovation, e.g., patents, in creating firm value has long been
recognized. Firms undertake investment in research and development in hopes of developing patents that lead to increased performance. Prior research has found a positive correlation between innovation and firm value (Griliches, 1981; Pakes, 1985).
For example, Griliches (1981) reported that investments in innovation can yield returns of 200 percent over the long run. The role of technological diversification on the firm performance, however, is not as clear. Based on the studies of product diversification, firms would find it particularly beneficial to pursue low levels of product diversification to stay focused and attain more specialized product-market expertise (Wan and Hoskisson, 2003). Because the sources of competitive advantage in these environments rest on continuous improvements in the value chain, specialized capabilities in certain transformational activities, leading to patents or consumer loyalty, constitute significant barriers to entry (Wan and Hoskisson, 2003). Low product diversification, which places great emphasis on developing unique, critical capabilities, is likely to enhance firm performance (Wan and Hoskisson, 2003).
From opponent of perspective, building on the work of Rumelt (1974, 1977) investigated the relationships among diversification strategy, organizational structure and economic performance. Rumelt tied diversification strategy to financial performance. The related diversification strategies were found to outperform the other diversification strategies on the average. By contrast the unrelated diversification
strategy was found to be one of the lowest performing diversification strategies.
Rumelt (1977) suggested that firms in industries is characterized by an extensible core skill and many opportunities for product differentiation and segmentation. They are excellent fields for using a difficult-to-replicate competence to create unique and defensible product-market position. Montgomery (1979) argued that performance differences between related-constrained and unrelated firms, the essence of which is that related-constrained firms tend to be in industries whose market structure leads to above average profitability. Montgomery also founded that an individual firm‟s profitability depended on the weighted average industry concentration, weighted average industry profitability, and weighted average firm market share across all of the industries the firm participates in. Bettis (1981) have founded the same result as Rumelt that science-based relatedness would appear to be particularly potent in generating excess returns. This suggests that for research and development related (i.e.
science-based) firms, management should focus particular emphasis on maintaining a strong degree of relatedness along the research and development dimension as the firm continues to grow and diversify (Ehrbar, 1980).
As the extent of technological diversification increases, it is unavoidable that a firm not only pays more coordination costs (Granstrand and Oskarsson, 1994), but it also enable a firm to uncertainty due to unrelated fields or unfamiliar activities
(Brown, 1992). With a narrow technological base can enhance knowledge accumulation. When the technological scope is narrow, a firm can accumulate its technological competence in similar fields, producing a higher learning effect and accumulation of knowledge (Stuart and Podolny, 1996). As Breschi et al. (2003) pointed out, focusing their R&D in a small number of technological fields can allow firms to gain more profit from the specialization of their research activities.
Technological specialization can also enhance the economic of scale associated with the learning process, speeding the transfer of knowledge between the core technologies of the firm, and benefit from the technological „„comparative advantages‟‟
of the firm (Garcia-Vega 2006). The knowledge accumulation has path dependency effects through which a firm‟s core competence can be established and enhenced (Rheem 1995).
Thus, this study expected if the higher technological diversification would lead lower performance. The relationship between technological diversification and firm performance may be negative, then form the third hypothesis: