How relatedness promotes exit: A resource redeployment perspective (with G. Lee and M. Lieberman)
Researchers in corporate strategy have long argued that business “relatedness” contributes to a firm’s competitive advantage by promoting economies of scope. One implication is that entries made by a firm into businesses that are more related to the firm’s existing businesses are likely to survive longer than similar entries made into less related businesses. We offer a contrasting view in which relatedness increases the likelihood of exiting new businesses: relatedness facilitates the internal redeployment of resources, which justifies the undertaking of riskier entries and greater experimentation by the firm. Using a sample of more than 1,200 market entries in the U.S. telecommunications sector during 1989-2003, we find evidence consistent with both of these views on the benefits of relatedness.
Relatedness, Resource Redeployability, and Firm Value (with A. Sakhartov)
Our paper elaborates the effects that relatedness has on value of a multi-business firm. We emphasize that value results from interplay of benefits of synergy and resource redeployability. This view, considering how synergy and redeployability interact in determining value, extends prior separate considerations of the two benefits. We also diagnose that the value effect of relatedness is contingent on uncertainty and specify this contingent relationship. To develop those insights, we use the real option valuation approach and formally evaluate the impacts of the two effects of relatedness. This explication enables us to demonstrate how redeployability contributes to value beyond synergy, and how they contribute in tandem. In this sense, we illuminate value in multi-business firms that has been previously undiagnosed. In addition to providing theoretical insight, our results have important empirical and managerial implications.
combination of numerical simulation and large-scale empirical analysis is used.
Inducements for resource redeployment and value of growth opportunities (with A. Sakhartov)
Our paper considers how value of firm growth opportunities derives from inducements for redeployment of firm resources to new product markets. We define inducements as advantages in returns in new over existing markets and assemble their separate dimensions from research on corporate diversification and real options. We develop a formal model casting growth opportunities as a real option to switch the use of resources across markets and explicate interdependences among dimensions of inducements ignored by prior research. We also demonstrate that inducements modify the effect of relatedness on value deriving from corporate diversification. The developed theoretical arguments amend existing theory of growth opportunities and have important implications for corporate diversification research.
This paper examines the influence of angel groups and venture capitalists on technology venture innovation outcomes and successful exits. It is inspired both by the lack of evidence linking angels to venture innovation and by the ambiguity about whether venture capitalists benefit venture innovation beyond angels. We theoretically speculate about the relative contribution of both types of private equity investors and empirically test their effects. We do so by tracking 79 technology ventures backed by angel group investment, 58 ventures backed by both angel group and VC investment, and matching them to 213 pure VC-backed ventures. The methodologies employed econometrically control for selection issues in the dynamic multi-stage nature of external capital financing.
What determines the initial size of new ventures? (with F. Mellilo and F Delmar)
A fundamental issue in entrepreneurship is venture initial size, as it is expected to imprint the organization and bear upon its future success. Prior research has implicitly assumed the venture initial size decision about is independent from the entry decision. That is, individuals decide to enter and then decide on thedesired size. We relax this assumption of independence because (a) individuals may enter contingent upon be able to enter at a desired size, and (b) entry decisions may be inextricably linked to entry processes which influence initial size. Entry processes such as decisions around origin of entry (i.e., spinoff, spinout, de novo), legal form (i.e., corporation, proprietorship, partnership), or type of entry (hybrid entry, full immersion) may connect the size decision with the entry decision. We empirically consider whether dependence between size and entry decisions alters how we should interpret prior research, and enlighten our understanding of how entry processes influence initial size. A distinguishing feature of our work is the use of a broadly representative sample of new ventures (i.e., matched employee-employer data on nearly the entire Swedish population over a 13 year period), and access to a sample of non-entries allowing us to manage concerns around dependence between entry and size.
The limits to status in Italian wine industry – with A. Lanza, G. Simone, A. Pellegrino, and A. Sakhartov.
It is well recognized that organizations attain “status” or prestige by affiliating with notable partners or institutions, and that there are clear benefits to high status positions. We are interested in an obvious extension to this observation – what are the organizational limits to status? Why is not status overexploited by affiliates? These questions invite consideration that decisions to exploit status in new products might hinge not purely on the benefits of status, but also its impact on operating costs and opportunity costs. Opportunity costs may arise because overexploitation of status may result in formal or informal sanctions by institutions governing affiliations. Using a structural model, we deduce how status separately affects price, operating cost, and opportunity cost. We also uncover that prior research may understate the benefits to status because it ignores that exploitation decisions are endogenous to status. Our empirical context is new product introductions in the Italian Wine industry between 2006 and 2009.