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ABSTRACT
The research and development (R&D) process is critical to a firm's competitive advantage and often requires external funding. Yet, we know little about how different types of investors respond to the cash needs of established R&D intensive firms nor about how external financial analysts influence those decisions. We address these gaps by examining how afirm 's patenting activity affects its ability to raise cash. We distinguish the motivations of two investor groups: open-market and alliance partners. We focus on how patents based on emergent technologies impact two types of investors and their willingness to fund the R&D process. We develop theory and test our hypotheses using data from publicly traded biopharmaceutical firms by drawing upon knowledge-based view, alliance, and investment theories. We find evidence that patents built upon emergent technologies are viewed differently by the two types of investors. We find open market investors were less likely to invest in emergent technologies and invested less when they did. Conversely, alliance partner investors would be more appreciative of the opportunities new technology inputs present, thus, more likely to invest in firms using emergent technologies and invest more.
Keywords:
Knowledge-Based View, Patents and R&D Strategies, Innovation Process and Management
JEL Classification:
031,032, 034,016
(ProQuest: ... denotes formulae omitted.)
Introduction
Research and development (R&D) is critical to developing and maintaining a firm's sustainable competitive advantage (Grant, 1996; Kogut & Zander, 1992). Yet, the process is an especially precarious undertaking for the firm. R&D requires a finn to venture into unknown domains, often in areas where others have not travelled. Furthermore, innovative firms have little opportunity to consult previous successes and failures of others for guidance. The output of innovation is new knowledge. Yet, history provides only imperfect models as newly created knowledge by definition will bear only nominal similarity to previously successful knowledge (Hohnstrom, 1989). Novelty also leads to unforeseen obstacles and contingencies, reducing a firm's chances of successfully generating new and useful knowledge.
Such circumstances create difficulties for firms seeking external funding to support knowledge development. Although knowledge is critical to finn success and thus investor retums (Teece, Pisano & Shuen, 1997), it may paradoxically reduce investors' willingness to fund finn operations (Litov, Moreton, & Zenger, 2012). Further, efficient markets where buyers and sellers can...