Silverman 1999

Abstract

Resource base -> The choice of industries into which the firm diversifies

1) Operationalize technological resources at a more detailed level 

- The finer measure of resources 

2) Integrate principles from transaction cost economies into resource-based predictions concerning diversification

- Test whether rent-generating resources are too asset specific to allow contracting

Findings: Circumstances where resources can be and are exploited through contracting rather than through diversification

1. Introduction

RBV: to which direction of diversification?

Firms that exhibit high R&D intensities tend to diversify into industries that also exhibit high R&D intensities

Different from theoretical expositions of the resource-based view (e.g., Wernerfelt 1984, Barney1986) and related research into "technological competence" (e.g., Patel and Pavitt 1994), which suggest that a particular technological resource is useful in only a narrow range of applications

-> The resource-based view cannot predict whether a pharmaceutical firm is more likely to enter biotechnology or electronic data processing, both of which exhibit similar R&D intensities

Contracts in RBV?

Under-emphasized the possibility that firms can exploit resources through market arrangements rather than through expansion of cor- porate boundaries (exceptions include Teece 1980, 1982)

The empirical approaches to the question of diversification have implicitly or explicitly assumed that any resource valuable, rare, and inimitable enough to generate sustainable rents is too asset specific (in the sense of Williamson 1985) to be contracted out.

1) Empirically, it operationalizes technological resources at a more fine-grained level than has been done in prior resource-based research.

2) Theoretically, by stressing the links between transaction cost economics and the resource-based view, it examines and tests the assumption that rent-generating resources are necessarily too asset specific to allow contracting.

2. The resource-based view of diversification

RBV

Drawing heavily on Penrose (1959), the resource-based framework suggests that the firm is best viewed as a collection of sticky and imperfectly imitable resources or capabilities that enable it to successfully compete against other firms (Wernerfelt 1984, Barney 1986).

Of particular importance is the application- specificity inherent in such resources.

This specificity constrains the firm's ability to transfer these resources to new applications (Montgomery and Wemerfelt 1988).

- Operationalization of resources

Measurement in RBV

Two paths to operationalize resources in empirical research on diversification

1) The first avenue rests on the assumption that more "related" diversification supports more extensive exploitation of application-specific resources than does unrelated diversification

-> Relied on proximity within the SIC system to measure the degree of relatedness between two industries (e.g., Montgomery and Wernerfelt 1988

2) Montgomery and Hariharan (1991) find that firms tend to diversify into industries that have R&D intensities, advertising intensities, and capital expenditure intensities similar to those of the firms' existing businesses. Also find that higher R&D intensities and advertising intensities are associated with more diversification, and interpret this as evidence that R&D and marketing activity creates transferable resources that provide the competitive advantage

-> Relies on R&D intensity, advertising intensity, and other such investments as proxies for underlying resources

Criticism

Rests on strong assumptions about the ordering of the SIC system

Precise_Assume that each SIC code is equidistant from all other codes

Precise_Assume that 3- or 4-digit industries within a single 2-digit SIC are equally "similar" to each other

Accuracy_The SIC system is based on product (output) characteristics rather than on resource (input) characteristics

-> Share common or similar resource use patterns

Uncaptured idea

The fungibility of R&D and advertising intensity

Montgomery and Wemerfelt (1988) argue that a resource's rent-generating capacity should be inversely related to its range of useful applications, suggesting that potentially valuable resources can realize this value in only a few applications

Technological competence," which has found evidence of stable and highly focused areas of corporate technological strength (Pavitt et al. 1989) and high correlation between the primary business in which a firm operates and the set of technological areas in which it patents (Patel and Pavitt 1994).

Yet the proxies used in the resource-based empirical research do not capture these constraints

Three empiricals

Underlying resource requirements across industries to examine diversification pattern

1) Farjoun (1994) uses census data to operationalize industry relatedness as the degree to which two industries use the same types and proportions of human expertise. He finds that a firm tends to diversify into industries that rely on patterns of expertise similar to those required in its extant industries. 

2) Coff and Hatfield (1995) use similar data in a study of acquisition announcements, finding evidence of higher returns for acquisitions that are more "related" in terms of human expertise. 

3) Robins and Wiersema (1995) use Scherer's technology inflow- outflow matrix to operationalize industry relatedness as the degree to which two industries rely on the same inflows of technology, finding that corporate performance is higher for firms that have diversified into technologically related industries than those that have diversified into technologically unrelated industries.

However, these three studies characterize resources only at the industry level

Focusing on industry aggregate data precludes the analysis of interfirm differences in resource pools and diversification patterns

Identification of individual firms' resource portfolios allows the development of more nuanced insights into the role of resources in diversification and more fully-developed integration of resource-based insights with those of other approaches.

A measure of corporate technological resources, based on patent data, that arguably captures more effectively than R&D intensity the narrow range of businesses in which a firm's technological resources can be profitably applied.

HYPOTHESIS 1. Ceteris paribus, a firm is more likely to diversify into a business the more applicable its existing technological resources are to that business (in absolute terms). (Absolute)

# R&D intensity -> Technological resources 

A firm is constrained in the amount of entry it can pursue in a given time period due to limitations on managerial time (Penrose 1959).

In the face of such constraint, it will select among its potential viable entries according to the degree to which its resources provide the advantage in each industry (Montgomery and Wemerfelt 1988)

A higher applicability of a firm's technological resources to a given business, relative to the applicability of its technological strengths to other businesses, should increase the likelihood that the firm enters the given business.

HYPOTHESIS 2. Ceteris paribus, a firm is more likely to diversify into a business the more applicable its existing technological resources are to that business, relative to other opportunities facing the firm (Relative)

- Diversification vs. contracting out resources: the role of appropriability

RBV_oneway

Penrose's theory of firm growth (1959). The Penrosian framework is usefully informed by transaction cost economics.

Penrose implicitly assumes that exploitation of excess resources necessitates their use within the firm

As a logical consequence, her framework is unidirectional-firms grow

TCE_various way

The transaction cost perspective asks whether there are alternate ways to utilize these assets, including outside contracting and spinoffs (Teece 1980). Transaction cost economics also offers a rationale for the potential benefits of contract- ing out excess resources (incentive intensity) and suggests circumstances in which such resources will be better spun off from the company (Teece 1982, Williamson 1985).

RBV didn't listen

Montgomery and Hariharan (1991) explicitly assume that the resources they investigate-technical and market- ing skills-are difficult to transfer, and Montgomery (1994) contends that resources to which rent accrues are likely to be difficult to contract out. Chatterjee and Wernerfelt (1991) implicitly assume that the techno- logical and marketing resources for which R&D inten- sity and advertising intensity are proxies can not be exploited through contracting out.

Conditions under which technological resources can be exploited through contractual means. 

Teece (1986) proposes that licensing is a feasible alternative to diversification unless technological knowledge is either highly tacit or easily transferable and weakly protected

Levin et al. (1987) find wide variation in the efficacy of licensing technological innovations across industries, which they cite as evidence of varying levels of transaction costs across these industries.

HYPOTHESIS 3. Ceteris paribus, a firm is more likely to diversify into a business the more likely that contracting out its technological resources in that business is subject to high contractual hazards. 

a: Ceteris paribus, a firm is more likely to diversify into a business as the feasibility of licensing its technological resources in that business decreases. 

b: Ceteris paribus, a firm is more likely to diversify into a business as the need for secrecy to appropriate returns to its technological resources in that business increases. 

c: Ceteris paribus, a firm is more likely to diversify into a business as the degree of tacit knowledge associated with its technological resources in that business increases

3. Data and specification of the model

Firm, industry, and resource characteristics in 1981 -> The entry of existing firms into new SICs during the three-year window 1982-1985

My sample of firms is largely a subset of the database compiled by Jaffe (1986)

Patent data has been increasingly used as an indicator of corporate technological capabilities in management research (Jaffe 1986, Patel and Pavitt 1994, Mowery et al. 1996).

Compared to R&D expenditures, patents offer richer information on the particular range of technological strengths possessed by a firm.

While patents do not directly measure a firm's noncodifiable knowledge, they should function as a partial, noisy indicator of its unpatented technological resources.

- Dependent variable

Divij = 1 if firm i enters industry j between 1981 and 1985, and 0 otherwise.

Such entry can occur through either acquisition or internal expansion; this study does not distinguish between the two modes (see Silverman 1996, Chapter 6 for an analysis of entry mode choice).

Entry occurred in 1,023 of the 170,721 potential entries in my sample (0.5%), and nonentry occurred in 169,698 (99.5%) of the potential entries.

# Too small?

- Independent variable - measures of technological resource applicability

AbsTechi is defined as the absolute level of firm i's patent portfolio that is likely to be applicable to industry j.

- Independent variable - measures of contractual hazards

- Control variables

4. Logit estimation: results and discussion

- Effect of technological resource applicability measures

- Effect of contractual hazard measures

- Effect on the estimated probability of diversification 

- Further exploration of diversification direction: the industry of manufacture vs. the industry of use 

5. Conclusion

The effects of firms' heterogeneous technologi- cal resources as measured by patent data on diversifica- tion behavior