External Venturing and Discontinuous Strategic Renewal: An Options Perspective

This study examines the relationship between a firm's venturing activities and its undertaking of strategic renewal. The study was motivated by some important gaps in the corporate entrepreneurship literature on venturing and renewal. The extant literature has not focused on the different types and dimensions of firms' renewal activities. In particular, discontinuous renewal involving shifts in firms' core businesses is not well understood. Moreover, the conditions that drive firms to undertake strategic renewal have not been examined. For example, it is not known how venturing increases or reduces the benefits of undertaking renewal. This study focuses on a discontinuous form of renewal involving major changes in firms' core businesses and examines firms' external venturing activities that complement their internal development. We examine corporate venture capital (CVC) investments, which are direct minority equity investments made by established companies in privately held ventures. Discontinuous renewal is conceptualized as resulting from a set of related, and often sequential, managerial decisions. The first managerial decision is to initiate growth in a business that is relatively newer or smaller for the organization. The second decision is to move away, or even withdraw completely, from the current core business that enabled prior growth and prosperity for the firm and served as its primary revenue earner. Employing a real options perspective, we argue that CVC investments create growth options in new and existing businesses but do not result in firms' withdrawal from existing businesses. Therefore, we expect CVC activity to be negatively associated with the likelihood of a firm undertaking discontinuous renewal. We also propose that the benefits of withdrawing from existing businesses are even lower, and the costs even higher, for firms in dynamic industries and for firms that possess strong internal capabilities. The predictions of the study are tested using longitudinal data on 477 firms from the 1990 Fortune 500 list for the period 1990-2000. We find support for all our predicted hypotheses. These results help address important limitations in the corporate entrepreneurship literature. The study also contributes to the real options and organizational capabilities literatures.

Knowledge Creation Through External Venturing: Evidence from the Telecommunications Equipment Manufacturing Industry

Anu Wadhwa

Investment in entrepreneurial ventures has gained recent popularity as a means for established firms to learn about new technologies and markets. However, the link between such corporate venture capital (CVC) investments and innovation outcomes has not been examined in detail. Using panel data from corporate investors in telecommunications equipment manufacturing, we investigated the conditions under which CVC investments affect knowledge creation for corporate investors. We found that, when investor involvement is low, number of CVC investments has an inverted U-shaped relationship with innovation performance. However, when investor involvement is high, the relationship reverses, and an increase in investments boosts innovation.

2006

An Option to Partner: A Dyadic Analysis of CVC Relationships

Anu Wadhwa

This paper takes a real options view of corporate venture capital (CVC), which are direct minority equity investments made by established companies in privately held entrepreneurial ventures. CVC investments have been characterized as creating growth options for corporate investors. We argue corporate investors often exercise these growth options by forming strategic alliances with their portfolio firms. We identify and empirically test a set of factors that lead established firms to exercise the growth options embedded in CVC investments by forming strategic alliances with the entrepreneurial ventures in which they invested. We explore how uncertainty surrounding a CVC investment influences the likelihood of future alliance formation.

2009

Exploration and Resource Commitments in Unequal Partnerships: An Examination of Corporate Venture Capital Investments

Anu Wadhwa

While established firms' relationships with external ventures may have significant strategic benefits, the realization of such benefits is fraught with considerable uncertainty. The real options and interorganizational learning literatures present an interesting trade-off for established firms regarding commitment of resources in a partnership. This study seeks to enhance our understanding of how firms manage these trade-offs when committing resources to external venturing initiatives. We examine the magnitude of resources initially committed by an established firm to an external venturing partnership in the context of corporate venture capital (CVC) investments. While a real options approach suggests that resource commitments should be lowered in the presence of uncertainty regarding realization of benefits, the interorganizational literature emphasizes that resource commitments may be essential for building quality relationships that expedite learning. Corporate investors, who invest in new ventures in order to gain strategic benefits, face higher uncertainty when their investment objectives involve greater exploration. However, greater exploration also increases investors' need to learn from their portfolio ventures. We, therefore, predicted that the degree of exploration would have a U-shaped relationship with the investor's resource commitment in a venture. We also expected that factors that serve to decrease the investor's uncertainty, i.e., investor experience diversity and venture affiliation to prominent venture capitalists, would moderate the U-shaped relationship between exploration and resource commitment. The predictions of the study are tested on a sample of 248 initial investments in private ventures made by incumbent firms in the computer, semiconductor, and telecommunications industries between 1996 and 2000. We find some support for our hypotheses. This study contributes to the external venturing literature on CVC investments by examining the determinants of the magnitude of resource commitment to new ventures, and integrates real options perspective, which advocates low resource commitments under uncertainty, with the organizational learning literature, which argues for greater resource commitment to secure partner cooperation. The results of this study reveal interesting insights into how CVC investors manage individual investments to generate strategic benefits.

Wiley-Blackwell2013

Exploration and Resource Commitments in Unequal Partnerships: An Examination of Corporate Venture Capital Investments

Anu Wadhwa

Wiley-Blackwell2013