Value Impacts of Software Innovation : The Role of a Focal Firm’s and Competitors’ Capabilities

While prior research has examined the role of Information Technology (IT) investments in the process and performance of innovation, there is relatively little research on the business value of software innovation itself. In particular, whether a firm's software innovation affects the market value of the firm's rivals, and whether the capabilities of a focal firm and its rivals matter remain unexplored. In order to advance our understanding of the value implications of software innovation, we investigate the impact of a firm's software patents on both a firm's own market value and rivals' market value using data from IT industries in the US. Specifically, drawing on the resource-based view (RBV) and the dynamic capability perspectives, we conceptualize two capabilities of a focal IT firm – operations and marketing capabilities – that may enhance the potential value of software innovation by increasing the likelihood of success in commercializing the innovation. Further, we also identify a capability of rival firms – R&D capability – that may allow rival firms to imitate or develop an innovation similar to that of the focal firm, and thus may mitigate the negative impact of the focal firm's innovation on their firm value. We quantify these capabilities by employing a stochastic frontier approach. We theorize that marketing and operations capabilities support a focal firm's aggressive commercialization strategy for its software innovation, whereas the R&D capability of rival firms allows them to engage in a defensive strategy for dealing with fierce competition against the focal firm. Based on a large unique panel dataset consisting of 563 US firms during 2003-2012, our results indicate that a focal firm's marketing and operations capabilities indeed strengthen the positive impact of its software patent stock on its market value. Further, we find that a focal firm's software patent stock is negatively associated with its rivals' market value; however, rivals' R&D capabilities mitigate the negative impact of a firm's software patent stock on their market value. We discuss implications for research and practice