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Aom09b

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Presentation of research examining the impact of value creation and value appropriation investments on firm environment

Presentation of research examining the impact of value creation and value appropriation investments on firm environment

Published in: Business, Economy & Finance
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  • 1. Investments in Value Creation and Value Appropriation: The Effect of Industry Growth and Volatility David R. King, U.S. Air Force Rebecca J. Slotegraaf, Indiana University August 10, 2009
  • 2. Firm vs. Environment  Resource Based View (Barney, 1991; Dierickx & Cool, 1989) has established firm investments build internal capabilities  However, firm investments also impact the competitive landscape (Peteraf, 2005)  Entry barriers (Williamson, 1975)  Spillover effects (Henderson & Cockburn, 1996; Porter, 1985)  Question: How do firm investments shape industry environment? 1
  • 3. Environment & Investment  Environmental munificence – growth profit/sales  Value Creation – Aggregate R&D investment  3-phases innovation: Incremental/disruption/dominant design  H1a: U-shaped relationship with industry sales growth  Initially positive impact of R&D on profit, but diminishing returns  H1b: Inverted U-shaped relationship with industry profit growth 2
  • 4. Environment & Investment  Environmental munificence – growth profit/sales  Value Appropriation – Aggregate advertising investment  Diminishing returns to advertising  H2a: Inverted U-shaped relationship with industry sales growth  Some advertising better than none, but establishing brand requires significant investment  H2b: U-shaped relationship with industry profit growth 3
  • 5. Environment & Investment  Environmental dynamism – volatility profit/sales  Value Creation – Aggregate R&D investment  Predictable levels of R&D have lower sales volatility  H3a: U-shaped relationship with industry sales volatility  R&D has high failure rate, but likely find something useful with high investment  H3b: Inverted U-shaped relationship with industry profit volatility 4
  • 6. Environment & Investment  Environmental dynamism – volatility profit/sales  Value Appropriation – Aggregate advertising investment  High advertising reaches new customers and markets  H4a: Positive relationship with industry sales volatility  Advertising is an “expense” not fully covered by premium pricing  H4b: Negative relationship with industry profit volatility 5
  • 7. Method  Sample  Longitudinal, secondary data  Annual data: 1980-2000  377 industries (4-digit SIC and 10+firms in industry)  Measures  Munificence/Dynamism (Keats & Hitt, 1988)  Sales growth/volatility  Profit growth/volatility  R&D and Advertising investment  Depreciated, 1 year lag of aggregate spending  Controls: Year, capital investment, intensive industries, and industry debt & profitability  Analysis  Preliminary – Granger (1969) causality tests 6  OLS regression
  • 8. Results: Growth  R&D Investment  H1a: U-shaped impact on sales growth Supported (p < .05)  H1b: Inverted U-shaped impact on profit growth Supported (p < .01)  Advertising Investment  H3a: Inverted U-shaped impact on sales growth Supported (p < .10)  H3b: U-shaped impact on profit growth Supported (p < .01) Sales Growth Profit Growth Effect on R&D investments Effect on Industry Sales R&D investments Adv. investments Industry Profit Grow th Grow th Adv. investments Level of Cum ulative Investm ents Level of Cum ulative Investm ents 7
  • 9. Results: Volatility  R&D  H2a: U-shaped impact on sales volatility Supported (p < .05)  H2b: Inverted U-shaped impact on profit volatility Supported (p < .01)  Advertising  H4a: Increase sales volatility Supported (p < .01)  H4b: Decrease profit volatility Supported (p < .01) Sales Volatility Profit Volatility Effect on Effect on Industry R&D investments R&D investments Industry Profit Sales Volatility Adv. investments Volatility Adv. investments Level of Cum ulative Investm ents Level of Cum ulative Investm ents 8
  • 10. Discussion  Firm-level investments (when aggregated) impact industry characteristics  Firm level decisions make a difference internal and external to a firm  Value Creation (R&D) and Value Appropriation (Advertising) investments act as complements  Balance potentially negative second-order effects  Value of resources varies by Type & Industry 9

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