Aom09b

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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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Aom09b

  1. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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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