This document discusses how firm investments can shape the competitive landscape of an industry. It presents hypotheses about the relationships between aggregate R&D and advertising investments and industry growth and volatility. The results show that R&D investments generally have an inverted U-shaped relationship with industry profit growth and volatility, while advertising investments have a U-shaped relationship. So firm-level decisions can impact both the firm and its industry environment.

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?
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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
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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
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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
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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
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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
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 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
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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
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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
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