The Contribution of Corporate Ventures to Radical Innovation

Established firms' difficulty to innovate has been discussed extensively among economists. In contrast to incumbent firms, industry entrants are often described to be more flexible and innovative, setting forth the process of creative destruction. A recent stream in the management literature argues, however, that incumbent firms can take measures to overcome their presumed lack of innovativeness. In particular, corporate venturing is discussed as an effective tool for fostering the incumbent firms' radical innovativeness. By setting up corporate ventures (CVs), incumbent firms create autonomous or semi-autonomous units, which are less constrained by "inertial forces". As a result, CVs can react faster and more flexible to emerging innovation opportunities while being supported by the financial resources of their parent firms. In practice, however, established firms can be tempted to exert too much control on their ventures. If the venture's freedom to operate is restricted, however, their expected radical innovativeness can fail to appear. This study investigates the contribution of corporate ventures to radical innovation empirically. Our analysis is based on a sample of about 2,500 ventures in German manufacturing in the period 1993-2007. We find that CVs innovate more radically than a control group of independent ventures (IVs). The contribution of corporate ventures to radical innovations, however, significantly decreases with a more concentrated ownership structure. Ownership concentration increases the parents’ incentive to monitor and control the ventures. The resulting lack of managerial discretion makes it difficult for the ventures to develop radical innovations. In conclusion, our findings signal the need to balance the control incentive, stemming from the incumbents' investment into corporate venturing, with the benefits from granting some independence to the ventures. We conclude with management advice on how a balance can be achieved.

Czarnitzki, Dirk, Johannes Dick and Katrin Hussinger (2010), The Contribution of Corporate Ventures to Radical Innovation, ZEW Discussion Paper No. 10-060, Mannheim, published in: Research Policy.