From Litigation To Innovation: Firms’ Ability To Litigate And Technological Diversification Through Human Capital

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Author Information : Martin Ganco, University of Wisconsin-Madison
Cameron D. Miller, Syracuse University
Puay Khoon Toh, University of Texas at Austin

Year of Publication : Strategic Management Journal (2020)

Summary of Findings : Litigation ability is an important antecedent to the firm’s technological diversification, especially when the firm is considering expanding into domains where its existing inventors cannot be utilized or where the inter-mobility of inventors is low.

Research Questions : (1) Does the firm’s ability to litigate affect its decision to diversify into a new technological domain?

(2) Is this effect contingent upon the characteristics of human capital needed within the new technological domain?

What we know : Our paper touches upon three important topics: firm diversification, intellectual property (IP) litigation, and human capital. Prior literature on technological diversification shows that the firm’s existing fungible knowledge is a prerequisite for technological diversification. The extant literature on strategic IP litigation in technological competition has mostly focused on how litigation protects the firm’s existing IP. Research has shown that the knowledge contained within human capital is tacit and hence tied to its conduit, therefore, mobility of employees is important source of knowledge flows.

Novel Findings : As firms attempt to diversify into new technological domains, they may not have all the necessary knowledge. Often, the firm needs to access some knowledge from the outside, which means hiring outside inventors. The key complication is that the human capital in question usually resides within other firms already operating in the focal domain, and there are intellectual property (IP) safeguards in place to restrict the diversifying firm’s access to it.

Therefore, we propose that a key antecedent to technological diversification is the firm’s ability to litigate IP and protect against IP litigation. IP litigation ability has an insurance-like property that helps protect revenues in the new domain and reduce potential IP-related costs. We also predict that IP litigation ability will be more important when the firm is less able to utilize its own inventors in the new domain or when the inter-firm mobility of inventors within the domain is lower, as both factors raise the potential costs.

To identify these effect empirically, we exploit unrelated exits of firms’ primary IP law firm. We find that this unexpected reduction in a firm’s ability to litigate temporarily reduces its diversification. The negative effect is magnified when considering expansion into domains where the firm’s existing inventors cannot be utilized or where the inter-mobility of inventors is low.

Implications for Practice : Employee mobility represents a fundamental channel through which knowledge diffuses across firm boundaries. As the firm diversifies, it will often need to source knowledge from new employees, which may come from competitors. This exposes the firm to potential IP infringement suits. Managers need to be careful to devise the right IP strategy prior to expansion, so to protect future revenues and mitigate IP and litigation related costs. In our context, we find that IP law firms play an important role in this strategy.

Implications on Research: We add to the literature on technological diversification by studying an important factor affecting the acquisition of resources necessary for technological diversification. By focusing on human capital as a conduit for the knowledge required for the diversification, we bring human capital to the forefront of the study of firms’ technological diversification.

By bridging the technological diversification and the IP literatures, we highlight an underappreciated role of IP strategy. The purpose and value of a firms’ litigation ability goes beyond protecting its existing IP, it also plays an important role as the firm attempts to generate new IP.

Full Citations : Ganco, M., Miller, C.D., & Toh, PK. From Litigation To Innovation: Firms’ Ability To Litigate And Technological Diversification Through Human Capital. Strategic Management Journal (forthcoming).

Abstract : When firms diversify technologically, they often acquire human capital from competitors. Legal challenges emerge when intellectual property safeguards are involved. We examine a firm’s ability to initiate intellectual property litigation or protect against litigation (i.e., litigation ability) as an antecedent to its technological diversification. We demonstrate that an unexpected reduction in firm’s litigation ability is associated with a temporary decline in its entry into new technological domains. Further, we find that the negative effect is stronger when the firm’s existing inventors cannot be easily utilized in the new domain or when inter-firm mobility in the new domain is low. These findings extend prior work by highlighting a proactive role of the firm’s litigation ability that spans beyond protecting the firm’s existing intellectual property.

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Cameron Miller
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