Technological diversification

4.4.1. Technological diversification as an influencing variable

The relationship between technological diversification and the set-up of the CVC unit internally or externally remains unexplored by literature to date. In the following, we theorize this relationship while drawing from some of the literature on technological diversification itself (e.g. Ahuja &

Lampert, 2001; Breschi, Lissoni, & Malerba, 2003; Patel & Pavitt, 1997). Specifically,

technological diversification is theorized to have an influence on the choice of setting up an internal or external CVC unit through (i) path dependency, (ii) search, coordination and bureaucratic costs and (iii) replication.

Firstly, in line with the notion of absorptive capacity (Cohen & Levinthal, 1990), organizational learning often takes places locally (Breschi et al., 2003): This implies that firms are bound by existing technologies when searching for new ones, and managers are constrained by current knowledge and technologies with regards to the direction of search (Breschi et al., 2003; Patel &

Pavitt, 1997). Consequently, technological diversification can be viewed as path dependent, and partly determined by knowledge-relatedness (Breschi et al., 2003), imposing limits to the possible exploration of technologies. Furthermore, technological diversification is to a large degree an outcome of combining and re-combining existing technologies, eventually resulting in new inventions: A technologically diversified firm is thus subject to a greater set of opportunities (Granstrand, 1998).

As CVC is often viewed as a mean to access technologies novel to the organization, setting up the CVC unit externally can be a tool to reduce the impact of the limitations imposed by path

dependency. Hereby, an external CVC unit can increase the breadth of search for technological

16 As will be argued for an shown in the results section, the variable that will proxy absorptive capacity will be omitted due to correlation issues. Therefore, this thesis will not offer any conclusive evidence for absorptive capacity.

innovation to fields outside of the organization’s current technological expertise, exposing the organization to a wider range of opportunities.

This effect is theorized to be especially present in firms with a low degree of technological diversification, as there is less breadth of knowledge to be leveraged when searching new technologies. Since engineers might develop a myopic view with regards to technological

expansion, a highly specialized organization, only active in few technological fields, is limited in its capability to search for new opportunities, which can be addressed by setting up the CVC unit externally. Highly technologically diversified companies, on the other hand, already possess a wide range of knowledge and thus are internally less constrained to recognize technological

opportunities. Consequently, the higher the technological diversification, the more the CVC unit can leverage existing knowledge internally to ensure sufficient exposure to technological

opportunities. This effect implies a negative relationship between technological diversification and the likelihood of an external CVC unit. It is important to note that this argument is based on the assumption that, at least some, companies with a low technological diversification are actually interested in technologies that lie outside the scope of their current technological portfolio

(exploration). However, this might not be the case for all organizations; some companies might be doing well exploiting opportunities in their narrow scope (exploitation). Taking this into account, the negative relationship between technological diversification and the likelihood of an external CVC unit could be weakened.

However, there is a second effect, closely related to the breadth of search: An increasing number of technological opportunities requires an increasing amount of time to differentiate and rank those opportunities according to their value. Because of this increased level of complexity, it is potentially more difficult to recognize valuable opportunities. As per TCE, it entails three different types of costs: Firstly, the effort to process and evaluate the available options implies search costs.

Secondly, since the sources of knowledge about the diverse technologies are spread throughout the firm, information needs to be coordinated and transferred internally, leading to coordination costs.

Thirdly, organizational interdependencies result in bureaucratic costs (Jones & Hill, 1988). With a larger technological diversification, these costs increase. Structurally separating the CVC unit from its parent company reduces the complexity and thus the transaction costs stemming from the need to coordinate (i.e. coordination and bureaucratic costs) and thereby paves the way for a more targeted,

focused search. Due to the costs related to the breadth of search, technological diversification is expected be positively related to the likelihood of an external CVC unit.

Lastly, literature suggests that diversified firms (in terms of products or industries) are more likely to be organized by units that operate under a high degree of organizational autonomy (Chandler, 1962). Technological diversification is typically higher than product diversification (one product can require multiple technologies) within a firm, but the two concepts are related: As technological diversification often precedes product diversification (Pavitt, 1998), the argument can be transferred in the context of technological diversification. Thus, the replication of existing structural

characteristics suggests a positive relationship between technological diversification and the likelihood to set up a CVC unit externally.

As shown, technological diversification can be related to the structure of a CVC unit in multiple ways. Path dependency of the parent could indicate a negative relationship of technological diversification and an external unit, while search, coordination and bureaucratic costs as well as replication effects imply the opposite. The overall theorized effect is hence not completely clear.

4.4.2. Technological diversification as a moderating factor

Technological diversification is not only theorized as an influencing factor by itself but further as a moderating factor in the relationship between other theorized effects and the likelihood of setting up a CVC unit externally. Specifically, it is expected to moderate the relationship between the

likelihood of setting up an external CVC unit and (i) the value of innovations and (ii) firm specificity. To explain the moderating influence, we relate technological diversification to the specific sub-effects of the two concepts. As the overall effect is determined by the strength of the individual effects, moderating factors can indirectly influence the overall nature of the relationship between value of innovations and firm specificity, respectively, and the likelihood of setting up the CVC unit externally.

Firstly, we theorize the relationship between the value of innovations and the likelihood of setting up an external CVC unit to be moderated by technological diversification. Specifically, we propose that the relationship is weakened if technological diversification is high. The reasoning is as

follows: The effect of a parenting advantage was theorized to be negatively related to the likelihood of setting up an external CVC unit. In the case of a high technological diversification, the parenting

advantage is dampened. As the breadth of knowledge increases (i.e. more technologically diverse), TCE suggests that coordination becomes costlier; it simply becomes less easy to find, assess and use the right technology and associated resources when there are more to pick from. The increased complexity makes resource-sharing more difficult, which would be essential to leverage benefits from a parenting advantage in an internal CVC unit. Hence, through dampening the parenting advantage, technological diversification is suggested to moderate the relationship between value of innovations and the likelihood of an external CVC unit.

Secondly, we theorized that the degree of firm specificity is related to the likelihood of setting up a CVC unit internally or externally through the presence of the NIH-syndrome and difficulty to absorb. Both of the effects suggest a positive relationship with the likelihood of an external CVC unit. We theorize that technological diversification could be a moderating factor in this relationship.

Specifically, if the firm is highly specialized (technological diversification is low), the effect of firm specificity on the likelihood of an external CVC unit is theorized to be stronger. This can be

explained by the underlying effects: Firstly, if knowledge is concentrated to few technologies, the NIH-syndrome is expected to be more strongly present, as the bias toward internal innovations is even larger. Secondly, with little diversification and a high degree of firm specificity, absorbing external knowledge might be even more difficult, as the knowledge base to draw from is more narrow: External innovations outside the prevalent technologies are even harder to efficiently

leverage. Vice versa, with a high technological diversification, firm specificity might exert a weaker influence in to set up CVC unit externally, as technological diversification might mitigate the

prevailing sense of myopia.

In summary, technological diversification is expected, next to being a complementary factor, to have a moderating influence on both the relationship between value of innovations and firm specificity, respectively, and the choice of an external or internal CVC unit. This is because of two main reasons: Firstly, a high degree of technological diversification can hamper internal resource-sharing and hence affect the influence of the value of innovations on the setup of the CVC unit.

Secondly, with regards to firm specificity, a high degree of technological diversification potentially weakens a prevailing sense of myopia, which has an effect on the likelihood of setting up a CVC unit externally.