Corporate venture capital as a contributor of corporation's innovativeness
1University of Oulu, Oulu Business School, Department of Management and International Business, International Business
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|Persistent link:|| http://urn.fi/URN:NBN:fi:oulu-201611233105
|Publish Date:|| 2016-11-28
|Thesis type:||Bachelor's thesis
In today’s ever-changing and chaotic world corporations are forced to develop themselves continuously to be able to survive (Kessler et al. 2007). Companies have had a need to develop new services and products to follow the evolution for a long time (Tushman & Nadler 1986), but especially during the past decades the need to innovate has become a necessary and innovating has increased its role as a critical driver of corporations’ survival and nations’ long-term economic growth (Chemmanur et al. 2014). Large companies are paying more and more attention to changing industries and it is becoming clear that the most successful corporations are those who are able to innovate most efficiently (Stringer 2000). Especially corporations in high- tech industries face problems with decreasing life cycles of products and continuous technological breakthroughs followed by a need to innovate new products all the time (Kessler et al.). The main problem in corporations’ development is that they do not have an idea about how to advance their innovative activities and as a result they tend to become stuck with existing products and technologies (Stringer 2000). Urbancová (2013) states that 21st century is based on knowledge, information and innovative economy. Since there are new business models and technologies arising all the time, companies’ own research and development (R&D) activities are not sufficient anymore (Stringer). Consequently, corporations have to move from internal R&D activities to external R&D projects (Brockhoff 1998, Ernst et al. 2005, Fulghieri & Sevilir 2009, Lantz & Sahut 2010). An external R&D project refers to the process in which a corporation acquires knowledge resources outside the company (Ito & Tanaka 2016). External R&D activity is essential especially for international corporations since there exists higher competitive pressure there compared to domestic markets (Ito & Tanaka). Popular ways of conducting external R&D have been for example joint ventures and acquisitions, but during the last decades corporate venture capital (CVC) investment has increased its reputation increasingly as an innovation enhancer, especially among big companies such as Intel and Microsoft (Chesbrough 2002, Fulghieri & Sevilir 2009). In practice things acquired from external R&D projects mean expertise, intellectual property and know-how (Ito & Tanaka). Generally CVC is defined as a process of established firms making investments in entrepreneurial firms (Chesbrough 2002, MacMillan et al. 2008). Chemmanur and Loutskina (2009) describe corporate venture capital units as subsidiaries of non- financial corporations investing their parent corporations’ funds in recent ventures. According to Hill & Birkinshaw (2014) CVC units build new skills for the corporation, simultaneously leveraging its already existing capabilities. Generally CVC investors invest in early-stage, entrepreneurial companies and obtain a minority equity stake in it (MacMillan et al.). By doing this, the parent corporation is able to monitor new emerging technologies and complementary companies that can in future become their partners (MacMillan et al.). CVC investors can also combine their capital with that of other venture capitalists to invest in firms with a lot of uncertainty (Lerner 2013). CVC investments are originally based on the venture capital (VC) investments. Venture capital firms are established to finance high-risk high-reward projects and their goal is to gain as high financial returns as possible (Gompers & Lerner 1998). According to Rind (1981), the modern venture capital era can be considered to have started after the Second World War. Gompers and Lerner and Rind state that another important act for the development of venture capital industry was the formation of the first venture capital firm (American Research and Development) in 1946. During the following decades venture capital companies achieved large gains, which led to the establishment of many new VC companies in the 1960s and 1970s (Rind 1981). The first CVC funds were established about two decades after the traditional venture capital funds in the mid-1960s (Gompers & Lerner 2000). Since 1960s the development of corporate venturing has followed that of venture capital. The development of these two can be divided into three cycles. The first wave occurred when CVC investments started to arise in 1960s. The second wave began in 1970-1980s mainly because of the fall in capital gain taxes. In 1987 as the stock market crashed, the venture capital lost its grace for a while also. The third wave of venture capital can be considered to have started in 1990s because of the boom of telecommunications and Internet-related companies. Nowadays venture capital forms a significant part of corporations’ investment portfolios and its popularity keeps increasing all the time. (Gompers & Lerner 2000, Gompers 2002, Singhal 2015.) This thesis examines the key success factors of the CVC investments as a source of parent corporation’s innovation growth. It is stated in almost all literature according to innovation that companies are forced to look for external sources of innovation to be able to keep growing and stay competitive. Especially in technology-intensive industries, firms need to innovate to retain their competitiveness (Wadhwa et al. 2016). This need can also be found in news almost daily and there is a lot of discussion about large firms’ lack of creativeness and entrepreneurial culture leading to their failure (for example Nokia’s case). The topic of this thesis is chosen because existing literature lacks an integrative study about the factors affecting the CVC investment’s ability to foster the innovativeness of the parent corporation. CVC investment’s role as a source of new innovation growth has increased during the past decades and in 2013 CVCs portion of all venture capital investments was over 10% (Weiblen & Chesbrough 2015). This may be a result of nowadays’ situation, in which large and established companies face numerous obstacles lacking the innovativeness typical to entrepreneurs and are forced to start looking for new ways to keep growing. Since there is a clear lack of research concerning the topic, this thesis will help companies to get familiar with the concept and the benefits of it as a source of innovativeness. The study focuses on an international context, not aiming to highlight any specific country or continent. Since venture capitalists tend to invest mostly in high-technology companies (Fenn & Liang 1998), the focus will be mainly on that industry. This study has examined the key factors affecting the success of CVC investments as a source of innovation growth for their parent companies. The objective of the study was to gather the main factors in the structure and goal setting of the investment affecting the success of CVC in the innovation growth in corporations by analyzing existing literature related to the topic. This study shed also light to the parent corporation’s qualities that support CVC unit’s activities. The key factors found in this thesis can be categorized to four sections: the qualities of the parent corporation, the goal setting of the unit, the compensation system of the unit and the relationship between the unit and the parent company. The key qualities in the parent corporations seem to be the ambidexterity of the corporation, a well- developed internal R&D-activities and the ability to give up the excess control. Three key factors in the goal setting of the investment were found: the clearness, the diversification and the good amount of goals. The main finding in the compensation system of the unit was that it should be performance-based to motivate the personnel to stay in the company and to work efficiently and also the long-term success should be highlighted in the system. The key factors in the relationship between the unit and the parent were the sufficient autonomy of the unit and the support of the parent in its operations. The concept of innovation was discussed in the context of organizational ambidexterity, which refers to corporation’s ability at the same time to exploit existing business and explore new territories. In this theory, innovation is divided into incremental and radical innovations. This study has examined how CVC investments are able to foster both types of innovation by either introducing new technologies and markets to the corporation, or strengthening the existing capabilities. One of the key ideas behind the innovation growth in large companies is their ability to be ambidextrous. Without this, corporations are not able to succeed over a long-time period. One of the key factors in the internal R&D activity is parent corporation’s ability to let go of the old habits to be able to create new and more innovative solutions. A well- developed and multidimensional internal R&D is essential for the parent corporation to be able to adopt the innovations and the knowledge coming from the external sources. This statement relates the findings of this study strongly to the Chesbrough’s open innovation theory presented in chapter two, since the importance of good internal R&D in the adaption of new knowledge was one of the key factors in the theory also. The most important factors in the goal setting of the unit seem to be the right amount of objectives, clearness of these objectives and suitable diversification of objectives to different kind of industries and technologies. When corporations keep the amount of their goals quite small, it is also easier for them to control them and they can be sure that the CVC units are performing effectively and appropriately. By setting clear goals corporations can ensure that units do not try to achieve wrong things but instead they will fully focus on their main goal. The importance of diversification between different industries is justified because corporation’s internal R&D units can not be able to keep an eye on all new novelties (Ernst et al. 2005), and without external sources they can miss some important and relevant new technological innovations. The importance of compensation system and the long-term time-horizon can be discussed together since there are few factors bringing them together. Since CVC units’ goals are generally set for a long-time horizon, early financial or other failures should not be seen as a failure of its activity and the managers should not be punished financially for these. If the managers of the corporation keep in mind that though CVC investments have shorter life-times than that of IVCs, the goals will be achieved later, they tend to be successful more likely than the ones worrying about the short-time performance. CVC unit’s managers’ salaries are generally based on fixed payment, sometimes with annual bonuses (Dushnitsky 2006). This kind of compensation system seems not be working good for them and the better option would be to adapt a system more related to that of IVCs (Lerner 2013). The essential thing is to find a system that really motivates the personnel to be innovative and most importantly to support their entrepreneurial activities because if the workers feel like they are not supported in their current workplace, they tend to move to places where their work is appreciated more. The relationship between the parent corporation and the CVC unit have significant influence on the successful strategic performance of them. In the best situation, parent corporation gives the CVC unit a freedom to operate, just providing support and advices when needed. An autonomous activity of the unit enables it to work flexibly in an entrepreneurial atmosphere and results in better innovative performance of parent corporation also. The CVC unit should be constructed to be multidimensional meaning that there should be few seniors who have clearly in mind the vision the parent corporation, mixed with persons with entrepreneurial experience and attitudes to enable the creative process of the unit. Though the importance of external sources of innovation is highlighted in this study, one of the findings is also that corporations should build an innovation strategy that includes both external and internal sources of innovation. When the corporation has a well adjusted combination of these two, the company is able to successfully adopt the new knowledge acquired from outside to the existing capabilities. The amount of both of these sources in the innovation strategy of the corporation remains unknown.
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