Alliances, R&D and Profitability of Software Firms

Like all digital products, software is fungible, has low marginal replication costs, and has a relatively high fixed cost of initial investment in development. As larger segments of economic goods become digitized, it is important to understand how software-producing firms can protect and leverage value from their R&D investments. We consider alliances as a mechanism for protecting and leveraging value from R&D investments in the software context. We use a panel of data on 464 firms in the software (IT-producing) industries, spanning the 14 year period from 1996 to 2009. We examine the economic returns to R&D as software firms form alliances with other IT-producing firms as well as with IT-consuming firms, i.e., firms in all other industries. Our findings yield insights into how IT-producing firms should position themselves within a network, through alliances with potential rivals (i.e., other IT-producing firms) or with potential clients (i.e., IT-consuming firms).