Competitive Impacts of IT Innovation: An Empirical Analysis of Software Patents in the IT Industry

While prior research has examined the role of Information Technology (IT) investments in the process and performance of innovation, there is relatively little research on the business value of IT innovation itself. In particular, the impact of a firm’s IT innovation on the performance of the firm’s rivals remains unexplored. In order to advance our understanding of the competitive impact of IT innovation, we investigate the impact of a firm’s software patents on rivals’ market value using data from the US IT industries. Theoretically, there are two countervailing forces influencing the competitive impact of software patents: market-stealing and spillover. Therefore, the net impact of a firm’s software patents on rivals depends on the relative magnitude of these two forces, and is essentially an empirical question. We find that a focal firm’s software patent stock is negatively associated with its rivals’ market value. In addition, we find interesting moderating effects of two factors: hardware patent stock and competitive intensity. Our results indicate that the focal firm’s hardware patent stock amplifies the negative impact of its software patent stock on rivals’ market value. Furthermore, we find that the competitive intensity of the industry mitigates the competitive impact of software patent stock. We discuss the implications for research and practice.