Business Method Innovations and Firm Value: An Empirical Investigation

Abstract

Problem Definition. Are business method innovations valuable to manufacturing firms? Do patents further increase their value? Our paper provides answers to these questions with empirical evidence. Academic/Practical Relevance. Despite increasing academic and practitioner attention on business method innovations, there is a lack of empirical evidence regarding the economic value of business method innovations to manufacturers. Our work points to both business method innovations and business method patents as central sources of firm value. Methodology. We leverage the exogenous shock of the 1998 State Street ruling, which first recognized business methods as a patentable category of innovation and allowed US manufacturers to patent their business method innovations. We estimate separately the impact of business method innovations and business method patents on firm value. Results. We find that firms that were granted business method patents after State Street enjoyed a 16% value premium relative to peers with no such patents. We show that this premium consists of two components. This set of firms enjoyed an 11% value premium even before State Street was decided, and saw an additional 12% value increase post–State Street. The former can be viewed as the innovation premium (the value of undertaking business method innovation); the latter may be considered a patent premium (the value of owning intellectual property protection). We corroborate the innovation premium by showing that firms that had filed applications for business method patents (but were yet to receive any business method patent grants) exhibit only the innovation premium, and not the patent premium. We further confirm the existence of a patent premium for business methods by showing that business method patents are more likely to be renewed in comparison to other types of patents. Managerial Implications. This research provides empirical support for the widely held assumption in the operations and strategy literature that, in the digital age, business method innovations are key drivers of manufacturing firms’ performance.