Death Hurts, But It Isn't Fatal: The Postexit Diffusion of Knowledge Created by Innovative Companies

Abstract

There is little understanding of whether a firm’s innovative knowledge dies with it or if instead significant diffusion of knowledge occurs even after a firm exits an industry. Theoretical predictions about the differing effects of firm exit on private and public knowledge and implications for interfirm knowledge transfer are forwarded. We investigated main and moderating effects of a firm’s exit from the disk drive industry on knowledge diffusion to other firms, finding evidence that the ability to use a firm as a template plays a critical role in successfully replicating its knowledge. Absent this template, knowledge “stickiness” reduces knowledge diffusion. In 1999, despite millions of dollars of investment and a portfolio of innovative technologies, flat panel display manufacturer Optical Information Systems (OIS) shut down operations, unable to achieve commercial success. Although OIS failed, its technology lived on. A letter by the firm’s former director of advanced technologies to the editors of the magazine Information Display reported that even after the firm’s exit, OIS technology continued to make waves in the flat panel industry, with many of its patents covering processes that became mainstream technology. The letter then cited specific innovations by other firms that had built on OIS breakthroughs. Although the firm had exited the industry in spite of its technological strength, it left a lasting legacy for the industry’s technology. Is the OIS story unusual, or does it highlight a regular occurrence? Since technological expertise is an important determinant of firm success (Jovanovic & MacDonald, 1994; Teece, 1986), it could be argued that firms that exit an industry are typically lacking in this important area and thus have little impact on the technological progress in the industry. This formulation would imply that firms like OIS are outliers and that diffusion of the knowledge they create is generally low, both before