Dipping a Toe? The Relation between CVC Investments and Entry into New Technology Domains

Abstract

Existing research has prescribed corporate venture capital (CVC) investments as effective tools for firms to explore new technologies. However, it remains unclear to what extent firms can use CVC investments to build capabilities to create technology in previously unfamiliar domains as this requires that they go through an extensive learning process. This paper argues that CVC investment not only allows exploring new technologies but sets in motion a chain of learning events linked by four stages in a knowledge absorption framework, and which is moderated by investee quality and the presence of other corporate investors. We test our propositions using a panel of 244 large pharmaceutical firms that make 847 unique CVC investments during 2000-2015 in ventures patenting in technology domains in which the firms were not active in the 5 years preceding the investment. We show that firms who make CVC investments in ventures active in technology domains which are unfamiliar to them, have a higher likelihood to subsequently start patenting in these new domains. Furthermore, we show that this likelihood is positively moderated by the average quality of the investee, the presence of investment syndicates and the the relatedness of the technology to the firm’s existing knowledge base. These results add to the literature on CVC investments and technological entry by furthering our understanding on the role of CVC investments not only as a tool for technological exploration, but also as an effective vehicle for technological exploitation through learning.