Innovation Portfolio Research Articles

The Risk of De-Risking Innovation: Optimal R&D Strategies in Ambiguous Environments

This article develops a framework for driving innovation under highly ambiguous conditions. An analysis of the most novel medicines of the past 20 years shows that a very large group of small companies created more breakthroughs, at considerably less overall cost, than a much smaller group of very large companies. This article’s findings present the first large-scale empirical validation of the theoretical literature predicting the superiority of decentralized parallel searches in ambiguous environments. Accordingly, companies that attempt to “de-risk” the innovation portfolio by narrowing their search efforts to minimize failures run the risk of filtering out the next breakthrough.

Small firms and patenting revisited

In order to observe a patent application at the firm level, two conditions need to be met: new products need to be of patentable quality, which depends both on the degree of novelty of innovations and on the total number (portfolio) of innovations; and the benefits of patents need to be higher than the costs of owning them. Analyzing the patent propensity of small and large UK firms using a novel innovation-level survey (the SIPU survey) linked to Community Innovation Survey data, we find that when we consider the whole innovation portfolio, smaller firms do patent less than larger firms. However, using data on individual innovations, we find that smaller firms are no less likely to patent any specific innovation than larger firms. We argue that size differences in the probability to patent relate primarily to the “portfolio effect,” i.e., larger firms generate more innovations than smaller firms, and therefore are more likely to create one or more which are patentable. As for the decision to patent a patentable innovation, we find that cost barriers, more than issues of innovation quality or enforceability, deter small firms from patenting specific innovations. Measures to address the costs of patenting for smaller—perhaps by considering patents as eligible costs for R&D tax credits—and/or subsidizing SMEs’ participation in IP litigation schemes may both encourage patent use by smaller firms.

Specifičnosti upravljanja portfolijom inovacionih projekata

In an age of turbulence in modern business, where innovation is positioned as a key factor in creating competitive advantage and resource-oriented strategy, where human capital and intellectual property come to the fore, portfolio management of innovation projects becomes a powerful weapon, but only if handled properly. Differences between classic projects on the one hand and innovation projects on the other, characterized primarily by an extremely high degree of risk and impact of the human factor, i.e. creativity, require comparative analysis of the projects themselves and their portfolios, in order to reach the conclusions necessary for successful management of the innovation portfolio. Due to the specificity of the innovation projects and the innovation portfolio, the methods and techniques used in managing the portfolio of classic projects do not guarantee success if applied to the portfolio of innovation projects. Noticing the differences and peculiarities of both is the first step in creating a methodology that would deliver the expected results.

Technology Evolution in the Global Automotive Industry: A Patent-based Analysis

This study explores the evolution of the knowledge base of the dominant Original Equipment Manufacturers (OEMs) in the global automotive industry. Using data on patent families, we reconstruct and analyze their innovative portfolio in the period 1990-2014. The analysis documents experimentation in new technical fields as well as stability in industry-specific technical areas, allowing to draw implications on the underlying industry dynamics. Specifically, our results show that despite the emergence of technological opportunities in new and once-unrelated technical domains, the importance of core automotive technologies has increased over the period of analysis. At the same time, the relative position of carmakers along different performance dimensions has remained quite stable, suggesting that the technological capabilities that have traditionally driven success in this industry continue to play a key role in explaining firms’ competitive strength.

Do Firms Really Learn From Failure? The Dynamics of Abandoned Innovation

Abandoned and failed innovations can be regarded as a part of the natural process of experimentation by firms, which can lead to important lessons being learned. Although the literature suggests some benefit from failure or abandoned innovation activities, prior studies using relatively large firm-level datasets to test the nature of this link are often unable to deal explicitly with the time dimension of learning. We contribute to the literature by showing the dynamic and causal nature of the linkage between abandoned innovation and subsequent innovation outcomes at firms. We demonstrate based on balanced panel data of Spanish manufacturing firms from 2008-2016 that innovation failure not only leads to more successful innovation, but that there is an explicit time dimension to this. We demonstrate that firms which have experienced ‘failure’ (as evidenced by abandoned innovation activities) in the past will have stronger positive effects of recent abandoned innovation activities on innovation output. This is a strong test of the ‘learning-from-failure’ hypothesis. In addition, we find evidence that in addition to enabling cumulative learning processes, abandoning innovation may also act as a dynamic corrective mechanism preventing firms carrying weaker innovation portfolios through from one period to the next.

Analytical approach to the diversification effect evaluation of the innovative engineering projects portfolio for a machine-building enterprise

As a tool to reduce the risks of innovation at the machine-building enterprises the authors suggest a new methodology aimed at point-based assessment of innovation risks. However, the experts are more likely to give interval estimates when assessing the risks of innovation. To work with interval estimates, a new software system was developed. The authors suggest using a market model that assumes a division of risks into systematic and non-systematic and allows to take into account the effect of diversification of the innovative portfolio of the machine-building enterprise. The steps of the methodology and its approbation on the data on innovative projects of one of Russian Federal Space Agency (Roskosmos) enterprises are presented in the paper.

«Цифрові» трансформації: взаємозв’язок із системою економічної безпеки підприємства

В даній статті автор зазначає, що «цифровізація» бізнесу є об’єктивною необхідністю розвиткупідприємства в умовах «Індустрії 4.0». Окреслено ймовірний перелік об’єктів цифрових трансформа-ційних процесів для підприємств харчової промисловості. Об’єкти цифрової трансформації згрупованів три блоки: інфраструктура забезпечення цифровізації, інформаційно-комунікативні системи та біз-нес-процеси й системи управління. Виділено основні фактори запровадження цифрових технологійна підприємствах харчової промисловості. Відзначено, що цифрові технології є платформою зростан-ня ефективності системи економічної безпеки підприємства.Автором сформульовані основні завдання системи економічної безпеки підприємства в умовахцифрових трансформацій. Визначено основні вимоги щодо створення відповідних умов забезпеченнятрансформаційних ІТ-процесів. Виділено структурні компоненти системи запровадження цифровізаціїсистеми економічної безпеки підприємства. Зроблено висновки щодо напрямів подальших дослі-джень в галузі забезпечення системи економічної безпеки «цифрових» трансформацій.

Mergers and Innovation Portfolios

This paper studies mergers in markets where firms invest in a portfolio of research projects of different profitability and social value. The portfolio nature of the investment problem brings about novel insights on the external effects of firms’ investments. The investment of a firm in one project imposes a negative business-stealing externality on the rival firms because it lowers the probability they win the innovation contest for that project; however, the investment of a firm in one project also exerts a positive business-giving externality on the rival firms because it increases the likelihood they win the contest for the alternative project. Merging firms internalize these positive and negative externalities they impose on each other. We show that when the project that is relatively more profitable for the firms is also the more appropriable, then a merger increases consumer welfare by reducing investment in the most profitable project and increasing investment in the alternative (less profitable) project. For the case of linear demand and constant marginal costs, the portfolio effect of mergers makes them consumer welfare improving. With constant elasticity of demand and constant marginal costs, a merger increases consumer welfare if the more profitable project corresponds to the market with the higher elasticity of demand. The portfolio effect of mergers may dominate the usual market power effects of mergers.

Alpha, Beta and the Endowment Model

Alpha, or outperformance of a benchmark, can be generated in many ways within a portfolio. It can be created by picking the top hedge fund managers, or by capturing the illiquidity premium via alternative assets. Venture capital is a major source of alpha for long-term investors. Alpha can also be achieved by active asset allocation using both tactical and strategic beta tilts. For the top endowments, these and other innovative portfolio decisions have created great, long-term alpha versus a global balanced benchmark with 70% stocks/30% bonds. Since asset allocation plays a large role in determining portfolio returns, it is interesting to compare how beta (or index fund) portfolios have compared historically versus sophisticated institutional portfolios. We compare 3 decades of performance: the 10 year period before the Internet Bubble’s peak (FY1988-1998), the 10 years including fiscal year 2000’s spectacular gains (FY1998-2008), and a more recent period (FY2008-2018). The Endowment Model will no doubt continue to help colleges to fulfill their missions, and enable public pensions to meet their retirement obligations. However, for some investors, over-diversification can dilute manager alpha and lead to performance that is similar to beta portfolios. Given its complexity, the Endowment Model is not a one-size-fits-all strategy, and is best suited for larger investment teams with considerable resources. For those institutions constrained by limited resources, using a balance of alternative assets and beta could achieve the best of both worlds. For instance, mid-sized investors might be better served by streamlining their portfolios with a liquid beta core, coupled with satellite alternative assets. And smaller investors could only use index fund portfolios and still achieve alpha. An index fund portfolio may be no substitute for a world-class endowment fund, but it could be an ideal investment solution for some long-term investors.

Measuring innovation through a crowd source initiative

PurposeThis study aims to demonstrate the values and effects of innovation becomes a challenge when selecting clear and correlating measures. While there is extensive research in the area of innovation measurement, there is a lack of consistent quantifiable measures that organizations can use. The International Association of Innovation Professionals (IAOIP) has partnered with Spigit to crowdsource innovation measures via the Innovation Measurement Standard (IMS) challenge with IAOIP members and the global public to determine the various ways innovation is measured across industries.Design/methodology/approachThis study used a mixed-methods approach and a sequential exploratory design to analyze the data collected during the IMS challenge. In the first phase, the qualitative methodology was used to analyze innovation measures submitted during the IMS challenge and participants’ interactions and comments. In the second phase, the innovation measures were analyzed quantitatively to identify the most prominent measures.FindingsA total of 73 innovation measures were collected during the challenge. In total, 18 top measures were ranked based on the participants’ votes, and the top five measures were selected as the winning measures of the challenge. These five measures included intelligent failure rate, financial results of innovation, the results brought to the company, the number of innovative ideas selected for action and innovation portfolio balancing.Originality/valueThis study is the first to select the innovation metrics while considering their relevance to the community of innovators that included academics, CEOs, consultants, innovation managers, etc. Another original factor of this work is the crowdsourcing approach used to identify innovation measures. This approach allowed us to explore multiple perspectives on the significance of each submitted measure.

Evaluating the Performance of Systemic Innovation Problems of the IoT in Manufacturing Industries by Novel MCDM Methods

The Internet of Things (IoT) is an important technological innovation that can enhance industrial competitiveness and sustainability. Thus, governments need to carefully construct an innovation portfolio that promotes sustainable IoT development. To help define an accurate innovation policy and promote development of the IoT industries, potential problems in terms of systemic perspectives should be examined. Such problems, so-called “systemic innovation problems”, influence and block sustainable development of IoT technology as well as the IoT industry. However, past studies that explored systemic innovation problems in IoT-related industries are limited. Thus, this research aims to explore systemic innovation problems related to configuring an IoT innovation policy portfolio. A hybrid Bayesian rough based evaluation model was used to derive the most feasible policy instruments. The modified Delphi, Bayesian Rough Decision-Making Trial and Evaluation Laboratory Based Network Procedures (BR-DNP), and the modified Bayesian rough Vlse Kriterijumska Optimizacija I Kompromisno Resenje (MBR-VIKOR) were introduced. Gaps in performance corresponding to each systemic innovation problem can thus be assessed based on the features of technological innovation systems. The applicability of the proposed model for promoting industrial sustainability of IoT in the Taiwanese smart manufacturing industry (based on the opinions provided by Taiwanese experts) was verified by an empirical study. Eleven systemic innovation problems that influence the development of the IoT for the smart manufacturing industry were compared and ranked. Based on the results of the empirical study, the performance-gap ratio of “low level of interdisciplinary collaboration” problem is the lowest, as compared to other systemic innovation problems. In addition, the systemic functions of entrepreneurial activities and knowledge development are relatively more important than other systemic functions. The empirical results can serve as a basis for planning an IoT innovation policy portfolio definition and roadmap. Moreover, suggestions for enhancing current systemic innovation problems are provided for policy makers and industrial researchers, according to the results of the evaluation.

Analysing energy innovation portfolios from a systemic perspective

A systemic perspective on energy innovation is required to design effective portfolios of directed innovation activity. We contribute a standardised set of technology-specific indicators which describe processes throughout the energy technology innovation system, ranging from patents and publications to policy mixes, collaborative activity, and market share. Using these indicators, we then conceptualise and develop benchmark tests for three portfolio design criteria: balance, consistency, and alignment. Portfolio balance refers to the relative emphasis on specific technologies. Portfolio consistency refers to the relative emphasis on related innovation system processes. Portfolio alignment refers to the relative emphasis on innovation system processes for delivering targeted outcomes. We demonstrate the application of these benchmark tests using data for the EU's Strategic Energy Technology (SET) Plan which spans six technology fields. We find the SET Plan portfolio generally performs well particularly in areas over which portfolio managers have direct influence such as RD&D funding. However we also identify potential areas of imbalance, inconsistency, and misalignment which warrant further attention and potential redress by portfolio managers. Overall, we show how energy innovation portfolios can be analysed from a systemic perspective using a replicable, standardised set of measures of diverse innovation system processes.

Improving portfolio performance of renewable energy stocks using robust portfolio approach: Evidence from China

As the largest coal and the second largest crude oil consumer in the world, China has urgent task to develop its renewable energy industry quickly. By now, there are over 80 renewable energy companies listed in China’s stock exchanges. Thus to manage the market risk and achieve better investment returns of renewable energy stocks in China is of great value for policy makers and investors. The aim of this paper is to introduce an innovative portfolio allocation approach, robust portfolio, to improve portfolio performance of renewable energy stocks in China by considering the parameter uncertainty in the process of portfolio optimization. Furthermore, to make the conclusions more robust, we classify the stock market into three commonly recognized statuses: bull market, bear market and steady market, respectively, and compare the performances of robust portfolio method with traditional Markowitz approach. The empirical results indicate that the robust portfolio method can produce better performance of the renewable energy stock portfolio than Markowitz approach in various market statuses with much more flexibility in handling the problem of parameter uncertainty. This paper provides an alternative but very effective strategy other than Markowitz method for the portfolio allocation of renewable energy stocks in China.

Managerial Political Behavior in Innovation Portfolio Management: A Sensegiving and Sensebreaking Process

By applying formalized innovation portfolio management systems, firms seek to ensure an alignment of their goals and strategy with their employees' different abilities, actions, and outcomes. However, research indicates that nonrational, political behavior also determines formalized innovation portfolio management decision‐making processes. Research on political behavior in respect of innovation portfolio management usually conceptualizes political behavior as a set of self‐serving activities, such as negotiation, bargaining, coalition building, and acquiring power, aimed at protecting, maintaining, or promoting an actor's self‐interest and power. Consequently, extant research tends to focus on political behavior's dysfunctional impacts on decision‐making processes and their subsequent outcomes. This paper challenges this negativity bias by exploring a novel, neutral specification of political behavior and its relation to innovation portfolio management decision‐making processes. By conducting an automotive industry case study focusing on the innovation portfolio management decision‐making processes, the paper analyzed the data from 43 interviewees. The conceptual model shows that managers' political capabilities determine their ability to behave politically. According to the results, political behavior comprises the activities that prepare the stage and orchestrate others in order to form a political coalition. Furthermore, results show that political behavior functions as a sensegiving and a sensebreaking process, with managers seeking to shape an innovation project's understanding according to their interests and to influence portfolio decisions. The resulting novel specification of political behavior extends the construct's scope and validity by investigating their functional and dysfunctional aspects, and by indicating that a political sensemaking process complements formalized innovation portfolio management decision‐making processes.

Co-creating value in online innovation communities

Purpose Online innovation communities are central for many organizations seeking to advance their innovation portfolio. While these communities rely on consumers to collaborate in the innovation process, it remains unclear what drives these consumers to perform value co-creation activities and what value dimensions they derive as a result. This paper aims to advance the understanding of value co-creation in the online collaborative innovation context. Specifically, it aims to examine social and individual factors driving such activities, and the value derived from the perspective of the member. Design/methodology/approach A self-administered online questionnaire was used to collect data from collaborative innovation community members yielding 309 complete responses. Structural equation modelling was used to analyse the data, using variance-based structural equation modelling with partial least squares path modelling in SmartPLS. Findings Results confirm that distinct social and individual factors facilitate individual value co-creation activities, including the provision of feedback, helping, rapport building and information sharing. Furthermore, the research confirms the mediating role of learning on these relationships. Research limitations/implications This study contributes to the micro-foundation movement in marketing by undertaking an independent examination of value co-creation activities and their nomological network. Practical implications A shift in the mindset of managing for collaborative innovation is required, from a focus on collaborative product development to the management of an online community where members derive value from their co-creation activities. Originality/value This research is the first to offer insight into important individual and social pre-conditions and subsequent value outcomes of four common value co-creation activities. It informs practice about how to facilitate value co-creation activities and contribute to the co-creation of value for online innovation community members.

Investigation of Innovation Factors and Optimal Innovation Portfolio Structuring

Son yıllarda ülke harcamalarında inovasyon yatırımlarının ve buna bağlı olarak getiri ve risklerin de arttığı görülmektedir. Bu durum doğru inovasyon yatırımlarının gerekliliğini ortaya koymaktadır. Bu çalışmada öncelikle Türkiye’de inovasyona uzun dönemli etki eden değişkenleri bulabilmek için yerli patent sayılarının bağımlı değişken olduğu tamamen değiştirilmiş en küçük kareler yöntemi (FMOLS) ile geliştirilmiş modellerde AR-GE harcamaları, AR-GE personeli sayısı, doğrudan yabancı yatırımlar ve ithalat miktarı etkenler olarak bulunmuştur. Öte yandan inovasyon yatırım kanalının incelenmesi adına AR-GE harcamalarının sektörel bazda yerli patent başvuru sayısına etkileri incelenmiştir. Bu modellerde anlamlı etkiye sahip olan özel sektör, kamu ve yükseköğretim AR-GE harcamaları için harcama oranları ve tahmin modellerinde elde edilen katsayıları ışığında optimal yatırım modeli geliştirilmiştir. Yerli patent başvuru sayısını maksimize etmeyi amaçlayan modellerde, en etkili kanalın yükseköğretim aracılığıyla AR-GE’ye yatırım yapmak olduğu görülmüştür.

Organizational complexity and innovation portfolio decisions: Evidence from a quasi-natural experiment

We examine how a firm's organizational complexity affects innovation portfolio decisions in response to a shock to innovation incentives. Using the 2013 medical device sales tax as a quasi-natural experiment, we find that firms with a complex organization structure, as proxied by organization size and multi-division structure, generate fewer radical innovations (introduction of new products) but more incremental innovations (improvements on existing products) after the tax. Multidivision firms also shift capital investment to their corporate divisions that are not affected by the tax, thereby decreasing their innovation output. Collectively, these responses cause a significant decline in the radical innovation output of the industry in aggregate. We contribute to the literature by advancing the understanding of how organization structure influences managers' innovation portfolio decisions in response to economic shocks.

Mergers and Innovation Portfolios

This paper studies mergers in markets where firms invest in a portfolio of research projects of different profitability and social value. The portfolio nature of the investment problem brings about novel insights on the external effects of firms’ investments. The investment of a firm in one project imposes a negative business-stealing externality on the rival firms because it lowers the probability they win the innovation contest for that project; however, the investment of a firm in one project also exerts a positive business-giving externality on the rival firms because it increases the likelihood they win the contest for the alternative project.

Technology Evolution in the Global Automotive Industry: A Patent-Based Analysis

This study explores the evolution of the knowledge base of the automotive industry. Over the last decades, the knowledge base of this industry has experienced major changes. New and originally unrelated fields have increasingly become relevant in the industry. Using data on utility patent families granted in the period 1990-2014, we map the knowledge base of the automotive industry by reconstructing and analyzing the innovative portfolio of the top firms operating in this industry. The analysis documents exploration in new technical fields as well as persistence in industry-specific technical areas, pointing to the relevance of core competences that might be difficult to accumulate for industry outsiders.

Financing the Next Generations of Innovation: New Dimensions in the Private Equity Model

It is widely acknowledged that, for firms to grow, they need to regularly introduce new generations of innovation; however, this is rarely addressed in the finance or private equity literature. If the private equity investment class is structured based on the business cycle, little is known about how it fosters firms’ capacity to regenerate. This leads to the question: How can private equity support firms’ ability to repeatedly innovate? Building on the literature in innovation management and design theory, we propose complementing private equity models with new dimensions: the design of potential future products and their expected value. This model is used to analyze in-depth a longitudinal case provided by a French investment fund. We show that it is far better suited to certain investment strategies than are classical models. Among other important implications, we suggest that private equity must not only provide seed, venture, or buyout capital, but also support firms’ innovation portfolio regeneration. JEL Codes: G320, O32