Real options in value appropriation: Theory and evidence from patent strategies

This dissertation proposes and shows that real options reasoning is important for understanding firms’ value appropriation strategies in innovation. Despite a large body of research on real options for value creation in innovation, how real options reasoning can inform firms’ decision-making in value appropriation strategies under uncertainty has received relatively little scrutiny. My dissertation seeks to address this gap in the literature by examining what drives firms to purchase real options as mechanisms to preserve flexibility in their commitment decisions in patenting strategies. In my first empirical study (Chapter 2), I seek to examine the patent-secrecy choice as an exemplar of the value of such real options in appropriability strategies. As a primary hypothesis, I propose that the greater the risk of technology disclosure to rivals due to patenting, the more likely that firms purchase “secrecy options” to retain secrecy of inventions while attempting to patent them. I employ a difference-in-differences research design that leverages the American Inventors Protection Act, a quasi-exogenous change in U.S. patent law that resulted in faster disclosure of technologies pursuing patent protection, and show that firms were more likely to purchase secrecy options (by filing provisional patent applications) for patents affected by faster disclosure. Further, I find that this effect was quite large, and more pronounced for smaller firms and more novel technologies. In my second empirical study (Chapter 3), I examine how firms strategically respond to the patent racing incentives created by a first-past-the-post principle of the patent system, and propose that they may do so by capitalizing on real options – represented by provisional applications – in the patenting process. I employ a difference-in-differences design that leverages the transition of the U.S. patent system from a first-to-invent to a first-to-file system following the America Invents Act, and show that firms were more likely to file provisional applications (as real options on future patent applications) under a first-to-file system. Furthermore, I show that the magnitude of this effect depended on contingencies such as the firm’s technological dominance, industry concentration and patent effectiveness. In my third empirical study (Chapter 4), I examine firms’ revealed preference to purchase real options in patent term extension by leveraging the Agreement on Trade Related Aspects of Intellectual Property Rights, which changed U.S. patent term from a 17-years-from-issuance to a 20-years-from-priority date term. I show that patent prosecution uncertainty increases the value of real options in patent term extension, consistent with real options theory. I find that a firm’s purchase of real options is further related to industry differences, invention value, and the type of patent application (original versus continuing). My dissertation contributes to the literature in real options theory as well as appropriability strategies by applying received theory to a new context. Implications for managers and policymakers are also discussed.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Business Administration

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2018

Author dc:creator

• Chung, JiYoon

Contributors dc:contributor

• Somaya, Deepak
• Bercovitz, Janet
• Johnson, Timothy C.
• Toh, PK

• Real options
• Appropriability

Statement dc:rights

• Copyright 2018 Jiyoon Chung

Language dc:language

en

Handle dc:identifier

http://hdl.handle.net/2142/101196

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/101196