Disruptive Innovation and Firm Investment

Date

2023-05

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Abstract

Recent literature shows that disruption resulting from innovation within an industry negatively impacts incumbent firms. Using a measure based on the scale and intensity of fund raising by venture capital-backed (VC-backed) companies, I study how incumbent firms respond to disruption risk posed by new entrants. My results indicate that when uncertainty regarding within-industry innovation is high, firms significantly increase capital expenditure, and acquisitions. Consistent with my hypotheses, cross-sectional analyses reveal that responses vary with the magnitude of the risk, financial constraints, and the incumbent firm’s competitive position. Additionally, in the presence of potential disruptors who are also unicorns, public firms aggressively invest in acquisition and raise external financing.


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Keywords

Venture Capital, Innovation, Disruption, Investment

Citation