Soft but Strong: Software-Based Innovation and Product Differentiation in the IT Hardware Industry

43 Pages Posted: 10 Jan 2019 Last revised: 20 Jan 2021

See all articles by Keongtae Kim

Keongtae Kim

Decision Science and Managerial Economics, Chinese University of Hong Kong

Jeongsik Lee

Drexel University - LeBow College of Business

Anandasivam Gopal

University of Maryland - Robert H. Smith School of Business

Date Written: January 18, 2021

Abstract

It has been argued in recent years that software is a significant value-creating factor within the manufacturing sector, leading to an increased interest in understanding the pathways by which firms may benefit from software-based innovation. Empirical work in evaluating these pathways remains under-developed however. In this paper, we examine one such pathway by which software-based innovation provides value for information technology hardware firms in the U.S. Specifically, we examine the influence of software patents on the extent to which firms are able to benefit from product differentiation in their product markets. Using data on over 380,000 patent grants for innovations filed by 730 public IT hardware firms over the time-period 19962015, we find that greater levels of software-based innovation within the firm are associated with higher levels of product differentiation in product markets: increases in the intensity of software patents within the firm’s patent stock, which we refer to as software intensity, are associated with lower total similarity of product offerings relative to those offered by rivals as well as fewer effective competitors in the market. Furthermore, using a different dataset consisting of 23,000 new IT hardware product announcements, we show that firms with greater software intensity subsequently launch a higher number of new products. Moreover, these firms are more likely to launch products that are not only differentiated from those of rivals but also distinct from their own product lines. Our research contributes to the emerging literature on software-based innovation by substantiating an important pathway by which software helps transform industry sectors through product differentiation.

Keywords: sotware, patents, innovation, information technology, hardware, product differentiation

Suggested Citation

Kim, Keongtae and Lee, Jeongsik and Gopal, Anandasivam, Soft but Strong: Software-Based Innovation and Product Differentiation in the IT Hardware Industry (January 18, 2021). Available at SSRN: https://ssrn.com/abstract=3308277 or http://dx.doi.org/10.2139/ssrn.3308277

Keongtae Kim (Contact Author)

Decision Science and Managerial Economics, Chinese University of Hong Kong ( email )

12 Chak Cheung street
Shatin
Hong Kong

Jeongsik Lee

Drexel University - LeBow College of Business ( email )

3141 Chestnut Street
Philadelphia, PA 19104
United States

Anandasivam Gopal

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

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