Incubation of an industry: Heterogeneous knowledge bases and modes of value capture
| Author | Mahka Moeen,Rajshree Agarwal |
| Published date | 01 March 2017 |
| DOI | http://doi.org/10.1002/smj.2511 |
| Date | 01 March 2017 |
Strategic Management Journal
Strat. Mgmt. J.,38: 566–587 (2017)
Published online EarlyView 4 May 2016 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2511
Received 8 July 2014;Final revisionreceived 22 September 2015
INCUBATION OF AN INDUSTRY: HETEROGENEOUS
KNOWLEDGE BASES AND MODES OF VALUE
CAPTURE
MAHKA MOEEN1and RAJSHREE AGARWAL2†*
1Kenan-Flagler School of Business, University of North Carolina, Chapel Hill, North
Carolina, U.S.A.
2Robert H. Smith School of Business, University of Maryland, College Park,
Maryland, U.S.A.
Research summary: Weexamine rms’ technological investments during an industry’s incubation
stage— the period between a technological breakthrough and the rst instance of its commercial-
ization. Using the agricultural biotechnology context, we develop stylized ndings regarding the
understudied knowledge evolution precedingproduct evolution in an industry’s life cycle, the trend
and diversity of rms undertaking technological investmentsin anticipation of industry emergence,
their leverage of markets for technology and corporatecontrol, and their use of alternative modes
of value capture. We juxtapose these stylized ndings with existing literature to identify new theo-
retical insights, and set the stage for futurescholarly work to develop and test new theories for the
incubation period, examine its existence in other industries, and study its impact on subsequent
rm and industry evolution.
Managerial summary: New technological breakthroughs present managers of existing rms and
aspiring entrepreneurs with opportunities to createaltogether new industries. During the vibrant
incubation period, we nd that multiple rms capitalize on diverse knowledge bases to shape
the industry’s knowledge evolution and also capture economic value in diverse ways. Existing
rms in the obsolescing industry are more likely to become targets in acquisitions given their
complementary knowledge. Science-based start-ups are morelikely to engage in acquisitions and
collaborations with established rms. Diversifying rms are more likely to commercialize prod-
ucts after leveraging of internal development, acquisitions, and alliances. Our study highlights
the importance for managers to think about “success” and “failure” acrossmultiple yardsticks of
performance, rather than only as product commercialization as the sole goal. Copyright © 2016
John Wiley & Sons, Ltd.
INTRODUCTION
The birth of new industries following technology
breakthroughs has long been associated with
entrepreneurial entry and creative destruction
Keywords: industry evolution; nascent industries; markets
for technology; rm evolution; entry and exit
*Correspondence to: Rajshree Agarwal, Robert H. Smith School
of Business, University of Maryland, 4512 Van Munching Hall,
College Park, MD 20742, U.S.A. E-mail: rajshree@umd.edu
†Authors contributed equally and rst names are listed in alpha-
betical order.
Copyright © 2016 John Wiley & Sons, Ltd.
(Schumpeter, 1942). Conceptualizing industry
inception as the instance of rst commercialization
of a product, scholars have examined subsequent
patterns of rm entry and exit (Gort and Klepper,
1982; Utterback and Suárez, 1993), competitive
dynamics between entrants and incumbents in
the industry becoming obsolete (Mitchell, 1991;
Tripsas, 1997; Tushman and Anderson, 1986), and
heterogeneity in rms’ performance (Helfat and
Lieberman, 2002; Klepper and Simons, 2000). Left
understudied is industry incubation, dened as the
period between the introduction of a discontinuous
Incubation of an Industry 567
technological change and the rst instance of
product commercialization. While the average
duration of the industry incubation period across
multiple industries is reported to be between 26
and 28 years (Agarwal and Bayus, 2002; Golder,
Shacham, and Mitra, 2009), we lack a systematic
investigation of the number and types of rms
that enter or exit during this time, the knowledge
bases they leverage, and their modes of capturing
value.
The rm and industry level dynamics during
the incubation period deserve scholarly attention,
not only to uncover how knowledge evolves
during this nascent stage, but also because the
industry’s knowledge evolution during this period
may critically shape and dene subsequent
post-commercialization rm and industry structure.
Are the above noted long durations of incubation
period largely fallow ground, or are they character-
ized by signicant entry and exit of rms exploring
technological opportunities in anticipation of, and
resulting in, the creation of a new industry? Is there
heterogeneity among the types of rms that partic-
ipate in the evolution of the industry’s knowledge
(Helfat and Lieberman, 2002), and their capture
of value through markets for commercialization
(Klepper and Simons, 2000), corporate control
(Jensen and Ruback, 1983), or technology (Arora,
Fosfuri, and Gambardella, 2001)? Given a focus on
product commercialization as the key point of an
industry’s inception, and a lacuna of comprehensive
data on rms’ forays in technological investment
during the incubation period, we lack answers to
these critical questions.
When answering the above research questions,
we juxtapose the stylized ndings from our detailed
empirical examination of the incubation period
of the agricultural biotechnology industry with
the received theories that explain industry and
rm dynamics post-commercialization. Doing so
enables the identication of instances where extant
theories either fail to explain the observed patterns,
or predict patterns that are inconsistent with what is
observed. Thus, our study sets the stage for future
scholarly work to develop theories for the incu-
bation period, and examine its existence in other
industries and its impact on subsequent rm and
industry structure.
Our ndings reveal that the incubation period
of the agricultural biotechnology industry lasted
18 years, and rms investing in the knowledge base
exceeded rms commercializing products by almost
sevenfold. The knowledge base of the nascent
industry drew from diverse sources, as evidencedby
the greater heterogeneity among investing rms rel-
ative to commercializing rms; compared to incum-
bents in the obsolescing conventional agriculture
industry and university-based start-ups, diversify-
ing rms constituted 70 percent of those that com-
mercialized a product, but only 26 percent of the
rms making technological investments. However,
the high “failure” rates of incumbents in the obso-
lescing industry and start-ups in terms of lack of
commercialization mask their value capture through
participation in the “sell-side” of vibrant markets for
corporate control and technology.Indeed, the indus-
try and rms within it co-evolved due to leverageof
heterogeneous knowledge bases by investing rms,
their value capture via alternative modes, and the
industry’s retention of their collective knowledge
and capabilities.
These ndings provide novel insights to research
streams in industry evolution, strategic manage-
ment, and technology entrepreneurship. To indus-
try evolution, we shed light on a critical, hitherto
understudied incubation period. We highlight the
importance of rms’ technological investments and
the concomitant evolution of knowledge during the
incubation period for a better understanding of fac-
tors underpinning the subsequent evolution of the
industry. We show that the quest for synergies in
capabilities residing across rm boundaries drives
the pre-commercialization shakeout. Second, we
show that vibrant markets for technology and cor-
porate control result in the transfer of knowledge
and account for the difference in numbers of com-
mercializing and investing rms. These markets are
not absent in nascent stages as has been previously
assumed (Stigler, 1951; Williamson,1975); instead,
the pre-commercialization presence of markets for
complementary capabilities is critical to the indus-
try’s knowledgeevolution and the creation of recon-
gured capabilities that reside in a commercializ-
ing rm. Third, by examining alternative modes of
value capture, we connect entrepreneurship litera-
ture that treats acquisitions as successful exits with
industry evolution literature that treats lack of prod-
uct commercialization as failure. Start-ups do not
just compete with diversifying entrants in a race for
product commercialization (Klepper and Simons,
2000; Mitchell, 1991); we show that they engage
in mutually benecial transactions for joint value
creation and capture. Taken together, we contribute
to innovation and entrepreneurship by elaborating
Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 566–587 (2017)
DOI: 10.1002/smj
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