Collaborative Promotion of Technology Standards and the Impact on Innovation, Industry Structure, and Organizational Capabilities: Evidence from Modern Patent Pools

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Abstract: This study explores the impact of modern patent pools—inter-organizational collaborative arrangements for promoting the adoption of technology standards—on the rate of follow-on innovations based on pooled technologies, the vertical structure of associated industries, and organizational capabilities of noncollaborating firms. On one hand, the formation of modern pools can boost follow-on innovation by lowering the search, negotiation, and licensing costs associated with pooled standards. On the other hand, modern pools may decrease the incentives to invest in follow-on innovations because of cannibalization risks and grant-back provisions. To the extent that modern pools succeed in establishing a dominant standard, their collaborative nature and their reliance on markets for technology can reduce technological uncertainty and appropriation hazards, hence triggering vertical disintegration in related industries. Moreover, by establishing a dominant standard, modern pools can effectively diminish the relative importance of integrative capabilities inside firms. Employing a combination of empirical strategies, I show that the formation of seven major modern patent pools has, on average, increased the rate of follow-on innovations based on the pooled standards by about 14%. Moreover, the results suggest that the establishment of modern pools can facilitate a shift toward vertical disintegration in associated industries where upstream technology-focused organizations would disproportionally contribute to the development of follow-on complementary technologies. The results also suggest that modern pools reduce the relative importance of integrative capabilities and provide a more advantageous position for specialized startups vis-à-vis diversifying entrants. I discuss the implications for literatures on organizational economics, organizational capabilities, business ecosystems, standards, and nascent industries.