New research explores the paradox of firms’ unique technologies

A company’s ability to be technologically unique is an asset — but it can also be a costly, isolating characteristic. A new study published in Strategic Management Journal provides empirical evidence of this paradox, offering documentation of technologically unique pay-offs, as well as the double penalty of being a contrarian company.

The research team — including Yang Fan of Colby College, Lubomir Litov of the University of Oklahoma, Mu-Jeung Yang of the University of Colorado, and Todd Zenger of the University of Utah — focused on the natural tension of firms developing unique technology. On one hand, competitors will struggle to imitate the tech, protecting the company’s intellectual property. But on the other hand, a very unique technology reduces the opportunity to benefit from spillover insights from competitors’ similar tech.

“Out of this tension several questions emerge,” Yang says. “Does the average firm benefit from technological uniqueness? And maybe even more importantly: Which firms are likely to benefit and which firms are likely to lose out?”

To explore the substance of the tradeoff faced in pursuing unique technology, as well as the net result on firm performance, the team designed a novel measure of technological uniqueness. They combined insights from previous research on how to determine directional uniqueness of technology by way of patents: The less correlated the types of technology of a focal firm are with the technology types pursued by its competitors, the more unique the focal firm's patent portfolio is. Then, the team looked at how the uniqueness of a firm's patenting vector affects the scope of knowledge spillovers it enjoys, the cost of capital it pays, and the financial performance it generates.

The researchers found that, indeed, greater technological uniqueness is associated with better firm performance — and actually that less technological uniqueness results in underperformance; however, their work also highlighted the costs of technological uniqueness.

Technologically unique firms benefit from fewer technological spillovers from their competitors, the team found. Plus, it’s more difficult for those outside the firm to understand the contrarian company, because they cannot access private information. The team determined that equity analysts struggle to recognize value in these technologically unique firms, making analysts more likely to drop coverage of the firm.

Yang explains that firms must address these competing factors when evaluating whether to invest in unique technology: “How much technical progress will there be in common industry technology? For example, if you are in a space where the baseline technology will progress at least as fast as more proprietary solutions, uniqueness will be costly. … Any technology for which pursuing your own path forecloses your benefitting from important outside research expertise will have high costs for technological uniqueness.”

The study’s findings suggest that a firm’s decision to strategically pursue technological uniqueness depends on certain factors. For example, firms in industries with frequent and large incoming technology spillovers do not necessarily benefit from more technological uniqueness. Firms in very capital-intensive industries may also find the additional costs of technological uniqueness outweigh the benefits of being technologically unique. On the other hand, firms with high-growth strategies and aggressive R&D investments can disproportionately benefit from technological uniqueness.

To read the full context of the study and its methods, access the full paper available in the Strategic Management Journal.

About the Strategic Management Society

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