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Distance to Frontier and Appropriate Business Strategy

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  • Alex Coad

Abstract

This paper is an empirical test of the hypothesis that the appropriateness of different business strategies is conditional on the firm’s distance to the industry frontier. We use data on four 2-digit high-tech manufacturing industries in the US over the period 1972-1999, and apply semi-parametric quantile regressions to investigate the contribution of firm behavior to market value at various points of the conditional distribution of Tobin’s q. Among our results, we observe that innovative activity, measured in terms of R&D expenditure or patents, has a strong positive association with market value at the upper quantiles (corresponding to the leader firms) whereas the innovative efforts of laggard firms are valued significantly less. Laggard firms, we suggest, should instead achieve productivity growth through efficient exploitation of existing technologies and imitation of industry leaders. Employment growth in leader firms is encouraged whereas growth of backward firms is not as well received on the stock market.

Suggested Citation

  • Alex Coad, 2008. "Distance to Frontier and Appropriate Business Strategy," DRUID Working Papers 08-05, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
  • Handle: RePEc:aal:abbswp:08-05
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Gombau, Verònica & Segarra Blasco, Agustí, 2011. "Innovation and absorptive capacity: What is the role of technological frontier?," Working Papers 2072/179622, Universitat Rovira i Virgili, Department of Economics.
    2. Verònica Gombau & Agustí Segarra, 2011. "The Innovation and Imitation Dichotomy in Spanish firms: do absorptive capacity and the technological frontier matter?," Working Papers XREAP2011-22, Xarxa de Referència en Economia Aplicada (XREAP), revised Dec 2011.
    3. Simon Alder, 2010. "Competition and innovation: does the distance to the technology frontier matter?," IEW - Working Papers 493, Institute for Empirical Research in Economics - University of Zurich.

    More about this item

    Keywords

    Distance to frontier; Strategy; Market value; Innovation; Firm growth;

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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