Enemies at the Gate? Essays on New Entry Threats in the U.S. Information Technology Industry

Abstract

The Information Technology industry is characterized by constant technological changes, fast clock speed, and hypercompetitive markets. A significant part of this fast-moving dynamic is fed by the high rate of new entry in the form of entrepreneurial ventures. In recent decade, digital platforms accelerate these threats from startups by providing financial and marketing resources. While these developments have led to a significant increase in new entry threats faced by incumbent firms, there is little empirical research that has addressed the consequences of these threats on incumbents. This dissertation aims to fill this gap in the literature. In the first essay, I develop and validate an innovative measure of new entry threat. Then, I show that in the presence of new entry threat, firms tend to reduce their investments in innovation systematically. Further, firms that have a diversified product or technology portfolio, operate in industries with strong network effects, or face high levels of technological cumulativeness invest relatively more in R&D when facing greater new entry threats. The second essay focuses on the impact of new entry threat on the operational performance of firms in the IT industry, and studies how features of the incumbents’ board may help moderate the effects of new entry threat. I provide strong empirical evidence for the theoretical predication of the negative relationship between new entry threats and firm performance. I also show that facing high NET, firms with more independent directors are better able to withstand these threats. In the third essay, I examine the influence of new entry threats on the incumbent’s information disclosure in the IT industry. I find evidence consistent with theoretical prediction that high new entry threats faced by the firm indeed leads to a decrease in the incumbent’s information disclosure. Interestingly, I also find the effect is less pronounced in highly concentrated sub-industries, where actual entry barriers are higher, and more pronounced in the software and services sectors, where proprietary information is more vulnerable. Overall, the three essays contribute to the literature by first creating and validating a measure of new entry threats and linking

this measure to specific firm-related strategic decisions within the IT industry.