Technological relatedness: How do firms diversify their technology?

Abstract

The principle of relatedness, which helps estimate the affinity between economic activities, suggests that cities, regions, and countries are more likely to undertake new economic activities when they already perform related activities. This empirical principle has been confirmed for various dimensions---cities, regions, and countries---and their activities--- developing new technologies, products, and industries. However, the technological diversification of firms is yet unexplored. Is a firm more successful at entering a new technology when it has already accumulated related technologies? Here, we explore this issue using a unique dataset that contains firms' patent data and financial and market information. In particular, we examine Korean firms listed in the Korean stock market that published patents at the patent offices in Korea, Europe, and the United States from 1984 to 2004. We develop a technological relatedness measure to estimate whether a firm has already published patents with similar technologies. We find that firms are more likely to develop a new technology when they already have related technologies. Interestingly, technological relatedness shows an increasing return to related knowledge. We also check the robustness of this effect using propensity score matching and find that the effects of technological relatedness and its increasing return behavior remain significant when controlling for potential confounding effects. These findings extend the concept of relatedness to a firm's technological diversification and show that the development of a firm's technological knowledge is shaped by its technological relatedness.

Technological Leadership in Industry 4.0: A Comparison Between Manufacturing and ICT Sectors Among Korean Firms

“…Column (1) and (2) depict the results of the logistic model, which estimate the effect of structural factors of technology on the emergence of new I4 technology in a firm and ask whether there exists a difference in the effects between the manufacturing and the ICT sector. Our analysis confirms the findings of Kim et al [43], [44] that the density of related technologies, w i,k , has a positive and significant effect on the firm's probability of success in entering a new I4 technology. Moreover, we find that this effect is stronger in the ICT sector than in the manufacturing sector.…”

“…To examine the level of path-dependency of firms in their technological diversification [43], [44], we further calculate the density and check whether its effect is similar between the manufacturing and the ICT sectors by using the proximity ψ k,l . The density of related technology of a firm at time t is given by…”