Intellectual property protection and firm risk: How service transition and knowledge intensity mitigate the loss of strategic resources

Abstract

The inherent rarity and inimitability of intellectual property (IP) has long been recognized as the foundation of its strategic value. These characteristics are compromised in markets with weak IP protection, where IP cannot be leveraged to create sustainable competitive advantage. This presents significant challenges for internationalization, and extant literature provides little guidance on how firms can mitigate this risk. From first principles of resource-based theory, we posit that service transition alleviates this loss of a strategic resource, representing a basis for reliable revenue generation that retains its rarity and inimitability across markets with varying levels of regulatory protection. Combining novel datasets on firms’ foreign market activity and countries’ IP rights, we find that IP risk increases the volatility of revenues and consequently firm idiosyncratic risk, but that this can be offset by (a) deriving a larger share of revenues from service-based business segments and (b) increasing the knowledge intensity of service offerings. Results from a 12-year panel of 2,716 firms across 223 industries offer new insights into how the regulatory environment can erode the strategic value of resources and practical recommendations to mitigate the detrimental effects on firm-specific risk and market performance.