From litigation to innovation: Firms' ability to litigate and technological diversification through human capital

Research Summary: When firms diversify technologically, they often acquire human capital from competitors. Legal challenges emerge when intellectual property (IP) safeguards are involved. We examine a firm's ability to initiate IP litigation or protect against litigation (i.e., litigation ability) as an antecedent to its technological diversification. We demonstrate that an unexpected reduction in firm's litigation ability is associated with a temporary decline in its entry into new technological domains. Furthermore, we find that the negative effect is stronger when the firm's existing inventors cannot be easily utilized in the new domain or when interfirm mobility in the new domain is low. These findings extend prior work by highlighting a proactive role of the firm's litigation ability that spans beyond protecting the firm's existing IP. Managerial Summary: To diversify successfully, the firm often needs new knowledge that can be acquired by hiring new research personnel. However, these inventors may come from competitors and their knowledge may be protected by IP safeguards. We examine how the firm's ability to initiate and protect against IP litigation influences its technological diversification. We find that an unexpected reduction in a firm's ability to litigate temporarily reduces its expansion. The negative effect is magnified when considering expansion into domains where the firm's existing inventors cannot be utilized or where the intermobility of inventors is low. Our findings suggest that the ability to both protect IP and avoid litigation are important factors in a firm's diversification strategy.