Business investment strategy and technological innovation in agribusiness firms

Inaki Pena Legazkue, Purdue University

Abstract

Immersed in an industry consolidation process, agribusiness managers are witnessing in the nineties the proliferation of inter-organizational collaborative agreements which aim to develop, manufacture and commercialize technological innovation. Investment in technological projects becomes a complicated issue in agribusiness companies, since decisions need to be made under uncertainty and irreversibility conditions. As the millennium approaches, the flurry of strategic alliances and technological advancements is creating a new window of opportunities for many agribusiness companies; opportunities that ultimately encourage business investment. Nevertheless, the high R&D costs required to thrive in a highly uncertain technological environment appears to discourage investment. Agribusiness firms are caught in the middle of this dilemma: to invest/not to invest. Not investing in new technological projects may put a firm at risk of rendering its current technology obsolete, and thereby, at risk of abandoning the market as a result of superior technologies developed by competitors. Furthermore, if the decision chosen is to invest, the next inquiry becomes: where, when and how much to invest. The objectives of this study are, first, to identify factors determining business investment strategy (i.e., the choice of investment commitment, timing and form) and second, to test the effect of business investment strategy on firm performance. A conceptual model is developed which merges transaction cost economics and real option theoretical notions. Hypotheses resulting from the model are tested using secondary data from primarily major US and European companies for the 1994–97 period. Results concerning transaction-specific investment suggest that companies with more experience conducting collaborative agreements, a larger technological uncertainty and resource uncertainty embedded in a business investment transaction are less likely to pursue investments with a higher commitment level (i.e., acquisitions or majority equity-based controlling investments). The investment commitment level embedded in a single business transaction seems to be affected not only by a goal of transactional cost minimization, but also by strategic motives (i.e., retaliation, market power enhancement, preventing access to valued assets, etc.). Findings concerning firm-specific investment suggest that firm investment behavior in agricultural biotechnology and food technology markets is better explained by technological obsolescence and opportunity cost arguments than by investment uncertainty reasons. Contrary to expectations, agribusiness companies with a higher stock of technology endowment, pursuing amplification or technology option investment strategies showed a lower level of financial performance. However, intangible resources like industry experience and research skills developed in the past seem to be very important for successful product innovation.

Degree

Ph.D.

Advisors

Boehlje, Purdue University.

Subject Area

Management|Agricultural economics

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