Entrepreneurial discovery and information complexity in knowledge-intensive industries

Why are some firms better able than others to exploit new opportunities? I posit that differences in the type and level of complexity of the information obtained through the entrepreneurial discovery process may be a meaningful indicator of the likelihood that a firm is able to exploit a new opportunity. Specifically, I investigate knowledge reproduction processes for product replication (internal copying) and imitation (external copying) as a means of exploiting opportunities and building competitive advantage. Integrating concepts from information theory and the knowledge-based view of the firm, I introduce a generalized model and quantitative methods for estimating the inherent complexity of any unit of knowledge, such as a strategy, technology, product, or service, as long as the unit is represented in algorithm form. Modeling organizations as information processing systems, I develop measures of the information complexity of an algorithm representing a unit of knowledge in terms of the minimum amount of data (algorithmic complexity) and the minimum number of instructions (computational complexity) required to fully describe and execute the algorithm. I apply this methodology to construct and analyze a unique historical dataset of 91 firms (diversifying and de novo entrants) and 853 new product introductions (1974–2009), in a knowledge-intensive industry, digital signal processing. I find that: (1) information complexity is negatively and significantly related to product replication and imitation; (2) replicators have the greatest advantage over imitators at moderate levels of information complexity; (3) intellectual property regimes strengthening the patentability of algorithms significantly increase product replication, without significantly decreasing imitation; (4) outbound licensing of patented technologies decreases product replication and increases imitation; (5) products introduced by de novo entrants are less likely to be replicated and more likely to be imitated than products introduced by diversifying entrants; and (6) diversifying entrants have the greatest advantage over de novo entrants at high and low levels of information complexity; neither type of entrant has a significant advantage at moderate levels of complexity. These empirical findings support and extend predictions from earlier simulation studies. The model is applicable to other aspects of organizational strategy and has important implications for researchers, managers, and policymakers.