Agency Theory and the Role of R and D Governance in Enabling Technology Strategy and Corporate Entrepreneurship

The fundamental motivation for this thesis is the business reality the pursuit of technology strategy and corporate entrepreneurship by firms is increasingly being facilitated by R&D (Kor and Mesko, 2013). This thesis investigates the following overarching research question: how can R&D governance facilitate a firm's technologically driven competitive advantage and strategic renewal efforts? In paper one, we revisit Jensen's Free Cash Flow hypothesis and investigate the influence inside directors have in the governance of managerial cash holdings, or financial slack, in high technology firms where R&D persistence is needed for sustained competitive advantage. Jensen's FCF hypothesis (1986) claims when managers have access to abundant cash holdings in the presence of weak investment opportunities manager squander these Free Cash Flows (FCF's) into managerial perks, or overinvestment into unprofitable R&D projects. While we affirm the presence of overinvestment of FCF's into --NPV R&D projects, we extend AT by postulating an agency cost of underinvestment of financial slack into R&D persistence as a more pressing problem for R&D-intensive firms. Governance research has historically placed considerable weight on the internal controls of institutional ownership in mitigating overinvestment of FCF's into managerial empire building (e.g., Castaner and Kavadis, 2013). In contrast, we redirect attention to the internal control role of the board, in particular the role of insiders in governing cash holdings in R&D-intensive firms. This is because insiders mitigate informational asymmetries needed to persevere with R&D, at all costs. We postulate insiders help preserve R&D, during periods of slack and financial distress. We test our theory using a panel-data set of 253 S&P 1500 firms in R&D-intensive industries from 1997--2007. Dynamic panel data analysis and three way interaction effects are utilized. We find inside directors mitigate underinvestment of slack into R&D persistence. During periods of resource munificence, insiders ensure slack is used to further increase R&D intensity. During distress, we find an economically significant difference in R&D intensities exists between firms that retain insiders on their boards, and those that do not. In paper two, we re-investigate the long standing debate in the strategic management and entrepreneurship literature on whether AT's prescription of board-independence influences R&D (see, Baysinger and Hoskisson, 1990). We revisit this debate by extending AT to include both agency-costs of overinvestment and underinvestment in R&D intensity. Also, we draw on dual-agency theory to suggest director discretion requires use of incentives and controls to manage director risk-aversion (Hoskisson et al., 2002). While the literature in management on R&D governance accentuates the agency-cost of underinvestment, it often fails to address potential overinvestment of FCF's into R&D. This is because management research claims persistence in R&D should never be compromised (Kor and Mahoney, 2005). We draw on recent developments in management that suggest persistently punctuating R&D expenditure, with increases and declines may be achieved without jeopardizing a firm's commitment to technologically enabled innovation (see, Mudambi and Swift, 2013). We contend variability in board structures, along with alternative mechanisms to mitigate director risk-aversion are required to bring a firms R&D intensity into alignment with its individual growth capacity for technologically enabled rents. We test our theory using a panel-data set of 502 S&P 1500 firm, both high-tech and non-R&D intensive, from 1997--2007. Dynamic panel data and random effect models are utilized. We find board independence (CEO duality and outsiders) matters when managers have FCF's to overinvest into an unfavorable R&D intensity. In contrast, in the absence of FCF's and when growth prospects are propitious insiders encourage favorable levels of R&D intensity. Supplementary analysis reveals while R&D persistence leads to rents for all firms in our sample, firms with low growth prospects suffer diminished performance when cash is used to persist with a higher than industry average R&D intensity. In contrast, firms with favorable investment horizons experience increased performance when cash is used to pursue a higher that industry-average R&D intensity. Moreover, the dual agency addendum asserts director risk-aversion requires the use of outsider incentives and controls as well. These results suggest more important than outsider financial incentives is the use of outsider tenure and appointments in encouraging a favorable R&D intensity. In paper three, we are concerned with studying how managers from several industry leading technology firms actually manage the process of corporate entrepreneurship enabled by R&D (Burgelman and Grove, 2007). This study investigates how both incentives and controls are used to commercialize a diverse portfolio of breakthrough technological innovations (BI). Multiple case study analysis is utilized to study the governance systems of twelve industry-leading companies with a strategic intent to commercialize BI projects, on a persistent basis (see, O'Connor et al., 2003). (Abstract shortened by UMI.).