Needless Distraction or Font of Knowledge: Understanding the Relationship between Divestitures and Innovation

John Eklund, USC Marshall, and Emilie Feldman, Management, The Wharton School

Abstract: Few studies have examined the impact of divestitures on the innovation performance of firms. In particular, little attention has been paid into how the divestiture of firms’ non-core businesses could influence the innovation outcomes of their core businesses. Theoretical arguments can be made for divestitures both helping and hindering firms’ innovation efforts. In this study we plan to examine the relationship between firms’ divestitures of non-core businesses and a variety of innovation-related outcomes. Further, we seek to examine a selection of key contingencies that are likely to influence the relationship between divestitures and firms’ innovation outcomes. In doing so, we hope to further integrate research pertaining to corporate strategy with that associated with innovation management. We will empirically examine this phenomenon within the pharmaceutical industry. We will use a pseudo-differences in differences approach to compare the innovation outcomes (ranging from invention, through development to commercialization) of a set of firms that have gone through a divestiture event with a comparable set of firms that have not. Further, we will examine how the primary divestiture-innovation relationship is moderated by a variety of factors (e.g. how related divestiture is) to define boundary conditions for when divestitures can help or harm innovation.

Read the full working paper here (PDF).

Michelle Eckert is Marketing and Communications Coordinator for the Mack Institute, where she works to engage students, researchers, and corporate partners in opportunities for collaboration. Michelle received her B.A. in Art from Valparaiso University in 2007. Her background includes two AmeriCorps terms of service working to teach mathematics, computer literacy, and job readiness skills to out-of-school youth in Philadelphia, focusing particularly on promoting access to post-secondary education.