Business method innovation
How can we conceptualize the notion of “business methods” (which is a patentable category of innovation)? How does that relate to the idea of “business models”? Does engaging in business method innovation create value for firms, particularly those in the manufacturing and trade sectors that make and move physical products?
Difficult but fascinating problems. Here’s the abstract of a working project
What kinds of business method innovation do firms in the manufacturing and trade sectors engage in? Does engagement in business method innovation create value for these firms? Our paper provides answers to these questions with empirical evidence. Drawing on classification and text analysis of the business method patents of firms in the manufacturing and trade sectors, we first sought to understand their content and scope. We show that business method innovation in these sectors is primarily aimed at improving the business operations supporting product sales—that is, the ways in which tangible products are marketed, delivered, or enhanced through service offerings. We then evaluate the effect of having business method innovation, as evidenced by patents, on a firm’s value. Leveraging the exogenous shock of the State Street ruling, which first recognized business methods as a patentable category of innovation, we identify a set of firms that possess business method patents and a matched comparable set of firms without such patents. Then, using a difference-in-differences with firm fixed effects model on the matched sample, we show that the valuation of the former set of firms increased by 9% after State Street, as measured by Tobin’s q. We further show that (1) business method innovators in the manufacturing sector gained a 7% increase; while business method innovators in the trade sectors gained a 25% increase; and (2) only firms with broader innovation scope—i.e., business method innovations covering the range of marketing, delivery, and service support of products—see a significant value bump. This research provides evidence that business method innovation in the manufacturing and trade sectors primarily involves innovating on the business operations supporting product sales. Our work also provides empirical support that engaging in business method innovation drives manufacturing and trade firms’ market performance.