PATENT ABANDONMENT AND SUBSEQUENT CUMULATIVE INVENTIONS BY WEN ZHENG DISSERTATION Submitted in partial fulfillment of the requirements for the degree of Doctor or Philosophy in Business Administration in the Graduate College of the University of Illinois at Urbana-Champaign, 2019 Urbana, Illinois Doctoral Committee: Professor Joseph Mahoney, Chair and Director of Research Professor Deepak Somaya Associate Professor Sonali Shah Professor Janet Bercovitz, University of Colorado Boulder ABSTRACT This dissertation explores how the focal firm’s patent abandonment strategy can facilitate cumulative inventions by external inventors, as well as subsequent cumulative inventions by the focal firm to enable value creation and value capture. To keep a patent in force in the United States, a firm must pay maintenance fees at three subsequent time-periods after the issuance of the patent. The focal firm’s patent abandonment reduces transaction costs of external inventors conducting cumulative inventions that build on the focal firm’s abandoned patent, which creates a larger and broader knowledge spillover pool. Further, the firm’s patent abandonment can be a positive-sum game, in which the focal firm can also benefit by identifying distant knowledge as well as potential new inventors’ inventions. This patent abandonment allows the focal firm to learn from the knowledge spillover pool created through its patent abandonment. Following Chapter 1, which provides the introduction, Chapter 2 examines how the focal firm’s patent abandonment influences external inventors conducting cumulative inventions, which build on the focal firm’s abandoned patent. I submit that the focal firm’s patent abandon-ment opens up invention to the “wisdom of crowds,” and reduces external inventors’ licensing costs and litigation threats from the focal firm holding the initial patent. Thus, the focal firm’s abandoned patent provides external inventors greater opportunities to conduct more research that builds on the focal firm’s abandoned patent. Further, a focal firm’s patent abandonment could transform its own limited internal and external search into broader external inventors’ collective search. Thus, inventions by external inventors in the knowledge spillover pool created through the focal firm’s patent abandonment can become both larger and greater breadth. Consistent with this theory development, I corroborate empirically that the focal firm’s patent abandonment can increase the amount and breadth of external forward citations of the abandoned patent. ii Chapter 3 and Chapter 4 focus on how the focal firm can create and capture value through its patent abandonment. Chapter 3 examines under what conditions the focal firm can learn more from the knowledge spillover pool created through its patent abandonment, which is a necessary condition for the focal firm to create and capture positive economic value from its patent abandonment. I submit that the knowledge spillover pool created by external inventors due to the focal firm’s patent abandonment can facilitate the focal firm’s subsequent learning and consequently increase its subsequent inventions. Such learning from the knowledge spillover pool by the focal firm is greater when this pool contains higher quality external inventions and larger number of external inventors. This chapter further explores how moderating factors, such as the focal firm’s: (i) explorative search path in its invention creation stage; (ii) internal use of the abandoned patent in its invention development stage; (iii) experience in leveraging external knowledge, and (iv) self-ownership of complementary patents, influence the efficiency and effectiveness of its learning from a more valuable knowledge spillover pool. Chapter 4 explores how the focal firm can use patent abandonments to overcome its own limited search in subsequent exploration and exploitation of its patent. In particular, I examine which inventions within the knowledge spillover pool developed by external inventors are more likely to be integrated by the focal firm in its subsequent inventions. Through its patent abandonment, the focal firm could then rely on collective search to identify inventions containing knowledge that is more distant and developed by potentially new external inventors, which lowers the cost of the focal firm compared to renewing its patent and conducting its own internal search. Due to the focal firm’s path dependent search behavior and its limited absorptive capacity, the focal firm’s reliance on external inventors’ collective search would likely be more efficient and effective in its familiar domain. The empirical results show that the focal firm is more likely to iii integrate external inventors’ inventions into its subsequent inventions if the invention is: (i) combined with knowledge that is distant from the focal firm’s existing knowledge base; and (ii) created by new external inventors. Furthermore, the focal firm would be more likely to integrate inventions containing knowledge that is more distant and created by new inventors, if the inventions are in the areas where the focal firm has greater technological strength. The fifth and final chapter offers conclusions, provides research limitations, and suggest future research directions. To address some of these limitations, suggestions for future research that builds on this dissertation are also provided. iv ACKNOWLEDGEMENTS It is difficult to summarize my hard, but enjoyable journey toward finishing this dissertation and my Ph.D. study in such a few pages. I have so many people to thank and no matter how many “thank you” I have said to them, I still feel they are not enough. I wish I could write a similar length of “ACKNOWLEDGEMENTS” as my dissertation if I am allowed to do so. First, I express my great thanks to my advisor and dissertation chair, Joe Mahoney. During my Ph.D. study, Joe always replied to my emails very quickly with his feedback and comments no matter when I sent him my research draft and no matter how busy he was at the time. He would sometimes spend a whole workday in his office with me to review my work sentence-by-sentence. He read and checked every footnote and every single citation of my dissertation repeatedly. Joe provided me with not only tons of invaluable comments and suggestions for my academic research, but also many philosophies of how to become a good researcher. I remembered, one day, I stopped by Joe’s office and he was adding a reference for an already accepted paper. I asked Joe: “Hasn’t the paper already been accepted?” Joe replied to me with two words “So what?” He further explained: “I don’t think acceptance should be the end of research.” Over the time, his rigorous attitude and great passion in doing academic research greatly influenced me, and will guide my academic career path. Joe made me assured that I made the right choice to pursue a Ph.D. in strategy at the University of Illinois at Urbana-Champaign. Second, I thank all my dissertation committee members, Deepak Somaya, Janet Bercovitz, and Sonali Shah. They all continuously provided guidance and encouragement for me to finish my dissertation. They are very nice and always willing to meet and discuss my dissertation work. Their knowledge in patent and technology management and wisdom in doing academic research helped me a lot in shaping and refining my dissertation idea. I also extend my gratitude to other faculty in v Business Administration at the “U of I.” Doug Miller guided me to the first research study in my first year and let me know how to find research questions, propose theories, analyze data, and position the paper. Phil Anderson was the course coordinator when I taught Business Policy and Administration (BADM 449), who always encouraged me and helped me overcome difficulties in my teaching. I also get a lot of teaching guidance and suggestions in regular instructor meetings from Arkadiy Sakhartov, who has great passion and enthusiasm in teaching and doing research. I enjoyed very much to work with Fiona Yao on one research project. Fiona is really kind and generous in sharing her materials and experience. I also greatly appreciate Mario Schijven, who provides me many useful suggestions while practicing my Job talk. I have learned so much in terms of research, teaching, and developing my academic career in the past six years. I am so fortunate to become a Ph.D. student and to have had the opportunities to learn from these top-level scholars in the Department of Business Administration within the Gies College of Business. As well as to faculty members, I also feel great appreciation to all Ph.D. friends and officemates who offered me research suggestions and enriched my Ph.D. life here. Last, but not least, I wish to express my love to my parents Naihong Li and Lijun Zheng, my husband Wenlong Yu, and my daughter Linxuan Yu. My parents always give me the best support they can. They give me freedom to do whatever I want. I hope I have done them proud. My husband served as a cheerleader for my Ph.D. Marathon. I might want to give up for a thousand times during the past six year. Every time, he convinced me with his scientific logic and emotional love to keep going. For my daughter, I feel sorry that I did not have a lot of time to be with her to record every footprint of her growth. I hope I can be a great mom to let her enjoy every day in the future. vi TABLE OF CONTENTS CHAPTER 1: INTRODUCTION ........................................................................................1