In recent years, technological advances and structural shifts have catalyzed a surge in corporate investments in research and development (R&D), intellectual property, and other intangible assets. These developments reflect the growing importance of innovation-driven growth in the modern economy. In this context, R&D investments, by their nature, generate ideas that are “non-rival,” meaning that their use by one firm does not diminish their potential value to other firms. This characteristic of non-rivalry leads to R&D spillovers, where the benefits of R&D investments by one firm could be copied by and benefit other firms.

Prior research has mainly focused on two manifestations of R&D spillovers: positive “technology spillovers” and negative “product market rivalry spillovers.” Technology spillovers occur when R&D by one firm enhances the technological capabilities of other firms in related fields. For example, the use of AI technology for customer service in e-commerce firms might inspire firms in manufacturing to also use AI in their customer service. In contrast to technology spillovers, product-market rivalry spillovers arise when a firm’s R&D investments enable it to capture more market share, potentially stealing business from of its competitors.

Board Network R&D Spillovers

Building on recent research on the possibility of information spillovers through board networks (Fracassi (2017), Fan and Yang (2023), and Cabezon and Hoberg (2024)), we introduce a new form of R&D spillover: board network R&D spillovers, which are defined by the sharing of commercially-relevant ideas emerging from R&D. Reconsider the example of AI customer service mentioned above. Even though board directors might not have the technical expertise to copy the use of AI systems in customer service, the directors can understand and share the commercially valuable knowledge that such systems are used and that customers appreciate them.

To study the impact of board-network R&D spillovers, we construct a novel measure of such spillovers, using data on board networks s across all publicly traded firms, in combination with R&D changes in response to state tax incentives. Our measures capture the idea that commercial-knowledge sharing is more frequent among firms that are closer within the board network. Said differently, firms with closer connections are more likely to exchange commercial ideas related to R&D and thoughts about the strategic importance of technologies, even across different industries.

Key Findings

The article yields three key findings on how board networks shape the effects of R&D spillovers across corporations:

1. Positive Impact on Market Value: R&D spillovers channeled through board networks have a positive and statistically significant impact on a firm’s market value. This suggests that the knowledge and insights shared through board connections contribute to more effective R&D strategies, ultimately enhancing the firm’s valuation.
2. Influence on R&D Investments: Incoming board-channeled R&D spillovers also result in more and better R&D investments. Additionally, board-network spillovers affect the strength of corporate responses to other types of R&D spillovers: larger board network spillovers weaken the firm’s R&D investment response to product market rivalry spillovers while amplifying the response to technology spillovers. We hypothesize that this result is due to the fact that ideas shared through board networks can reshape a board’s perception of the investment opportunities arising from R&D spillovers. For example, a board that learns about high rates of return from AI investments will tend to more aggressively invest in AI in response to getting technological ideas on AI from other firms.
3. Strengthened Impact on Intangible Capital Investments: Board-channeled R&D spillovers also magnify the effect of technology spillovers on intangible capital investments. These results highlight the interdependence of R&D and intangible capital – such as intangible assets like intellectual property, brand equity, and an “analytic culture” – as the insights gained through board networks drive more aggressive intangible capital investments.

Impact on Corporate Governance and Strategy

These findings have several implications for corporate governance and strategy. First, they suggest that board networks have an important direct impact on market value and R&D as well as a systematic indirect impact on firms’ investment responses to R&D spillovers.. This highlights the importance of selecting directors with connections to multiple firms. Boards should focus not only on candidates’ experience and expertise, but also on their ability to learn about the commercial or strategic value of technological trends.

Second, the results indicate that firms with well-connected boards may better navigate the complexities of R&D spillovers, balancing the benefits of technology spillovers with the competitive pressures of product-market rivalry. This could give such firms a competitive edge in rapidly evolving technological landscapes.

Finally, the strengthened relationship between board network spillovers and intangible capital investments suggests that firms should focus not only on R&D, but also on building and maintaining intangible assets – such as company culture and capabilities – that complement their innovation efforts. By fostering a culture of knowledge sharing and strategic investment, firms can maximize the benefits of R&D spillovers and enhance their long-term growth.

Conclusion

The integration of board networks into the analysis of R&D spillovers provides a new way to understand the dynamics of corporate innovation and investment. As firms continue to invest heavily in R&D and intangible assets, the role of board networks in shaping these investments will become increasingly important. By leveraging the knowledge and insights shared through these networks, firms can better position themselves to capitalize on the opportunities presented by R&D spillovers and drive sustained growth in the digital age.

REFERENCES

Cabezon, Felipe and Gerard Hoberg, “Directors Networks and Innovation Herding,” Working Paper, 2024.

Fan, Yang and Mu-Jeung Yang, “Competitive Differentiation Effects of Board Network Distance,” Working Paper, 2023.

Fracassi, Cesare, “Corporate Finance Policies and Social Networks,” Management Science, 2017, 63 (8), 2420–2438.

This post comes to us from professors Yang Fan at Colby College and Mu-Jeung Yang at the University of Oklahoma. It is based on their recent article, “Unlocking Innovation: How Board Networks Reinforce R&D Spillovers,” available here.