Software Patents and Firm Value : A Real Options Perspective on the Role of Innovation Orientation and Environmental Uncertainty

While software patents have been growing steadily since 1996 when the restrictions on the patentability of software were eliminated, their value and impacts on firm’s profits remain unclear and ambiguous. Drawing on the real option theory and the literature on exploration and exploitation, we develop a novel theoretical framework to assess the value of software patent. Moreover, we examine the impact of contextual factors related to the nature of innovation underlying firms’ patent portfolios (exploitative vs. explorative) and the environmental uncertainty (competitiveness and dynamism) on the value of software patents. Specifically, we examine the interaction effect of a firm’s software patent stock and its innovation orientation on firm in markets exhibiting different levels of environmental uncertainty. Based on a large panel dataset consisting of 602 US firms, our results indicates that a software patent portfolio having higher levels of explorative orientation is associated with higher firm value (as measured by Tobin’s q) in market environments exhibiting low dynamism and high competitiveness. In contrast, a software patent portfolio with higher levels of exploitative orientation is associated with higher firm value in market environments exhibiting high dynamism and low competitiveness. We discuss the implications for research and practice