When do Firms Undertake R&D by Investing in New Ventures?

We explore the conditions under which firms are likely to pursue equity investment in new ventures as a way to source innovative ideas. We find that firms invest more in new ventures - commonly referred to as “corporate venture capital” - in industries with high technological ferment, weak intellectual property protection, and where complementary distribution capability is important. Furthermore, we find that the greater a firm's cash flow and history of innovation, the more likely it is to invest. Our results suggest that in Schumpeterian environments, incumbents may supplement their innovative efforts by tapping into the knowledge generated by new ventures