Unveiling the inverted-U shape: how firm knowledge diversity influences the industry distance of CVC investment

Purpose In the era of a knowledge-driven economy, corporate venture capital (CVC) has emerged as a vital mechanism for fostering innovation and strategic growth among incumbents. However, a crucial aspect that has been somewhat overlooked is why incumbents choose to invest in technology ventures in specific areas rather than others. This study aims to fill this gap by exploring the relationship between firm knowledge diversity and the strategy of CVC investment based on the knowledge-based view. Design/methodology/approach The authors’ analysis is based on data covering CVC investments from established Chinese manufacturing firms. The authors integrated data from CV Source, IncoPat, the Chinese Research Data Services Platform and China Stock Market and Accounting Research (CSMAR) to create the data set. Given the discrepancy between the industry classifications for startups in CV Source and those for investors in CSMAR, we implemented a large language model to analyze textual business descriptions of startups to map them onto industry codes consistent with the National Economic Industry Classification system used by CSMAR. Findings The empirical results reveal that incumbents’ knowledge diversity has an inverted U-shaped effect on the industry distance of CVC investments. Moreover, technological dynamism and CEO tenure negatively moderate this curvilinear relationship. These findings contribute to strategic management theory and have implications for corporate investment strategies. Originality/value This study advances the CVC literature by revealing a nonlinear relationship between firm knowledge diversity and industry distance of CVC investments, while taking into account boundary conditions.