Integration and appropriability: A study of process and product components within a firm's innovation portfolio

Abstract Research Summary We examine how and when integration of process and product components within a firm's innovation portfolio increases firm returns. Strategy literature argues that integration enhances the firm's appropriation of returns from innovations. We evaluate this argument recognizing that integration is but one of multiple appropriation tools; firms can also use other (e.g., scale‐based) mechanisms to enhance appropriation. Using new measures of integration based on textual coding of patent claims, we demonstrate that while higher process–product integration improves firm performance, this effect diminishes when the firm has greater production capacity or access to markets. Further, high integration lowers innovative productivity. Together, these demonstrations explain why firms, even with awareness of the benefits of integration between components, may not all choose high‐integration strategies. Managerial Summary How should a manager design, structure, and organize the firm's innovation portfolio—as a collection of separate standalone process and product innovations, or a set of innovations each containing both new process and product attributes? Using data from the global chemicals industry and new textual‐coding‐based measures, we demonstrate that the latter helps the firm appropriate returns to its innovations by making it harder for others to understand and replicate its innovations, but that it comes with a tradeoff of lower innovative productivity. We stress that latter approach is less useful when the firm has other scale‐based tools in place, that enhance appropriation as well, such as large production capacity or reach to markets.