Digital centricity and innovation performance

This paper examines the shift toward more digital-centric innovations experienced by US firms. By digital centricity, we refer to the increasing proportion of ICT patents in the overall patent portfolio of a firm. Using data from U.S public firms between 1980 and 2012, we document the growing digital centricity of firm innovations and test the subsequent impact of this shift on innovation performance and firm valuation. Results show that firms with higher digital-centricity in their innovation portfolio are able to achieve higher innovation efficiency and effectiveness. We further show that innovation efficiency and effectiveness are salient to the market valuation of firms. While innovation effectiveness or the value of new product introductions is completely incorporated in current market valuation, innovation efficiency is not fully priced in current market value, but is accounted for in the long-run abnormal returns for the firm.