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Business News/ Companies / News/  If innovation is what you are after, an IPO may not be the best idea
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If innovation is what you are after, an IPO may not be the best idea

Research finds internally generated innovation, productivity and mobility of inventors, acquisition of external innovation all change after an IPO

Photo: iStockPremium
Photo: iStock

Going public may be the ultimate ambition for the management of a company. Everyone from investors to employees are probably waiting for that moment. And why not? All that cash infusion, opportunities to expand and higher returns for investors make a public offer definitely attractive. But hold on; what if that initial public offering (IPO) takes a toll on your innovation, the very quality that sets your company apart from the rest?

Shai Bernstein, assistant professor of finance at the Stanford Graduate School of Business, in his paper Does Going Public Affect Innovation? says IPO affects innovation capabilities of a company.

The author found that internally generated innovation, the productivity and mobility of individual inventors, and acquisition of external innovation, all changes after a company files for an IPO.

Bernstein looked at over 6,000 IPO filings, and looked at the publicly-available data on patents and patent-citations of the companies. Even though he felt patent citations might not be the best way to determine innovation, it was a measure that stock markets reacted to favourably.

He used this data to analyse the capabilities of innovative companies five years after they filed for IPOs. The findings were alarming. He found that there is an almost 40% decline in innovation novelty as measured by patent citations.

The number of patents also showed that there was no change in the scale of innovation. It points to the fact that the transition to public equity markets leads firms to take up more conventional projects than invest in research and development. It is not just the number of patents or citations, the quality of innovation also seemed to suffer.

According to Bernstein, the innovations produced by inventors who remained at the firm declined following the IPO and that key inventors were more likely to leave. To compensate for lack of innovation within the company, companies turn to acquiring.

Bernstein saw that public companies acquired a substantial number of patents through mergers and acquisitions, and in fact, acquired patents constituted almost a third of firms’ total patent portfolio in the five years following the IPO. Not only that, acquired patents were also of higher quality than the patents produced internally following the IPO.

“These results illustrate that the transition to public equity markets affects the strategies firms employ in pursuing innovation. While publicly traded firms generate more incremental innovation internally, they also rely more heavily on acquiring technologies externally. This shift takes place during a substantial inventor turnover after the IPO," he said.

The findings show that going public changes the strategies that companies employ when pursuing innovation. This affects labour productivity, project selection and even outsourcing strategies. Therefore, managements of companies would do well to take these measures into account before deciding on when is the best time for a firm to go public.

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Published: 14 Oct 2015, 12:54 AM IST
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