Software Patents and Firm Value: A Real Options Perspective on the Role of Innovation Orientation and Environmental Uncertainty

Our paper shows that software-based patents can contribute significantly to the value of firms. Our paper provides managers with insights into how different types of software-based innovations affect firm value in market environments exhibiting different levels of competitiveness and dynamism. Using a large-panel data set consisting of 602 U.S. firms, we find that firms with a software patent portfolio having higher levels of explorative innovation orientation achieve higher market value in environments with high competitiveness and low dynamism. By contrast, firms with a software patent portfolio exhibiting high levels of exploitative innovation orientation achieve higher market value in low competitiveness and high dynamism environments. Although some practitioners are still skeptical about the value of software patents, we provide empirical evidence that a firm’s software patents do contribute to firm performance, thereby helping practitioners to justify their investments in software innovation and assess the value of their software patents. Furthermore, our paper highlights key factors—both internal (i.e., innovation orientation) and external (i.e., environmental uncertainty)—that may affect the value of software patents. This can help firms formulate the appropriate innovation strategy for software patents that can lead to the greatest returns. Although software patents have been growing steadily since 1996, when the restrictions on the patentability of software were eliminated, their value and impacts on the firm’s profits remain unclear and ambiguous. Drawing on the real options theory and the literature on exploration and exploitation, we develop a novel theoretical framework to assess the value of software patents. Moreover, we examine the impact of contextual factors related to the nature of innovation underlying firms’ patent portfolios (exploitative versus explorative) and the environmental uncertainty (competitiveness and dynamism) on the value of software patents. Specifically, we examine the interaction effect of a firm’s software patent stock and its innovation orientation on firm value in markets exhibiting different levels of environmental uncertainty. Based on a large-panel data set consisting of 602 U.S. firms, our results indicate that a software patent portfolio having higher levels of explorative orientation is associated with a higher firm value (as measured by Tobin’s q ) in environments exhibiting low dynamism and high competitive