IEEE TRANSACTIONS ON ENGINEERING MANAGEMENT, VOL. 53, NO. 1, FEBRUARY 2006 17 Patent Portfolio Diversity, Technology Strategy, and Firm Value Bou-Wen Lin, Chung-Jen Chen, and Hsueh-Liang Wu Abstract—This paper investigates how the composition and di- versity of a firm’s patent portfolio can create synergy and, thus, contribute to firm performance. To resolve two conflicting views on whether technology diversity or strategic focus can improve firm performance, we develop a scheme to measure the diversity of a patent portfolio at the two levels of broad technology diver- sity and core field diversity. In our framework, both views can be valid. The former argument is effective when the focal firm has very high technology stocks and profitability is used as a perfor- mance measure. The latter is true for a focal firm with above av- erage technology stocks and where shareholder value is consid- ered as a performance indicator. This paper highlights technology stocks as a moderator between the relationship of technology di- versity and firm performance. Generally, a firm without very high- technology stocks should concentrate its R&D resources on a spe- cific technology field, and even within the core technology field the firm should stay focus on a small number of core technolo- gies. Results support the competence-based view of the firm. Tech- nology-based firms should develop a portfolio with a clear tech- nology focus. This study lays the groundwork for future study on the interrelationships of technology strategy, patent portfolio, and long-term performance. Index Terms—Patent portfolio, strategy, synergy, technology diversity. I. INTRODUCTION T HE MOST challenging task of managers in the current knowledge-based economy is to exploit the full value of corporate intellectual properties and to effectively accumulate and commercialize knowledge assets [1]–[3]. This challenge is actually not new for technology managers since their primary job is to manage corporate technological assets and to develop new technological capabilities. Textbooks on innovation man- agement and technology strategy often start with the concept of technology portfolio and technological core competences [4]. One of the underlying assumptions of this field is that the port- folio of a firm’s technological assets and its complementary resources should be considered as an integrated whole and a synergistic effect is expected so that the value of a technology portfolio can add up to more than the sum of its separate parts. Henderson and Cockburn [5] tried to measure heterogeneous organizational competence by using patent data in the context Manuscript received July 1, 2003; revised April 1, 2004 and April 1, 2005. Review of this manuscript was arranged by Department Editor A. S. Bean. This work was supported in part by the National Science Foundation, Taiwan, R.O.C. B.-W. Lin is with the Institute of Technology Management, National Tsing Hua University, Hsinchu 30013, Taiwan, R.O.C. (e-mail: bwlin@mx. nthu.edu.tw). C.-J. Chen and H.-L. Wu are with the Department of Business Administration, National Cheng Kung University, Tainan 701, Taiwan, R.O.C. Digital Object Identifier 10.1109/TEM.2005.861813 of pharmaceutical research. Based on patent data, Fleming and Sorenson [6] demonstrated that technology should be consid- ered as a complex adaptive system. Several authors such as DeCarolis and Deeds [7] and Gittelman and Kogut [8] have con- ducted empirical studies using patent and financial data from biotechnology firms. Based on this prior work, two research questions deserve further empirical investigation: how can a technology portfolio create synergy, and what are the character- istics of a valuable patent portfolio? We concentrated here on the patent portfolio diversity and how it relates to firm performance. The resource-based view of the firm stresses that successful firms have the ability to identify, cultivate, and exploit core com- petencies that are the roots of sustainable competitive advan- tages [9]. In this sense, a firm should not be perceived as a collec- tion of businesses, but rather as a portfolio of competencies and strategic assets. However, much of the strategic management literature investigates corporate diversification effects not from a competence perspective but from a product/market perspec- tive. From a resource-based view, technology portfolios shape the capability bases for firms to generate a series of technolog- ical innovations. Investigating corporate diversification effects from “the roots of sustainable competitive advantages” can shed light on how a firm’s technology strategy could be integrated as an integral part of its corporate strategy. For a technology-based firm, its technology portfolio can characterize its competences and strategic assets. The R&D function is, therefore, increas- ingly being charged with the job of managing and restructuring the corporation’s technology portfolio [10]. As technological innovation increasingly plays the central role in today’s knowl- edge economy, building linkages between technology portfolio strategy, and firm performance deserves more theoretical and empirical work. This paper tries to fill the gap in the current literature by investigating: 1) the characteristics of a valuable technology portfolio and 2) the relationship between technology diversity strategy and firm value. II. LITERATURE REVIEW A. Technology Portfolio Strategy Sadowski and Roth [3] suggested that technology portfolio strategy lies at the heart of all business activities of a tech- nology-based firm. Theories of portfolio management address the question of how a firm can reduce risk and tap into busi- ness opportunities by effectively holding a collection of dif- ferent technologies, markets, or resources. Modern finance portfolio theory suggests that investors should diversify their portfolio of financial assets to reduce 0018-9391/$20.00 © 2006 IEEE