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ABSTRACT The fortunes of high-technology firms depend on investments in intangible capital, which is comprised of intellectual capital as well as marketing capital. While the importance of intellectual capital--R&D capability, human capital, and the like--has been well established, the central role of complementary marketing capital--in the form of brand name and other marketing assets--in the process of innovation nerds greater understanding. The inability of high-technology firms to increase the appropriability of the fruits of their innovative efforts--because of imitation--is a particularly difficult problem in turning their technological competencies into sustainable competitive advantages. The paper examines this issue conceptually and, drawing upon the evidence from pharmaceutical and software industries, provides managerial implications from a marketing strategy perspective. INTRODUCTION The fortunes of U.S. companies and the new economy are increasingly dependent on intangible capital, which is comprised of two main components: intellectual capital and marketing capital. Intellectual capital includes research and development capability, human resources, and organizational practices. Marketing capital encompasses the reputation associated with brand name and other marketing assets. Both are essential to the new economy. The information and communication technology (ICT) sector, the power behind the new economy, epitomizes the growth and importance of intangible capital. It has been estimated that roughly one-third of the growth in gross domestic product (GDP) since 1995 has come from the ICT sector, although that sector's share of GDP is only 8 percent (Economic Report of the President, ERP, 2001). Another indicator of the growing importance of intangible capital to the U.S. economy is the trend in Tobin's q, the ratio of a firm's market value to the cost of replacing its underlying tangible assets. According to recently published data (ERP 2001), Tobin's q more than doubled in the nonfinancial corporate sector of the economy during the late 1990s. One interpretation of a high and rising q is that a large part of the firm's value derives from its intangible capital--intellectual as well as marketing capital and the importance of that intangible capital's growth. This paper argues that marketing capital is a necessary complement to the intellectual capital--or intellectual property (IP) as it is often referred to--of a firm. A shift towards intangible capital increases the importance of marketing strategies because intellectual capital is expensive to produce, but cheap to copy. This is the classic problem of appropriability noted by Arrow (1962). Legal protection of intellectual capital by means of patents, copyrights, and trade secrets does not work well in practice. Inventing around patents is a common practice that often can be accomplished at relatively modest cost. Pioneering studies by Mansfield (1985) and other scholars suggest that strategic information about product development usually lands in the hands of competitors within 12 to 18 months of introduction, and 60 percent of patented innovations are imitated within four years. Classic examples of innovators losing to imitators include the EMI cat scanner, the Bowmar pocket calculator, and the Xerox office computer (Teece, 2000). Creating and sustaining a brand name and other difficult-to-imitate marketing strategies is the chief means by which successful innovators protect themselves against imitation. In 1999, economy-wide expenditures on advertising-but one component of total promotional expenditures--reached $215 billion or 2.3 percent of GDP compared with expenditures of $169 billion, representing 1.8 percent of GDP, on industry-funded R&D. The ratio of advertising to R&D expenditures fluctuated within a narrow range of 1.3 to 1.6 during the 1990s (U.S. Census Bureau, USCB, 1999 and 2000). …
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