Do investors value firm inventions that recombine distant knowledge across domain boundaries? Analyzing more than 1.5 million firm patents, we find that, despite its strong association with long-term technological impact beyond the local domain, distant recombination of domain knowledge contributes less to a patent’s market valuation when compared to local recombination, thereby inducing a misalignment between valuation and impact. This valuation disadvantage is especially pronounced when distant recombination occurs in a domain primarily built on local knowledge, draws on knowledge from domains with broad applicability, and spans domains with limited connections. Mechanism tests suggest that the inherent evaluation and appropriation challenges for inventions built on distant recombination plausibly account for these findings. We thus establish domain distinctions in knowledge recombination as a key explanation of why innovations’ private returns may diverge from their technological impact despite the commonly assumed alignment between the two. Funding: The authors acknowledge financial support from Cornell University. Supplemental Material: The online appendices are available at https://doi.org/10.1287/orsc.2023.17475 .
Yayavaram et al. (Tue,) studied this question.