Complementary assets

Complementarity is defined as “the total economic value added by combining complementary factors in a production system the value that would be generated by applying these production factors in isolation.” Thus two assets are said to be complements when investment in one asset increases the marginal return on the other. On the contrary, assets are substitutes when investment in one does not effect the marginal return of the other. Complementarity is defined as “the total economic value added by combining complementary factors in a production system the value that would be generated by applying these production factors in isolation.” Thus two assets are said to be complements when investment in one asset increases the marginal return on the other. On the contrary, assets are substitutes when investment in one does not effect the marginal return of the other. If the production process is described by the production function F ( x , y ) {displaystyle F(x,y)} , where x {displaystyle x} and y {displaystyle y} are the amounts invested of the two assets, then it is possible to define formally the elasticity of substitution as If σ x y {displaystyle sigma _{xy}} is equal to 1, the assets are substitutes; if lower, complements; if higher antagonists. In the field of strategy, the concept is sometimes understood to apply to assets, infrastructure or capabilities needed to support the successful commercialization and marketing of a technological innovation, other than those assets fundamentally associated with that innovation. The term was first coined by David Teece. Key empirical studies on complementary assets were conducted by Frank T. Rothaermel.