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Innovation: The interplay between demand-side shock and supply-side environment

Ivalina Kalcheva, Ping McLemore and Shagun Pant

Research Policy, 2018, vol. 47, issue 2, 440-461

Abstract: We study the interaction between supply- and demand-side factors and its effect on innovation. Employing a quasi-natural experiment, we show that a shift in demand has an impact on innovation and this effect is conditional on an enabling supply-side environment. Specifically, we exploit a shift in product demand generated by Medicare approvals for reimbursement coverage of medical devices. Using a triple-difference approach, we find that innovation is significantly greater for medical device firms that experience a positive shock to demand due to the Medicare approvals when the firms are exposed to a more favorable supply-side environment. The highest level of innovation is accomplished when all three of our supply-side factors: venture capital (industry), universities (academia), and National Institutes of Health grants (government) are concentrated in one place. These findings show that (i) a positive interaction between supply- and demand-side factors fosters innovation, and (ii) the trilateral intersection of industry, academia, and government creates the highest level of innovation.

Keywords: Innovation; Demand; Supply-side environment; Medical device industry; Venture capital (search for similar items in EconPapers)
JEL-codes: G24 M13 O3 (search for similar items in EconPapers)
Date: 2018
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