Optimal Project Rejection and New Firm Start-Ups

Bruno Cassiman and Masako Ueda

No 3429, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Entrants are typically found to be more innovative than incumbent firms. Furthermore, these innovative ideas often originate with established firms in the industry. Therefore, the established firm and the start-up firm seem to select different types of projects. We claim that this is the consequence of their optimal project allocation mechanism, which depends on their comparative advantage. The start-up firm may seem more ?innovative? than the established firm may because the comparative advantage of the start-up firm is to commercialize ?innovative? projects, i.e. projects that do not fit with the established firms? existing assets. Our model integrates various facts found in the industrial organization literature about the entry rate, firm focus, firm growth, industry growth and innovation. We also obtain some counter-intuitive results such that a reduction in the cost of start-ups may actually slow down start-ups and that the firm may voluntarily give away the property rights to the inventions discovered within the firm.

Keywords: Real option; Project selection; New firm start-ups (search for similar items in EconPapers)
JEL-codes: D21 G31 L11 (search for similar items in EconPapers)
Date: 2002-06
New Economics Papers: this item is included in nep-cfn and nep-ent
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

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Related works:
Journal Article: Optimal Project Rejection and New Firm Start-ups (2006)
Working Paper: Optimal project rejection and new firm start-ups (2002)
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