When do Thick Venture Capital Markets Foster Innovation? An Evolutionary Analysis

Luca Colombo, Herbert Dawid and Kordian Kabus ()
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Kordian Kabus: Bielefeld University

No ief0074, DISCE - Quaderni dell'Istituto di Economia e Finanza from Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE)

Abstract: In this paper we examine the trade off between different effects of the availability of venture capital on the speed of technological progress in an industry. We consider an evolutionary industry simulation model based on Nelson and Winter (1982) where R&D efforts of an incumbent firm generate technological know-how embodied in key R&D employees, who might use this know-how to found a spinoff of the incumbent. Venture capital is needed to finance a spinoff, and therefore the expected profits from founding a spinoff depend on how easily venture capital can be acquired. Accordingly, thick venture capital markets might have two opposing effects. First, incentives of firms to invest in R&D might be reduced and, second, if spinoff formation results in technological spillovers between the parent firm and the spinoffs, the generation of spinoff firms might positively influence the future efficiency of the incumbent's innovation efforts. We study how this tradeoff influences the effect of venture capital on the innovation expenditures, speed of technological change and the evolution of industry concentration in several scenarios with different industry characteristics.

Keywords: Venture Capital; Technological Progress; R&D Effort; Spinoff; Industry Evolution (search for similar items in EconPapers)
JEL-codes: J30 L20 O30 (search for similar items in EconPapers)
Pages: nn pages 24
Date: 2007-03
New Economics Papers: this item is included in nep-cfn, nep-ent, nep-evo, nep-ino, nep-ipr, nep-pr~, nep-mic, nep-pke and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: When do thick venture capital markets foster innovation? An evolutionary analysis (2012)
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