Organization of Innovation and Capital Markets

Cuneyt Orman ()

MPRA Paper from University Library of Munich, Germany

Abstract: There has been an explosion of innovation backed by venture capital since late 1970’s. Nonetheless, a great deal of innovation still occurs within large companies. In this paper, I investigate the factors that determine when innovation is performed by venture-backed firms and when by large companies. To this end, I develop a theoretical model in which development of new technologies and products requires the collaboration of researchers, executives, and suppliers of capital. I focus on the two-tier agency problem designed to provide simultaneously the right kinds of incentives for researchers and executives. I find that if capital markets function perfectly, it is optimal for innovation to be conducted by venture-backed firms: Specialization implicit in venture form of organization mitigates two-tier agency problems. If capital markets are sufficiently imperfect, however, it is optimal for innovation to be performed by large companies: they can use cheaper internal funds to finance innovation. I finally point to the role of policy in improving capital markets and hence innovation performance.

Keywords: Innovation; Organizational Form; Financial Imperfections; Venture Capital (search for similar items in EconPapers)
JEL-codes: D2 D82 D86 G24 O32 (search for similar items in EconPapers)
Date: 2008-05-31, Revised 2010-05-21
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://mpra.ub.uni-muenchen.de/22848/1/MPRA_paper_22848.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/22882/1/MPRA_paper_22882.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/23499/1/MPRA_paper_23499.pdf revised version (application/pdf)

Related works:
Journal Article: Organization of innovation and capital markets (2015)
Working Paper: Organization of innovation and capital markets (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:22848

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