Organization of Innovation and Capital Markets (Teknolojik Yeniligin Orgutlenmesi ve Sermaye Piyasalari)

Cuneyt Orman ()

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

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: 2010
New Economics Papers: this item is included in nep-ino
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:1010

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