Information and Governance in the Silicon Valley Model

Masahiko Aoki

Working Papers from Stanford University, Department of Economics

Abstract: October 1999

This paper argues that the truly unique role of venture capitalists is found in their information-mediating and governance functions, which can be understood only in the context of relationships between the "clustering" of entrepreneurial firms and (a club) of venture capitalists. The entrepreneurial firms in Silicon Valley compete in innovation and thus their activities are fundamentally substitutes. Therefore, their information processing activities need to be encapsulated from each other to excel competitors. A new product system may be then evolutionarily formed by combining modular products ex post that evolve from such decentralized efforts. In order for such evolutionary selection is possible, however, common standards for interfaces among modular products need to be provided to make individual product attributes compatible. Venture capitalists plays an important role in mediating information necessary for endogenously forming and governing competition among entrepreneurs under such framework. The first section assembles stylized facts about venture capital - entrepreneurial firm relationships as a basis for modeling. The second section presents a framework for comparing information systemic aspects of alternative R&D organizations and tries to understand the unique innovation capability of the Silicon Valley model. The third section then proceeds to the analysis of the venture capital governance as an institution for supporting such information system. Repeated tournaments among initially funded firms for refinancing necessary for the completion of projects, and the threat of termination of financial support by the venture capitalist, are seen to provide greater incentives for the entrepreneurs than under traditional arms' length financing. The fourth section discusses the incentives of the venture capitalist and other institutional characteristics of the Silicon Valley model.

Date: 1999-10
New Economics Papers: this item is included in nep-ino, nep-law and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www-econ.stanford.edu/faculty/workp/swp99028.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www-econ.stanford.edu/faculty/workp/swp99028.pdf [301 Moved Permanently]--> https://www-econ.stanford.edu/faculty/workp/swp99028.pdf [307 Temporary Redirect]--> https://economics.stanford.edu//faculty/workp/swp99028.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wop:stanec:99028

Access Statistics for this paper

More papers in Working Papers from Stanford University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Thomas Krichel ().