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Focused Firms and the Incentive to Innovate

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  • Kenneth S. Corts

Abstract

This paper explores the possibility that a firm may make a credible strategic commitment to high levels of innovation by limiting its horizontal or vertical scope. Specifically, I develop a model in which a firm decides whether to undertake an innovation that affects a system of products, which can also be interpreted as multiple stages of the production process. The products are technologically related, and innovation in the core product is assumed to impose costs on the producers of ancillary products, due to cannibalization of the old technology and redesign or retooling costs, for example. I demonstrate that a firm may optimally and credibly commit to innovate by choosing to be a focused firm and licensing the production of the ancillary product, even when licensees are inefficient. In stark contrast to the irrelevance results of the strategic delegation literature, this commitment may be credible even when licensing contracts are renegotiable, but only if licensees are sufficiently inefficient.

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  • Kenneth S. Corts, 2000. "Focused Firms and the Incentive to Innovate," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(3), pages 339-362, June.
    • Handle: RePEc:bla:jemstr:v:9:y:2000:i:3:p:339-362
    DOI: 10.1111/j.1430-9134.2000.00339.x
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    References listed on IDEAS

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    1. Reinganum, Jennifer F, 1983. "Uncertain Innovation and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 73(4), pages 741-748, September.
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    3. Katharine E. Rockett, 1990. "Choosing the Competition and Patent Licensing," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 161-171, Spring.
    4. Rebecca Henderson, 1993. "Underinvestment and Incompetence as Responses to Radical Innovation: Evidence from the Photolithographic Alignment Equipment Industry," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 248-270, Summer.
    5. Patrick Rey & Joseph Stiglitz, 1995. "The Role of Exclusive Territories in Producers' Competition," RAND Journal of Economics, The RAND Corporation, vol. 26(3), pages 431-451, Autumn.
    6. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-526, June.
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    Cited by:

    1. Briance Mascarenhas, 2012. "The International Specialist Strategy: Financial Funding and Deployment," Multinational Finance Journal, Multinational Finance Journal, vol. 16(1-2), pages 87-103, March - J.
    2. Stephen C. Hansen & John S. Hughes, 2005. "The Dissemination of Management Consulting Innovations and the Pace of Technological Improvements," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 161(3), pages 536-555, September.
    3. Briance Mascarenhas, 2013. "The Industry-focused International Strategy," Management International Review, Springer, vol. 53(2), pages 251-267, April.
    4. Arora, Ashish & Gambardella, Alfonso, 2010. "The Market for Technology," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 1, chapter 0, pages 641-678, Elsevier.

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