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The Circulation of Ideas in Firms and Markets

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  • Thomas Hellmann

    ()
    (Sauder School of Business, Univeristy of British Columbia, Vancouver, British Columbia V6T 1Z2, Canada)

  • Enrico Perotti

    ()
    (Department of Finance, University of Amsterdam, 1018 WB Amsterdam, The Netherlands)

Abstract

This paper models the generation, circulation, and completion of new ideas, showing how markets and innovative firms complement each other in a symbiotic relationship. Novel ideas are initially incomplete and require further insight before yielding a valuable innovation. Finding the complementary piece requires ideas to circulate, which creates appropriation risks. Circulation of ideas in markets ensures efficient completion, but because ideas can be appropriated, market entrepreneurs underinvest in idea generation. Firms can establish boundaries that guarantee safe circulation of internal ideas, but because firms need to limit idea circulation, they may fail to achieve completion. Spin-offs allow firms to benefit from the market's strength at idea completion, whereas markets benefit from firms' strength at generating new ideas. The model predicts diverse organizational forms (internal ventures, spin-offs, and start-ups) coexisting and mutually reinforcing each other. The analysis provides new insights into the structure of innovation-driven clusters such as Silicon Valley. This paper was accepted by Bruno Cassiman, business strategy.

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File URL: http://dx.doi.org/10.1287/mnsc.1110.1385
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 57 (2011)
Issue (Month): 10 (October)
Pages: 1813-1826

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Handle: RePEc:inm:ormnsc:v:57:y:2011:i:10:p:1813-1826

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Keywords: innovation; market for ideas; start-ups; spin-offs;

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References

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Citations

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Cited by:
  1. Da Rin, M. & Hellmann, T. & Puri, M.L., 2011. "A Survey of Venture Capital Research," Discussion Paper 2011-044, Tilburg University, Tilburg Law and Economic Center.
  2. Thomas F. Hellmann & Veikko Thiele, 2014. "Friends or Foes: The Interrelationship between Angel and Venture Capital Markets," NBER Working Papers 20147, National Bureau of Economic Research, Inc.
  3. Stanko, Michael A. & Olleros, Xavier, 2013. "Industry growth and the knowledge spillover regime: Does outsourcing harm innovativeness but help profit?," Journal of Business Research, Elsevier, vol. 66(10), pages 2007-2016.
  4. Gambardella, Alfonso & Giarratana, Marco S., 2013. "General technological capabilities, product market fragmentation, and markets for technology," Research Policy, Elsevier, vol. 42(2), pages 315-325.
  5. Haeussler, Carolin & Jiang, Lin & Thursby, Jerry & Thursby, Marie, 2014. "Specific and general information sharing among competing academic researchers," Research Policy, Elsevier, vol. 43(3), pages 465-475.

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