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Optimal project rejection and new firm start-ups

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Author Info
Cassiman , Bruno () (IESE Business School)
Ueda, Masako (IESE Business School)

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Abstract

Entrants are typically found to be more innovative than incumbent firms. Furthermore, these innovative ideas often originate with established firms in the industry. Therefore, the established firm and the start-up firm seem to select different types of projects. We claim that this is the consequence of their optimal project allocation mechanism, which depends on their comparative advantage. The start-up firm may seem more "innovative" than the established firm because the comparative advantage of the start-up firm is to commercialize "innovative" projects, i.e. projects that do not fit with the established firms' existing assets. Our model integrates various facts found in the industrial organization literature about the entry rate, firm focus, firm growth, industry growth and innovation. We also obtain some counter-intuitive results, such as that a reduction in the cost of start-ups may actually slow down start-ups, or that the firm may voluntarily give away the property rights to the inventions discovered within the firm

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Paper provided by IESE Business School in its series IESE Research Papers with number D/460.

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Length: 27 pages
Date of creation: 24 May 2002
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Handle: RePEc:ebg:iesewp:d-0460

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Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
Web page: http://www.iese.edu/
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Keywords: Management Innovation management

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M10 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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    Other versions:
  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. [Downloadable!] (restricted)
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  7. Rotemberg, Julio J & Saloner, Garth, 1994. "Benefits of Narrow Business Strategies," American Economic Review, American Economic Association, vol. 84(5), pages 1330-49, December. [Downloadable!] (restricted)
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    Other versions:
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    Other versions:
  21. Baldwin, Carliss Y, 1982. " Optimal Sequential Investment When Capital Is Not Readily Reversible," Journal of Finance, American Finance Association, vol. 37(3), pages 763-82, June. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Palomeras, Neus, 2003. "Sleeping patents: any reason to wake up?," IESE Research Papers D/506, IESE Business School. [Downloadable!]
  2. Andres Almazan & Javier Suarez & Sheridan Titman, 2007. "Firms' Stakeholders and the Costs of Transparency," NBER Working Papers 13647, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Motta, Massimo & Rønde, Thomas, 2002. "Trade Secret Laws, Labour Mobility and Innovations," CEPR Discussion Papers 3615, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Peter Thompson & Steven Klepper, 2006. "Intra-Industry Spinoffs," Working Papers 0605, Florida International University, Department of Economics. [Downloadable!]
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