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

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  • Cuneyt Orman

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.

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Bibliographic Info

Paper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 1010.

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Date of creation: 2010
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Handle: RePEc:tcb:wpaper:1010

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Keywords: Innovation; Organizational Form; Financial Imperfections; Venture Capital;

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  1. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
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  17. Holmström, Bengt, 1989. "Agency Costs and Innovation," Working Paper Series 214, Research Institute of Industrial Economics.
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