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Organization and Financing of Innovation, and the Choice between Corporate and Independent Venture Capital

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  • Fulghieri, Paolo
  • Sevilir, Merih

Abstract

This paper examines the impact of competition on the optimal organization and financing structures in innovation-intensive industries. We show that as an optimal response to competition, firms may choose external organization structures established in collaboration with specialized start-ups where they provide start-up financing from their own resources. As the intensity of the competition to innovate increases, firms move from internal to external organization of projects to increase the speed of product innovation and to obtain a competitive advantage with respect to rival firms in their industry. We also show that as the level of competition increases, firms provide a higher level of financing for externally organized projects in the form of corporate venture capital (CVC). Our results help explain the emergence of organization and financing arrangements such as CVC and strategic alliances, where large established firms organize their projects in collaboration with external specialized firms and provide financing for externally organized projects from their own internal resources.

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  • Fulghieri, Paolo & Sevilir, Merih, 2009. "Organization and Financing of Innovation, and the Choice between Corporate and Independent Venture Capital," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(06), pages 1291-1321, December.
  • Handle: RePEc:cup:jfinqa:v:44:y:2009:i:06:p:1291-1321_99
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    Cited by:

    1. Patrick Herbst & Uwe Walz, 2017. "The Design of Vertical R&D Collaborations," Economica, London School of Economics and Political Science, vol. 84(333), pages 54-77, January.
    2. Rin, Marco Da & Hellmann, Thomas & Puri, Manju, 2013. "A Survey of Venture Capital Research," Handbook of the Economics of Finance, Elsevier.
    3. Beshears, John, 2013. "The performance of corporate alliances: Evidence from oil and gas drilling in the Gulf of Mexico," Journal of Financial Economics, Elsevier, vol. 110(2), pages 324-346.
    4. Habib, Michel A. & Mella-Barral, Pierre, 2013. "Skills, core capabilities, and the choice between merging, allying, and trading assets," Journal of Mathematical Economics, Elsevier, vol. 49(1), pages 31-48.
    5. Cole, Rebel & Cumming, Douglas & Li, Dan, 2016. "Do banks or VCs spur small firm growth?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 41(C), pages 60-72.
    6. Bayar, Onur & Chemmanur, Thomas J. & Liu, Mark H., 2011. "A theory of equity carve-outs and negative stub values under heterogeneous beliefs," Journal of Financial Economics, Elsevier, vol. 100(3), pages 616-638, June.

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