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Optimal Project Rejection and New Firm Start-ups

Author

Listed:
  • Bruno Cassiman

    (IESE Business School, Avenida Pearson 21, Barcelona 08034, Spain)

  • Masako Ueda

    (School of Business, University of Wisconsin-Madison, 975 University Avenue, Madison, Wisconsin 53706)

Abstract

We study the decision of an established firm to commercialize innovations. An innovation can be exploited by the established firm as an internal venture, pursued by a new firm start-up as an external venture, or not commercialized at all. The limited commercialization capacity of the established firm in the short run results in an option value of waiting. In this setup, start-up firms emerge when the established firm is generating many innovations or is selective because the option value of waiting is high, or both. The model predicts that innovations commercialized through internal ventures are characterized by a higher fit with the internal resources of the established firm, a higher cannibalization of the established firm's existing businesses, and a lower profitability than innovations commercialized through external ventures. The model furthermore generates predictions on the relation between firm performance and spin-off performance.

Suggested Citation

  • Bruno Cassiman & Masako Ueda, 2006. "Optimal Project Rejection and New Firm Start-ups," Management Science, INFORMS, vol. 52(2), pages 262-275, February.
    • Handle: RePEc:inm:ormnsc:v:52:y:2006:i:2:p:262-275
    DOI: 10.1287/mnsc.1050.0458
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    More about this item

    Keywords

    real option; project selection; new firm start-ups; IPR; bargaining;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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