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When do Thick Venture Capital Markets Foster Innovation? An Evolutionary Analysis

  • Luca Colombo

    ()

    (DISCE, Università Cattolica)

  • Herbert Dawid

    ()

    (Bielefeld University)

  • Kordian Kabus

    ()

    (Bielefeld University)

In this paper we examine the trade off between different effects of the availability of venture capital on the speed of technological progress in an industry. We consider an evolutionary industry simulation model based on Nelson and Winter (1982) where R&D efforts of an incumbent firm generate technological know-how embodied in key R&D employees, who might use this know-how to found a spinoff of the incumbent. Venture capital is needed to finance a spinoff, and therefore the expected profits from founding a spinoff depend on how easily venture capital can be acquired. Accordingly, thick venture capital markets might have two opposing effects. First, incentives of firms to invest in R&D might be reduced and, second, if spinoff formation results in technological spillovers between the parent firm and the spinoffs, the generation of spinoff firms might positively influence the future efficiency of the incumbent's innovation efforts. We study how this tradeoff influences the effect of venture capital on the innovation expenditures, speed of technological change and the evolution of industry concentration in several scenarios with different industry characteristics.

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File URL: http://www.unicatt.it/Istituti/EconomiaFinanza/Quaderni/ief0074.pdf
File Function: First version, 2006
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Paper provided by Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE) in its series DISCE - Quaderni dell'Istituto di Economia e Finanza with number ief0074.

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Length: nn pages 24
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:ctc:serie3:ief0074
Contact details of provider: Web page: http://www.unicatt.it/Istituti/EconomiaFinanza
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