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

  • Cuneyt Orman

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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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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  1. Perez-Castrillo, J.D. & Macho-Stadler, I., 1992. "Centralized and Decentralized Contracts in a Moral Hazad Environment," UFAE and IAE Working Papers 179.92, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
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  8. James M. Poterba, 1989. "Venture Capital and Capital Gains Taxation," NBER Chapters, in: Tax Policy and the Economy, Volume 3, pages 47-68 National Bureau of Economic Research, Inc.
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  14. van Pottelsberghe de la Potterie, Bruno & Romain, Astrid, 2004. "The Economic Impact of Venture Capital," Discussion Paper Series 1: Economic Studies 2004,18, Deutsche Bundesbank, Research Centre.
  15. Radner, Roy, 1993. "The Organization of Decentralized Information Processing," Econometrica, Econometric Society, vol. 61(5), pages 1109-46, September.
  16. Holmström, Bengt, 1989. "Agency Costs and Innovation," Working Paper Series 214, Research Institute of Industrial Economics.
  17. Luigi Zingales & Raghuram G. Rajan, 2003. "Banks and Markets: The Changing Character of European Finance," NBER Working Papers 9595, National Bureau of Economic Research, Inc.
  18. Hirukawa, Masayuki & Ueda, Masako, 2008. "Venture Capital and Industrial ''Innovation''," CEPR Discussion Papers 7089, C.E.P.R. Discussion Papers.
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  20. Holmstrom, Bengt, 1989. "Agency costs and innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 12(3), pages 305-327, December.
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