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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. Astrid Romain & Bruno Van Pottelsberghe, 2004. "The economic impact of venture capital," Working Papers CEB 04-014.RS, ULB -- Universite Libre de Bruxelles.
  2. 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.
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  8. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc.
  9. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-83, June.
  10. James M. Poterba, 1988. "Venture Capital and Capital Gains Taxation," Working papers 508, Massachusetts Institute of Technology (MIT), Department of Economics.
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  12. Sanford J Grossman & Oliver D Hart, 2001. "An Analysis of the Principal-Agent Problem," Levine's Working Paper Archive 391749000000000339, David K. Levine.
  13. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  14. Stein, Jeremy C, 1997. " Internal Capital Markets and the Competition for Corporate Resources," Journal of Finance, American Finance Association, vol. 52(1), pages 111-33, March.
  15. Bharant N. Anand & Alexander Galetovic, 1998. "Weak Property Rights and hold-up in R&D," Documentos de Trabajo 39, Centro de Economía Aplicada, Universidad de Chile.
  16. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
  17. Holmstrom, Bengt, 1989. "Agency costs and innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 12(3), pages 305-327, December.
  18. Radner, Roy, 1993. "The Organization of Decentralized Information Processing," Econometrica, Econometric Society, vol. 61(5), pages 1109-46, September.
  19. Hirukawa, Masayuki & Ueda, Masako, 2008. "Venture Capital and Industrial ''Innovation''," CEPR Discussion Papers 7089, C.E.P.R. Discussion Papers.
  20. Laura Bottazzi & Marco da Rin, 2003. "Financing Entrepreneurial Firms in Europe: Facts, Issues, and Research Agenda," CESifo Working Paper Series 958, CESifo Group Munich.
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