Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 783: The Organization of the Innovation Industry: Entrepreneurs, Venture Capitalists and Oligopolists

Pehr-Johan Norbäck () and Lars Persson ()
Additional contact information
Pehr-Johan Norbäck: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Lars Persson: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: We construct a model where incumbents can either acquire basic innovations from entrepreneurs, or wait and acquire developed innovations from entrepreneurial firms supported by venture capitalists. We show that venture-backed entrepreneurial firms have an incentive to overinvest in development vis à vis incumbents due to strategic product market effects on the sales price of a developed innovation. This will trigger preemptive acquisitions by incumbents, thus increasing the reward for entrepreneurial innovations. We also show that venture capital can emerge in equilibrium if venture capitalists have cost advantages, or if development is associated with double moral hazard problems.

Keywords: Acquisitions; Entrepreneurship; Innovation; Venture Capital

JEL-codes: G24; L10; L20; M13; O30

38 pages, January 2, 2009

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