The Organization of the Innovation Industry: Entrepreneurs, Venture Capitalists and Oligopolists

47 Pages Posted: 25 Apr 2006

See all articles by Lars Persson

Lars Persson

Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR)

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2006

Abstract

Exit of venture-backed firms often takes place through sales to large incumbent firms. We show that in such an environment, venture-backed firms have a stronger incentive to develop basic innovations into commercialized innovations than incumbent firms, due to strategic product market effects. This will increase the price for basic innovations, thereby triggering more such innovations by entrepreneurs. Consequently, a venture capital market implies that more innovations are created, and that these become better developed. Moreover, we show that to exist in equilibrium, venture capitalist must be substantially more efficient, otherwise incumbents will preempt venture capitalists entering the market by acquiring basic innovations.

Keywords: Acquisitions, entrepreneurship, innovation, venture capital

JEL Classification: G24, L1, L2, M13, O3

Suggested Citation

Persson, Lars and Norbäck, Pehr-Johan, The Organization of the Innovation Industry: Entrepreneurs, Venture Capitalists and Oligopolists (January 2006). CEPR Discussion Paper No. 5449, Available at SSRN: https://ssrn.com/abstract=898898

Lars Persson (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

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