Locating Innovation: The Endogeneity of Technology, Organizational Structure and Financial Contracting

43 Pages Posted: 22 Oct 2009

See all articles by Ronald J. Gilson

Ronald J. Gilson

Stanford Law School; Columbia Law School; European Corporate Governance Institute (ECGI)

Date Written: October 22, 2009


There is much we do not understand about the “location” of innovation: the confluence, for a particular innovation, of the technology associated with the innovation, the innovating firm’s size and organizational structure, and the financial contracting that supports the innovation. This Essay suggests that these three indicia are simultaneously determined and discusses the interaction among them through four examples of innovative activity whose location is characterized by tradeoffs between pursuing the activity in an established company; in a smaller, earlier stage company; or some combination of the two. It first considers the dilemma faced by an established company in deciding whether to keep an employee’s innovation or allow the employee to pursue the innovation through a startup. It next takes up a very different relationship between an established company and an earlier stage company: the development by the smaller company of a “disruptive” innovation that displaces the industry’s dominant companies. The Essay then considers an established company’s instrumental use of the startup market to outsource development of a particular innovation to a technology race. Finally, the Essay examines a form of innovation located between an established and earlier stage company: the pattern of joint ventures between large pharmaceutical companies and smaller biotechnology companies.

Keywords: venture capital, innovation, organization design, corporations

JEL Classification: G24, G34, K22, L14, L22, L26

Suggested Citation

Gilson, Ronald J., Locating Innovation: The Endogeneity of Technology, Organizational Structure and Financial Contracting (October 22, 2009). Columbia Law Review, Forthcoming; ECGI - Law Working Paper No. 133/2009; Columbia Law and Economics Working Paper No. 353; Stanford Law and Economics Olin Working Paper No. 377. Available at SSRN: https://ssrn.com/abstract=1492762

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