When Does Start-Up Innovation Spur the Gale of Creative Destruction?

Abstract

Considering that the last decade has witnessed a dramatic rise in the level of venture financing provided to technology-oriented start-ups in the United States, it is important to investigate the economic drivers of the commercialization path of these firms. A simple theoretical model is presented that identifies conditions under which start-ups earn their returns on innovation by engaging in product market cooperation (rather than competition) with established firms. The model generates a number of hypotheses.The start-ups commercialization strategy choice weighs the benefits and costs of cooperation. Although a cooperative commercialization strategy wards off the costs of product market competition and prevents duplicative investment in sunk assets, imperfections in the market may still lead innovators to engage in competition. If the transaction costs of bargaining with incumbents are high, then innovators are more likely to choose product market competition. These hypotheses are tested against survey data on the commercialization paths of 118 small, research-oriented firms, spilt almost equally between enterprises funded by venture capital and the United States Federal government.The empirical results support the hypotheses. Among the most striking findings is the fact that firms which control intellectual property or are associated with venture capital financing are more likely to pursue a cooperative strategy. Increases in the strength of intellectual property increase the relative returns to cooperation by facilitating the market for ideas. (SAA)

Keywords: Startups, Intellectual property, Venture capital, Commercialization, Market strategies, Cooperation, Market competition