The 80/20 Rule: Corporate Support for Innovation by Employees

36 Pages Posted: 5 Sep 2013 Last revised: 19 Mar 2015

See all articles by Silvana Krasteva

Silvana Krasteva

Texas A&M University

Priyanka Sharma

Illinois Institute of Technology - Stuart School of Business, IIT

Liad Wagman

Illinois Institute of Technology - Stuart School of Business, IIT

Date Written: October 17, 2014

Abstract

We model an employee’s decision to pursue an innovative idea at his employing firm (internally) or as a start-up (externally). We characterize an idea by its market profitability and the degree of positive/negative externality that it imposes on the employing firm’s profits. The innovation process consists of exploration and development. Exploring an idea internally grants the employee access to exploration support provided by the firm, but reduces his appropriability of the idea. We demonstrate that ideas exhibiting weak externalities are explored and developed externally whereas ideas with strong externalities are explored and handled internally. Moderate externalities are associated with internal exploration, but subsequent external development. An increase in the firm’s exploration support attracts internal exploration of a wider range of ideas, but may increase the likelihood of subsequent external development. We further show that while the optimal level of exploration support rises with the firm’s innovation appropriability, overall profits may decline.

Keywords: Innovation, R&D, Entrepreneurship, Intellectual property

JEL Classification: O31, O34, L51

Suggested Citation

Krasteva, Silvana Simeonova and Sharma, Priyanka and Wagman, Liad, The 80/20 Rule: Corporate Support for Innovation by Employees (October 17, 2014). Available at SSRN: https://ssrn.com/abstract=2320618 or http://dx.doi.org/10.2139/ssrn.2320618

Silvana Simeonova Krasteva

Texas A&M University ( email )

Langford Building A
798 Ross St.
College Station, TX 77843-3137
United States
(979) 845-7384 (Phone)

HOME PAGE: http://econweb.tamu.edu/skrasteva/

Priyanka Sharma

Illinois Institute of Technology - Stuart School of Business, IIT ( email )

10 West 35th Street, 18th Floor
Chicago, IL 60616
United States

HOME PAGE: http://mypages.iit.edu/~psharm21/

Liad Wagman (Contact Author)

Illinois Institute of Technology - Stuart School of Business, IIT ( email )

565 W Adams St Suite 452
Chicago, IL 60661
United States
7739809883 (Phone)

HOME PAGE: http://lwagman.org

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