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Innovation: The interplay between demand-side shock and supply-side environment

57 Pages Posted: 21 Aug 2015 Last revised: 25 Jan 2018

Ivalina Kalcheva

University of California, Riverside

Ping McLemore

Federal Reserve Banks - Federal Reserve Bank of Richmond

Shagun Pant

University of Iowa - Department of Finance

Date Written: November 20, 2017

Abstract

We study the interaction between supply- and demand-side factors and its effect on innovation. Employing a quasi-natural experiment, we show that a shift in demand has an impact on innovation and this effect is conditional on an enabling supply-side environment. Specifically, we exploit a shift in product demand generated by Medicare approvals for reimbursement coverage of medical devices. Using a triple-difference approach, we find that innovation is significantly greater for medical device firms that experience a positive shock to demand due to the Medicare approvals when the firms are exposed to a more favorable supply-side environment. The highest level of innovation is accomplished when all three of our supply-side factors: venture capital (industry), universities (academia), and National Institutes of Health grants (government) are concentrated in one place. These findings show that (i) a positive interaction between supply- and demand-side factors fosters innovation, and (ii) the trilateral intersection of industry, academia, and government creates the highest level of innovation.

Keywords: innovation, demand, supply-side environment, medical device industry, venture capital

JEL Classification: G24, M13, O3

Suggested Citation

Kalcheva, Ivalina and McLemore, Ping and Pant, Shagun, Innovation: The interplay between demand-side shock and supply-side environment (November 20, 2017). Available at SSRN: https://ssrn.com/abstract=2646835 or http://dx.doi.org/10.2139/ssrn.2646835

Ivalina Kalcheva

University of California, Riverside ( email )

900 University Avenue
Riverside, CA 92521
United States

Ping McLemore (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Shagun Pant

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States

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