Why Entrepreneurs Choose Risky R&D Projects - But Still Not Risky Enough

57 Pages Posted: 29 Nov 2016

See all articles by Erika Färnstrand Damsgaard

Erika Färnstrand Damsgaard

National Institute of Economic Research; Research Institute of Industrial Economics (IFN)

Per Hjertstrand

Research Institute of Industrial Economics (IFN)

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN)

Lars Persson

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

Helder Vasconcelos

Universidade do Porto - Faculdade de Economia (FEP)

Multiple version iconThere are 2 versions of this paper

Date Written: October 24, 2016

Abstract

This paper examines how entrepreneurs and incumbents differ in R&D strategies. We show that entrepreneurs have incentives to choose projects with higher risk and a higher potential in order to reduce expected commercialization costs. However, entrepreneurs may still select too safe projects from a social point of view, since they do not internalize the business stealing effect. Commercialization support induces entrepreneurship but may lead to mediocre entrepreneurship by inducing entrepreneurs to choose less risky projects, whereas R&D support encourages entrepreneurship without affecting the type of entrepreneurship. We develop a regression framework to test empirical predictions of the model. Within our regression framework we derive and attach statistical decision hypotheses corresponding to each prediction. Using a unique data set of Swedish patents and innovators, we find strong empirical support for these predictions.

Keywords: entrepreneurship, R&D, entry deterrence

JEL Classification: K230

Suggested Citation

Färnstrand Damsgaard, Erika and Hjertstrand, Per and Norbäck, Pehr-Johan and Persson, Lars and Vasconcelos, Helder, Why Entrepreneurs Choose Risky R&D Projects - But Still Not Risky Enough (October 24, 2016). CESifo Working Paper Series No. 6138. Available at SSRN: https://ssrn.com/abstract=2876571

Erika Färnstrand Damsgaard

National Institute of Economic Research ( email )

Box 3116
Stockholm, SE-103 62
Sweden

Research Institute of Industrial Economics (IFN) ( email )

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

Per Hjertstrand

Research Institute of Industrial Economics (IFN) ( email )

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

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN) ( email )

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

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

Helder Vasconcelos

Universidade do Porto - Faculdade de Economia (FEP) ( email )

Rua Dr. Roberto Frias
s/n
4200-464 Porto, 4200-464
Portugal

HOME PAGE: http://www.fep.up.pt/docentes/hvasconcelos

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