Optimal Project Rejection and New Firm Start-Ups

39 Pages Posted: 13 Aug 2002

See all articles by Bruno Cassiman

Bruno Cassiman

IESE Business School; KU Leuven - Faculty of Business and Economics (FEB)

Masako Ueda

University of Wisconsin, Madison - School of Business; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2002

Abstract

Entrants are typically found to be more innovative than incumbent firms. Furthermore, these innovative ideas often originate with established firms in the industry. Therefore, the established firm and the start-up firm seem to select different types of projects. We claim that this is the consequence of their optimal project allocation mechanism, which depends on their comparative advantage. The start-up firm may seem more 'innovative' than the established firm may because the comparative advantage of the start-up firm is to commercialize 'innovative' projects, i.e. projects that do not fit with the established firms' existing assets. Our model integrates various facts found in the industrial organization literature about the entry rate, firm focus, firm growth, industry growth and innovation. We also obtain some counter-intuitive results such that a reduction in the cost of start-ups may actually slow down start-ups and that the firm may voluntarily give away the property rights to the inventions discovered within the firm.

Keywords: Real option, project selection, new firm start-ups

JEL Classification: D21, G31, L11

Suggested Citation

Cassiman, Bruno and Ueda, Masako, Optimal Project Rejection and New Firm Start-Ups (June 2002). CEPR Discussion Paper No. 3429. Available at SSRN: https://ssrn.com/abstract=323383

Bruno Cassiman (Contact Author)

IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain
+34 93 602 4426 (Phone)
+34 93 253 4343 (Fax)

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Masako Ueda

University of Wisconsin, Madison - School of Business ( email )

975 University Avenue
Madison, WI 53706
United States
608-262-3656 (Phone)
608-265-4195 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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