Corporate Spin-Offs, Product Market Competition, and Innovation
58 Pages Posted: 11 Jan 2020
Date Written: December 22, 2019
We develop a theory of the interaction between product market competition, corporate spin-offs, and innovation. In our model, a conglomerate firm operates a profitable existing technology, but has access to a new technology into which it must invest to develop a commercially viable product. While new technology development has synergies with the existing firm, the new technology will cannibalize profits from the firm's existing technology if successfully developed into a viable product. We show that, in the absence of competition, the conglomerate firm has an incentive to underinvest in the new technology. The entry of a competing firm, however, defeats the above incentive, forcing the conglomerate firm to spin off its new technology division, after which the spun-off firm invests optimally in developing and commercializing the innovation. In our two-stage model, we endogenize new technology development, analyzing the interaction between competition, corporate spin-offs, and the development and commercialization of innovations.
Keywords: Innovation, Spin-offs, Acquisitions, Product market competition, Commercialization
JEL Classification: G31, G32, G34, O31, O32.
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