Swinging for the Fences: Startup Novelty as a Response to Entry Costs *

Abstract

Why are startups more likely than incumbents to commercialize novel products when faced with a scientific breakthrough? The question has become a pressing one in light of a deepening division of innovative labor in the American innovation ecosystem that increasingly tasks startups with the job of commercializing science into products. The literature has explained the higher innovative propensity of some startups by noting their superior fit with new technology and markets. However, it is also possible that the apparent innovativeness of startups may be a result of firm choice rather than inherent capability gaps. Startups may choose to develop novel products that are risky but offer high payoffs because they pay a higher entry cost than incumbents in the form of investments in new factories, sales, and distribution channels. This selection into novelty due to higher entry cost has received little attention so far because it is difficult to rule out upstream capability differences between potential entrants. To address this challenge, I link the influx of new laser science from the former Soviet Union after the end of the Cold War to patents (pre-entry) and products (post-entry) by American laser firms. Startups are approximately 37% more likely than incumbents to introduce new products using Soviet science, but not more likely to rely on Soviet science during pre-entry patenting. Moreover, the probabilities of both entry and exit are lower for startups than for incumbents, which is consistent with startups choosing more novel innovations due to higher market entry costs. The results suggest that startups have a comparative advantage in innovating with novel technologies and markets because of their absolute disadvantage in downstream commercialization.

Keywords: Science Commercialization Strategy, Innovation, Entrepreneurship, Laser Industry, Entry Costs

JEL Classification: M13;O31;O32;L26;L63