When do thick venture capital markets foster innovation? An evolutionary analysis |
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Authors: | Luca Colombo Herbert Dawid Kordian Kabus |
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Institution: | (1) Institute of Economics and Finance, Catholic University, Milano, Italy;(2) Department of Business Administration and Economics, Bielefeld University, Bielefeld, Germany;(3) Institute of Mathematical Economics, Bielefeld University, Bielefeld, Germany |
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Abstract: | In this paper, we examine the trade off between different effects of the availability of venture capital on the speed of technological
progress in an industry. We consider an evolutionary industry simulation model based on Nelson and Winter (1982), in which R&D efforts of an incumbent firm generate technological know-how embodied in key R&D employees, who might use
this know-how to found a spinoff of the incumbent. Venture capital is needed to finance a spinoff, so that the expected profits
from founding a spinoff depend on how easily venture capital can be acquired. Accordingly, thick venture capital markets might
have two opposing effects. First, incentives of firms to invest in R&D might be reduced and, second, if spinoff formation
results in technological spillovers between the parent firm and the spinoffs, the generation of spinoff firms might positively
influence the future efficiency of the incumbent’s innovation efforts. We study the manner in which this tradeoff influences
the effect of venture capital on innovation expenditures, speed of technological change and evolution of industry concentration
in several scenarios with different industry characteristics. |
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