IDEAS home Printed from https://ideas.repec.org/p/tcb/wpaper/1010.html
   My bibliography  Save this paper

Organization of Innovation and Capital Markets (Teknolojik Yeniligin Orgutlenmesi ve Sermaye Piyasalari)

Author

Listed:
  • Cuneyt Orman

Abstract

There has been an explosion of innovation backed by venture capital since late 1970�s. Nonetheless, a great deal of innovation still occurs within large companies. In this paper, I investigate the factors that determine when innovation is performed by venture-backed firms and when by large companies. To this end, I develop a theoretical model in which development of new technologies and products requires the collaboration of researchers, executives, and suppliers of capital. I focus on the two-tier agency problem designed to provide simultaneously the right kinds of incentives for researchers and executives. I find that if capital markets function perfectly, it is optimal for innovation to be conducted by venture-backed firms: Specialization implicit in venture form of organization mitigates two-tier agency problems. If capital markets are sufficiently imperfect, however, it is optimal for innovation to be performed by large companies: They can use cheaper internal funds to finance innovation. I finally point to the role of policy in improving capital markets and hence innovation performance.

Suggested Citation

  • Cuneyt Orman, 2010. "Organization of Innovation and Capital Markets (Teknolojik Yeniligin Orgutlenmesi ve Sermaye Piyasalari)," Working Papers 1010, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    • Handle: RePEc:tcb:wpaper:1010
    as

    Download full text from publisher

    File URL: https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Research/Working+Paperss/2010/10-10
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Holmstrom, Bengt, 1989. "Agency costs and innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 12(3), pages 305-327, December.
    2. Romain, Astrid & Pottelsberghe de la Potterie, Bruno van, 2003. "The Economic Impact of Venture Capital," IIR Working Paper 03-20, Institute of Innovation Research, Hitotsubashi University.
    3. Rotemberg, Julio J & Saloner, Garth, 1994. "Benefits of Narrow Business Strategies," American Economic Review, American Economic Association, vol. 84(5), pages 1330-1349, December.
    4. Stein, Jeremy C, 1997. "Internal Capital Markets and the Competition for Corporate Resources," Journal of Finance, American Finance Association, vol. 52(1), pages 111-133, March.
    5. Ueda, Masako & Hirukawa, Masayuki, 2008. "Venture Capital and Industrial ''Innovation''," CEPR Discussion Papers 7089, C.E.P.R. Discussion Papers.
    6. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    7. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-586, June.
    8. Sah, Raaj Kumar & Stiglitz, Joseph E, 1986. "The Architecture of Economic Systems: Hierarchies and Polyarchies," American Economic Review, American Economic Association, vol. 76(4), pages 716-727, September.
    9. Samuel Kortum & Josh Lerner, 2000. "Assessing the Contribution of Venture Capital to Innovation," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 674-692, Winter.
    10. repec:ner:ucllon:http://discovery.ucl.ac.uk/17678/ is not listed on IDEAS
    11. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    12. Rajan, Raghuram & Zingales, Luigi, 2003. "Banks and Markets: the Changing Character of European Finance," CEPR Discussion Papers 3865, C.E.P.R. Discussion Papers.
    13. Hellmann, Thomas & Puri, Manju, 2000. "The Interaction between Product Market and Financing Strategy: The Role of Venture Capital," The Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 959-984.
    14. James M. Poterba, 1989. "Venture Capital and Capital Gains Taxation," NBER Chapters, in: Tax Policy and the Economy, Volume 3, pages 47-68, National Bureau of Economic Research, Inc.
    15. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    16. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    17. Philippe Aghion & Jean Tirole, 1994. "The Management of Innovation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 1185-1209.
    18. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
    19. Inés Macho‐Stadler & J. David Pérez‐Castrillo, 1998. "Centralized and Decentralized Contracts in a Moral Hazard Environment," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 489-510, December.
    20. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    21. Paul Gompers & Josh Lerner, 2006. "The Venture Capital Cycle, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572389, December.
    22. Bharat N. Anand & Alexander Galetovic, 2000. "Weak Property Rights and Holdup in R&D," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(4), pages 615-642, December.
    23. Laura Bottazzi & Marco da Rin, 2003. "Financing Entrepreneurial Firms in Europe: Facts, Issues, and Research Agenda," CESifo Working Paper Series 958, CESifo.
    24. Bharant N. Anand & Alexander Galetovic, 1998. "Weak Property Rights and hold-up in R&D," Documentos de Trabajo 39, Centro de Economía Aplicada, Universidad de Chile.
    25. Nahum D. Melumad & Dilip Mookherjee & Stefan Reichelstein, 1995. "Hierarchical Decentralization of Incentive Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 654-672, Winter.
    26. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
    27. Hellmann, Thomas, 2002. "A theory of strategic venture investing," Journal of Financial Economics, Elsevier, vol. 64(2), pages 285-314, May.
    28. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    29. Radner, Roy, 1993. "The Organization of Decentralized Information Processing," Econometrica, Econometric Society, vol. 61(5), pages 1109-1146, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Orman, Cuneyt, 2015. "Organization of innovation and capital markets," The North American Journal of Economics and Finance, Elsevier, vol. 33(C), pages 94-114.
    2. Rin, Marco Da & Hellmann, Thomas & Puri, Manju, 2013. "A Survey of Venture Capital Research," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 573-648, Elsevier.
    3. Stein, Jeremy C., 2003. "Agency, information and corporate investment," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 2, pages 111-165, Elsevier.
    4. Joshua Gans & Scott Stern, 2003. "When does funding research by smaller firms bear fruit?: Evidence from the SBIR program," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 12(4), pages 361-384.
    5. Jeremy C. Stein, 2002. "Information Production and Capital Allocation: Decentralized versus Hierarchical Firms," Journal of Finance, American Finance Association, vol. 57(5), pages 1891-1921, October.
    6. Bruno Cassiman & Masako Ueda, 2006. "Optimal Project Rejection and New Firm Start-ups," Management Science, INFORMS, vol. 52(2), pages 262-275, February.
    7. Stefan ARPING, 2002. "Cannibalization & Incentives in Venture Financing," Cahiers de Recherches Economiques du Département d'économie 02.07, Université de Lausanne, Faculté des HEC, Département d’économie, revised May 2002.
    8. Ramana Nanda & William R. Kerr, 2015. "Financing Innovation," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 445-462, December.
    9. Bottazzi, Laura & Da Rin, Marco & Hellmann, Thomas, 2008. "Who are the active investors?: Evidence from venture capital," Journal of Financial Economics, Elsevier, vol. 89(3), pages 488-512, September.
    10. Sergei Guriev & Sudipto Bhattacharya, 2008. "Control Rights over Intellectual Property: Corporate Venturing and Bankruptcy Regimes," FMG Discussion Papers dp618, Financial Markets Group.
    11. Bechlioulis, Alexandros & Economidou, Claire & Karamanis, Dimitrios & Konstantios, Dimitrios, 2023. "How important are capital controls in shaping innovation activity?," Journal of International Money and Finance, Elsevier, vol. 131(C).
    12. Hyytinen, Ari & Pajarinen, Mika, 2002. "Small Business Finance in Finland. A Descriptive Study," Discussion Papers 812, The Research Institute of the Finnish Economy.
    13. Da Rin, Marco & Nicodano, Giovanna & Sembenelli, Alessandro, 2006. "Public policy and the creation of active venture capital markets," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1699-1723, September.
    14. Hyytinen, Ari & Pajarinen, Mika (ed.), . "Financial Systems and Firm Performance. Theoretical and Empirical Perspectives," ETLA B, The Research Institute of the Finnish Economy, number 200, June.
    15. Denis, David J., 2004. "Entrepreneurial finance: an overview of the issues and evidence," Journal of Corporate Finance, Elsevier, vol. 10(2), pages 301-326, March.
    16. Bottazzi, Laura & Da Rin, Marco & Hellmann, Thomas F, 2004. "Active Financial Intermediation: Evidence on the Role of Organizational Specialization and Human Capital," CEPR Discussion Papers 4794, C.E.P.R. Discussion Papers.
    17. Fabrizi, Simona & Lippert, Steffen & Norback, Pehr-Johan & Persson, Lars, 2007. "Venture Capitalists, Asymmetric Information and Ownership in the Innovation Process," MPRA Paper 6265, University Library of Munich, Germany.
    18. Iain Cockburn & Rebecca Henderson & Scott Stern, 1999. "Balancing Incentives: The Tension Between Basic and Applied Research," NBER Working Papers 6882, National Bureau of Economic Research, Inc.
    19. Jeremy C. Stein, 2000. "Information Production and Capital Allocation: Decentralized vs. Hierarchical Firms," NBER Working Papers 7705, National Bureau of Economic Research, Inc.
    20. repec:zbw:bofrdp:2015_028 is not listed on IDEAS
    21. Keuschnigg, Christian & Nielsen, Soren Bo, 2004. "Start-ups, venture capitalists, and the capital gains tax," Journal of Public Economics, Elsevier, vol. 88(5), pages 1011-1042, April.

    More about this item

    Keywords

    Innovation; Organizational Form; Financial Imperfections; Venture Capital;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tcb:wpaper:1010. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sermet Pekin or Ilker Cakar or the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/tcmgvtr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.