Hostname: page-component-6b989bf9dc-llglr Total loading time: 0 Render date: 2024-04-12T09:19:40.828Z Has data issue: false hasContentIssue false

Organization and Financing of Innovation, and the Choice between Corporate and Independent Venture Capital

Published online by Cambridge University Press:  09 October 2009

Paolo Fulghieri
Affiliation:
University of North Carolina at Chapel Hill, Kenan-Flagler Business School, Campus Box 3490, Chapel Hill, NC 27599. paolo_fulghieri@unc.edu
Merih Sevilir
Affiliation:
University of North Carolina at Chapel Hill, Kenan-Flagler Business School, Campus Box 3490, Chapel Hill, NC 27599. merih_sevilir@unc.edu

Abstract

This paper examines the impact of competition on the optimal organization and financing structures in innovation-intensive industries. We show that as an optimal response to competition, firms may choose external organization structures established in collaboration with specialized start-ups where they provide start-up financing from their own resources. As the intensity of the competition to innovate increases, firms move from internal to external organization of projects to increase the speed of product innovation and to obtain a competitive advantage with respect to rival firms in their industry. We also show that as the level of competition increases, firms provide a higher level of financing for externally organized projects in the form of corporate venture capital (CVC). Our results help explain the emergence of organization and financing arrangements such as CVC and strategic alliances, where large established firms organize their projects in collaboration with external specialized firms and provide financing for externally organized projects from their own internal resources.

Type
Research Articles
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aghion, P., and Tirole, J.. “The Management of Innovation.” Quarterly Journal of Economics, 109 (1994), 11851209.Google Scholar
Brander, J., and Lewis, T.. “Oligopoly and Financial Structure: The Limited Liability Effect.” American Economic Review, 76 (1986), 956970.Google Scholar
Casamatta, C. “Financing and Advising: Optimal Financial Contracts with Venture Capitalists.” Journal of Finance, 58 (2003), 20592086.Google Scholar
Chemmanur, T. J., and Chen, Z.. “Venture Capitalists versus Angels: The Dynamics of Private Firm Financing Contracts.” Working Paper, Boston College (2006).Google Scholar
Chemmanur, T. J., and Loutskina, E.. “How Do Corporate Venture Capitalists Create Value for Entrepreneurial Firms?” Working Paper, Boston College and University of Virginia (2008).Google Scholar
Chesbrough, H. “Making Sense of Corporate Venture Capital.” Harvard Business Review, 80 (2002), 9099.Google ScholarPubMed
Dushnitsky, G., and Lenox, M. J.. “When Do Firms Undertake R&D by Investing in New Ventures?Strategic Management Journal, 26 (2005a), 947965.Google Scholar
Dushnitsky, G., and Lenox, M. J.. “When Do Incumbents Learn from Entrepreneurial Ventures? Corporate Venture Capital and Investing Firm Innovation Rates.” Research Policy, 34 (2005b), 615639.Google Scholar
Dushnitsky, G., and Lenox, M. J.. “When Does Corporate Venture Capital Investment Create Firm Value?Journal of Business Venturing, 21 (2006), 753772.CrossRefGoogle Scholar
Economist. “The Tortoise and the Hare.” (Jan. 21, 2006).Google Scholar
Gompers, P., and Lerner, J.. “Money Chasing Deals?: The Impact of Fund Inflows on the Valuation of Private Equity Investments.” Journal of Financial Economics, 55 (2000) 281325.Google Scholar
Grossman, S., and Hart, O.. “The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration.” Journal of Political Economy, 94 (1986), 691719.CrossRefGoogle Scholar
Hart, O., and Moore, J.. “Property Rights and the Nature of the Firm.” Journal of Political Economy, 98 (1990), 11191158.CrossRefGoogle Scholar
Hellmann, T. “Theory of Strategic Venture Investing.” Journal of Financial Economics, 64 (2002), 285314.CrossRefGoogle Scholar
Hellmann, T., and Puri, M.. “Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence.” Journal of Finance, 57 (2002), 169197.Google Scholar
Lerner, J., and Merges, R.. “The Control of Technology Alliances: An Empirical Analysis of the Biotechnology Industry.” Journal of Industrial Economics, 46 (1998), 125156.Google Scholar
Mathews, R. “Strategic Alliances, Equity Stakes, and Entry Deterrence.” Journal of Financial Economics, 80 (2006), 3579.Google Scholar
Maula, M., and Murray, G.. “Corporate Venture Capital and the Creation of US Public Companies: the Impact of Sources of Venture Capital on the Performance of Portfolio Companies.” In Creating Value: Winners in the New Business Environment, Hitt, M. A., Amit, R., Lucier, C. E., and Nixon, R. D., eds. Oxford, UK: Blackwell (2002).Google Scholar
Robinson, D. “Strategic Alliances and the Boundaries of the Firm.” Review of Financial Studies, 21 (2008), 649681.Google Scholar
Stole, L., and Zwiebel, Z. H.. “Intra-Firm Bargaining under Non-Binding Contracts.” Review of Economic Studies, 63 (1996a), 375410.CrossRefGoogle Scholar
Stole, L., and Zwiebel, Z. H.. “Organizational Design and Technology Choice under Intrafirm Bargaining.” American Economic Review, 86 (1996b), 195222.Google Scholar
VentureOne. The 2001 Venture Capital Industry Report. San Francisco, CA (2002).Google Scholar