Abstract
This paper provides a theoretical explanation as to why breakthrough innovations seem to be possible only within capitalist economies (Kornai in Dynamism, rivalry, and the surplus economy: Two essays on the nature of capitalism, Oxford University Press, Oxford, 2013). Specifically, our theory explains why disruptive innovations are discovered and financed by large numbers of independently owned small firms in capitalist economies rather than in socialist economies where state ownership is the only option. The key is that the ownership structure of the firm affects the ex-post selection of worthwhile discoveries, which determines the fate of disruptive innovation. Our paper also contributes to empirical work on disruptive innovation, which is missing in the literature. We use new molecular entities (NMEs) in the pharmaceutical industry as a proxy for disruptive innovation. Although pharmaceutical companies are often very large, their R&D projects greatly depend on forming alliances with much smaller independent firms. We find that the number of NMEs discovered by pharmaceutical companies is positively and significantly associated with the number of R&D alliances in which they participate. Our theory is supported by the empirical findings.
Highlights
In his most recent book, Dynamism, Rivalry, and the Surplus Economy, Janos Kornai (2013) investigates the fundamental differences between capitalism and socialism1 in innovativeness in general and Schumpeterian creative destruction in particular
Our theory explains why disruptive innovations are rarely invented in centralized institutions, such as large corporations in the market or centralized economies, and why they are mostly initially created in venture capital (VC)–financed startups and further developed by outsourced R&D alliances involving multiple owners/financiers
We study how the ownership structures of R&D projects in capitalist economies are purposefully arranged differently in sectors where innovation is more likely to be revolutionary and subject to greater uncertainty than in other sectors
Summary
In his most recent book, Dynamism, Rivalry, and the Surplus Economy, Janos Kornai (2013) investigates the fundamental differences between capitalism and socialism in innovativeness in general and Schumpeterian creative destruction in particular. Centralized institutions do not have that commitment capacity in ex-post R&D project screening because they face SBCs. Relying on that logic, our theory explains why disruptive innovations are rarely invented in centralized institutions, such as large corporations in the market or centralized economies, and why they are mostly initially created in venture capital (VC)–financed startups and further developed by outsourced R&D alliances involving multiple owners/financiers. Pharmaceutical companies with more R&D alliances were more successful in developing NMEs. The number of R&D alliances formed by pharmaceutical companies is significantly and positively associated with obtaining approval of NMEs. The paper addresses long-standing fundamental questions about why ownership matters and whether disruptive innovation is fostered better by socialism or capitalism. The paper addresses long-standing fundamental questions about why ownership matters and whether disruptive innovation is fostered better by socialism or capitalism In doing so, it contributes to the literature on innovation, economic systems, and theories of the firm.
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