Innovation Rents Research Articles

When less is more: Information and the financing of innovation

This paper examines the impact of informational frictions when the entrepreneur anticipates having little or no bargaining power in negotiating with the financier and can select ex ante the innovation/venture he wants to develop. In this environment the entrepreneur faces a tradeoff between selecting an innovation that creates high value but one which only allows him to capture little or none of that value; or selecting a “pet-project” innovation that creates lower value but yields private benefits to him. In the baseline scenario, without contractual frictions, the financier is able to elicit first-best entrepreneurial effort, but cannot commit not to extract all innovation rents from the entrepreneur, leading the entrepreneur to select his favored but inefficient innovation. The key insight of the model is that the introduction of informational frictions like non-verifiability of effort or talent information asymmetry, while leading to reductions in effort (for a given innovation choice), may lead to more efficient (i.e. higher value) innovation choices ex ante, and indeed could generate a superior payoff to the financier and a greater total surplus from innovation. This yields several empirical implications, not least of which the potential motivation for financiers to commit to “opacity of information” when the resulting improvements in innovation selection dominate the impact of effort reduction.

When Less is More: Information and the Financing of Innovation

This paper examines the impact of informational frictions when the entrepreneur anticipates having little or no bargaining power in negotiating with the financier and can select ex ante the innovation/venture he wants to develop. In this environment the entrepreneur faces a tradeoff between selecting an innovation that creates high value but one which only allows him to capture little or none of that value; or selecting a pet-project innovation that creates lower value but yields private benefits to him. In the baseline scenario, without contractual frictions, the financier is able to elicit first-best entrepreneurial effort, but cannot commit not to extracts all innovation rents from the entrepreneur, leading him to select his favored but inefficient innovation the first place. The key insight of the model is that the introduction of informational frictions like non-verifiability of effort or talent asymmetry, while leading to reductions in effort (for a given innovation choice), do lead to more efficient (i.e. higher value) innovation choices ex ante, and indeed could generate superior payoffs for the entrepreneur and the financier, as well as a greater expected total surplus from innovation. This yields several empirical implications, not least of which the potential motivation for financiers to commit to opacity of information when the resulting improvements in innovation selection dominate the impact of effort reduction.

Big tech, knowledge predation and the implications for development

ABSTRACT This paper focuses on tech giants as active drivers of a phase of globalization characterized by growth in digital services trade combined with a general shift to intangible assets. By analysing how Google, Amazon and Microsoft organize their innovation activities, we show that they continuously monopolize knowledge while outsourcing innovation steps to other firms and research institutions. The paper compares science and technology collaborations with patent co-ownership suggesting knowledge predation from those other organizations. We also highlight that selected tech giants combine the collection of innovation rents with rents from exclusive access to data. We, therefore, refer to tech giants as data-driven intellectual monopolies, each organizing and controlling a global corporate innovation system (CIS). Intellectual monopolies predate knowledge (including data when they are data-driven) from their CIS that they turn into intangible assets. The paper ends with reflections on the implications for innovation and development.

Asymmetric Power of the Core: Technological Cooperation and Technological Competition in the Transnational Innovation Networks of Big Pharma

This article theoretically and empirically analyzes leader corporations’ innovation processes in contemporary capitalism. We highlight three characteristics: their transnational scope, the primacy of power or asymmetric relations exercised by leaders over the participants of their innovation circuits or networks, and the relevance of what we called technological competition and technological cooperation between leaders. Focusing on the latter, our theoretical contribution integrates the concepts of innovation circuit, global innovation network and modularity of knowledge production in order to elaborate a preliminary model for synthesizing leader’s technological competition and collaboration behaviors. This model is the general framework used for studying three big pharma’s innovation networks (Roche, Novartis and Pfizer). In particular, we study those networks by considering two outputs: scientific publications and patents. Network maps are constructed based on institutions’ co-occurrences, thus looking at who is co-authoring their publications and co-owning these corporations’ patents. We find that big pharmaceuticals co-produce together mainly generic knowledge modules, thus develop a strong technological cooperation. Simultaneously, to succeed in their technological competition they outsource stages of their innovation networks to subordinate institutions that, even if they contribute to achieve the innovation, will not be co-owners of the resulting patents, while big pharmaceuticals enjoy associated innovation rents.

Regional Innovation Systems in Policy Laboratories

Innovation policy and business strategy often expect that investing in private and public research and development will immediately produce a flow of products and processes with high commercial and social returns. Policymakers and managers implicitly follow the logic underlying most linear innovation models assuming a well-defined and uni-directional relationship between R&D spending as input and innovation rents as output of the innovation process. Modern innovation economics dismisses the simplified approximation of knowledge by R&D investment and, instead, considers complex knowledge generation and diffusion processes in innovation networks. From this angle, the disappointing performance of traditional approaches is traced back to strong limits of conventional steering, control, and policy instruments. In this paper, we show that the new view of knowledge generation and diffusion in innovation networks allows for an alternative and has led to systemic approaches in innovation analyses. Combined with computational approaches like agent-based modeling, this new view enables today innovative tools in policy consulting. Using the example of regional innovation policy, we introduce a policy laboratory in which innovation processes can be analyzed in depth to see the impact of different innovation policy instruments in-silico. This ex-ante evaluation helps considerably to improve the understanding of innovation processes and with it the performance of innovation policy.

Rents, Power and Governance in Global Value Chains

This paper addresses the generation of rents and the distribution of gains in the global operations of governed Global Value Chains (GVCs) and seeks to provide an architecture for analyzing the governance of GVCs. It distinguishes between four sets of rent—gifts of nature; innovation rents; exogenously defined rents; and market power—and three spheres of governance—setting the rules -“legislative governance”; implementing the rules -“executive governance”; and monitoring rules and sanctioning malfeasance -“judicial governance.” The exercise of governance power in GVCs over the generation, protection and appropriation of rents is considered though the lens of four sets of key GVC stakeholders—the corporate sector, civil society organizations, the nation state and supranational institutions. This general analysis is given flesh through three case studies: food-safety standards in GVCs; taxation policies and competition policies. In these sectors, the corporate sector is generally much more effective in governing rent generation and appropriation in the global operations of GVCs than are the three sets of non-corporate stakeholders. From this observation we offer a hypothesis that the capacity of non-corporate stakeholders, including national states, to govern GVCs is contingent upon the extent to which this coincides with the interest of the corporate sector. However, as noted, this balance of power between private and non-corporate actors is a contested terrain and dynamic in nature.

Once bitten, less shy? The influence of prior misappropriation experience on R&D collaboration

Firms often face the challenge of collaborating for innovation and protecting themselves from misappropriation. Given this tension, we investigate the relationship between prior misappropriation of protected and unprotected intellectual property (IP) and R&D collaboration. We combine more than 600 firm observations from the German Community Innovation Survey with patent data and qualitative interview data. Our results consistently point to (1) less subsequent R&D collaboration after being copied (misappropriation of unprotected IP) and (2) more subsequent R&D collaboration after being infringed (misappropriation of protected IP) in the following three years. Moreover, we find indication that firms that are copied start to collaborate more during the subsequent period (four to six years later). Our study adds to a better understanding of the tension between appropriating innovation rents and remaining open to R&D collaboration. Further, we provide insights on how firms strategically leverage previous misappropriation experience to create value.

The importance of trademark protection for product differentiation and innovation

Trademarks mark new product varieties. Trademarks may become associated with a favorable public recognition and evaluation that sustains the advantages from a horizontally differentiated market position. A favorable public assessment appears more important for firms in service sectors where production exhibits usually more experience characteristics than in manufacturing and for firms with vertically-differentiating product innovation. Using data from the 2011 German innovation survey, we find that for firms in service sectors, the use of trademarks increases the probability that the firm’s products and services are not easily substitutable by rival ones. This product-differentiating effect of trademarks in services is present for firms with new-to-the-market product innovation but not for firms without product innovation. This suggests that trademarks supplement the appropriation of product innovation rents in services. The number of trademarks exhibits a product-differentiating effect for service sector firms with imitative new-to-the-firm product innovation, which suggests differentiation due to proliferating product variants. Regarding firms in manufacturing sectors, trademarks do not show a conclusive product-differentiating effect.

Demand lotteries, abandonment options and the decision to start R&D and process innovation

(ProQuest: ... denotes formulae omitted.)1. IntroductionThe decision to start a Research and Development (RD Eiser & Nadiri, 1968). The second category includes market structure which is determined by market power (Levin, Cohen, & Mowery, 1985), competition (Grenadier, 2000; Huisman, Kort, Pawlina, & Thijssen, 2005) and entry pressure (Etro, 2006; Acemoglu, 2008; Aghion, Blundell, Griffith, Howitt, & Prantl, 2009), and general industry conditions (Acs & Audretsch, 1987; Dorfman, 1987). The third category includes different types of options such as a timing option (Dixit & Pindynck, 1994; Trigeorgis, 1996) and an abandonment option (Myers & Majd, 1990; Berger, Ofek, & Swary, 1996), and different types of uncertainty such as input cost uncertainty (Pindynck, 1993), technical uncertainty (Pindyck, 1993) and market uncertainty (Tyagi, 2006).Market uncertainty is of particular interest for our analysis. Market uncertainty is related to the future value of the innovation which is strongly determined by market demand. For example, if firms have successfully developed the new product or production technology, uncertainty still exists about market acceptance and hence innovation rents. In general, market uncertainty reduces R&D investments. However, Czarnitzki and Toole (2009, 2011) show that the negative effect is mitigated when firms receive R&D subsidies or patent their innovations.In this paper, R&D leads to a cost-reducing process innovation. We build on the model of Lukach, Kort, & Plasmans (2007) that contains many aspects of real-life R&D decisions within a net present value (NPV) framework. Besides entry threat, Bertrand competition and multi-stage R&D with an abandonment option, our model differs from Lukach et al. (2007) as it includes demand (market) uncertainty rather than supply (technical) uncertainty. We deduct testable hypotheses on the basis of which we empirically analyze the non-traditional factors driving the decision to start an R&D project. The uniqueness of our data lies in the availability of proxies for demand uncertainty, the abandonment option as well as perceived entry threat.We model an R&D project as a multi-stage game where the incumbent must decide at the first stage to start and at the second stage to continue R&D. The decision to start is influenced by demand uncertainty, modelled as a lottery between a proportional increase (=good state) and decrease (=bad state) in demand. A lottery becomes more divergent when the difference between the outcomes of the lottery increases. We derive under which lottery probabilities more divergent demand lotteries positively or negatively affect the decision to start R&D. For empirical testing, we use data from the fourth Community Innovation Survey (CIS IV) in Germany for about 2600 firms to explain the decision to start R&D. Our main results, strongly confirming our model predictions, are that for firms facing lotteries where the good state is more likely to prevail a 10% increase in the degree of divergence of the demand lottery increases the likelihood of undertaking R&D by 1. …

Protecting Plants: Incentives to Innovate and Access to Biological Resources. A Historical Overview

This paper analyses the evolution of intellectual property (IP) protection for plant varieties and the debates generated in its design and implementation, relating the institutional history to problems raised by the economics of innovation, such as, on the side of the innovator, incentives to innovate, appropriability of innovation rents, disclosure and cumulativeness; and, on the side of the user, diffusion and access to biological resources and knowledge. We have identified three main issues that were fiercely discussed along history: whether plant varieties could be considered as inventions or simple products of nature; secondly, how to provide incentives to plant breeders without preventing access to innovation and looking upon the contribution that farmers have done to obtain present improved varieties; and, thirdly, the social cost of generating monopolies in plant breeding and agriculture as producers of food. These three arguments shaped the debates and remained controversial until our days. Finally, the analysis shows that the co-evolution of legal and scientific factors resulting in different IP protection systems and appropriability of rents did not impede the obtaining of innovations over the centuries.

Research and Development Projects Upon Real Options View

We investigate the importance of R&D expenditures for SMC (small and medium companies) and for Blue Chips, focusing on the existence of relation between Research and Development (R&D) option value and some variables such as relative probability of innovation, level of capital expenditures, expected innovation rents, expenditures with respect to the implementation of new technologies, proportions of money, proportions of indebtedness, operating cash flows, patents of affiliated companies, numbers of workers, market concentration and the efficiency of work. Empirical analysis also includes R&D projects valuation worksheet based upon the competition duopoly model that we applied to Brazilian Embraer and Canadian Bombardier. Embraer and Bombardier are 3rd and 4th largest suppliers of commercial aircrafts. These are main rival competitors in the segment of small commuter planes. Our main objective was to study changes of R&D projects performance when alterations of environmental factors are simulated. Basically, we observed significant difference between SMCs and Blue Chips. SMC tend to start new R&D projects on their own while Blue Chips buy other companies that already have access to new technologies. Moreover, in the group of small companies, R&D costs are significantly positive, while Blue Chips show opposite results as R&D costs are negative and statistically significant in this group. In addition, R&D projects and patents possessed by investigated companies affect positively R&D projects valuation. Future growth, which forms part of the value of a company, depends on the number of patents pertaining to companies and newly started R&D projects which subsequently will become patents possessed by those companies. DOI: http://dx.doi.org/10.5755/j01.ee.25.3.2737

Process Innovation Propagation: Appropriating Supply Chain Innovation Returns

This paper introduces the concept of Process Innovation Propagation (PIP) as a power-based appropriation mechanism that departs from conventional strategies of protective appropriation. PIP is defined as collecting returns from process innovations through passing them over to supply chain partners. The transfer process is based on the two mediated sources of power which pre-exist in a buyer-supplier linkage prior to joint innovation endeavors: market and expert, and is novel in: (1) suggesting external appropriation through using other firms as opposed to solely depending on internal capabilities; (2) directly challenging the preclusive component of generative appropriability; and, (3) collecting innovation rents through supply chain operational benefits and market image. Acknowledging its significant potential as a profit-enhancing mechanism, PIP is distinguished as a new construct, and propositions regarding its elements and antecedents are developed based on a thorough analysis and synthesis of the literature.

Knowledge Spillover Entrepreneurship in an Endogenous Growth Model

This paper challenges the key assumption in idea based growth models that innovation rents ultimately reward the creation of knowledge. In modern capitalist economies the agents that commercialize new ideas, the entrepreneurs, receive the bulk of the innovation rents and are generally the residual claimant. We develop a model that separates invention from innovation where new ideas are a costless spillover from profit motivated corporate R&D aimed at improving existing production processes. We then show that a central planner can improve over the decentralized equilibrium by reallocating resources between R&D and entrepreneurship. The optimal allocation between commercializers and inventors depends on the relative strength of down- and upstream knowledge spillovers.

Geography, knowledge spillovers and small firms’ exports: an empirical examination for The Netherlands

This study examines the impact of external and internal scale economies on the decision to start exporting and the level of exports of innovating firms. Based on new trade theory, increasing returns to scale—both internal and external scale economies—are considered an important source of comparative and competitive advantage. The empirical analysis of (small) innovating firms in The Netherlands leads to two main findings. First, firms that are located in technical Marshallian clusters seem less inclined to become exporters. Availability of technical knowledge alone does not help to reduce entry costs that come with the decision to export and/or marketing and sales costs in order to achieve a higher export performance. Second, firms that experience difficulties in appropriating innovation rents due to labour poaching also seem to be less inclined to become exporters. The explanation for this second finding is the importance of outgoing knowledge spillovers, which is particularly relevant for small, product innovating firms. This reduces their probability to export. However, if firms export, the knowledge leaking argument is not valid for the export performance of the firm.

Is firm-specific innovation associated with greater value appropriation? The roles of environmental dynamism and technological diversity

This paper extends the resource-based theory of the firm to examine the contingencies that either intensify or reduce the relationship between firm-specific innovation and value appropriation. Based on a large-scale analysis of a sample of US manufacturing firms, we found that greater innovation rents appropriation is associated with an increase in firm specificity of its innovative knowledge. But the positive relationship between firm-specific innovations and firm value appropriation tends to decrease when the product or technology market is highly dynamic. Further, under high environmental dynamism, firms should increase the diversity in their knowledge composition in order to mitigate the risk of value erosion associated with firm-specific innovations.

Appropriability, preemption, and firm performance

AbstractThe impact of strategies used to appropriate innovation rents on firm performance is analyzed using a sample of U.S. public manufacturing firms. Stronger appropriability at the firm level, achieved through patent protection or the ownership of specialized complementary assets, leads to superior economic performance, as measured by the stock market valuation of a firm's R& D assets. Among commonly used ‘nonconventional’ patent strategies, preemptive patenting allows incumbents to strengthen their market power. Consistent with theory, such effect is higher for incumbents with higher ex ante market power and facing a higher threat of entry, and lower when R& D competition is characterized by the discovery of drastic innovations. Copyright © 2008 John Wiley & Sons, Ltd.

Appropriability, Preemption, and Firm Performance

The impact of strategies used to appropriate innovation rents on firm performance is analyzed using a sample of U.S. public manufacturing firms. Stronger appropriability at the firm level, achieved through patent protection or the ownership of specialized complementary assets, leads to superior economic performance, as measured by the stock market valuation of a firm's R&D assets. Among commonly used 'non-conventional' patent strategies, preemptive patenting allows incumbents to strengthen their market power. Consistent with theory, such effect is higher for incumbents with higher ex ante market power and facing a higher threat of entry, and lower when R&D competition is characterized by the discovery of drastic innovations.

PATENT SHARKS AND THE SUSTAINABILITY OF VALUE DESTRUCTION STRATEGIES.

Patent sharks (a.k.a. patent trolls) appropriate innovation rents by threatening to patent-block other players' R&D-related value creation. Modelling interactions between sharks and manufacturers within a biform game, we show that, despite policy changes, patent extortion will remain viable. We support our findings using empirical data on patent shark attacks.

Sustaining value creation in technology-based firms: the role of five protection options in securing rents from new product development

We examine the use of five strategies of securing rents from incremental product innovations: patents, secrecy, lead time, providing competitive service, and financial strength. We find that: regardless of appropriability regime, either formal intellectual property protection or use of non-financial assets for commercialisation of innovations were more important in securing rents from innovations than was the use of financial assets; combination of strategies may be the key to effective protection of innovation rents; out of patents, secrecy, lead time, services, and financial strength, the latter is the least viable strategy of sustaining new products' value except for market leaders.

Patent Trolls, the Sustainability of ‘Locking-in-to-Extort’ Strategies, and Implications for Innovating Firms

Patent trolls appropriate innovation rents by threatening to block other players’ R&D-related value creation. Legal loopholes and inefficiencies in court practice have been identified as drivers of these ‘locking-in-to-extort’ strategies, which might suggest that policy changes can eradicate the troll business. Through modeling interactions between trolls and manufacturers, we show that this is not the case. Patent extortion will remain viable in technologically crowded industries as long as trolls choose patents that are sufficiently sophisticated to be upheld in court and produce significant long-term switching costs for manufacturers after infringement. We analyze how innovating firms may react to the continued presence of patent trolls, and discuss adjustments to their R&D strategies regarding product design, interaction with trolls, coordination with competitors, and patenting activity overall.