Schumpeterian Innovation Research Articles

Post-IPO Employment and Revenue Growth for U.S. IPOs, June 1996-2010

There is significant concern among policymakers about the health of the Initial Public Offering (IPO) market. From 1980–2000, an average of 298 domestic operating companies went public in the United States each year, but from 2001–2011, the number of new listings fell to an average of only ninety per year. Despite the acknowledged importance of stock markets in raising capital for newly listed firms, there has been surprisingly little research examining the impact of these newly listed entrepreneurial firms on the U.S. economy in terms of revenues or employment. This report examines the employment and revenue growth performance of all domestic operating companies undertaking an IPO on American markets from June 1996, when the SEC’s EDGAR site started making IPO prospectuses available online, through 2010. During this period, according to our definitions, 2,766 domestic operating companies went public. These 2,766 companies employed 5.062 million people prior to going public and 7.334 million in 2010, an increase of 2.272 million employees, or 45 percent. This increase in post-IPO employment works out to 822 jobs added per firm. Note that, in contrast to the conventional wisdom, most of the jobs were created prior to the IPO. In dollars of 2011 purchasing power, in the aggregate these 2,766 companies had $1.32 trillion in annual sales in the year before going public, and $2.58 trillion in sales in fiscal 2010, a 96 percent increase. Inflation-adjusted revenue grew faster than employment due to high productivity growth. The average company going public raised $162 million in inflation-adjusted proceeds, not including an additional $27 million raised by selling shareholders. Since the average company going public created 822 jobs after the IPO, on average every job required an investment of approximately $200,000. In addition to reporting the employment and revenue growth for all companies going public, we categorize firms into emerging growth companies (“EGCs”), which we define as domestic operating companies less than thirty years old that are not spinoffs, rollups, buyouts, or demutualizations; and other companies (from here on, “others”). The aggregate employment for the subset of 1,700 EGCs increased from 651,000 employees prior to the IPO to 1.666 million employees in 2010, a 156 percent increase. For these EGCs, aggregate pre-IPO annual sales increased from an inflation-adjusted $134 billion to $481 billion in 2010, a 259 percent increase. Among the EGCs, growth was not uniform. There were standout performers, particularly in technology, such as Amazon, eBay, and Google, and in retail, such as Texas Roadhouse, that are responsible for outsized returns. The 1,066 other non-EGC IPOs, which are frequently larger companies, are responsible for employing more than 5.6 million people and generating $2.1 trillion in annual revenue in 2010, although most of their employees were hired prior to going public. We also examine the fate of all of the EGCs going public. Ten years after the IPO, only 29 percent of the EGCs from 1996–2000 remained as independent public companies. Of those that do not survive, being acquired is much more common than going bankrupt. The survival rates, however, differ markedly by industrial sector. In geographic terms, there is an extraordinary concentration of firms making IPOs in certain states. California is the home to 46 percent of all EGC IPOs, while Massachusetts has the highest per-capita number of EGC IPOs. While New York and Texas also have significant numbers of EGC IPOs, on a per-inhabitant basis they are not as impressive. Within states, there are regions — in particular, the San Francisco Bay Area and Greater Boston — that exhibit extremely high concentrations of EGC IPOs. While aggregate statistics reporting revenue or employment increases provide valuable insights, there are particular firms in our population, such as Amazon, eBay, and Google, that are examples of Schumpeterian innovation, whereby a firm or group of firms can lead reorganizations of entire economic sectors. Their influence cannot be reduced to their internal performance.

Misguided Policy? Following Venture Capital into Clean Technology

In a search for Schumpeterian solutions, the Obama Administration has made venture capital a cornerstone of its Clean Technology policy, adopting a strategy of providing large loan guarantees to a few venture capital-financed firms. This article argues that three key conditions are necessary for venture capital to successfully open new economic spaces and then it applies them to assess the viability of venture capital investment in clean technology. The article concludes that large loan guarantees are unlikely to be effective. Other government policies such as SBIR grants, university R&D support, certain (de)regulatory actions, large-scale demonstration projects, and/or procurement decisions can better encourage both incremental and Schumpeterian innovation without distorting the turbulent dynamics of new market creation. This analysis can also be applied to other sector- and market-specific innovation policies.

Property rights, entrepreneurship and coordination

The notion of plan coordination enjoys a central place in the analysis of institutions and competitive market processes. The conventional wisdom is that institutions and policies vary in the extent to which they promote competition and how quickly and completely they bring individuals’ plans into closer coordination with one another. Kirzner has provided the most fully elaborated statement on the use of coordination as a positive analytical device for explaining market dynamics and as a normative criterion for evaluating economic policies. We identify the core propositions in his analysis that elucidate how economic coordination depends upon that most fundamental of market institutions – the system of private property rights. We also probe into Kirzner's claims about inherent limitations in our ability to compare the coordinative potential of alternative property rights systems. We unpack the consequences of these core propositions using the economic theory of property rights. We also examine Kirzner's assertion that dynamic competition – including Schumpeterian innovation – is necessarily coordinative in its market effects. We find that his argument rests on the implicit assumption that property rights remain constant during the process of market adjustment. We provide a case study of the advent of commercial aviation as a potential counterexample to his claims.

Platform envelopment

AbstractDue to network effects and switching costs in platform markets, entrants generally must offer revolutionary functionality to win substantial market share. We explore a second entry path that does not rely upon Schumpeterian innovation: platform envelopment. Through envelopment, a provider in one platform market can enter another platform market, and combine its own functionality with that of the target in a multi‐platform bundle that leverages shared user relationships. Envelopers capture market share by foreclosing an incumbent's access to users; in doing so, they harness the network effects that previously had protected the incumbent. We present a typology of envelopment attacks based on whether platform pairs are complements, weak substitutes, or functionally unrelated and we analyze conditions under which these attack types are likely to succeed. Copyright © 2011 John Wiley & Sons, Ltd.

Should Business Method Inventions be Patentable?

In this article, I define business method inventions and provide an economic framework to address the question of patentability raised in Bilski. A business method invention is the discovery of a commercial technique that firms can apply to address market opportunities. The initial implementation of a business method invention by firms is a Schumpeterian innovation. I advance several arguments in favor of business method patentability. Business method inventions are an important foundation for entrepreneurship and a channel for the commercialization of scientific and technological inventions. IP protections for business method inventions are essential for economic efficiency, including incentives for invention, efficient allocation of inventions, and transaction efficiencies in the market for discoveries. Business method inventions are significant because they are the foundation of what I term the ‘‘Business Revolution’’: the augmentation and replacement of human effort in business transactions by computers, communications systems, and the Internet. I conclude that the patent system should continue to provide intellectual property protections for business method inventions just as it does for other types of inventions.

An Integrated Business Model Innovation Approach

This chapter will foster the understanding of business model innovation with a focus on the Information and Communication Technology (ICT) industry and e-entrepreneurship. A general overview of business models and their elements as well as an introduction to innovation alternatives will provide the necessary background for business model innovation. On the basis of Schumpeterian innovation, this chapter will pioneer in describing business model innovation as addendum to Abernathy’s and Utterback’s dynamic model of process and product innovation. Thereby an integrated business model innovation approach will be initiated overcoming the drawbacks of unilateral innovation. The integrated business model innovation approach proposes a framework for long-term differentiation and competitive advantages. Different examples, in particular ICTventures, will clarify the effect of integrated business model innovation.

Tobin's q and U.S. inflation

A smaller than 1 Tobin's q has been frequently observed for the postwar U.S. economy. In theory, Tobin's q less than 1 would discourage investment. However, actual capital stock has grown during this period. This paper proposes inflation besides Schumpeterian innovation as an explanation for this apparent paradox. A stylized IS-LM model along the lines of Tobin–Brainard shows that inflation affects Tobin's q. Employing U.S. data from 1953 to 2000, we find a negative strong relationship between Tobin's q and inflation. Vector error correction models (VECM) confirm the long-run relationship and suggest a very fast rate of adjustment to the steady-state in some specifications. Overall, price movements have a long-run negative impact on Tobin's q.

A Spatial and Sectoral Analysis of U.S. Technology Innovation and Venture Capital Investment Performance

The economic impact of venture capital on the U.S. economy is significant. Global Insight (2007) estimated total revenue of venture-backed companies to be $2.3 trillion (17.6% of U.S. GDP) and 10.4 million jobs (9.1% of U.S. private sector employment) resulting from VC-backed IPO and M&A exits - the key determinants of venture capital performance. Thus it is no surprise that policy makers see venture capital as an important instrument of regional economic development. A recent study by Chen et al (2010) assessed the geographic concentration of both venture capital firms and venture capital-financed companies in specific metropolitan areas. Venture capital firms were found to be located in regions with high success rates of venture capital-backed investments as measured by the incidence of exits. Venture capital firms based in locales that were venture capital centers were found to outperform regardless of investment stage or location. The study however paid little attention to the influence of technological innovation on venture capital performance, arguably the most important of all Schumpeterian innovations for technology-based firms. This study seeks to address this specific knowledge gap in venture capital research and practice. It builds on resource-based view (RBV) and knowledge-based view theories which argue that technological innovation is a strategic resource of the firm that can provide competitive advantage and produce superior performance. This research paper is based on matched data compiled from VentureXpertTM, DelphionTM and NBER/USPTO databases. The resulting unique and proprietary dataset consists of 1020 VC-backed US technology company IPO exits across all technology sectors in the 20 years from 1980-2000. The relation between technological innovation of VC-backed firms and venture capital exit performance is examined with a focus on the influence of spatial and sectoral factors which have been found to be meaningful predictors in theories (i.e. regional growth, industrial, cluster and evolutionary theories) explaining the uneven distribution of technological innovation. As predicted by RBV theory technology firms engaged in patenting activity attracted more VC investors but experienced however longer time-to-exit and lower IPO values. Results show that sectoral and spatial factors influence the patenting activity and investment performance of VC-backed technology firms. Patenting activity and dependent variables total VC invested and IPO value are shown to vary significantly across both regions and sectors.

Mobile Payment Technology and Competitiveness In the Credit Card Chain

This paper discusses the value creation sources of Mobile Payment concept into the Credit Card Chain. A case-study was developed based on the Transaction Cost Theory, Value Chain Analysis, RB V, Schumpeterian Innovation, and Strategic Network Theory. The results illustrate the technology potential to modify the configuration of Credit Card chain.

Crisis as a catalyst: the role of Schumpeterian innovation in the Lithuanian economy

What circumstances allow businesses to flourish in a stagnant world economy? We ask that question in our discussion of the uniquely favorable circumstances of the biotechnology sector in Lithuania. The purpose of this paper is to analyze Lithuania’s ability to expand its economy during a time of crisis, focusing on its unique ability to innovate in such sectors as biotechnology.

Crisis as a catalyst: the role of Schumpeterian innovation in the Lithuanian economy

What circumstances allow businesses to flourish in a stagnant world economy? We ask that question in our discussion of the uniquely favorable circumstances of the biotechnology sector in Lithuania. The purpose of this paper is to analyze Lithuania’s ability to expand its economy during a time of crisis, focusing on its unique ability to innovate in such sectors as biotechnology.

Endogenous Growth in Entrepreneurial Environments: A Path-Dependent Process for Competitive Regional Development

How can regions maximize their competitive advantage? Traditional neoclassical growth theory stresses regional comparative advantage under assumptions of perfect competition and constant returns to scale. Recent endogenous growth theory emphasizes increasing returns and competitive advantage as the ‘opportunity’ source of perpetual growth within business cycles. This article suggests a merger of these neoclassical perspectives, proposing ‘competitive regional development’ (CRD). The dynamic nature of discontinuous, clustering, and creatively-destructive Schumpeterian innovation can self-reinforce the path-dependency of externalities and scale effects in agglomeration. Proposed are increasing externalities and scale effects within an entrepreneurial environment where innovation can be incubated, nurtured, and diffused.

Causal mechanisms of long waves

Previous research on the causes of economic growth maintains that long waves of economic development arise as a result of Schumpeterian innovation. This paper builds on this research by introducing four primary causal mechanisms for the long wave of economic development. The causal mechanisms are classified based on level of analysis. The paper argues that describing causal mechanisms by level of analysis allows researchers to more easily draw from various fields and establish needed consensus in long wave theory.

Understanding firm performance: The case of developing countries's firms that compete internationally in technologically advanced industries

Insights from industrial organization, Schumpeterian innovation, and economic development theories are used to try to explain firm behavior in cases of successful acquisition of advanced technological assets and international trade competitiveness by Asian and Latin-american countries at an intermediate level of industrial and technological development. The role of the state as innovator as well as the importance of alternative forms of organization emerge as the most salient findings.

Endogenizing institutions and institutional changes

Abstract:This paper proposes an analytical-cum-conceptual framework for understanding the nature of institutions as well as their changes. First, it proposes a new definition of institution based on the notion of common knowledge regarding self-sustaining features of social interactions with a hope to integrate various disciplinary approaches to institutions and their changes. Second, it specifies some generic mechanisms of institutional coherence and change – overlapping social embeddedness, Schumpeterian innovation in bundling games, and dynamic institutional complementarities – useful for understanding the dynamic interactions of economic, political, social, organizational, and cognitive factors.

Dimensions of environmentally sustainable innovation: the structure of eco‐innovation concepts

AbstractThe present study analyses environmentally sustainable innovation, or eco‐innovation for short, from the perspective of extant theories of innovation, in order to establish dominant structures of such innovations and current weaknesses, as well as fruitful ways forward. 105 venture concepts were sampled from the winning contributions of a national environmental innovation competition, and analysed in terms of Schumpeterian innovation type and innovation mode (radical–incremental and component–architectural). The resulting distribution confirms a bias towards incremental process innovations, but points towards interesting characteristics in radical–architectural modes of eco‐innovation, e.g. the tendency to combine ‘hardware’ and ‘software’, or technology and social arrangements, the combination of generically diverse technologies and finally the ‘eco‐enabling’ of old technologies by the application of new ones. Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment.

The Coase Theorem and planning for sustainable development

This paper discusses the potential contribution and limitations of the Coase Theorem to the theorisation of sustainable development. The Coase Theorem can be manifested in numerous ways beyond the hypothetical example of direct negotiation between the polluters and the pollutees. Sustainable development not only provides a negotiative context, an infrastructure where compensation in the Coasian sense can be made, but also a framework for transforming negative externalities into positive externalities, as illustrated by a real life example from Canada. Central to the framework is a change in the mindsets of parties to a negotiation and Schumpeterian innovations.

Corporate venturing and the rent cycle

This study views entrepreneurial rents as renewable opportunities and explores how firms can effectively utilize corporate venturing to create and sustain economic rents. Schumpeterian entrepreneurs create rents by harnessing corporate venturing to exploit attractive economic opportunities. The Schumpeterian rent is composed of Ricardian and Austrian rents. Ricardian rents result from unique and non-reproducible characteristics or competencies of the firm, and hence, are not appropriable by imitators. Conversely, Austrian rents, or economic profit, are subject to dissipation by imitators and attract entry by competitors or Austrian entrepreneurs until they are bid to zero or destroyed by another Schumpeterian innovation. In this formulation, Austrian entrepreneurs are modeled as infra-marginal rent seekers. Consequently, to sustain rents, firms must cycle between using corporate venturing to create or discover Schumpeterian entrepreneurial opportunities and using venturing as a mechanism to exploit existing rent generating opportunities.

Persistent Superior Economic Performance, Sustainable Competitive Advantage, and Schumpeterian Innovation:: Leading Established Computer Firms, 1954–2000

Sustainable competitive advantage is a key concept in strategy practice and research, not least because of its intended result of persistent superior economic performance. Previous research revealed that persistent superior performance is very rare. Also, theory predicts that Schumpeterian innovation will erode sustainable competitive advantage and thus prevent leading established firms attain persistent superior economic performance. This study of Fortune Global 500 computer firms, active in a dynamic industry with widely acknowledged Schumpeterian innovations, found a relatively high ratio of firms achieving persistent superior economic performance.

Inter-firm Trust and Schumpeterian Innovations

This paper focuses on discussing the role of trust in strategic alliances aimed at creating new knowledge and developing novel products in the rapidly changing technological setting. Trust is regarded as a salient factor in forming collaborative relationships among direct or indirect competitors for high technology markets. Trusting attitudes also foster organizational learning and unhampered knowledge exchange within an alliance structure. Finally, trust plays a considerable role in distributing and enforcing property rights for the objects of innovation when their valuable features cannot be meaningfully predicted or fully defined due to the rapidly changing environment as well as incomplete firms' knowledge caused by radical shifts of technology.