Recent Reports & Studies: Gans, Hsu & Stern: When does Start-up Innovation Spur the Gale of Creative Destruction?

Why do some start-up technology businesses choose to directly commercialize their innovations, taking on the industry titans as is common in the electronics industry, while other new tech firms, such as those involved in biotechnology, choose a path of cooperation with the industry leaders, commercializing through licenses, joint ventures, and outright acquisition? The answer(s) should help economic development practitioners and science and technology policy makers design the most effective strategies for technology-based entrepreneurial assistance.

Joshua Gans, David Hsu and Scott Stern set out to define the discerning factors or determinants for choosing each path in When Does Start-up Innovation Spur the Gale of Creative Destruction?, an August 2000 Working Paper from the National Bureau of Economic Research (NBER Working Paper #7851). Gans, of the University of Melbourne, Australia, and Hsu and Stern, both of the Sloan School at MIT, work to test how three factors --- intellectual property protection, transactional costs for partnering (including expropriation of the technology), and incumbent sunk costs for production, manufacturing and distribution --- "affect the relative attractiveness of cooperation versus competition."

The authors found that each of the factors is associated with a greater probability to cooperate with competitors for commercialization. Their findings include:

• companies with intellectual property protection are 23 percent more likely to cooperate with competitors than are non-patent holders 
• start-up firms with limited or little control over production assets are 18.4 percent more likely to cooperate with competitors 
• on average, venture financing increases the relative attractiveness of cooperation with more established firms by reducing transaction costs
• smaller firms are more likely to cooperate, perhaps due to limited availability of capital 
• businesses led by their founder are disproportionately more likely to retain control over commercialization, even at the cost of lower profits

As a result, the authors conclude that failures within the "market for ideas," such as high initial production costs or weak patent protection, may be the drivers for the industrial upheaval or creative destruction recorded when technological advances allow small, innovative companies to replace giant corporations as the industry leaders (e.g. electronics, software, and industrial equipment).

The authors work with a data set compiled from surveys of strategic choices made by 55 companies that had received venture capital investments and 86 firms that had won funding from the federal Small Business Innovation Research Program after each company had successfully developed and commercialized a prototype technology. The final sample size, after eliminating responses with missing data points, was 118 start-up businesses. One third of the sample had pursued commercialization through cooperation.