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Optimal Project Rejection and New Firm Start-ups

Optimal Project Rejection and New Firm Start-ups We study the decision of an established firm to commercialize innovations. An innovation can be exploited by the established firm as an internal venture, pursued by a new firm start-up as an external venture, or not commercialized at all. The limited commercialization capacity of the established firm in the short run results in an option value of waiting. In this setup, start-up firms emerge when the established firm is generating many innovations or is selective because the option value of waiting is high, or both. The model predicts that innovations commercialized through internal ventures are characterized by a higher fit with the internal resources of the established firm, a higher cannibalization of the established firm's existing businesses, and a lower profitability than innovations commercialized through external ventures. The model furthermore generates predictions on the relation between firm performance and spin-off performance. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Management Science INFORMS

Optimal Project Rejection and New Firm Start-ups

Management Science , Volume 52 (2): 14 – Feb 14, 2006
14 pages

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Publisher
INFORMS
Copyright
Copyright © INFORMS
Subject
Research Article - Focused Issue on Entrepreneurship
ISSN
0025-1909
eISSN
1526-5501
DOI
10.1287/mnsc.1050.0458
Publisher site
See Article on Publisher Site

Abstract

We study the decision of an established firm to commercialize innovations. An innovation can be exploited by the established firm as an internal venture, pursued by a new firm start-up as an external venture, or not commercialized at all. The limited commercialization capacity of the established firm in the short run results in an option value of waiting. In this setup, start-up firms emerge when the established firm is generating many innovations or is selective because the option value of waiting is high, or both. The model predicts that innovations commercialized through internal ventures are characterized by a higher fit with the internal resources of the established firm, a higher cannibalization of the established firm's existing businesses, and a lower profitability than innovations commercialized through external ventures. The model furthermore generates predictions on the relation between firm performance and spin-off performance.

Journal

Management ScienceINFORMS

Published: Feb 14, 2006

Keywords: Keywords : real option ; project selection ; new firm start-ups ; IPR ; bargaining

References