TIM Lecture 5

Question 1

Condition for profitable innovation

Answer 1

• Appropriability regime (strong,weak)
• Life cycle phase
  (pre-paradigmatic, paradigmatic)
• Complementary assets
  (generic, specialized, co-specialized)

Question 2

Appropriability regime

Answer 2

The “appropriability conditions” denote all factors that influence the possibility of profitable imitation of an innovation.
Among these factors are:
– availability and strength of legal protection
– viability of secrecy
– characteristics of underlying technology

Question 3

When should a technology-based entrepreneur co-operate or compete with existing firms?
What factors should the entrepreneur think about when making this choice?

Answer 3

1. Go through the markets for products
– Compete with existing products
– Complement existing products
2. Go through the markets for ideas
– Sell ideas
– Sell your company
– Make alliances

Question 4

Profiting from innovation via product markets

Answer 4

– Ability to acquire complementary assets to ensure that innovation offers novel customer value proposition
– Incumbents may be risk-adverse and slow to respond 
– Product market entry by new firms
        – Be aggressive, quick and
           paranoid
        – Manage many factors:
           marketing, manufacturing,
           sales and service
        – Establish a market
           presence
        – Persuade customers of
           novelty of offering
        – Avoiding detection by
           incumbents
        – Gaining access to
           enforceable IPR

Question 5

Profiting from innovation via markets for ideas

Answer 5

– Co-operate with other firms by signing agreements for the commercialization of the idea
– Everything is in the price the new firm gets for the idea => sell high and go to the beach!
– Can be hazardous => the threat of competition from incumbent may hang in the air
– Different types of co-operation strategy
– License technology to one
or more buyers
– Sell firm to incumbents
– Joint ventures or strategic
alliances

Question 6

Benefits of Cooperation

Answer 6

– Shares the potential benefits with others (less competition for Schumpeterian rents)
– Allows new firms to build on other firms existing competencies
– Avoids costs of catching-up
– Many firms are skilled users of new firms in their innovation strategies (GE acquires a new firm every day!)

Question 7

Risks and costs of co-operation

Answer 7

– Paradox of disclosure (willingness to pay depends on their knowledge of the idea, yet the knowledge of the idea implies that potential buyers need not pay for it)
– Without IPR, buyers can claim they knew it already
– Bargaining power of new firms (are their threats credible?)
– Finding partners and negotiating with them can be expensive and time consuming

Question 8

Summary

Answer 8

– Innovations typically benefit the innovator, but also customers, imitators, suppliers, and complement providers
– Appropriability of profits depends on strength of appropriability regime, life cycle
and complementary assets
– Implications for R&D: Focus on innovations that are easily protectable or complementary to assets in which innovator has strong position