Who innovates, and why?

Question 1

Determinants of innovative activity

Answer 1

Economists interpretation: costs and benefits of innovation are dominant drivers of innovative activity
- whoever stands to gain most innovation will be most likely to perform it
- whoever has the lowest cost of doing an innovation will be most likely to do it

Question 2

Schumpeter classical question: what market structure is most conducive to innocation

Answer 2

Schumpter I:
- entrepreneurs and new firms drive innovation (fragmented markets)

II:
- large firms drive innovation
-> markets with some monopoly power

Question 3

Arrows model

Answer 3

1. ex-ante perfect competition -> ex-post monopoly
2. ex-ante monopoly -> ex-post monopoly
   - lowest inventive (cannibalization effect)
3. ex-ante social planer -> ex-ante social planer

Question 4

efficieny effect

Answer 4

if the innovation is only slightly better than existing products it is more attractive to remain the only player in a monopolistic market than to become the second player in duopoly

Question 5

Liabilities of newness

Answer 5

lead to increased failure rates vs. older firms

roles and tasks have to be
assigned (takes time, creates
inefficiencies and conflicts)
– new organizations lack reputation
and experience
– exchange relationships with
various actors have to be
established
– new firms have to rely on
interactions among “strangers”

Question 6

advantages of new firms

Answer 6

Organization-related advantages:
– no path-dependence; can create
business from scratch, thus more
willing to pursue completely new
approaches
– less “inertia“; company structure
more flexible
– more open and flexible culture
▪ HR-related advantages:
– can hire people that exactly match
the task at hand; no need for retraining
– will have, on average, more
flexible employees (younger,
more entrepreneurial)

Question 7

Liabilities of smallness

Answer 7

lead to larger failure rates
limited resources (financial,
personnel, …)
▪ low variety of skills in the firm;
some critical skills may be lacking
▪ no buffer to survive times of crisis
▪ disadvantage on the job market
(as an employer)
▪ low market power
▪ little “organizational slack”
available for innovation, training
etc.

Question 8

advantages of smallness

Answer 8

more flexible processes
▪ company structure easier to
identify, clearly laid out
▪ short ways, direct communication
▪ fast decision-making
▪ job satisfaction typically higher

Question 9

Disruptive innovation model

Answer 9

Christensen characteristics of these innovations:
– These innovations are technologically straightforward
– Initially, they do not satisfy customers in established markets
instead, they are sold to niche or new markets
– Over time, however, performance of both established and new
technology grow faster than market needs
– Eventually, the new technology supplants the old one even in the
established, main market