Locating Innovation: The Endogeneity of Technology, Organizational Structure, and Financial Contracting

There is much we do not understand about the location of innovation: the confluence, for a particular innovation, of the technology associated with the innovation; the innovating firm\u27s size and organizational structure; and the financial contracting that supports the innovation. This Essay suggests that these three indicia are determined simultaneously and discusses the interaction among them through four examples of innovative activity whose location is characterized by tradeoffs between pursuing the activity in an established company, in a smaller, earlier-stage company, or some combination of the two. It first considers the dilemma faced by an established company in deciding whether to keep an employee\u27s innovation or allow the employee to pursue the innovation through a startup. It next takes up a very different relationship between an established company and an earlier-stage company: the development by the smaller company of a disruptive innovation that displaces the industry\u27s dominant companies. This Essay then considers an established company\u27s instrumental use of the startup market to outsource development of a particular innovation to a technology race. Finally, this Essay examines a form of innovation located between an established and earlier-stage company: the pattern of joint ventures between large pharmaceutical companies and smaller biotechnology companies