TY - JOUR AU - Gans,Joshua S. AU - Hsu,David H. AU - Stern,Scott TI - When Does Start-Up Innovation Spur the Gale of Creative Destruction? JF - National Bureau of Economic Research Working Paper Series VL - No. 7851 PY - 2000 Y2 - August 2000 UR - http://www.nber.org/papers/w7851 L1 - http://www.nber.org/papers/w7851.pdf N1 - Author contact info: David Hsu 2000 Steinberg-Dietrich Hall Wharton School, University of Pennsylvania Philadelphia, PA 19104 Tel: 215-746-0125 Fax: 215-898-0401 E-Mail: dhsu@wharton.upenn.edu Scott Stern MIT Sloan School of Management 100 Main Street, E62-476 Cambridge, MA 02142 Tel: 617/253-3053 Fax: 617/253-2660 E-Mail: sstern@mit.edu AB - This paper is motivated by the substantial differences in start-up commercialization strategies observed across different high-technology sectors. Specifically, we evaluate the conditions under which start-up innovators earn their returns on innovation through product market competition with more established firms (such as in many areas of the electronics industry) as opposed to cooperation with these incumbents (either through licensing, strategic alliances or outright acquisition as observed in the pharmaceutical industry). While the former strategy challenges incumbent market power, the latter strategy tends to reinforce current market structure. Though the benefits of cooperation include forestalling the costs of competition in the product market and avoiding duplicative investment in sunk assets, imperfections in the market for ideas' may lead to competitive behavior in the product market. Specifically, if the transaction costs of bargaining are high or incumbents are likely to expropriate ideas from start-up innovators, then product market competition is more likely. We test these ideas using a novel dataset of the commercialization strategies of over 100 start-up innovators. Our principal robust findings are that the probability of cooperation is increasing in the innovator's control over intellectual property rights, association with venture capitalists (which reduce their transactional bargaining costs), and in the relative cost of control of specialized complementary assets. Our conclusion is that the propensity for pro-competitive benefits from start-up innovators reflects an earlier market failure, in the market for ideas.' ER -