Lecture 1: description + Entrepreneurship- An opportunity based framework
Today we will discuss this:
Goals of the lecture:
Understand the nexus between innovation and
entrepreneurship
Distinguish between startup innovation vs incumbent
innovation
Discuss advantages and prevalence of each mode of
innovation
Motivation:
Creative Destruction:
Schumpeter believed that innovation causes most markets to evolve in a characteristic pattern.
Markets have periods of comparative quiet, when firms that have developed superior products and
technologies earn positive profits (incumbents dominating the market and have advantage from the
past, they earn positive profits from this).
These periods are punctuated by fundamental shocks that destroy old sources of advantage and
replace them with new ones. Destroy this, disrupt and then new ones.
Entrepreneurs who exploit the opportunities created by the shocks enjoy economic profits during the
next period of quiet. These become the new incumbents. Idea that they key aspect is opportunities,
what are the shocks an which are ready to explore these opportunities.
(Blockbuster vs Netflix • Taxi vs Uber • DVD vs MP3 • Kodak vs digital camera • Nokia vs iPhone)
Disruptive technologies:
New entrants are associated with the creation of disruptive technologies. Such disruptive
technologies are heralded as a key driver of rising living standards.
Incumbent firms often are associated with incremental innovations that contribute more marginal
gains to innovation. Often believed to be aimed at preserving market power.
This lecture, also challenge this view, its not always the case?
Creative Destruction & Competitive Advantage:
What is the comparative advantage of startups vs incumbents at discovering and exploiting
opportunities?
To answer this question, take Entrepreneurship as an opportunitybased framework:
,3. Entrepreneurship as an opportunitybased framework (Shane and Venkataraman)
Entrepreneurship as the ability to exploit opportunities:
Entrepreneurship (innovation): the discovery and exploitation of a lucrative opportunity
Opportunities: situations in which new goods, services, raw materials, and organizing methods can
be introduced and sold at greater [value] than their cost of production (Casson, 1982). When there is
opportunity, this requires innovation, load things differently to make profits out of it.
Who discovers opportunities?:
Opportunities are objective, but the process to identify them is subjective. Entrepreneurship requires
that people hold different beliefs and capabilities about the value of resources.
Heterogeneity (e.g. different information, specific capabilities) generates a comparative advantage
that allows some individuals and not others to act on certain opportunities
Startup vs incumbent innovation:
Entrepreneurship does not require (but can include) the creation of new organizations. According to
the definition entrepreneurship can also be there within an incumbents. Also the identification of an
opportunity = entrepreneurship.
It depends on who discovers and who exploits opportunities (do not need to be the same)
Four types of innovation depending on the locus (startups vs incumbent firms) of the two key stages
of entrepreneurship (discovery and exploitation)
Incumbent innovation - All in house
The incumbent may discover the invention, but
prefer not to commercialize due to the well-
known Arrow replacement effect (lack of
incentives to commercialize inventions that
disrupt current products of the firm).
Also sometimes incumbents can cannibalize
own, when launching less profits than the
‘’older version’’ so then not launch it
Incumbents can be disruptive, we can have incumbents disrupt in other segments. Like apple with
iPod. Amazon also entering new markets not active yet. Apple to cell phone when launching iPhone.
Incumbents have resources and can be innovative.
Incumbent innovation – External invention
Markets for technology are necessary for this
option to be valid (e.g. patent trades,
licensing, M&As, hiring inventors).
Many companies are input for incumbents
instead of growing large themselves. They
discover and then commercialized by
incumbents.
,Startup innovation – Spinout
Opposite: the entity that brings to the market is
a startup, discovery in incumbent. Isn’t very
common, not a lot of examples.
Incumbent not profitable, then inventor moves
out and creates startup and becomes entrepreneur.
Startup innovation – Entrepreneurial inventor
discovery and launch in startup. Most iconic
of entrepreneurial whe n thinking about it.
Zuckerburg coming in and discovering
Facbook and also exploiting it for example.
Indiviudals spotting opportunity, discovering
and commercializing themselves.
When markets for technology are not
available, or knowledge is tacit, or the
entrepreneur has information about the viability of the invention that cannot be easily transferred to
third parties, or the invention is so novel that incumbents do not have complementary manufacturing
capabilities.
4. Comparative advantages of startup vs incumbent innovators through the lens of three
dimensions covered in this course (resources/legitimacy/form)
These three lenses are covered more from the second lecture.
Optimal choice of mode: incumbent/entrepreneur
, Incumbents have better resources, cash flows, financial capability, manufacturing capability also. also
accumulated internal knowledge (learning), also for recombinant and incremental innovation. Also,
good network and reputation. More rigid forms (mechanistic), ambidextrous, consolidated.
Startup: lack resources, capabilities. But they are flexible, inventive and novel knowledge. novelty can
be asset, needed to build reputation, lobbying/marketing efforts. Flexible structure, need to define
internal structure and control and tension between founders and financiers.
-> search for mechanistic, ambidextrous, consolidated, adhocracy structure etc.
5. What does evidence tell us?:
Asterbo (2003):
Its about: what are the returns to independent inventive efforts, created by startups, incumbents or
individuals?
The return on independent inventive efforts is 11.4%
This is less than the median return on innovative activities in established firms, of 25%
Garcia-Macia, D., Hsieh, CT., Klenow, P., 2019. How Destructive is Innovation?. Econometrica:
Brings notion of creative destruction to the test. How valid is the story, how much innovations from
disruptors? Looking a employment, when lot of employment/turnaround then creative distruction.
Not what they found:
Creative destruction is not as important as thought.
Most innovations are incremental innovations by incumbents and destructive effects (in terms of
employment) are not pervasive
Incumbents are able to preserve the competitive advantage from their resources and capabilities.
Though, paper not so good at seeing the entrepreneurship within incumbents like Apple with iPhone,
which it was.
See one minute video summarizing the paper: https://youtu.be/WkENXciOrIg
De Loecker et al. (2020):
X axe is years and y axe is markups. This is the price
per unit of output sold of margin of cost of
producing.
Perfect competition when p – mc. As prises rise,
more away from perfect competition, then more
price than cost.
Markups have been increasing over time. Suggests that incumbents have been able to accumulate
more market power and speaks to change in structure of markets. Entrants lost ability to enter and
threat incumbents. This is figure that made a lot of debate.
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