Insights from the Entrepreneurial Finance and Innovation Conference

Throughout the year, I’ll be traveling to about a half-dozen conferences on economics, entrepreneurship, and innovation.  For each conference, I’ll write a short post highlighting what I thought were the most interesting papers and/or speeches.

This month, I was fortunate to attend the 2015 Entrepreneurial Finance and Innovation Conference (EFIC), hosted by The Brandeis International Business School, and funded in part by the Kauffman Foundation.  Pretty much every paper presented would be worth mentioning, but three caught my eye especially:

1. ”Are ‘Better’ Ideas More Likely to Succeed?  An Empirical Analysis of Startup Evaluation”

By Erin L. Scott, Pian Shu, and Roman M. Lubynsky

Topic: Can we tell, ex ante, whether a startup’s idea will succeed?

Contribution: Previous literature, and most economists’ prior view, has been that ex ante quality prediction of a venture and its idea is extraordinarily difficult, verging on frivolous.  This is the first research to show that it might actually be possible to determine which ideas will succeed, at least under certain conditions.  This could be particularly relevant for accelerators, especially given their recent exponential growth.

Remaining Questions: How much does the baseline selection issue matter (the sample consists of MIT-affiliated teams)?  Is commercialization the right benchmark, or should we be looking harder at exits?  The study finds that related, industry-specific expertise is not helpful in assessing a startup’s idea, which goes strongly against intuition – why is this? 

2. “Deterring ‘Creative’ Innovators: A Potential Negative Externality of Technology Spillovers”

By Seong K. Byun, Jong-Min Oh, and Han Xia

*Winner of Best Paper Award at this conference

Topic: Are there negative externalities associated with technology spillovers?

Contribution: Past research on technology spillovers has long found strong evidence for positive externalities.  That is, when a firm innovates, other firms in the industry tend to benefit.  This study, however, gives us reason to think about a hitherto unexamined, negative side to the equation.  Specifically, the authors argue that innovation in a particular firm sparks imitation at other firms in the industry.  This alters the overall mix of innovation in an industry, at least temporarily, away from radical and toward incremental innovation

Remaining Questions: Are patents a good enough measure to distinguish between radical and incremental innovation?  Is this dynamic a feature or a bug?  What does this process mean for entrepreneurial firms (their data set covers only public firms)?  Where do the star inventors go, when these firms shift their human capital structures away from them?  Are the stars’ contributions during these periods lost, diminished, or just reallocated to other places (e.g., academia, government labs, startups)? 

3. “Effects of Patent Rights on Industry Structure and R&D”

By Tolga Caskurlu

Topic: How does the strength of the patent rights regime affect M&A rates, and R&D activity?

Contribution: This paper’s main contribution is arguably a technical/tools one.  Caskurlu exploits the patent lawsuit appeals process, in which “decisions are given by majority in randomly assigned 3 judge panels.”  He then confines his analysis to cases in which there was a dissent.  As far as theory and empirical support, Caskerlu outlines a model in which increased patent rights lead to greater infringement (potential and realized). This, in turn, leads to greater M&A rates, as would-be or actual infringers resort to acquisition as an alternative to litigation. The increase in M&A rates then leads to more R&D investment by small firms (in the hopes of getting acquired). 

Remaining Questions: To what extent does this trend countervail the potential negative effects of a strong patent regime on follow-on innovation?  Are there any biases / voting patterns among the judges that Caskerlu could exploit, à la Sampat & Williams (2015) and patent examiners?  Why would a weaker patent enforcement regime necessarily cause reduced R&D in small firms through the M&A channel, as opposed to the simpler/broader story that IP is now worth less across the board (e.g., in the event of an IPO, instead)?

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