Essays on innovation and the financing of entrepreneurship

Xia, Shiyun

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Description

Title

Essays on innovation and the financing of entrepreneurship

Author(s)

Xia, Shiyun

Issue Date

2020-07-14

Director of Research (if dissertation) or Advisor (if thesis)

Bernhardt, Daniel

Doctoral Committee Chair(s)

Bernhardt, Daniel

Committee Member(s)

• Kahn, Charles
• Krasa, Stefan
• Lemus, Jorge

Department of Study

Economics

Discipline

Economics

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• Innovation
• antitrust
• intellectual property
• entrepreneurship
• venture capital.

Abstract

This research focuses on the understanding of innovation and entrepreneurship, with each chapter focuses on a different topic. The first chapter studies the effects of intellectual property rights (IPR) and antitrust policies on aggregate innovation. I develop a continuous-time model that examines the roles of incumbent firms and inventors. In this model, incumbent firms choose the extent of research and development (R&D) in which to engage in order to improve the quality of their products. On the flip side of my model, inventors who engage in R&D choose between pursuing a complementary innovation that they could sell to an incumbent firm and pursuing a disruptive innovation that could lead them to develop a superior technology that supersedes that held by an incumbent firm. I show that public policies usually face a trade-off between innovation from incumbent firms and innovation from independent inventors. If inventors only innovate to enter product markets, the trade-off can lead to an inverted-U relationship between the economic growth rate and inventors' ability to benefit from their innovations. However, a stronger IPR policy that protects inventors from incumbent firms on the market for ideas always increases aggregate innovation in two ways. First, the IPR policy has a stronger effect on inventors' incentives to innovate than it does on the incentives of incumbent firms to do so. Second, the IPR policy increases the economic growth rate by encouraging inventors to innovate to sell innovations on the market for ideas instead of innovating to enter product markets. The second chapter studies the effect of antitrust policies on industrial dynamism and economic growth. The literature suggests that laxer antitrust policies in the US contribute to a decreasing trend in industrial dynamism. But this explanation needs further examination. Antitrust policies in product markets do not directly target industrial-level dominance, as the latter hinges on all of the markets in which a firm has a presence. I develop a continuous-time model to bridge product market regulation and industrial dynamism. In this model, firms pursue complementary innovations to improve their products. Startups can also pursue innovations complementary to existing products and sell them to firms. Firms and startups pursue replacement innovations to obtain product lines they do not currently own. Startups successfully become firms when they obtain a product line, and firms exit when they lose all product lines. Laxer antitrust policies decrease the probability of entry, affecting the intensive and extensive margins of replacement innovation activities. On the intensive margin, firms expand into new markets at a slower rate due to laxer policies. On the extensive margin, fewer inventors will pursue innovations that generate superior products that allow them to compete with incumbents. The extensive margin effect dominates the intensive margin effect. Although firms expand at a slower rate, the competition they face in the markets that they reside in decreases even more. Hence on average, firms can grow bigger on average, and the entry and exit rates also decrease. The final chapter focuses on the financing of entrepreneurship by venture capitalists. Specifically, I study how deal-sourcing and venture capitalists' evaluation ability affect ventures' valuation and capital supply in the venture capital market when there is asymmetric information between investors and entrepreneurs about ventures' quality. The model has two building blocks. The first is a standard discrete trade model that entrepreneurs and venture capitalists search for partners and then match randomly. The second is the information environment where entrepreneurs can use referrals to signal their projects' quality, and venture capitalists can inspect projects in a due diligence process. The model shows that referrals are informative because entrepreneurs' networking incentives depend on the prospects of their projects. venture capitalists' screening ability reduces the low-quality project owners' expected payoffs from networking, changing their networking strategies. Hence the informativeness of a referral depends positively on the screening ability, implying referrals complement it to reduce lemons problem. Working together with venture capitalists' screening ability, networking can prevent market failure.

Graduation Semester

2020-08

Type of Resource

Thesis

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Copyright and License Information

Copyright 2020 Shiyun Xia

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