Government supports for innovation: when is promoting entrepreneurial entry suboptimal?

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2018
Uysal, Yetkin
Governments evidently provide financial support for R&D expenditures of start-ups, and subsidies for commercialization costs of entrepreneurs with the aim of promoting innovation and increasing welfare. In order to investigate these implications of entrepreneurship and government supports for an oligopolistic market with homogeneous goods, I construct a model where a start-up can commercialize its innovation either by market entry or by sale to an incumbent firm. The innovation is first considered a non-drastic process innovation, and then, in an extension, it is supposed to reduce fixed production cost. The results reveal that an optimal policy scheme for government supports is not just beneficial but also required in most cases to achieve higher innovation levels yielding more welfare. Governments’ bias towards favoring entrepreneurial entry over commercialization by sale is found to be counter-productive both for a non-drastic process innovation if the start-up is not innovative enough and for a fixed cost innovation if an entry-deterring incumbent acquisition is expected. In addition, for a non-drastic process innovation, increasing level of market competition diminishes the R&D expenditure and the resulting innovation level, if the start-up is, again, not an able innovator. For a fixed cost innovation, it inclines the start-up to choose riskier projects, that is, projects to arrive the product market less frequently, when market entry is possible for the start-up. Under such circumstances, facilitating incumbent acquisition instead of promoting entrepreneurial entry seems to be a preferable option for governments.

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Citation Formats
Y. Uysal, “Government supports for innovation: when is promoting entrepreneurial entry suboptimal?,” M.S. - Master of Science, Middle East Technical University, 2018.