Job Market Paper

Reference

Egan, Edward J. (2012), "Technology and Commercialization Strategy: The Role of Patent Citations, Property Rights and Product-Market Competition", Preliminary and Incomplete Draft.

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Status

• This is currently a preliminary and incomplete draft
• The main empirical results will persist across versions
• The next version will have a formal model first, and have an instrument

Abstract

This paper explores the relationship between the technology of a start-up and its choice to remain an independent competitor through an initial public offering or cooperate with an incumbent through an acquisition. I use two new measures of patent citations -- whether citations are made to valid or expired patents and whether citations are between firms in the same product-market or not -- to show that patent citations map complementary and/or substitution-based relationships between property-rights. I test a number of theories of patent citations and innovation from the literature by interpreting the consequences that they would have for these measures on both the choice to IPO or be acquired and the value of a start-up firm; my results are not consistent with any of them. I then articulate a theory of `systems versus component innovation', in which I argue that start-ups face a choice to either provide complete systems or specialize in producing high-quality components. I posit that component substitution explains why citations-received to start-ups are negatively correlated with value, and argue that the greater specificity of systems as compared with components to product-markets gives rise to the very strong explanatory power of the decomposition of citations into in-sector and out-of-sector citations.