Leading Edge
Superexponential long-term trends in information technology
Béla Nagy et al.
Technological Forecasting and Social Change, October 2011, Pages 1356-1364
Abstract:
Moore's Law has created a popular perception of exponential progress in information technology. But is the progress of IT really exponential? In this paper we examine long time series of data documenting progress in information technology gathered by Koh and Magee (2006). We analyze six different historical trends of progress for several technologies grouped into the following three functional tasks: information storage, information transportation (bandwidth), and information transformation (speed of computation). Five of the six datasets extend back to the nineteenth century. We perform statistical analyses and show that in all six cases one can reject the exponential hypothesis at statistically significant levels. In contrast, one cannot reject the hypothesis of superexponential growth with decreasing doubling times. This raises questions about whether past trends in the improvement of information technology are sustainable.
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Andrew Henderson, Michael Raynor & Mumtaz Ahmed
Strategic Management Journal, forthcoming
Abstract:
Although sustained superior firm performance may arise from skillful management or other valuable, rare, and inimitable resources, it can also result from randomness. Studying U.S. companies from 1965-2008, we benchmark how long a firm must perform at a high level to be confident that it is something other than the outcome of a time-homogeneous stationary Markov chain defined on the state space of percentiles. We find (a) the number of sustained superior performers in Compustat, measured by ROA and Tobin's q, exceeds the number of false positives we would expect to be generated by such a process; yet (b) the occurrence of false positives is often enough to fool many observers, so (c) the identification of sustained superior performers requires particularly stringent benchmarks to enable valid study.
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How Does Venture Capital Financing Improve Efficiency in Private Firms? A Look Beneath the Surface
Thomas Chemmanur, Karthik Krishnan & Debarshi Nandy
Review of Financial Studies, December 2011, Pages 4037-4090
Abstract:
We use the Longitudinal Research Database (LRD) of the U.S. Census Bureau, which covers the entire universe of private and public U.S. manufacturing firms, to study several related questions regarding the efficiency gains generated by venture capital (VC) investment in private firms. First, do VCs indeed improve the efficiency (total factor productivity, TFP) of private firms, and if so, are certain kinds of VCs (high reputation vs. low reputation) better at generating such efficiency gains than others? Second, do VCs invest in more efficient firms to begin with (screening), or do they improve efficiency after investment (monitoring)? Third, do efficiency improvements due to VC backing arise from increases in sales or reductions in costs? Fourth, do VC backing and the associated efficiency gains affect the probability of a successful exit (IPO or acquisition)? Our analysis shows that the overall efficiency of VC-backed firms is higher than that of non-VC-backed firms at every point in time. This efficiency advantage of VC-backed firms arises from both screening and monitoring: The efficiency of VC-backed firms prior to receiving financing is higher than that of non-VC-backed firms, and further, the growth in efficiency subsequent to VC financing is greater for such firms. The above increases in efficiency of VC-backed firms are spread over the first two rounds of VC financing after which the TFP of such firms remains constant until exit. Additionally, we show that while the TFP of firms prior to receiving financing is lower for high-reputation VC-backed firms, the increase in TFP subsequent to financing is significantly greater for these firms, consistent with high-reputation VCs having greater monitoring ability. We disentangle the screening and monitoring effects of VC backing using three different methodologies: switching regression with endogenous switching, regression discontinuity analysis, and propensity score matching. We show that while overall efficiency gains generated by VC backing arise primarily from improvements in sales, the efficiency gains of high-reputation VC-backed firms arise also from lower increases in production costs. Finally, we show that VC backing and the associated efficiency gains positively affect the probability of a successful exit.
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Competence and commitment: Employer size and entrepreneurial endurance
Jesper Sørensen & Damon Phillips
Industrial and Corporate Change, October 2011, Pages 1277-1304
Abstract:
Most entrepreneurs emanate from established firms, but the impact of these employment histories on entrepreneurial outcomes is poorly understood. We argue that work experiences in the prior firm shape both the entrepreneur's competence in and commitment to the entrepreneurial role. We focus on the effects of employer size on the prospective entrepreneur, and argue that employer size has a negative effect on both entrepreneurial competence and commitment. This implies that entrepreneurs from small firms should have superior economic performance and, for a given level of performance, be less likely to exit entrepreneurship. We find support for these predictions in analyses of entrepreneurs in a unique data set characterizing the Danish labor market.
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Publicly funded business advisory services and entrepreneurial outcomes
Douglas Cumming & Eileen Fischer
Research Policy, forthcoming
Abstract:
Given the mixed evidence for the impact of various publicly funded initiatives that aim to foster entrepreneurial activity, this paper empirically examines the efficacy of publicly funded business advisory services in relation to entrepreneurial outcomes. Based on a sample of 228 early-stage firms, of which 101 used business advisory services focused on helping companies secure 1st rounds of financing and start generating revenues, we examine the firm-level impact such services can have on sales growth, innovation, finance and alliances. We find services are positively associated with firms' sales growth, patents, finance and alliances. We assess statistical and economic significance, and assess robustness to controls for the non-randomness of the firm's using business advisory service program, as well as endogeneity of advisors' hours spent with firms. Other robustness checks are also included. We find significant robustness of hours spent on sales and finance, but sensitivity of the effect of hours on patents and alliances after controlling for endogeneity.
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Entrepreneurial Success and Failure: Confidence and Fallible Judgment
Robin Hogarth & Natalia Karelaia
Organization Science, forthcoming
Abstract:
Excess entry - or the high failure rate of market entry decisions - is often attributed to overconfidence exhibited by entrepreneurs. Assuming that these decisions depend on assessments of business opportunities, we model boundedly rational entrepreneurs and show analytically that, whereas excess entry is an inevitable consequence of imperfect judgment, it does not necessarily imply overconfidence. Indeed, judgmental fallibility can lead to excess entry even when all potential entrepreneurs are underconfident. We further demonstrate that, as a group, individuals who decide to start a new business exhibit more confidence than those who do not and that successful entrants are less confident than failures. Our results therefore question general claims that overconfidence leads to excess entry. We conclude by emphasizing the need to understand the role of judgmental fallibility in producing economic outcomes and implications for both venture capitalists and the training of entrepreneurs.
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Catching-Up and Falling Behind: Knowledge Spillover from American to German Machine Toolmakers
Ralf Richter & Jochen Streb
Journal of Economic History, December 2011, Pages 1006-1031
Abstract:
Today, German machine toolmakers accuse their Chinese competitors of violating patent rights and imitating German technology. A century ago, German machine toolmakers used the same methods to imitate American technology. To understand the dynamics of this catching-up process, we use patent statistics to analyze firms' activities between 1877 and 1932. We show that German firms deployed imitating strategies in the late nineteenth century and the 1920s to catch-up to their American competitors. The German administration supported this strategy by stipulating a patent law that discriminated against foreign patent holders and by delaying the granting of patents to foreign applicants.
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Diagnosing Development Bottlenecks: China and India
Wei Li, Taye Mengistae & Lixin Colin Xu
Oxford Bulletin of Economics and Statistics, December 2011, Pages 722-752
Abstract:
Beginning with lower income level in 1980, China's 2006 per capita GDP stands more than twice that of India's. We investigate the role of business environment in explaining China's productivity advantage using recent firm-level survey data. We find that China has better infrastructure, more skilled workers and more labour-hiring flexibility than India, but worse access to finance and a higher regulatory burden. Infrastructure appears to be a key constraint for India: it lags significantly behind China, yet it has important indirect effects for the effectiveness of labour flexibility. Labour flexibility also appears to be a major constraint for India, as evident in the predominance of small firms, the importance of firm size in accounting for India's disadvantage in productivity and the complementarity of proxies of labour flexibility with infrastructure and access to finance. Interestingly, regulatory uncertainty has adverse effects in India but not in China. Our empirical analysis suggests that it is important to consider country-specific growth bottlenecks and the indirect effects of policy reforms.
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The Consequences of Entrepreneurial Finance: Evidence from Angel Financings
William Kerr, Josh Lerner & Antoinette Schoar
Review of Financial Studies, forthcoming
Abstract:
This article documents the fact that ventures funded by two successful angel groups experience superior outcomes to rejected ventures: They have improved survival, exits, employment, patenting, Web traffic, and financing. We use strong discontinuities in angel-funding behavior over small changes in their collective interest levels to implement a regression discontinuity approach. We confirm the positive effects for venture operations, with qualitative support for a higher likelihood of successful exits. On the other hand, there is no difference in access to additional financing around the discontinuity. This might suggest that financing is not a central input of angel groups.
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Do Patents Matter for Commercialization?
Elizabeth Webster & Paul Jensen
Journal of Law and Economics, May 2011, Pages 431-453
Abstract:
This paper estimates the effect of a patent grant on the likelihood that an invention will progress to different commercialization stages, using survey data on 3,162 inventions that were the subject of a patent application. We find that about 40 percent of all inventions advanced to the point of market launch and mass production. Although a patent grant had no effect on the decision to proceed with the commercialization process, being refused a patent reduced the probability of attempting market launch and mass production by about 13 percentage points. Over and above this, having protection from several other complementary patents increased the probability of commercialization by an additional 3-5 percentage points.
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John Duffy
Stanford Law Review, June 2011, Pages 1247-1288
Abstract:
The rise of business method patents in the late twentieth century, and the controversy that has accompanied such patents over the last decade, has often been cast as being precipitated by novel judicial precedent that radically departed from traditional understandings of patentable subject matter. In particular, the Federal Circuit's decision in State Street Bank & Trust Co. v. Signature Financial Group has often been described, especially by opponents of business method patents, as an example of judicial activism that introduced patents into a field where patenting was unwanted and unnecessary. This Article demonstrates that such an explanation for the rise of business method patents is not accurate. The rise of business method patents was generated not so much by any court decision or other change in the legal system, but rather by fundamental technological and industrial changes that, during the second half of the twentieth century, began to transform many business fields into branches of engineering. This Article documents those technological and industrial changes and shows that the rise of business method patents is in fact an excellent case study in which the law followed, and accommodated, dramatic changes happening elsewhere in society.
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Amol Joshi & Atul Nerkar
Strategic Management Journal, November 2011, Pages 1139-1160
Abstract:
Research and development (R&D) consortia are specialized strategic alliances that shape the direction and scope of firm innovation activities. Little research exists on the performance consequences of participating in R&D consortia. We study the effect of patent pools, a unique form of R&D consortia, on firm performance in innovation. While prior research on alliances generally implies that patent pools enhance firm innovation, our study finds the opposite. Analyzing data on systemic innovation in the global optical disc industry, we find that patent pool formation substantially and significantly decreases both the quantity and quality of patents subsequently generated by licensors and licensees relative to the patenting activity of nonparticipants. Our empirical findings suggest that patent pools actually inhibit, rather than enhance, systemic innovation by participating firms.
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Fighting City Hall: Entry Deterrence and Technology Upgrades in Cable TV Markets
Robert Seamans
Management Science, forthcoming
Abstract:
This article investigates how private firms respond to potential entry from public firms. This paper uses a data set of over 3,000 U.S. cable TV systems to present evidence consistent with entry deterrence. Incumbent cable TV firms upgrade faster when located in markets with a potential municipal entrant. However, the same systems are then slower to offer new products enabled by the upgrade, suggesting upgrades in these markets occur for strategic reasons. Incumbent cable systems also upgrade faster in response to municipal entry threats than to private entry threats. Understanding how private firms respond to potential entry from public firms is especially important in light of recent U.S. government entry into several industries.