Focused Firms and the Incentive to Innovate

Posted: 19 Jan 2006

See all articles by Kenneth S. Corts

Kenneth S. Corts

University of Toronto - Rotman School of Management

Abstract

This paper explores the possibility that a firm may make a credible strategic commitment to high levels of innovation by limiting its horizontal or vertical scope. Specifically, I develop a model in which a firm decides whether to undertake an innovation that affects a system of products, which can also be interpreted as multiple stages of the production process. The products are technologically related, and innovation in the core product is assumed to impose costs on the producers of ancillary products, due to cannibalization of the old technology and redesign or retooling costs, for example. I demonstrate that a firm may optimally and credibly commit to innovate by choosing to be a focused firm and licensing the production of the ancillary product, even when licensees are inefficient. In stark contrast to the irrelevance results of the strategic delegation literature, this commitment may be credible even when licensing contracts are renegotiable, but only if licensees are sufficiently inefficient.

Keywords: innovation, vertical integration

JEL Classification: L1, L2

Suggested Citation

Corts, Kenneth S., Focused Firms and the Incentive to Innovate. Journal of Economics and Management Strategy, Vol. 9, No. 3, pp. 339-362, 2000, Available at SSRN: https://ssrn.com/abstract=875468

Kenneth S. Corts (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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