Entrepreneurship & Innovation

We analyze incomplete long-term financial contracts between an entrepreneur with no initial wealth and a wealthy investor. Both agents have potentially conflicting objectives since the entrepreneur cares about both pecuniary and non-pecuniary returns from the project while the investor is only concerned about monetary returns.

Four groups are identified among 113 Fortune 500 manufacturers that approach innovation quite differently. The groups are based on 27 measured elements of formal and informal organization, corporate strategy, and corporate environment. Both financial performance and product innovation differ significantly among the groups. A group of 42 firms that invest heavily in innovation perform the best financially, with a smaller group of firms that are not innovative but which follow a strategy of acquisition performing nearly as well financially.

A number of issues that relate to the desirability and implications of new venture financing are examined within a principal-agent framework that captures the essence of the relationship between entrepreneurs and venture capitalists. The model suggests: (1) As long as the skill levels of entrepreneurs are common knowledge, all will choose to involve venture capital investors, since the risk sharing provided by outside participation dominates the agency relationship that is created.

An analysis of the environments of leading manufacturing firms operating in the United States and in Australia produced a series of hypothesized differences in the strategies, organization structures, and market environments of firms in the two countries. Parallel hypotheses about differences between domestic Australian firms and subsidiaries of foreign multinationals operating in Australia were also developed. The hypotheses were by and large supported when tested on data obtained from leading corporations in the two countries.