PUB - Publikationen an der Universität Bielefeld

In this paper we examine to what extent market conditions facilitating start-up formation affect technical change and firms' profits. We consider a model in which R&D efforts of an incumbent firm generate partly tacit technological know-how embodied in a key R&D employee, who might use it to form a start-up. The availability of complementary assets influences whether new firms are created and determine expected profits for start-up-founders. A large availability of complementary assets has the direct effect that the generation of start-ups is fostered. However, as a strategic effect, the incentives of incumbent firms to invest in R&D might be reduced because of the increased danger of knowledge loss occurring through start-up formation. We fully characterize the effects of an increase in the availability of complementary assets, showing under which conditions the effects on innovative activities and industry profits are negative.