MANAGING INNOVATIONS: INFORMATION AND CONTRACTS

Abstract

Innovation has been acknowledged by both researchers and practitioners as a vital tool to yield growth and maintain competitive advantages. However, firms face stiff challenges in managing innovations. Developing new product generally requires substantial resource input, but the success rate is usually low due to internal technical difficulties and external market uncertainties. Even with successful innovative products, it is not guaranteed that the innovators will be rewarded for their efforts and investments, as the return from innovations may be siphoned off by suppliers, customers, and competitors. To profit from innovations, firms need to first create value with the right R&D strategies, and further capture value in the execution of innovations when dealing with the relevant partners. This dissertation studies the management of innovations and addresses these two important issues respectively. In the first essay, we investigate how strategically managing information can improve the new product performances in competitive R&D markets. The new product development process is essentially a series of inter-linked information processing activities: firms generate ideas, gather information from external environment to evaluate the feasibility and potential of the ideas, conduct research to create new knowledge and intellectual property, and finally commercialize the new knowledge into the market to generate value. We focus on how firms should acquire and manage external market information in competitive R&D markets, and how the information acquisition and management strategies impact their R&D investment decisions. The second essay studies how firms should manage the relationship with the relevant parties in the execution of innovations. The intrinsic uncertainty in the materialization of innovations, the intangibility of technical knowledge assets, and the difficulty of specifying and monitoring the performance of the other party, are the primary clauses that give rise to the hold-up problem in innovation partnerships -- that is, the R&D investment by a firm leaves it vulnerable to ex post opportunistic behaviors by its contracting partner (whether its supplier, customer, or joint venture partner). We study how the operational aspect of an evolving relationship may influence a firm's innate incentives to take advantage and `hold-up' the partner and mitigate the hold-up problem in innovation partnerships. The third essay extends the discussion of hold-up problem to general incomplete contracts and moral Darwinism. In conventional economic models, rational players are usually assumed to be self-interested and can take opportunistic actions to maximize their own payoffs, while socially desirable traits such as honesty and trust are often characterized as irrational and studied as deviations from tenets of rationality. However, these irrational traits are commonly observed in practice despite the widespread nature of incomplete contracts which have plenty of room for opportunism. This essay asks why traits such as honesty have not been weeded out by economic Darwinism, and offers a justification that the choice of honesty emerges both as desirable and rational under very reasonable conditions.