Why start-ups do radical innovations – novel insights in study by Joachim Henkel and co-authors

New entrants to a market tend to be superior to incumbents in originating radical innovations. In a recent study, Joachim Henkel (TUM), Thomas Rønde (Copenhagen Business School), and Marcus Wagner (University of Würzburg) provide a new explanation for this phenomenon, based on markets for technology. It applies in industries where successful entrepreneurial firms, or their technologies, are acquired by incumbents that then commercialize the innovation – a frequent phenomenon e.g. in software and life sciences. The authors find that, compared to incumbents, entrants tend to choose more radical R&D approaches, characterized by a higher risk of failure and a higher value in case of success. Essentially, incumbents can “wait and see” what the outcome of innovation by entrants is, and rely on the start-ups’ need to be acquired. At the same time, they perform conservative projects as a fall-back in case none of the entrants succeeds. The start-ups, in turn, need to perform radical projects in order to differentiate and to realize profits. The theoretical findings of the study are illustrated by a qualitative empirical study of the Electronic Design Automation industry. The study is available here.

Henkel, J., Rønde, T., Wagner, M. (2014) And the winner is – acquired. Entrepreneurship as a contest yielding radical innovations. Research Policy, dx.doi.org/10.1016/j.respol.2014.09.004.