Working Paper: CEPR ID: DP14861
Authors: Di Guo; Haizhou Huang; Kun Jiang; Chenggang Xu
Abstract: Among the 87 revolutionary innovations in the world over the life of the Soviet Union, 86 were invented in capitalist economies (Kornai, 2013). This paper studies why this is the case. This paper provides a theoretical foundation, which explains why disruptive innovations are organized and financed with a large number of independent small firms in a capitalist economy. Whereas not allowing private ownership, this kind of arrangement is not an option in an economy where only state ownership exists. This paper also contributes to empirical work on disruptive innovation, which is missing in the literature. We use FDA approved new molecular entities (NMEs) in the pharmaceutical industry as a proxy of disruptive innovation in the industry. Although pharma firms are often very large in size, their R&Ds for developing NMEs depend deeply on forming R&D alliances with independent small R&D firms. We find NMEs invented by a pharma firm is positively and significantly associated with the number of R&D alliances that the firm creates.
Keywords: Socialism; Capitalism; Innovation; Soft-Budget Constraint
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Commitment capacity to terminate failing R&D projects (G31) | R&D alliances (O36) |
| Hard budget constraints (HBC) (H60) | R&D decisions (O32) |
| Soft budget constraints (SBC) (H60) | R&D inefficiencies (O32) |
| R&D alliances (O36) | NMEs (Y20) |