Chapter 5: Innovation of Entrepreneurial Firms
INTRODUCTION The growing interest in the behavior of small entrepreneurial firms refocuses attention on the role that the entrepreneur plays in the firm and the economy (Brock and Evans 1989; Acs and Audretsch 1990a and 1990b). This chapter describes recent theoretical research into the function of the entrepreneur and provides an empirical test of the implications of the limited attention which must be allocated between maintaining current operations and innovating new products. One of the implications of the optimal allocation is that innovation depends on firm size and monopoly profits only if the ability to maintain current operations is high relative to the ability to innovate new products. In this case, some attention is allocated to trying to improve current products through product improvement or process innovation and away from new product innovation. This diverts attention away from efforts to innovate new products. The inability to maintain the profitability of current operations is defined as obsolescence. As the firm grows, more attention is diverted away from new product innovation in order to maintain the profitability of a growing number of current product lines. However, greater profits decrease the frequency with which each product must be improved and so increase the amount of attention allocated to new product innovation. Therefore, if the firm conducts product improvement as well as new product innovation, then new product innovation decreases with firm size and increases with monopoly profits. Product improvement is optimal only if the degree of obsolescence of current product lines is not...
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