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Economics of innovation

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Question:

Main actors in the innovation process (Entreprenuers and venture capitalists)

Author: Nasta Charniak



Answer:

Schumpeter distinguished between two models of innovation. In the Mark I model, creative destruction is driven by the entrepreneurial task of ‘breaking up old, and creating new tradition’. Schumpeter’s Mark II model recognized that entrepreneurship occurs in large established firms as well as newly created firms, reflecting the changing industrial realities as formally organized, large-scale R&D activities grew in scale from the 1920s. Entrepreneurship is therefore the organizational process by which opportunities are sought, developed, and exploited in many different kinds of company and organization. Entrepreneurial start-up firms often receive investments from venture capitalists who are prepared to assume higher risks than high street and investment banks. Different international models of venture capital exist, but the US is often considered exemplary. US venture capital may include funds from private investors or corporations, and their managers may possess deep experience or knowledge of particular technological sectors and become engaged in the governance of start-up companies. The objective of venture capitalists is usually to acquire shares in companies in their early years that then reap extraordinary returns after they exit when the firms have reached sufficient maturity to attract a purchaser or to be floated on a stock market. Among their portfolio of investments, venture capitalists recognize that the majority of returns will come from a limited number of cases (power law)


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