Being the best or being the only one – Dichotomous R&D strategy choices by startups aiming for acquisition

Abstract

We characterize optimal R&D strategies in a model where an incumbent and a startup with no possibility to enter the market choose both investment level and radicalness of their R&D projects. The incumbent commercializes the most valuable project, and, where necessary, acquires the startup. The startup has two locally optimal strategies: A “high quality” and a “low cost” strategy where it aims for having the most valuable and the only successful R&D project, respectively. The struggle for rents inside the innovation system results in an inefficient portfolio of projects compared to the R&D choices that a monopolist would make.