Tacit knowledge with innovative entrepreneurship

a r t i c l e i n f o Tacit knowledge affects the trade-off between entrepreneurship and technology transfer. I present a formal model in which an inventor and the existing firm engage in a strategic innovation game by choosing whether to compete or to cooperate through technology transfer. The model highlights how the problem of tacit knowledge affects the inventor's R&D investment and the existing firm's investment in absorptive capacity. The inventor's tacit knowledge implies that benefits from own-use through entrepreneurship can exceed the benefits from technology transfer. In equilibrium, higher-quality inventions result in entrepreneurship and lower-quality inventions result in technology transfer. R&D investment and absorption investment are strategic substitutes in the innovation game with the option of entrepreneurship. The possibility of entrepre-neurship increases R&D investment and reduces absorption investment. The equilibrium probability of entre-preneurship is decreasing in the costs of R&D, increasing in the costs of absorption, and decreasing in the setup costs of new firms. Inventors' tacit knowledge can make it difficult to separate discoveries from the individuals who make them. Although both inventors and adopters know that a discovery has particular features, some inventors know how to apply their discoveries better than do potential adopters. Inventors can benefit from their tacit knowledge by becoming innovative entrepreneurs who establish firms to implement their discoveries. However, entrepreneurship entails costs of setting up new firms and rent dissipation from competing with existing firms. Alternatively, inventors can transfer their discoveries to existing firms but this entails costs of codifying, transferring, and absorbing tacit knowledge and imperfect implementation of discoveries. 1 Therefore, tacit knowledge creates a fundamental trade-off between own-use of discoveries by their inventors and adoption of discoveries by others. To address this trade-off, I present a formal model that examines how inventors' tacit knowledge influences the choice between innovative entrepreneurship and technology transfer. The option of innovative entrepreneurship changes the market for discoveries and affects inventors' investment in research and development (R&D) and potential adopters' investment in absorption of discoveries. The economic analysis of tacit knowledge presented here highlights the important role of the individual inventor. The individual inventor's tacit knowledge is essential for implementing technology. Tacit knowledge gives an own-use advantage to inventors who become innovative entrepreneurs in comparison with technology transfer to existing firms. This result contrasts with the standard view that complementary assets give existing firms an advantage in implementing technology. 2 Tacit knowledge …