Innovation by asymmetric firms

One need only look at the list of the world's most valuable firms, including Apple Inc. and Microsoft, to understand that there is a link between innovation and success. However, little has been done to explore why some firms are more innovative. In this thesis we explore one possible reason that some firms are more innovative than others: innate ability. The first essay explores the importance of abilities on the innovative process, defined as a firm's ability to spot and implement new technologies. We observe that if the more able firm possesses both an ability and timing advantage, it always becomes the dominant firm. However, if an ex ante low ability firm has an investment timing advantage it can become the ex post market leader if and only if the a priori ability gap is not too large. The second essay analyses whether a firm's incentive to agglomerate, when research spillovers are location based, survives the existence of asymmetric abilities which may generate heterogeneous unit costs. First, we find that agglomeration is never optimal, not even when the firms are symmetric, due to the threat of rapidly escalating of price competition. Second, where a firm is better able to both reduce its own costs and assimilate a rival's economic knowledge, it becomes more aggressive in terms of both location and investment, leading to increasingly asymmetric outcomes. The third essay examines the impact abilities have on venture capital funding. Specifically, we consider the impact of venture capital from the firms' perspectives. We find evidence of both a direct and indirect impact of venture capital. Furthermore, we find that the commonly held assertion that venture capital spurs success is too vague. Instead, venture capital only spurs innovation amongst the "lucky", chosen few, but unambiguously suppresses innovation of non-VC-backed firms.