Thomas B. Astebro

The Return to Independent Invention: Evidence of Unrealistic Optimism, Risk Seeking or Skewness Loving?

Examining a sample of 1,091 inventions I investigate the magnitude and distribution of the pretax internal rate of return (IRR) to inventive activity. The average IRR on a portfolio investment in these inventions is 11.4%. This is higher than the risk-free rate but lower than the long-run return on high-risk securities and the long-run return on early-stage venture capital funds. The portfolio IRR is significantly higher, for some ex ante identifiable classes of inventions. The distribution of return is skew: only between 7-9% reach the market. Of the 75 inventions that did, six realised returns above 1400%, 60% obtained negative returns and the median was negative.

Noncapital Investment Costs and the Adoption of CAD and CNC in U.S. Metalworking Industries

Many studies have shown that firm size is the strongest and most consistent predictor of the adoption of technological innovations, but the causes for this relationship are debated. I investigate the relationships between various size measures and the adoption of computer-aided design (CAD) and computer numerically controlled (CNC) machine tools. Plant size is the dominant factor in predicting CAD and CNC adoption. Other measures such as firm size or multiplant operations have independent effects that are not present after controlling for plant size. I test four potential explanations for the results: noncapital cost spreading, equipment replacement, risk aversion, and learning. There is support only for the first explanation.

Stars and Misfits: Self-Employment and Labor Market Frictions

Recent evidence has shown that entrants into self-employment are disproportionately drawn from the tails of the earnings and ability distributions. This observation is explained by a multitask model of occupational choice in which frictions in the labor market induce mismatches between firms and workers, and misassignment of workers to tasks. The model also yields distinctive predictions relating prior work histories to earnings and to the probability of entry into self-employment. These predictions are tested with the Korean Labor and Income Panel Study, from which we find considerable support for the model. This paper was accepted by Lee Fleming, entrepreneurship and innovation.

Seeking the Roots of Entrepreneurship: Insights from Behavioral Economics

There is a growing body of evidence that many entrepreneurs seem to enter and persist in entrepreneurship despite earning low risk-adjusted returns. This has lead to attempts to provide explanations—using both standard economic theory and behavioral economics—for why certain individuals may be attracted to such an apparently unprofitable activity. Drawing on research in behavioral economics, in the sections that follow, we review three sets of possible interpretations for understanding the empirical facts related to the entry into, and persistence in, entrepreneurship. Differences in risk aversion provide a plausible and intuitive interpretation of entrepreneurial activity. In addition, a growing literature has begun to highlight the potential importance of overconfidence in driving entrepreneurial outcomes. Such a mechanism may appear at face value to work like a lower level of risk aversion, but there are clear conceptual differences—in particular, overconfidence likely arises from behavioral biases and misperceptions of probability distributions. Finally, nonpecuniary taste-based factors may be important in motivating both the decisions to enter into and to persist in entrepreneurship.

How to Deal with Missing Categorical Data: Test of a Simple Bayesian Method

The authors analyze the efficiency of six missing data techniques for categorical item nonresponse under the assumption that data are missing at random or missing completely at random. By efficiency, the authors mean a procedure that produces an unbiased estimate of true sample properties that is also easy to implement. The investigated techniques include listwise deletion, mode substitution, random imputation, two regression imputations, and a Bayesian model-based procedure. The authors analyze efficiency under six experimental conditions for a survey-based data set. They find that listwise deletion is efficient for the data analyzed. If data loss due to listwise deletion is an issue, the analysis points to the Bayesian method. Regression imputation is also efficient, but the result is conditioned on the specific data structure and may not hold in general. Additional problems arise when using regression imputation, making it less appropriate.

Entrepreneurs, Jacks of all trades or Hobos?

Lazear (2005) suggests that entrepreneurs should be generalists, while those who work for others should be specialists. Many prospective entrepreneurs will develop varied skills by engaging in a variety of employment activities prior to becoming an entrepreneur, and incomes are higher for those that do so. An alternative view predicts that those with greater taste for variety are more likely to become entrepreneurs. Varied employment prior to becoming an entrepreneur is simply an expression of this taste, and is associated with lower earnings. Data from a survey of 830 independent inventors and 300 individuals from the general population are used to discriminate between these two theories. The results show that inventor-entrepreneurs typically have a more varied labor market experience, and that varied work experience is associated with lower household income.

The effect of management and social interaction on the intra-firm diffusion of electronic mail systems

Can management affect the rate by which organizational members adopt a new computer based communication medium? The question is addressed by comparing the rate by which employees start to use an electronic mail system (EMS) and case descriptions across four departments during a five year period in a large Swedish manufacturing company. Data on EMS use are fitted to a model describing the spread of use as a function of social and management influence. Data are consistent with the hypothesis that the rate of new users of EMS can be influenced by both department-level management and peers. Faster growth in use occurred when department-level management exercised implementation efforts. The rate of growth increased significantly when a local information center (IC) was established. The more resources the local IC was supplied with the higher the rate of growth in EMS use. Management of the implementation process may be especially preferred when introducing end-use network technologies in organizations due to interdependent demand among users.

Universities, Entrepreneurship and Local Economic Development

There has been an increased trend in the number of spin-offs generated by universities in the past thirty years. Past research reveals that the majority of these start-ups are located in the same region as the university from which they originated. In this paper, we investigate critically what universities do to encourage entrepreneurship to increase regional economic development. We will also discuss whether maximizing local entrepreneurship necessarily maximizes total welfare. Unfortunately, the scientific evidence reviewed in this paper indicates that policy changes at universities typically have very little impact on commercialization of research and the benefits to the universities are marginal. For example, current evidence indicates that creating incubators and science parks on university grounds have no discernable effects on local start-up rates. Further, from a theoretical perspective we have reviewed articles showing that introducing Technology Licensing Offices (TLOs), the most popular method to stimulate research commercialization, may likely introduce economic inefficiencies, hold-ups and decision biases that deviate from what is optimal. The median university among the top U.S. research-based institutions creates less than two academic spin-offs per year and so the relative effects on local economic conditions through TLO efforts and policies are bound to be marginal. Nevertheless the evidence also shows that the scientific stature of the faculty, the commercialization culture at the university, and the sheer number of science and engineering students graduated do have important positive effects on local start-up rates. Increasing expenditures on university staff and students causes increases in regional productivity growth and innovation and the marginal effects are much bigger in structurally weak regions. Evidence confirms that university spin-offs disproportionally favor local development. Maybe as much as 80 percent of all university spin-offs are and remain locally situated. However, universities that maximize local effects will not maximize their societal impact. Instead, it appears more efficient if universities simply try to maximize licensing revenues and not worry about the number of spin-offs and their locations.

Basic Statistics on the Success Rate and Profits for Independent Inventors

1,095 responses were received from a telephone survey of independent inventors. The majority of inventors surveyed (89%) are male, and a plurality of their inventions are designed for consumer products (47%). Conditional on commercializing their invention, and at development costs about 1/8 of those in established firms, inventive efforts by independent inventors lead to gains virtually comparable to those of established firms. Their innovations survive for about as long as the average start-up. Gross profit margins are comparable to the pharmaceutical industry (29%). However, only a small fraction of inventions developed by independent inventors reach the market (6.5%). The probability of reaching the market is four to eight times less than for inventions developed by established firms. Why do only a fraction of inventions developed by independent inventors become commercialized when those that do commercialize are quite profitable and survive for as long as other start-ups?

Profitable Advice: The Value of Information Provided by Canada's Inventor's Assistance Program

Inventors who are considering whether and how to commercialize their inventions. can often avail themselves to evaluations and advice provided by government supported programs initiated to encourage innovation. In Canada. such a service is provided by the Canadian Innovation Centre. through its Inventors Assistance Program. In its twenty years of operations the IAP has evaluated 11,000 inventions. The fee charged for an invention evaluation was Cdn.