When Does Lack of Resources Make New Firms Innovative?

In this study, the environmental characteristics that giverise to innovation in new firms are investigated. Following a discussion of theresource-based view of the firm, several hypotheses are proposed. Takentogether, these hypotheses predict that new firms will have a higher rate ofinnovation in smaller, more competitive markets in which financial resourcesare more plentiful. A fourth hypothesis suggests that new firms innovate less often inmanufacturing-intensive markets. Data on 964 attempts by firms to innovateusing 1,397 inventions patented by the Massachusetts Institute of Technology(MIT) between 1980 and 1996 are used to test the hypotheses. Analysis of thedata indicates that the market environment does indeed play an important rolein determining when new firms innovate. New firms are more likely to achieve first sale and less likely to abandonefforts to innovate in smaller, more competitive markets that boast fewresources and are not focused on manufacturing. These results challenge theconventional assumption that low-competition, high-demand environments withplentiful resources most often lead to innovation. (SAA)