Innovation, entrepreneurship, and the firm: The wealth of individuals

It is well known that possession of competitively valuable information contributes to the realization of profits, when it is used proprietarily. It is also well known that the proprietary use of this information increases the competitive uncertainty of market agents, who do not have access to it. This study offers a theory how market agents cope with competitive uncertainty. The theory of protection costs explains that loss averse market agents incur costs to reduce competitive uncertainty. Because competitive uncertainty is a state of incomplete information, protection costs are incurred (1) to collect, (2) develop, and (3) protect competitively valuable information. The theory of protection costs is used to explain the internal organization of firms. On this view the internal organization of firms is determined by evaluating how processes contribute to the collection, development, and protection of competitively valuable information. Processes that contribute to the collection development, and protection of competitively valuable information are internalized, and processes that do not are outsourced. Finally, the theory of protection costs and the model of the firm are used to review the stakeholder theory of the firm and to propose a reform in the intellectual property system. Two types of stakeholder claims are distinguished: (1) rights claims, based on legal rights, and (2) quasi claims, which arise from exchange relationships but are not specified in contracts. While rights claims are unquestionably to be taken seriously by the managers and owners of firms, quasi claims are found to be contrary to the principle of internalizing processes for protection purposes. This argument advocates stronger protection of the interests of the owners of the firm. Yet, the strong emphasis on protection of valuable intellectual assets leads also to the proposal that employees/inventors have the right to claim back patents, which firms do not commercialize. This right is justified on the grounds that if employers were to specify exactly the protected intellectual assets, serendipitous innovations would have remained owned by their inventors. It is concluded that such a policy will mobilize dormant intellectual assets and will promote entrepreneurship.