The Economics of Intrapreneurial Innovation

We present a model of employee-firm interaction in which private intrapreneurial activity competes with the basic activity of the firm. The parent firm lacks ownership over any new asset created through intrapreneurial activity, but asset complementarity gives it an advantage over outsiders in the auction to develop the asset. We show that a firm might tolerate or even encourage intrapreneurial activity if the complementarity is high and the innovation environment is favourable. Contrary to intuition, higher complementarity may lead to lower innovation levels. We present some empirical evidence in support of the model's predictions - among a sample of publicly listed firms that are prolific spawners of new ventures, the profit share paid to the employee is negatively related to the level of intrapreneurship in the firm.