TABLE OF CONTENTS
Introduction - Josh Lerner, Scott Stern
DOI: 10.7208/chicago/9780226473062.003.0001
[innovation, economic growth, mature economies, firms]
Innovation—whether in the form of new products such as the iPad, new ways of incorporating process technologies such as bar coding, or new management practices—is critical to economic growth. This is particularly true in mature economies such as the United States and Europe, where pressing fiscal and demographic challenges preclude many other avenues to growth. Despite the critical nature of innovation, much remains unclear as to how nations, firms, and academic bodies can encourage this activity. While impressive strides have been made in understanding the economics of innovation over the past few decades, much about this activity remains uncertain or even mysterious. This volume simultaneously provides general building blocks for understanding the innovation process and reflects the issues of its day. It is based on the proceedings of the National Bureau of Economic Research 50th Anniversary Conference in honor of the influential 1962 volume, The Rate and Direction of Inventive Activity: Economic and Social Factors, edited by Richard Nelson. The volume seeks to sponsor new theoretical and empirical contributions on fundamental questions in the economics of innovation and technological change. An explosion of empirical and theoretical research in the economics of technological change, as well as contemporary policy challenges, suggest an opportunity for reevaluation of the traditional innovation policy framework. (pages 1 - 24)
This chapter is available at:
https://academic.oup.com/chica...
I. Panel Discussion: The Impact of the 1962 RATE AND DIRECTION Volume, a Retrospective
Why Was Rate and Direction So Important? - Nathan Rosenberg, Scott Stern
DOI: 10.7208/chicago/9780226473062.003.0002
[rate and direction, technological change, inventive activity, innovation, economics, microeconomics]
This chapter begins with a critical assessment of the 1962 edition of this book, with a focus on identifying why this earlier volume turned out to be so influential on subsequent scholarship. The central contention of the remarks is that the Rate and Direction Conference can be interpreted as a reaction to the work by Solow and others highlighting the aggregate implications of technological change. More than simply a debate about the nature of the “residual,” the 1960 conference focused attention on the central economic questions raised by inventive activity, innovation, and technological change. Specifically, it highlighted (1) the nature of innovation as an economic good, (2) the economics of the organization of research and development, and (3) the industrial organization of innovation-intensive industries and sectors, with a particular focus on dynamics and evolution. As a marker in the history of economic thought in this area, a central contribution of the earlier conference was to crystallize the questions and issues that would come to dominate the microeconomics of innovation and technological change for the foreseeable future. (pages 27 - 34)
This chapter is available at:
https://academic.oup.com/chica...
Some Features of Research by Economists on Technological Change Foreshadowed by The Rate and Direction of Inventive Activity - Richard R. Nelson
DOI: 10.7208/chicago/9780226473062.003.0003
[research by economists, technological change, empirical research, interdisciplinary approach, Science Policy Research]
This chapter focuses on some broad lessons that have emerged since the 1960 conference and on important methodological issues that have been raised. An important divide exists between the type of theory and empirical research emphasized within the United States (and within the National Bureau of Economic Research (NBER)) and the interdisciplinary, evolutionary approach that has been emphasized by researchers such as those at the Science Policy Research Unit in the United Kingdom. Some of the underlying tensions between these two camps were foreshadowed in the earlier volume of the book: the largely empirical tradition pioneered by Kuznets and Schmookler (and reflected in the NBER Productivity Program and its growth under Zvi Griliches) sat (sometimes uncomfortably) alongside the detailed case studies or innovation systems studies emphasized within the evolutionary tradition. (pages 35 - 42)
This chapter is available at:
https://academic.oup.com/chica...
The Economics of Inventive Activity over Fifty Years - Kenneth J. Arrow
DOI: 10.7208/chicago/9780226473062.003.0004
[economics, inventive activity, innovation, social characteristics, nonmarket factors]
The hypothesis that inventions require a distinctive mental effort led to an emphasis in the 1962 volume on the psychological and social characteristics of inventors, reflected in the terms “social” and “nonmarket factors.” The comments crystallized why economists have had such difficulty in clarifying the nature of innovation as an economic good. This chapter highlights the idea that the economics of innovation must confront and incorporate some of the unusual properties of innovation, both in terms of its production—for example, the significant level of uncompensated effort toward inventive effort, in areas ranging from medicine to Wikipedia—and use. It concludes with a note about the genesis of the two volumes. A great deal of attention was paid to the role of government procurement of innovation in the first volume, primarily in relation to defense. (pages 43 - 48)
This chapter is available at:
https://academic.oup.com/chica...
II. The University- Industry Interface
Funding Scientific Knowledge: Selection, Disclosure, and the Public-Private Portfolio - Joshua S. Gans, Fiona Murray
DOI: 10.7208/chicago/9780226473062.003.0005
[scientific research, private funding, research proposal, public–private portfolio, funding]
This chapter takes a conceptual look at the issues associated with funding academic research. It begins with a paradox: when agencies funding scientific research emphasize basic research over translational projects, they are criticized for their impracticality, but when they emphasize near-term mission-oriented R&D projects, they are criticized for crowding out what industry would have done otherwise and backing redundant efforts. A model in which the supply of and demand for public funds plays out in a world where private funding sources also exist is presented. The choices regarding funding sources—and the impact of publicly imposed requirements around disclosure—will vary not only with the scientific merit of the research proposal, but also with the immediacy of its applicability to commercial uses. The chapter gives a fresh insight into the subtle ways that public and private funding interact, and the role that government policy (e.g., mandating openness) plays in shaping the production and use of knowledge. (pages 51 - 103)
This chapter is available at:
https://academic.oup.com/chica...
The Diffusion of Scientific Knowledge across Time and Space: Evidence from Professional Transitions for the Superstars of Medicine - Pierre Azoulay, Joshua S. Graff Zivin, Bhaven N. Sampat
DOI: 10.7208/chicago/9780226473062.003.0006
[diffusion, scientific knowledge, professional transitions, academic mobility, physical proximity, researcher]
This chapter discusses the consequences of academic mobility and the extent to which the movement of high-achieving faculty members affects both scientific and commercialization activities at their old and new schools. It looks at articles published by, and patents granted to, the mobile scientist before they departed for the new school, comparing these to similar outputs by scientists who did not move. The heterogeneity that can distort simpler comparisons can be limited. The analysis suggests that the citations to a departing scientist's articles from the university where he or she departs are barely affected by the move. However, citations to the departing scientist's patents (whether made in articles or patents) decline sharply at the originating school. This suggests that the physical proximity of the researcher is important to ensuring knowledge flows to industry. Citations to the scientist's work at his or her new location increase dramatically once the move is complete. Barriers to scientific mobility may actually be socially detrimental, as they prevent the kind of knowledge gains from the mixing of ideas. (pages 107 - 155)
This chapter is available at:
https://academic.oup.com/chica...
The Effects of the Foreign Fulbright Program on Knowledge Creation in Science and Engineering - Shulamit Kahn, Megan MacGarvie
DOI: 10.7208/chicago/9780226473062.003.0007
[Fulbright Program, scientific mobility, postgraduation, United States, poorer nations]
This chapter explores the impact of scientific mobility, focusing on the Fulbright Foreign Student Program, which since 1946 has brought students from many countries to undertake graduate studies in the United States, with the expectation that they spend at least two years in their home nation before they can return. The Fulbright scientists (relative to the controls) spent more than twice as many of their postgraduation years outside the United States when compared to controls. While the program does increase collaborations between U.S. scientists and those based in the emerging world, Fulbright scientists from poorer nations or those with a weaker scientific tradition have fewer publications and less of an impact. This effect is not seen among those scholars from wealthier nations or those with a stronger scientific base. (pages 161 - 197)
This chapter is available at:
https://academic.oup.com/chica...
III. Market Structure and Innovation
Schumpeterian Competition and Diseconomies of Scope: Illustrations from the Histories of Microsoft and IBM - Timothy F. Bresnahan, Shane Greenstein, Rebecca M. Henderson
DOI: 10.7208/chicago/9780226473062.003.0008
[Schumpeterian competition, personal computer, browser, firm, technological trajectory, hypothesis]
This chapter discusses the detailed case studies of two historically important transitions: the introduction of the personal computer and the browser. Its analysis allows it to both assess the adequacy of existing theories (e.g., ant cannibalization concerns or the potential for organizational barriers within incumbents) and to identify key patterns that seem to characterize the process of creative destruction. The chapter points to a novel driver of creative destruction: diseconomies of scope induced by the presence of necessarily shared assets within the firm. When the strategic commitments made by an incumbent are necessarily reflected in business activities for both the old and the new technological trajectory, the incumbent may not simply be able to create a “firm-within-a-firm” to preempt competitive entry. The fact that the incumbent must simultaneously sell both the new and the old technologies may put them at a disadvantage in both technologies relative to an entrant; this disadvantage can be observed through the significant organizational conflicts that accompany technological transitions. This leads to a novel hypothesis about the underlying forces that may be at the heart of many cases of incumbent failure in the face of the gale of creative destruction. (pages 203 - 271)
This chapter is available at:
https://academic.oup.com/chica...
How Entrepreneurs Affect the Rate and Direction of Inventive Activity - Daniel F. Spulber
DOI: 10.7208/chicago/9780226473062.003.0009
[entrepreneurs, incumbents, innovators, incentive]
This chapter discusses how the strategic interaction between incumbents and innovators in the market for ideas shapes (and is shaped by) the potential for product market competition. On the one hand, if the market for ideas is efficient (e.g., there can be perfect, low-cost transfer of both new designs and process innovations), then incumbents and entrants will have an incentive to cooperate (rather than compete) in the commercialization process. However, when technology transfer of either product designs or processes is imperfect, then innovators will have an incentive to enter the product market and so start-up innovation will be associated with increased competition. An overarching lesson of the analysis is that the incentives for entry are higher when the underlying technologies are more (horizontally) differentiated from each other. Because the gains from cooperation are higher when the degree of differentiation is lower, the likelihood of entrepreneurial entry is higher under conditions of high product differentiation and imperfect technology transfer. (pages 277 - 315)
This chapter is available at:
https://academic.oup.com/chica...
Diversity and Technological Progress - Daran Acemoglu
DOI: 10.7208/chicago/9780226473062.003.0010
[diversity, technological progress, innovation, incumbency]
This chapter discusses the relationship between innovation and incumbency, but places emphasis on a dynamic setting that incorporates not simply the rate but also the direction of innovative activity: an environment where there are multiple potential “research lines,” but only one is commercially active at any point in time. There is a chance that the commercially active research line will at some point be made obsolete (e.g., as the result of exhausting a natural resource), and the chapter focuses on the underlying incentives to invest in the alternative (but not yet commercially viable) technology line. Because the returns from innovation are only realized for those generations where the research line is commercially active, the private returns to innovation in the alternative line will be low unless there is a high likelihood that the currently active line is about to made obsolete. (pages 319 - 356)
This chapter is available at:
https://academic.oup.com/chica...
Competition and Innovation: Did Arrow Hit the Bull's Eye? - Carl Shapiro
DOI: 10.7208/chicago/9780226473062.003.0011
[competition, innovation, merger analysis, Contestability Principle, Appropriability Principle, Synergy Principle]
This chapter, which offers a synthetic assessment of how the lessons of the economics of innovation inform merger analysis, contrasts two dominant perspectives that inform merger analysis: Arrow versus Schumpeter. Where the Arrow approach suggests the positive impact of product market competition on innovation, the Schumpeter perspective focuses instead on the innovation inducements due to scale, and looks upon the prospects of market power. Innovation is enhanced when (1) firms have the prospect of either gaining or protecting sales by providing additional value to consumers (the Contestability Principle), (2) the level of intellectual property protection is higher (the Appropriability Principle), and (3) complementary assets can be combined to enhance innovative capabilities (the Synergy Principle). Illustrating the role of these principles in clarifying the innovation impact of mergers in particular cases and circumstances, careful economic analysis helps to clarify policy analysis and how long-standing conceptual frameworks can be enriched by careful, formal reconsideration. (pages 361 - 404)
This chapter is available at:
https://academic.oup.com/chica...
IV. The Sources and Motivations of Innovators
Did Plant Patents Create the American Rose? - Moser Petra, Paul W. Rhode
DOI: 10.7208/chicago/9780226473062.003.0012
[plant patents, intellectual property rights, innovation, commercial nurseries]
This chapter considers the impact of formal intellectual property rights—specifically, the Plant Patent Act of 1930—on innovation. An important element of the analysis is the ability to distinguish between the impact of the Act on patenting (which of course increased) versus the impact on innovation (which is measured in terms of new rose registrations). After 1930, the number of registrations by American nurseries actually fell, and European nurseries accounted for an increasing share of new rose registrations. Instead of increasing the rate of innovation, it seems that the Plant Patent Act may have had the consequence of increasing the relative importance of commercial nurseries relative to hobbyists in the American industry and spurred the use of patents as a defensive and strategic tool in the context of litigation. There are important nonpecuniary motivations on the part of (at least an important group of) innovators in this area; prior to the Plant Patent Act, both hobbyists and public sector breeders played an important role in establishing distinctive American rose varieties, but their role was diminished thereafter. (pages 413 - 438)
This chapter is available at:
https://academic.oup.com/chica...
The Rate and Direction of Invention in the British Industrial Revolution: Incentives and Institutions - Ralf R. Meisenzahl, Joel Mokyr
DOI: 10.7208/chicago/9780226473062.003.0013
[British Industrial Revolution, incentive, technology, innovation, macroinvention]
This chapter offers an economic history approach to the peculiar nature of innovators and their motivations and interests during the British Industrial Revolution. The analysis focuses in particular on the body of individuals who advanced technology and innovation during this period. Moving beyond the celebration of specific individuals responsible for macroinventions such as the steam engine, it looks at “tweakers”—individuals involved in the process of incremental improvement and refinement central to cumulative technical progress. The analysis builds on a novel database of such individuals, and offers a portrait of their careers. Formal intellectual property rights such as patents likely played (at best) a limited role in the incentives and compensation of tweakers. Instead, their primary incentives seem to be related to the reputation-based and first-mover advantages associated with innovation, as well as the rewards to be gained through prize mechanisms or nonpecuniary rewards such as membership in societies and the like. (pages 443 - 479)
This chapter is available at:
https://academic.oup.com/chica...
The Confederacy of Heterogeneous Software Organizations and Heterogeneous Developers: Field Experimental Evidence on Sorting and Worker Effort - Kevin J. Boudreau, Karim R. Lakhani
DOI: 10.7208/chicago/9780226473062.003.0014
[confederacy, software organizations, field experiment]
This chapter reports on an actual field experiment that tests for the influence of “sorting” on innovator effort. The focus is on the potential heterogeneity among innovators and whether they prefer a more cooperative versus competitive research environment. The focus of the field experiment is a real-world multiday software coding exercise in which participants are able to express a preference for being sorted into a cooperative or competitive environment—that is, incentives in the cooperative environment are team based, while those in the competitive environment are individualized and depend on relative performance. Half of the participants are indeed sorted on the basis of their preferences, while the other half are assigned to the two modes on a random basis. (pages 483 - 502)
This chapter is available at:
https://academic.oup.com/chica...
V. Panel Discussion: Innovation Incentives, Institutions, and Economic Growth
The Innovation Fetish among the Economoi: Introduction to the Panel on Innovation Incentives, Institutions, and Economic Growth - Paul A. David
DOI: 10.7208/chicago/9780226473062.003.0015
[innovation fetish, economoi, incentives, institutions, economic growth, technological change]
This chapter focuses on the remarks of the underlying (though often implicit) assumption among economists that a higher rate of innovation is almost always preferred. The social impact of technological change depends not only on innovation but on diffusion. The ultimate impact of research investments depends on how they are organized and the complex process by which technologies are improved and adapted over time and context. Without considering the dynamic process by which social systems adapt and incorporate technological change, it is difficult to consider the net impact of new technologies on human welfare. The innovation fetish grips its adherents—and particularly those among the economoi who avow special concerns with technological change and its impact upon economic growth and human welfare—with an unreasonable degree of attention to, and particular reverence for, acts of commercial implementation of new processes and products, organizational practices, and business models. (pages 509 - 514)
This chapter is available at:
https://academic.oup.com/chica...
Innovation Process and Policy: What Do We Learn from New Growth Theory? - Philippe Aghion
DOI: 10.7208/chicago/9780226473062.003.0016
[innovation, macroeconomics, microeconomics, intervention, new growth theory, industrial policy, economic growth]
This chapter discusses the implications of advances in endogenous growth for both macro- and microeconomics. A major contribution of theories of economic growth that explicitly endogenize the production and diffusion of technology is to identify the potential policy impacts of different types of intervention. The chapter focuses on the contemporary policy matters insofar as they facilitate a higher level of innovative investment and shift the long-run growth rate. A range of recent evidence highlights the role of ensuring the ability to protect ideas (e.g., a stronger patent system) in economic growth, and the potential benefits of “industrial policy” measures. (pages 515 - 520)
This chapter is available at:
https://academic.oup.com/chica...
VI. The Social Impact of Innovation
The Consequences of Financial Innovation: A Counterfactual Research Agenda - Josh Lerner, Peter Tufano
DOI: 10.7208/chicago/9780226473062.003.0017
[financial innovation, social welfare, global financial crisis, investment, consumption]
This chapter explores the broader impacts of financial innovation. It looks at the literatures on financial innovation, and at the similarities and differences between financial innovation and other forms of innovation. The chapter proposes a research agenda to systematically address the social welfare implications of financial innovation. This class of breakthroughs that attracted no real discussion in the 1962 volume has broad impacts: not only do financial services represent a signify cant economic share (estimates in the United States run as high as over 30 percent), but in an ideal world, they enable households to have new choices for investment and consumption, and firms to raise capital in larger amounts and at a lower cost than they otherwise could. (pages 523 - 575)
This chapter is available at:
https://academic.oup.com/chica...
The Adversity/Hysteresis Effect: Depression-Era Productivity Growth in the US Railroad Sector - Alexander J. Field
DOI: 10.7208/chicago/9780226473062.003.0018
[boom–bust pattern, hysteresis effect, great depression]
This chapter takes a close look at the boom–bust pattern that characterizes many industries. During the boom period, there is a dramatic accumulation of physical capital—think of the huge efforts to lay broadband during the Internet boom of the late 1990s—followed by a contraction. The chapter examines the experiences of railroads during the Great Depression. This was a difficult period for the industry: the economic downturn, along with increased competition from automobiles and trucks, led to a sharp contraction in demand for railroads. Moreover, access to capital was largely cut off after a period of heavy expenditures. The industry undertook a major restructuring to utilize labor and capital resources more effectively. Both capital and labor inputs declined substantially. Yet logistical innovation enabled railroads to record slightly more revenue ton-miles of freight and book almost as many passenger miles in 1941 as they had in 1929. Adversity seems to have triggered a wave of innovation in this industry. (pages 579 - 606)
This chapter is available at:
https://academic.oup.com/chica...
Generality, Recombination, and Reuse - Timothy F. Bresnahan
DOI: 10.7208/chicago/9780226473062.003.0019
[generality, recombination, reuse, general-purpose technologies, innovations, entrepreneurial knowledge]
This chapter focuses on the recombination and reuse of key general-purpose technologies (GPTs), which are defined as widely used discoveries capable of ongoing improvement that enable complementary innovations. A critical factor behind the creation of these key technologies is the extent to which the broad prospects for reuse can be anticipated. The chapter distinguishes between two kinds of knowledge: technical and entrepreneurial. Technical knowledge—the understanding of how a firm can transform a technology into a product—is relatively commonplace. An understanding of market demand and how an invention might be used in other sectors is a rarer and more valuable asset. Because of the scarcity of entrepreneurial knowledge, the returns from developing a GPT may be much lower than they would be otherwise. However, over time, through a process of innovations and product introductions, this scarce entrepreneurial knowledge may become much more widely known. This theory is illustrated with a number of cases from the information technology industry, where important GPTs were only developed after numerous false starts. (pages 611 - 656)
This chapter is available at:
https://academic.oup.com/chica...
VII. Panel Discussion: The Art and Science of Innovation Policy
The Art and Science of Innovation Policy: Introduction - Bronwyn H. Hall
DOI: 10.7208/chicago/9780226473062.003.0020
[art and science, innovation policy, institutions, technological change]
This chapter focuses on the central role of policy and institutions in shaping the long-term rate and direction of technological change, and the value of bridging more narrow studies of the innovation process with more aggregate treatments in order to clarify the long-term drivers of economic growth. These themes were reinforced in “The Art and Science of Innovation Policy.” The chapter discusses some of the challenges of developing and implementing well-designed innovation policy initiatives. The author points out the disjunction between arguments for particular policies—for example, a particular tax rate or regulatory change—and the broader evidence that the rate and impact of innovation reflect broader measures of the overall innovation environment. The chapter also emphasizes the disjunction between academic and policy approaches. It furthermore highlights the role of certain types of institutions—for example, long-term interagency working groups—in facilitating a more sophisticated innovation policy-making process. (pages 665 - 668)
This chapter is available at:
https://academic.oup.com/chica...
Putting Economic Ideas Back into Innovation Policy - R. Glenn Hubbard
DOI: 10.7208/chicago/9780226473062.003.0021
[economic ideas, innovation policy, policy initiatives]
This chapter focuses on some of the challenges in developing and implementing well-designed innovation policy initiatives. It points out the disjunction between arguments for particular policies—for example, a particular tax rate or regulatory change—and the broader evidence that the rate and impact of innovation reflect broader measures of the overall innovation environment. The chapter also emphasizes the disjunction between academic and policy approaches. The role of certain types of institutions—for example, long-term interagency working groups—in facilitating a more sophisticated innovation policy-making process is also highlighted. Interagency processes approaches have tended to be much more successful in things related to finance than to technology, and one might look to success stories of long-term interagency working groups. The chapter concludes with a discussion on an important and underemphasized element: the policy process. (pages 669 - 672)
This chapter is available at:
https://academic.oup.com/chica...
Why Is It So Difficult to Translate Innovation Economics into Useful and Applicable Policy Prescriptions? - Dominique Foray
DOI: 10.7208/chicago/9780226473062.003.0022
[innovation economics, applicable policy prescriptions, economic analysis]
This chapter focuses in particular on the limited influence of economic science on policy making. Reflecting on the experiences within Europe, it discusses how the policy debates are often characterized by a low level of empirical sophistication, and how conditional statements or caveats often result in a diminished impact of rigorous economic analysis. The bulk of innovation policy initiatives has been focused on enhancing the overall rate of innovation, but an increasing share of innovation policy challenges are now about the direction of innovation—for example, addressing climate change. The obstacles presented in the chapter constitute a challenge for translating innovation economics and innovation policy research into useful and applicable policy prescriptions. (pages 673 - 678)
This chapter is available at:
https://academic.oup.com/chica...
Can the Nelson-Arrow Paradigm Still Be the Beacon of Innovation Policy? - Manuel Trajtenberg
DOI: 10.7208/chicago/9780226473062.003.0023
[Nelson–Arrow paradigm, innovation policy, public funder, policy-oriented research]
This chapter considers the broader legacy of the Nelson–Arrow paradigm, with its focus on appropriability and the role of government support for early-stage research on innovation policy. It highlights how many of the central challenges facing innovation policymakers cannot be addressed directly through the Nelson–Arrow framework—for example, while the framework assumes a single potential public funder, the question facing policymakers today is how much an individual country should fund, given the global nature of research and the potential to benefit from research conducted in other jurisdictions. The chapter focuses on the limited influence of rigorous economic analysis on actual policy, and suggests a focus on more policy-oriented research. (pages 679 - 684)
This chapter is available at:
https://academic.oup.com/chica...
Contributors
Author Index
Subject Index
