Objective: Define discovery, invention, and innovation.Discuss the interactions between these activities. Discuss theincentive system promoting each. Briefly discuss the evolution ofinstitutions promoting these activities. Next, discuss two learningstrategies that promote innovation. Then, discuss the impact ofconstant advance of technology on industrial organization. The indexfor this section is:
Definitions for discovery, invention and innovation are:
a. Discovery: A new increment to knowledge. In this course weconsider three types of knowledge of physical, biological or socialsystems. Theoretical knowledge is increasingly expressed as amathematical model. Empirical knowledge is obtained from observationsof new phenomenon or observations deliberately taken to test atheoretical hypothesis. Last, but not least, is practical knowledge.An important economic example is the practical knowledge acquired bya workforce to make a new manufacturing plant operate efficiently.This knowledge is intuitive and frequently very difficult to expressas equations.
b. Invention: A new device or process. To qualify for a patentan invention must pass a test of originality--that is, be sufficientlydifferent from previous inventions. Most inventions are minorimprovements on existing inventions which do not qualify for patents.Only a small percent of patented inventions have any economic value.
c. Innovation: A better way of doing things. Innovations canoccur in all goal-directed behavior such as profit maximization,reelection politics and personal lifestyles. Thus an innovationimproves performance in goal directed behavior as measured by acriterion. An example of a criterion would be profit maximization inbusiness. The advanced material at the end of this section presents adeeper development of innovation. [If you want to become agrader, then I advise you to read this material]
It is important to distinguish between an invention and an innovation.Spreadsheet software is an invention. A new business application ofspreadsheets that increases profits is an innovation. An example of aninnovation in government is submitting tax returns to the IRS by E-mailinstead of regular mail. An example of an innovation in personallifestyles is telecommuting by professionals from Telluride, CO.
Many current innovations are the result of applying new technology in(1) manufacturing and (2) processing of business and governmentpaperwork. Empirically, better performance is not achieved by the newtechnology to improve the performance of the old process. Rather, themanufacturing or paperwork process is redesigned from ground up tomake optimal use of the new combination of technology and people. Aportion of the performance gain is from carefully analyzing theprocess to be replaced and asking what really needs to be done tomaximize profits. In the business media, this is the origin of theword "reorganization".
It is important to note several features concerning theinteraction between discovery, invention and innovation.
a. Invention is promoted by discoveries in the natural sciences andmore recently the biological sciences; whereas, innovation ispromoted by discoveries in the industrial engineering, the socialsciences and the business disciplines.
b. The interaction between discovery and invention is a two-waystreet. Obviously, as science advances, it produces opportunities tocreate new inventions. However, the development of the full economicvalue of an invention requires massive discoveries for manyinventions. For example, the modern airplane required the scientificdevelopment of aerodynamics. The economic development ofsuperconductivity will require the physicists to develop a theory ofsuperconductivity.
c. Similarly the interaction between discovery and innovation andbetween invention and innovation is two-way.
It is important to understand that discovery, invention andinnovation have very different incentive systems. Moreover, thesedifferences create problems in transfer from one activity to another.For example, the culture for discovery and invention are very differentand transfer between the two activities requires incentives.
a. Discovery: Fame. Scientists want to become famous. Such fame bringsthem both praise and wealth. With fame as an incentive system,scientists have powerful incentives to immediately broadcast theirresults, thus creating a free flow of ideas. This means thatresearchers have at their disposal all the current results inconducting their ongoing research. However, fame does not create asufficient financial incentive for funding basic research.
b. Invention: Intellectual property. There are three important forms ofintellectual property: Patents, copyright, and trade secrets. Withoutproperty rights rivals would immediately copy inventions and theproducer with the lowest costs would claim the financial reward.Incentives to invent would be diminished. However, the creation of asocially efficient form of intellectual property rights is difficultbecause such rights can grant excessive monopoly rights and create anatmosphere of secrecy which impedes the free flow of ideas.
Intellectual property law is modified over time to create betterincentives in changing economic conditions. For example, copyright,which originally was for books, plays and other literary works, hasbeen extended to software and integrated circuit masks. In the US, apatent is issued to the first to discover, not the first to file. Asyou might expect this leads to endless law suits. Bell's patent for thetelephone is an example. Currently, there is a debate whether patentsshould be issued to the first to file, which is the practice in therest of the world.
Surf the Net: Check out several intellectualproperty sites:
c. Innovation: Better performance. There are no property rightsfor innovation; consequently, imitators immediately copy anypromising innovation. Imitation has become more important in theprivate sector with increasing international competition. The newbuzz word is ``benchmarking'' which means to compare the firm'sprocedures with the best practice in the world.
During the first hundred years of the republic, there was littleneed to promote discovery, invention and innovation becausetechnology could be adapted from England. Nevertheless, educationaldevelopments in the first hundred years created the foundation for amuch higher rate of discovery, invention and innovation in the secondhundred years. These developments were public primary and secondaryeducation in the industrializing states and researchuniversities.
During the second hundred years the rate of invention was increasedby the creation of corporate research and development. In addition,federal funding of research after WW II, especially through theNational Science Foundation, NSF, further stimulated discovery. WhileNSF funds basic research, government departments such as theDepartment of Energy and the Department of Defense fund appliedresearch directly leading to invention.
Another US institutional innovation is the concept of a startup,which is a small company specializing in new technology. Most startupsfail; however, enough succeed in becoming Fortune 500 companies tocreate powerful incentives for entrepreneurs. Startups are financed byanother US institutional innovation, venture capital. Venturecapitalists pool their resources and invest in a large number ofstartups with the expectation that all it takes is one success tobecome rich. Also, in 1984 the government relaxed the antitrust laws toallow firms to form consortia to promote invention. Consortia are alsouseful to establish industry standards which promote the industry.Another institutional innovation has been the creation of incubators thathelppromote startups in their initial stages of development.
Currently, there is a considerable effort to increase the rate oftechnology transfer from both university and government researchlaboratories to the marketplace.
Surf the Internet: Check out two examples ofcorporate R &D:
To study what NSF does to promote discovery, clickhere. Much of theinformation presented is for researchers in order to process theirresearch proposals. Other information lauds the accomplishments ofNSF.
To check out applied research sponsored by the Department of Energycheck out their OfficeofIndustrial Technologies. This office focuses onreducing energy use in various industries. The Department of Defensehas Defense Advanced Research Projects Agency, DARPA topromote research related to weapons.
In 1988 Congress initiated several programs to advanceautomation. A program to promote technology in small manufacturers isthe Manufacturing Extension Partnership under the National Instituteof Standards and Technology (NIST). To check this program out ,clickhere.
An important aspect of our competitiveness is how fast we cantransfer ideas from university and government labs into the privatesector. To view some resources on this topic click on
Since 1984 innovators have created numerous consortia topromote research on joint projects and the development of industrystandards. Check out the following:
Many private consulting firms earn their revenues by promotinginnovation and imitation in their public and private clients. Thefollowing list gives such a sample of the various types of consultingfirms:
Go to the Smithsonian Institute Technology,Invention, and Innovation Collections
that provides numerous examplesof innovation.
To return to the notes remember to click backat the top of your screen. You may have to clickseveral times depending how deeply you delve into the NSF files.Alternatively, you can pull down the GO menu atthe top of your screen and click on the site you want to makeactive.
Much less progress has been made to stimulate innovation. Currentlyworldwide economic competition is based on the rate of discovery,invention and innovation. The US is currently weak in the area ofmanufacturing innovation; however since the mid 80s progress has beenmade in catching up to the Japanese. We have copied many of theirinnovations such as creating design teams with members from alldepartments of the firm and with the power to make decisions. Mostpromotion of innovation takes place in the private sector byconsultants who aid firms and government agencies in implementinginnovation and imitation. Also, to aid in imitation of innovations,organizations have been created which collect files on the bestpractices in each industry. They act as clearing houses disseminatingthe information to imitators.
Surf the Net Check out several organizationswhich promote benchmarking:
Both inventions and innovations require much applied research toachieve their market success and their potential performancerespectively. An important aspect of this applied research is thelearning strategy. A simple learning strategy is animprovisatory strategy which is a trial and error approach tolearning how to achieve market success in an invention and betterperformance in an innovation. In the 19th century most invention wasby trial and error methodology, that is improvisatory methodology. Animprovisatory strategy for innovation means the innovator issimultaneously trying to learn and achieve performance at the sametime. For example, GM in installing new automation equipment in afactory must simultaneously learn how to effectively use the newmachinery and produce autos for sale at the same time. In animprovisatory learning strategy for innovation, the participants arelimited in how much experimentation they can perform to achievebetter future performance. This is especially true in governmentinnovation where equal treatment before the law effectivelyeliminates variation in administration.
A better learning strategy is a separation strategy whichrequires separating the learning activity into a formal researchsetting. For example, corporations currently develop new products inresearch and development laboratories. In agricultural innovationresearch is performed at research stations before the results aretransmitted to farmers. The second strategy provides a systematicapproach to the learning aspect of invention and innovation. Anexample of a systematic approach to learning is the use ofstatistically designed experiments to test the affect of variationsin fertilizer application on crop yield. Currently most invention isdone using a separation strategy; however most innovation still usesan improvisatory strategy.
Surf the Internet: Check out USDAresearchand science
An important empirical fact to remember in the pursuit of wealthis that existing large firms seldom are capable of making a majorshift in technology. For example, the railroad firms did not createautomobile divisions to shift from one form of transportation toanother. Why is this? The management of a large firm in an existingtechnology has invested numerous man years in understanding thebusiness of the existing technology. They have no expertise in thenew technology and if the shift in technology is large enough, theirknowledge of the existing business actually impedes their learningthe new.
New industries usually evolve out of a large number of startups. Mostof these startups fail. Some are bought out by larger firms wishingto enter the new industry. A few become corporate giants as theindustry matures.
As new industries rise, they displace older industries. Moreover, inthe world economy as less developed countries master the skills ofadvanced country industries, the advanced countries must constantlybe creating new industries to prosper.
The constant advance in technology creates countless opportunitiesfor those ambitious enough to become entrepreneurs. On the largestscale is the creation of a whole new industry. Another majoropportunity is the creation of a new service. Much more plentiful areopportunities to create a new niche market.
Now as economists it is extremely unlikely that any of you are goingto invent a new product which creates a whole new industry.Nevertheless, many successful enterprises are started by teams. AtApple Computer, Jobs was the entrepreneur and Wozniack was theinventor of the Apple line. At Hewlett Packard, Hewlett was theengineer and Packard was the businessman. In a successful startup thefirst 15 people in the door end up millionaires. In the case ofMicrosoft the first two ended up billionaires. So one possible routeis to team up with a creative engineer or software type who does notlike the business side.
The advance of technology creates hundreds of opportunities toperform some service in a new improved manner. One former UT studentbecame a millionaire by creating a service to tell whether houses orbusinesses were in the one hundred year flood plain. He ran thebusiness through fax machines. Dell's success is due in part to hismarketing strategy of selling computers by mail, telephone and nowthe internet.
Currently as the Net becomes secure, a very large number ofbusinesses will shift to the Net. Could you think up a possiblesuccessful business on the Net? If Java becomes popular as alanguage, you could create a niche business renting software forspecified time periods.
2.0 Discovery and Invention
- 2.1 Definitions
- 2.2 Incentives
- 2.3 Interactions
The starting point for making proposals that increase the rate of innovation in firms is to discuss closely related social processes of discovery and invention. In this section we will first define discovery and invention. Then, we will examine the incentives that promote these activities. Finally, we will consider the interactions between the two.
2.1 Definitions
Definitions in this chapter will be indicated by "italics ". The first two definitions to consider are discovery and knowledge. A discovery is a new increment to knowledge 1 that is defined as understanding the behavior of observable natural phenomena as well as understanding the structure of logical relationships. These observable natural phenomena consist of all physical, biological, and social processes that can be directly or indirectly observed. Logical relationships, on the other hand, are described by the study of pure logic, mathematics, statistics and computer science.
Knowledge of behavior can be further partitioned into theoretical models and empirical relationships. Theorists create models to explain and forecast behavior and empiricists observe behavioral relationships. Their pursuit of knowledge varies from the most theoretical to the most practical, or alternatively, from deep to surface. For example, theorists create models which vary from intuitive qualitative models to formal mathematical models, whose predictive capacity depends on how well the behavior being modeled is understood. Similarly, empiricists make observations using methodology which varies from carefully controlled experiments to casual unstructured observations.
With definitions for discovery and knowledge, the relationship between these two concepts can be clarified. Some examples of discoveries are the creation of a new theory, the observation of a new behavioral relationship or the development of a new skill. Current knowledge is the sum of prior discoveries which are stored either in human memory or on a human record such as printed material. Thus, not all prior discoveries are part of current knowledge because some discoveries are forgotten. Examples of forgotten discoveries are skills associated with obsolete technology such as the techniques for constructing stone-age tools, which modern archaeologists are trying to recreate2.
The next definition to consider is an invention. An invention is a new manmade device or process. A new device which qualifies as an invention may take such forms as a new physical product, a new biological lifeform or a new piece of software. A process, on the other hand, is a chemical, physical, or biological chain of events that produces a product or service. To be patentable, an invention must meet a test of originality. But the fact that an invention may qualify for a patent, does not guarantee that the invention will be profitable to produce. Each year inventors create numerous inventions, of which only a small percent will be profitable to produce. Corporations, in fact, focus much inventive effort on making improvements to existing products and processes. These improvements will be considered minor inventions, regardless of whether or not they could be patented.
2.2 Incentives
The incentive for discovery is fame. Scientists who make important discoveries or develop new theories become famous and simultaneously receive material rewards in the form or professorships and prizes. The pursuit of fame by researchers promotes the free flow of ideas as researchers compete to first present their work at conferences and in publications. Thus, new discovery is based on prior discovery and the rate of discovery is increased by the rapid dissemination of new results that anyone can use without charge.
In market societies, intellectual property in the form of patents, trade secrets, and copyrights have been developed to create better economic incentives for inventive and artistic endeavor. A patent gives an inventor exclusive use of an invention for a finite period of time. A trade secret enables a firm to sue for damages if an employee reveals economic secrets of the firm, and a copyright provides writers and musicians exclusive use of their creations for a finite period of time. Over time, innovations are needed to adjust these intellectual property rights to fit the changing needs of the political economy3. For example, in recent years copyright protection has been extended to software and integrated circuit masks.
These two incentive systems also have their weaknesses. Fame, for example, does not create an incentive system to finance basic research. And, while intellectual property creates strong incentives to invent, it creates a chasm between discovery and invention. Until inventors receive a patent on their invention, they are by necessity very secretive about any discoveries that they made in the process. Thus, their discoveries are not available to researchers in the field. We shall explore different aspects of this chasm throughout the chapter.
2.3 Interactions
Once discovery and invention have been defined, the next step is to describe the two-way interactions between these activities. For example, discoveries frequently lead to inventions, but in many cases the full economic development of an invention requires major new discoveries. Also, invention can lead to a large increase in knowledge accumulation. Fortunately, because the knowledge required for invention can be compartmentalized a successful inventor has to understand only a portion of this knowledge accumulation. Finally, the difference in incentives between discovery and invention impedes the necessary interaction between discovery and invention.
To illuminate these relationships, let us start with the interactions within the process of discovery itself. An important component of discovery is the direct pursuit of basic knowledge by scientists and mathematicians. Science has become a specialized activity which advances through the interactions of specialists such as empiricists, theorists, mathematicians and engineers. Empiricists discover new phenomena, which stimulate theorists to explain with new models and theories. Theorists then use formal mathematical methods to deduce the implications of their models. Empiricists either confirm or reject these implications on the basis of experiments and hypothesis testing. In addition, engineers using new discoveries create new instruments such as new observation devices and computers, which in turn promote further empirical and theoretical studies. Similarly, mathematicians in discovering the structure of formal relationships, create new tools that theorists can use in constructing formal models of behavior. Through the interactions of specialists, then, new formal models for explaining and predicting behavior are created4 .
The next step is to describe the interactions between discovery and invention. Discovery frequently creates opportunities for invention; however, the development of an invention generally requires further discovery specific to that invention. Inventors can rarely invent a fundamentally new product as a pure exercise in engineering. That is, they can rarely design a product purely from known principles, since theory rarely provides answers to all the design questions that are likely to arise during the process of invention. For example, in designing the airplane, the Wright brothers had to conduct wind tunnel experiments to design an efficient airfoil. They could not simply apply the nascent aerodynamic theory that existed at that time.
The relationship between theoretical discovery and invention is two way. An example of a theoretical advance that led to invention is the case of nuclear power. With Einstein's development of a theory to explain the relationship between mass and energy, physicists and engineers made numerous applied discoveries first to build the atomic bomb and then to create atomic power. In contrast, the advance of the economic usefulness of an invention from satisfying the legal definition for patentability to widespread economic application frequently requires a major investment in theoretical discovery5 . The development of commercial aviation and military airforces, for instance, stimulated the advance of theoretical discoveries in aerodynamics. In like fashion, the current efforts to develop market applications of superconductivity will undoubtedly generate major new theoretical models of superconductivity.
The rate that applied discovery needed to make an invention a commercial success occurs depends on the methodology of invention. The simplest methodology for invention is trial and error experimentation by an inventor without any formal training. All other things being equal, a more efficient methodology is trial and error experimentation by a inventor with training in science and engineering because such an inventor can eliminate blind alleys from theoretical considerations. A scientifically trained inventor can also improve the speed of applied discovery by using good scientific and statistical methodology. Finally, if a theory is well understood it can be incorporated into a computer assisted engineering program so that the inventor can quickly, inexpensively analyze alternatives without having to build prototypes and perform tests.
In addition, the organization of invention and discovery affects the rate of advance. Separating invention from production into research and development laboratories means that inventors can devote all their time to applied research needed to create commercially successful inventions. Nevertheless, in some cases the separation of research and development activities from production can create a problem in transferring ideas from the research and development laboratory to the market. A classic example here is Xerox who developed the graphical user interface that Apple brought to the marketplace.
Next, let us consider how the chasm between university discovery and private invention impedes the interaction between these two activities. In the pursuit of fame university researchers have incentives to present their ideas to other researchers, but not to potential inventors. Thus, there is a need to create incentives to promote the transfer of ideas from pure research to inventive activity. Also, the research that takes place in private research and development laboratories is frequently of great interest to university researchers, but because of the desire to reap the benefits of intellectual property, firms prohibit its release.
Another problem is that university researchers are generally interested in basic research to promote their academic careers and managers of researchers in the firm are generally interested in applied research which promises to create products in a reasonable time horizon. There is no incentive to perform applied research that might produce useful inventions in the long run. Such research is not prestigious enough for university research and is too risky for research in firms.
In spite of the these problems, discovery to develop the inventions associated with a new technology and its applications frequently leads to a significant accumulation of knowledge in many fields. Consider, for instance, the inventions associated with integrated circuits, computers and software. Crowding more and more components into an integrated circuit advances knowledge of materials at the atomic level, and designing integrated circuits advances knowledge of silicone compilers, software used in the design process. Reducing the production cost of computers requires discoveries to create new production techniques such as surface mount technology. One aspect of software discovery are advances in artificial intelligence to make programmers more efficient. The development of new applications software is frequently based on discoveries in the respective applications discipline. For example, the development of the mathematics of linear programming led to the development of software for applications.
If inventors in an industry had to understand all the knowledge accumulated in the development of technology in that industry, the process of invention would be severely hampered by the knowledge requirements. But, because technology generally has a modular structure, the process of invention requires specialized knowledge and discovery. Consider, for instance, the new central processor unit, the Pentium Pro chip, created by Intel. An inventor using this chip to invent a new computer workstation needs to know only the operating characteristics of the chip and not the knowledge needed to design the chip, crowd the components onto the chip, or obtain economic yield rates. Similarly, the developer of the operating system needs only to know the operating characteristics of the new computer rather than information about how it is designed. Finally, the developers of applications software knowledge of the computer are limited to knowing the software language and the operating system. This modular specialization of technology greatly facilitates invention by limiting the knowledge requirements for invention.
Within the modular structure of technology the depth of knowledge required for effective invention varies greatly. An inventor has an incentive to understand theory to the extent that this knowledge reduces the applied empirical research needed to perfect an invention. Some inventive activity takes place by inventors who understand how the modules work and creatively combine them. One example is the creation of the Apple II personal computer by Steve Wozniak who used a microprocessor designed for intelligent appliances as one of his modules6 . On the other hand, it is doubtful that a quantum effects transistor could be developed by an inventor without a considerable formal study in quantum mechanics7.
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