innovation and human capital accumulation. innovation endogenous growth imperatives technological...

Innovation and Human Capital Accumulation

InnovationInnovation

Endogenous growth imperativesTechnological innovations that increase the

productivity of fundamental inputs to production are the drivers of economic growth

Sources of innovationBasic researchApplied research and developmentDiffusion of new knowledge and know-how through

education and on-the-job-training

Markets for InnovationMarkets for Innovation

Public goods aspect of knowledgeIdeas are intangible but easily copied.An idea, once it is communicated, cannot be made

secret again. Hence, absent secrecy, the originator of an idea cannot exclude others from using the idea.

Ideas are non-rival in the sense that one person’s use of an idea does not diminish the availability of the idea for others’ use.

Markets for InnovationMarkets for Innovation

Public goods aspect of knowledge creation means that this activity will suffer from the same economic problems associated with all public goods:

Free riding due to so-called “spillover” externalityInsufficient private production of new knowledge if

generating it is costlyNeed for public policy action to stimulate production

Human CapitalHuman Capital

As we saw in our discussion of growth, human capital accumulation encompasses two distinct activities: research for innovation, and education

We will postpone discussing education until later in the course, and focus for now on innovations due to research

ResearchResearch

National Science Foundation definitions:R&D. According to international guidelines for conducting research and development (R&D) surveys, R&D, also called research and experimental development, comprises creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications.

Basic research. The objective of basic research is to gain more comprehensive knowledge or understanding of the subject under study without specific applications in mind. In industry, basic research is defined as research that advances scientific knowledge but does not have specific immediate commercial objectives, although it may be performed in fields of present or potential commercial interest.

ResearchResearch

National Science Foundation definitions:Applied research. The objective of applied research is to gain the knowledge or understanding to meet a specific, recognized need. In industry, applied research includes investigations to discover new scientific knowledge that has specific commercial objectives with respect to products, processes, or services.

Development. Development is the systematic use of the knowledge or understanding gained from research directed toward the production of useful materials, devices, systems, or methods, including the design and development of prototypes and processes.

ResearchResearchFunding sources and institutions

Research IncentivesResearch IncentivesThe distinction in the NSF definitions and in the funding

sources and institutions involved in basic versus applied research reflect the fundamental differences in incentives for doing each type of research

Research IncentivesResearch IncentivesBasic research

Recognition of peersMembership in prestigious societies

Professional awardsNobel prize

Access to resourcesGovernment grantsLaboratory directorships

Priority of discoveryNaming rights

Publication and career recognitionPromotion and tenureAdministrative posts

Research IncentivesResearch IncentivesFundamental characteristics that drive the incentive

structureResearch projects build on previous science, but are not

motivated by specific market-oriented goalsBasic research frequently finds answers to unposed questionsExample of invention of the laser

Outcomes are highly uncertainSubstantial risk of failure

Emphasis on priority of discovery severely restricts the value of being second with a new discovery, even though independent discovery occurs frequently

Winner-take-all reward structure

Research IncentivesResearch IncentivesEfficiency aspects of the reward structure

Possibility of independent discovery motivates scientists to exert effort in research

But don’t discount the play dimension of research as a motivator!Establishing priority mandates revealing the discovery sooner

rather than laterAllows for peer review and evaluation of the workDiscourages plagiarism and fraudEncourages consensus building

Building and maintaining a reputation provides a natural check on shirking or free-riding

Research IncentivesResearch Incentives

Lags in development of applications and costs associated with turning new science into new technology reduce incentives for proprietization

Example of xerographyProcess discovered in the 1930’s, but the first functioning copier

based on the process didn’t appear until the end of WWIICurrent issue of faster cycle of research in computer science

and biotech areas have led to pressure to patent or otherwise protect what would normally have been considered basic research


Applied Research and DevelopmentMarket-driven

Process innovations that reduce costs of productionProduct innovations that bring new and/or better products

to marketRewards are proprietary and are funded from the

rents accruing to the innovationRents are due to

First-mover advantagesTrade secrecyPatents or copyrights that confer legal monopoly status on

the innovation


Characteristics that drive the incentive structureProblem-oriented researchProprietary products/processes as goalMinimal uncertainty about outcomesProblems with externalities

Knowledge spillovers that benefit competitorsFree-riding by competitors absent protection


Problems arising from incentive structure for applied R&D

Because of spillover externalities, R&D innovations must either be kept secret, or provided legal protection against copying by competitors, if the innovator is to recover the costs of the innovation

The need for protection gives rise to the notion of intellectual property

Intellectual PropertyIntellectual Property

Cost-benefit outline of IP protectionTrade secrecy

Beneficial new techniques don’t propagate through the economy

New innovations based on an existing but secret innovation are slowed


Cost-benefit outline of IP protectionPatents as an alternative to trade secrecy

Patents allow an innovator a legal monopoly over the innovation for a limited period of time. The monopoly position allows the innovator to earn rents (i.e monopoly profits) that compensate him for the costs that went into the innovation

In exchange for the monopoly position, the innovator is obliged to fully disclose the science and technology behind the innovation.

Other firms or inventors are then free to build on the ideas behind the patented innovation for new innovation


Cost-benefit outline of IP protectionPatent Law (U.S. version): to receive a patent on an

innovation, the patentee must demonstrate that the innovation is

SuitableUsefulNovelNon-obvious


Details of requirements:Suitability: Not all innovations can be patented

U.S. patent laws permits granting patents to> Processes, such as new ways of brewing beer or depositing

circuits on silicon> Articles of manufacture (tools or other gadgets)> Compositions of matter> New and useful improvements on any of the above> Plant varieties which are produced asexually> Ornamental designs for articles of manufacture


Utility: To be patentable, an innovation has to have commercial utility

> In practice, this is not a very high hurdle, since it is relatively easy to argue that there will be a market (however small) for any innovation

> Example: U.S. patent no. 5,023,850 was granted for a wristwatch for dogs, which runs at 7 times normal speed.

Novelty: Is the innovation actually new?> This aspect is a frequent basis for challenging patents in court> Patents for which there is documented “prior art” can be

overturned by the courts


Non-obviousness: in addition to novelty, the innovation must be such that no one else would have thought of it before

> Current dispute over the granting of patents for business practices is based on the non-obviousness requirement

> Amazon.com’s patent on “one-click shopping”» Most programmers consider this an obvious improvement to

online shopping procedures and do not think it should have been granted a patent

> Example of possibly allowing a patent to the New York Times for the idea of laying out copy in columns.


Patent application processWhen an innovator files for a patent, they must provide a

detailed description of the innovation which will be made public upon the awarding of the patent

After filing, the patent application is assigned to an examiner at the U.S. Patent and Trademark Office

Examiner reviews patent to determine if it satisfies the criteria for granting a patent

Once the examiner determines that the criteria are met, the patent issues and the innovation is publicized


Patent ChallengesChallenges to a patent are adjudicated by the Court of

Appeals for the Federal Circuit (CAFC)> CAFC was created by Congress in 1982 to centralize the

process of deciding on patent challenges> Prior to creation of CAFC, regional appellate courts handled

cases, often issuing different opinions on similar casesChallenges must be based on an assertion that some

aspect of the patent criteria was not met


Challenges to novelty are the most common> Based on the assertion that PTO examiners overlooked “prior

art”, either in the form of previous patents for similar innovations, or non-patented but common usage of similar innovations

> Under U.S. patent law, priority for an innovation goes to the innovator who can demonstrate earliest actual working use of the innovation. Under European law, priority goes to the innovator who files first for a patent

Challenges to obviousness are also possible, but less frequent

Absent a successful challenge, patent protection for an innovation last 20 years from the date of issue


Patent InfringementIf a patent is found to be valid, it becomes, in effect, the

property of the patent holderAnyone else who uses the patented innovation without the

express permission of the patent holder is then said to be infringing the patent

Patent holders can sue infringers to force them to stop using the innovation, and can also sue for damages if the infringer’s use of innovation took business away from the patent holder


In addition to patents, the U.S. PTO also grants intellectual property rights to trademarks

Trademarks are language, art or iconography which firms use to identify their products

Trademarks, once granted last forever, except in instances where a brand name becomes generic, and the firm fails to defend its brand against this occurrence

> Kleenex, XeroxU.S. law also makes it a crime to knowingly divulge trade

secrets, so that these too have a intellectual property aspect to them

Copyright is the fourth type of intellectual property right granted in the law, and we will discuss this later in the course

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