4. Why the invention rate exceeds the
innovation rate
- 4.1 Acceleration of Discovery, Invention and Innovation
- 4.2 Evaluation of Discovery, Invention and Innovation
In this Section we shall consider two topics. First, the
institutional innovations that have resulted in an acceleration of
discovery, invention, and innovation in the late 20th century.
Second, why the rate of innovation needs to be increased to absorb
the higher rate of invention.
4.1 Acceleration of Discovery, Invention, and
Innovation
Most inventors in the 18th century English industrial revolution were
intelligent artisans with little technical training. In the early
19th century countries industrializing could adapt English technology
to their economic conditions. For example, during the early
development of manufacturing in the US, most manufactured items were
adaptations of British technology rather than developments from new
discoveries. Slater, a British mechanic, in conjunction with Brown, a
Providence businessman, set up the first textile mill in the United
States in 1793, but it wasn't until the 1820s, when Lawrence made
improvements to the designs copied from the mills around Manchester
that textiles became consistently profitable in the United
States24. Furthermore,
the mechanical skills used in developing textile machinery were
transferable to the development of machinery for the factory
production of other goods25.
The development of new products in the first hundred years generally
required very little resources and very few people. Inventors created
most inventions using only an empirical trial-and-error development
procedure without extensive applied research. The classic example of
this method is the folklore surrounding Edison's development of the
electric light bulb. With this methodology, inventors during the
first hundred years created a high rate of adaptations, inventions,
and improvements simply by intuitively exploiting surface
knowledge.
In the 19th century firms also made numerous innovations using an
improvisatory strategy. In the United States, labor was more
expensive than in England; hence, successful adaptation of technology
mandated using less labor than the original English technology. One
American contribution to manufacturing in this period was the concept
of interchangeable parts in mechanical equipment. This innovation
reduced labor both in assembly and in subsequent repair. A second
major American innovation in manufacturing was assembly-line
production, which increases efficiency of labor by greater
specialization. Cyrus McCormick had employed both concepts in the
production of reapers by 185026.
In addition, private innovators improved the organization of
manufacturing firms by creating the manufacturing corporation
organized by functions27.
The corporation was a desirable institution for raising capital, as
it limited the liability of the stockholders to the value of the
corporate assets. The functions of the corporation, such as
production, marketing, and finance were departmentalized, and each
department was headed by a vice president managing a specialized
staff. The methodology of innovation with respect to business
organizations was an intuitive, improvisatory strategy with
imitation. The corporate form for manufacturing is, in fact, an
adaptation of the corporate form developed to promote railroads, and
this organization, in turn, was an adaptation of the joint stock
trading companies.
In the early 19th century in order to promote a rapid economic
advance, a large investment to promote basic research was not
necessary. As long as manufacturing could rapidly advance through
intuitive trial and error experimentation to adapt English technology
to American conditions, there was little need to consider creating
new ideas that would lead to new inventions. But as the US caught up
to England technologically and the focus of inventions expanded into
chemistry and electricity, the factors needed to promote
manufacturing and invention changed.
First, both the workforce and inventors needed a higher level of
education. As they industrialized, states developed a system of
primary and secondary public education. At the federal level, the
Morrill Act in 1862 promoted the creation of public universities. Up
until this time the only basic research conducted in this country was
exploration such as the Lewis and Clark expedition. But in the latter
part of the nineteenth century, the major universities began to
emulate the German model of a university by emphasizing research as
an important university goal28.
Also, engineering became a university degree program. Moreover, a
number of individuals founded new universities, such as John Hopkins,
specifically for the purpose of promoting research. Thus, the
creation of public education and the research university in the
second half of the 19th century laid the foundation for the
subsequent acceleration in discovery. By 1900 there were eight
research universities
By the end of the 19th century major US corporations imitated the
German innovation of corporate research and development
organizations. Corporate research and development organizations
developed a more systematic approach to invention by separating the
activity of invention was separated from the activity of production.
This lead to greater inventive efficiency as the focus of invention
expanded to chemistry such as improving the steel making process and
making improvements on electric inventions such as the light and
telephone. Such inventions generally required considerable applied
research to reap their full economic potential29.
Scientifically trained engineers and scientists were more effective
than trial and error tinkers because they could eliminate numerous
alternatives from theoretical considerations without having to test
them in experiments30.
Consequently, research and development organizations increasingly
hired trained engineers and scientists. By 1900 a few large
corporations such as At&T and General Electric had initiated
R&D programs.
Public funding of research was initiated by the the Hatch Act of 1887, which began the public funding for university research in agriculture. The impetus for expanding the scope of public funding to all types of research was the success of applied research in World War II in producing such technology as the atomic bomb. The National Science Foundation was created to publicly fund basic research in most fields through a peer group review system of grant proposals31. Most of the basic research funded by the US government was performed in research universities and government laboratories. Public funding increased in response to the Soviet cold war threat and the specter of Soviet technological domination raised by Sputnik. Up to the present, high levels of expenditures for basic discovery have been sustained by a growing realization of its importance in military and economic competition.
Much applied research is now publicly funded by government
department through government laboratories, universities and private
corporations. For example, the Department of Energy through its
Office of Industrial Technologies funds non-nuclear energy projects
of small companies, individual researchers and university researchers
through competitive reviews in nine energy industries. To promote
commercialization the firms hold the intellectual property rights.
Since the creation of OPEC the increased prices of energy have
created incentives for private firms to become much more energy
efficient. For political reasons, US policy wants the US to promote
technological advance that reduces our dependence on foreign energy
supplies. Over the years technology developed through the Department
of Defense has had major commercial applications. For example, Boeing
developed the Boeing 707, one of the first successful commercial jet
airplanes from its knowledge in developing a jet used to refuel
fighter planes in the air. The development of the IC had some DARPA
funding in its early stages because the military want to build
smaller guidance systems for military rockets.
Public funding of all types of research created the research
university as the institutional arrangement to accelerate the rate of
discovery. Political support for the creation of the research
university with a teaching role was a coincidence of the need to
educate the baby boomers and the need to dominate science. Major
state-supported universities were accordingly transformed from
teaching institutions to research institutions through the expansion
of PhD programs. The PhD student became both a junior researcher and
the ubiquitous TA or teaching assistant, an arrangement which enabled
the faculty to spend more time on research and at the same time teach
more students by using TAs. With generous public funding the number
of research universities increased in number to about one hundred
today.
The magnitude of this expansion in research can be indicated by the
fact that in the second hundred years the number of universities
conducting research has increased by an order of magnitude, and there
are more scientists living today than have lived in all previous
times. In addition to universities, government laboratories and some
private laboratories are engaged in basic discovery. While the
expansion has occurred in all fields of study, funding has been
highest in fields corresponding to the perceived potential for
advances in military weapons, economic competition and social value.
The research university is now common in advanced countries and is
also being imitated in developing countries.
Besides the expansion of research universities, there has been a
great expansion of corporate research and development laboratories
staffed by university-trained specialists in the 20th century. By
World War I, over fifty corporations had laboratories32,
and today most corporations, intent on improving existing products
and inventing new ones, conduct organized research and development at
various levels, from basic knowledge research for major breakthroughs
to the most mundane forms of applied research to create minor
improvements in existing products. After WW II the US government also
began to fund firms to perform applied research through agencies such
as the Department of Defense. This funding is much greater than
funding for basic research. Unlike basic research, most of this
research is directed at achieving specific objectives. Firms have had
powerful incentives to perform this research because they capture the
benefits of any resulting intellectual property. Corporate research
and development is a characteristic of firms in advanced countries
and is increasing the developing world.
A US innovation in the creation of new industries which evolved from
the 19th century is the startup. In the US new industries are usually
created by the competition of numerous small firms (startups), a few
of which become giants absorbing most of the smaller firms in the
growth process. Examples are automobiles and each new type of
computer. In the 20th century this process has been fostered research
universities creating new ideas by new institutions of venture
capital to finance the growth of the startups and incubators to
promote their initiation. In the US and other areas the pragmatic
interest in promoting research universities is to create an active
business culture of startups and venture capital. Starting with the
natural growth of Silicon Valley and Route 128 near Boston, state
governments have actively tried to create such a business culture
around their research universities. Texas has had considerable
success in Austin. This process is being imitated throughout the
world.
This institutional structure of new product development is in
constant flux. In recognition of the need to improve the transfer of
knowledge from public government research laboratories into private
economic products, the federal government has create agencies such as
the National Technology Transfer Center, NASA Commercial Technology
Network, and the National Technical Information Service to aid the
transfer of technology from government laboratories to the private
sector.33 States are
creating institutional structures to speed the technological transfer
from state research universities to private firms. For example, in
Texas the Institute for Creative Capitalism at the University of
Texas as Austin has a program in technological transfer and the
nonprofit Texas Technological Transfer Association at Texas A&M
University coordinates technological transfer throughout the
state.34
The greatest improvement in innovation has come about by the creation
of a consulting industry for promoting innovation and imitation in
large firms and government. Some of these firms have arisen as new
activities of accounting firms such as Andersen Consulting and Price
Waterhouse and Coopers consulting and others have always been
consulting firms such as McKinsey and Bain. By contracting a
consulting firm to implement an innovation or imitation or an
innovation, the contracting firm does not need to hire a large staff
for a one time activity and in case of failure the contracting
manager can blame the consulting firm. If a consulting firm
implements a successful innovation in one firm, they frequently
acquire considerable additional business in implementing imitations
in other rival firms. Given the large overhead of current consulting
firms they focus their attention on large firms. Ernst and Young has
developed an online consulting service called Ernie to develop a
consulting business with smaller firms.
In addition to better evaluation technology, a very small number of industries have made improvements in the intuitive improvisatory strategy for innovation. In agriculture, for instance, the adoption of a better innovation implementation strategy, the separation strategy, has accelerated not only the process of discovery and invention but also the process of innovation itself. Starting with the Morrill Act of 1862, legislation created a system of agricultural experimental stations for research and a system of county agents to transmit their successes to farmers. Agricultural research stations now experiment with production techniques such as fertilizer application as will as inventions such as new seeds and equipment. This means that innovation itself is accelerated by the adoption of a separation strategy wherein innovation as well as invention benefits from good, statistically designed experiments35.
Recently, an institutional arrangement for a separation strategy
has been created for the 381,000 small manufacturing firms. In 1988,
Congress directed the National Institute of Standards and Technology
(NIST) to create an institutional framework called the Manufacturing
Extension Partnership (MEP) similar to the agricultural framework to
promote innovations in performance enhancing technologies in small
manufacturing businesses. The incentive for this public program was
that the productivity advance in small manufacturing has been much
less than that of large manufacturing. The cost of consulting
services has been too high for small firms to make the most
innovative use of advancing technology.
The MEP program has three parts. The first are federal- state funded,
non-profit Manufacturing Extension Centers that are designed help
small and mid-sized firms innovate using new manufacturing
technology. Each center is expected to become focused to the needs of
local industry. There are also two national centers. One focuses on
improving the production of the 52,000 printing establishments. These
centers and the Manufacturing Technology Centers created by NIST have
test facilities to experiment with new technology.
The second part of the MEP program are the State Technology Extension
Programs (STEP) that provided the agents that transmit the new
knowledge to small and mid-sized firms. Each state specializes in the
industries of its state, For example, New Jersey Manufacturing
Extension Partnership has initiated its efforts in promoting
production in metal working & Machinery, Rubber & Plastics,
and Electronics & Instrumentation. The state extension programs
provide the field agents to analyze particular small and mid-sized
businesses and make recommendations.
The third aspect of MEP is creating Links in computer networks such
as the WEB to provide small and mid-sized manufacturers accurate, up
to date information concerning MEP programs and technological
services plus databases of useful information. The network will link
all the offices of MEP with partnership organizations such as federal
laboratories and universities.
Linked to the WEB site of MEP are numerous success stories.
Nevertheless, it will probably take several decades to determine a
good estimate of social rate of return of the MEP. To the extent that
this new institutional arrangement demonstrates good social
performance, it will be adapted to other types of innovation.
For large firms there are less economies of scale in a program such
as MEP. To adopt a separation strategy, private firms can create an
institutional arrangement, such as a consortium, to perform the
research as a separate task. One such successful consortium is
Sematech, which performs research in production techniques in
semiconductor manufacturing for large semiconductor firms.
4.3 Evaluation of
Discovery,
Invention and Innovation
A central thesis of this chapter is that in the 20th century the rate
of invention has accelerated faster than the rate of innovation. One
contributing factor is that the rate of discovery which promotes
invention has accelerated relative to the rate of discovery which
promotes innovation. That is scientists working in the natural and
biological sciences have made much larger gains in understanding
natural and biological processes than scientists working in the
social sciences have progressed in their efforts to produce knowledge
about social behavior. The accumulation of knowledge promoting
inventions in many cases has advanced to state that inventors are
able to make quantitative predictions, whereas the accumulation of
knowledge promoting innovations has only advanced to state in most
cases that innovators can make qualitative predictions.
The advances in scientific knowledge have led to the creation of
simulation programs which enable inventors to evaluate the
performance of alternatives without experiments. The advances in the
social sciences, however, have provided fewer tools for analyzing
alternatives, and the poor forecasting performance of most social
science simulation programs limit their usefulness. This means that
to evaluate an alternative for innovation, an empirical
implementation is generally required. This is true even for many
innovations in production because current knowledge in social
sciences is insufficient to simulate accurately the impact of
alternative organizations and incentive systems on worker and manager
performance.
One reason for greater discoveries promoting invention than
innovation is the disparity in funding. Although the government funds
considerable research, most of its resources go toward creating a
public feedstock of ideas for the private development of inventions.
As the benefits of social sciences research are general and
frequently controversial, the social sciences lack powerful interest
groups promoting their interests and consequently, current funding
for the social sciences is only 5% of the NSF budget36.
A second reason is that investigators in the innovation sciences have
much more difficulty obtaining systematic observations than
investigators in the invention sciences. For social scientists and
business researchers systematic observation generally conflicts with
proprietary considerations and privacy. Firms generally desire to
restrict the flow of such information to prevent competitors from
understanding their competitive positions. Between private parties,
of course, information policy depends on voluntary release of
information as modified by required disclosures. For example,
producers of food products must disclose the ingredients, including
additives, on the label. Private parties typically filter voluntarily
released information in such a way as to promote their own interests;
consequently, such information does not constitute a representative
sample. Investigators in most areas of discovery promoting innovation
are limited in their ability to obtain representative samples of
behavior they wish to study. In a few cases this is also true in the
natural sciences. For example, hydrologists can not obtain data on
oil flows in private reservoirs from the oil firms without their
permission.
Given the severe restrictions on obtaining representative samples,
most empirical research on political economic behavior is frequently
carried out using data samples collected for oblique reasons:
hypothesis testing is restricted to those hypotheses for which data
is available. Naturally, this problem inhibits the development of the
business disciplines as well as the social sciences. For example, an
empirical management scientist can rarely obtain representative
samples of data on the relationship between incentives and
performance of middle managers across companies in an industry.
Even if observations are improved nothing will be learned if the
variables under study do not if fact vary. Individuals, firms, and
the government generally pursue their respective goals with the best
current knowledge. This means that for many variables of interest,
goal-seeking behavior can result in very little variation. For
example, rival firms in an industry can each use very similar
production techniques, organizations and incentives. This is
especially true for the federal government, where equal treatment
before the law and an aversion to experimentation inhibit variation.
Private firms have conducted experiments in incentives such as the
famous Hawthorne experiments37,
which were conducted by General Electric to determine what factors
influenced worker productivity. Since World War II, the government
has conducted a limited number of social experiments in such issues
as peak load pricing and guaranteed income38.
Currently the amount of variation in public and private policy
(especially systematic variation from experiments) is far to low to
promote discovery which in turn promotes innovation.
A second factor contributing to the disparity between the invention
rate and the innovation rate is that inventors use a more advanced
learning strategy than innovators. Currently most invention
experimentation has advanced from trial-and-error to more systematic
applied science in research and development laboratories. Invention
is a separate activity from production so that inventors employ a
good experimental design based on cost-benefit considerations.
In contrast, in almost all cases the strategy for innovation
implementation remains an intuitive, improvisatory strategy. This
means that most business, innovation remains largely the creation of
the heroic figure of the entrepreneur. As this is an intuitive
estimation and control problem, the ability to experiment is
subordinate to the overall profit objective of the firm. One of the
few examples of a separation strategy for innovation is agricultural
production innovation where applied research is performed at
agricultural research stations and the results are transmitted to the
farmers by agricultural agents. For this latter strategy to be
effective there must be a large number of individuals, firms, or
governments with similar tasks and incentives to fund joint
experimentation. To some extent this condition has been met in the
joint research consortia.