New way of doing business
Michele Boldrin & David Levine
Journal of Economic Perspectives, Winter 2013, Pages 3-22
Abstract:
The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity, unless productivity is identified with the number of patents awarded - which, as evidence shows, has no correlation with measured productivity. Both theory and evidence suggest that while patents can have a partial equilibrium effect of improving incentives to invent, the general equilibrium effect on innovation can be negative. A properly designed patent system might serve to increase innovation at a certain time and place. Unfortunately, the political economy of government-operated patent systems indicates that such systems are susceptible to pressures that cause the ill effects of patents to grow over time. Our preferred policy solution is to abolish patents entirely and to find other legislative instruments, less open to lobbying and rent seeking, to foster innovation when there is clear evidence that laissez-faire undersupplies it. However, if that policy change seems too large to swallow, we discuss in the conclusion a set of partial reforms that could be implemented.
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Innovation, Reallocation and Growth
Daron Acemoglu et al.
Harvard Working Paper, February 2013
Abstract:
We build a model of firm-level innovation, productivity growth and reallocation to investigate the economic implications of "industrial policy" supporting incumbent firms. We estimate the parameters of the model using simulated methods of moments on detailed US Census micro data on firm-level output, R&D and patenting. The model provides a good fit to the dynamics of firm entry and exit, output and R&D, and its implied elasticities are in the ballpark of a range of (credible) micro estimates. We find that policies that subsidize R&D by incumbents not only increase economic growth but are essentially as effective as subsidizing entrants: a subsidy equivalent to 1% of GDP to either entrants or incumbents increases the growth rate of the economy by about 0.08 percentage points and welfare by 0.8-1.25% in consumption equivalent terms. However, a (non-R&D) subsidy to the continued operation of incumbents of the same magnitude has a large negative effect on growth, reducing it by about 0.04 percentage points and welfare by 0.7% in consumption equivalent terms.
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Poisoning the Next Apple? The America Invents Act and Individual Inventors
David Abrams & Polk Wagner
Stanford Law Review, March 2013, Pages 517-563
Abstract:
The Leahy-Smith America Invents Act, the most significant patent law reform effort in two generations, may have a dark side: it seems likely to decrease the patenting behavior of individual inventors, a category which occupies special significance in American innovation history. In this Article, we empirically predict the effects of the major change in the law, which shifts the patent priority rules from the United States' traditional "first-to-invent" system to the internationally predominant "first-to-file" system. While there has been some theoretical work on this topic, we use an analogous law change in Canada as a natural experiment to shed the first empirical light on the question. Our analysis uses a difference-in-difference framework to estimate the impact of the Canadian law change on small inventors. Using data on all patents granted by the Canadian Intellectual Property Office and the U.S. Patent and Trademark Office, we find a significant drop in the share of patents granted to individual inventors in Canada coincident with the implementation of a first-to-file system. We find no measurable changes in patent quality and perform several additional analyses to rule out alternative explanations. While the net welfare impact that can be expected from a shift to first-to-file is unclear, our results reveal that, contrary to the conventional wisdom, the March 2013 implementation of a first-to-file rule in the United States is likely to result in a reduced share of patents granted to individual inventors.
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Is Pay for Performance Detrimental to Innovation?
Florian Ederer & Gustavo Manso
Management Science, forthcoming
Abstract:
Previous research in economics shows that compensation based on the pay-for-performance principle is effective in inducing higher levels of effort and productivity. On the other hand, research in psychology argues that performance-based financial incentives inhibit creativity and innovation. How should managerial compensation be structured if the goal is to induce managers to pursue more innovative business strategies? In a controlled laboratory setting, we provide evidence that the combination of tolerance for early failure and reward for long-term success is effective in motivating innovation. Subjects under such an incentive scheme explore more and are more likely to discover a novel business strategy than subjects under fixed-wage and standard pay-for-performance incentive schemes. We also find evidence that the threat of termination can undermine incentives for innovation, whereas golden parachutes can alleviate these innovation-reducing effects.
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Julian Atanassov
Journal of Finance, forthcoming
Abstract:
I examine how strong corporate governance proxied by the threat of hostile takeovers affects innovation and firm value. I find a significant decline in the number of patents and citations per patent for firms incorporated in states that pass antitakeover laws relative to firms incorporated in states that do not. Most of the impact of antitakeover laws on innovation occurs two or more years after they are passed, indicating a causal effect. The negative effect of antitakeover laws is mitigated by the presence of alternative governance mechanisms such as large shareholders, pension fund ownership, leverage, and product market competition.
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Forecasting the Technology Revolution: Results and learnings from the TechCast Project
William Halal
Technological Forecasting and Social Change, forthcoming
Abstract:
This research report presents latest results on the TechCast Project, first reported in Technology Forecasting & Social Change 14 years ago. TechCast is an online Delphi system that pools background trends and the judgment of experts around the world to forecast breakthroughs in all fields. Results are presented for strategic technological advances that are likely to enter the mainstream and their expected impacts, providing an overview of the Technology Revolution. Aggregating the forecast data then provides macro-forecasts of broad timetables for economic and social change. This analysis suggests that the global economy is likely to enter a new economic upcycle about 2015 and reach an advanced stage of development about 2020. We also examine examples of how organizations develop technology strategy to compete in an era of economic transformation, and conclude by analyzing the role of forecasting as one of many methods for reducing uncertainty.
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How Paris Gave Rise to Cubism (and Picasso): Ambiguity and Fragmentation in Radical Innovation
Stoyan Sgourev
Organization Science, forthcoming
Abstract:
In structural analyses of innovation, one substantive question looms large: What makes radical innovation possible if peripheral actors are more likely to originate radical ideas but are poorly positioned to promote them? An inductive study of the rise of Cubism, a revolutionary paradigm that overthrew classic principles of representation in art, results in a model where not only the periphery moves toward the core through collective action, as typically asserted, but the core also moves toward the periphery, becoming more receptive to radical ideas. The fragmentation of the art market in early 20th-century Paris served as the trigger. The proliferation of market niches and growing ambiguity over evaluation standards dramatically reduced the costs of experimentation in the periphery and the ability of the core to suppress radical ideas. A multilevel analysis linking individual creativity, peer networks, and the art field reveals how market developments fostered Spanish Cubist Pablo Picasso's experiments and facilitated their diffusion in the absence of public support, a coherent movement, and even his active involvement. If past research attests to the importance of framing innovations and mobilizing resources in their support, this study brings attention to shifts in the structure of opportunities to do so.
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James Ang, Yingmei Cheng & Chaopeng Wu
Review of Economics and Statistics, forthcoming
Abstract:
Using a unique and rich database of high technology firms in China, we show effective enforcement of intellectual property rights at the provincial level is critical in encouraging financing and investing in R&D. Better enforcement of IP rights positively affects firms' ability to acquire new external debt, and allows firms to invest in more R&D, generate more innovation patents, and produce more sales from new products. Our results suggests that facilitating financing and investing in R&D are the channels through which better IP rights enforcement can affect the growth of the economy.
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Statistical Basis for Predicting Technological Progress
Béla Nagy et al.
PLoS ONE, February 2013
Abstract:
Forecasting technological progress is of great interest to engineers, policy makers, and private investors. Several models have been proposed for predicting technological improvement, but how well do these models perform? An early hypothesis made by Theodore Wright in 1936 is that cost decreases as a power law of cumulative production. An alternative hypothesis is Moore's law, which can be generalized to say that technologies improve exponentially with time. Other alternatives were proposed by Goddard, Sinclair et al., and Nordhaus. These hypotheses have not previously been rigorously tested. Using a new database on the cost and production of 62 different technologies, which is the most expansive of its kind, we test the ability of six different postulated laws to predict future costs. Our approach involves hindcasting and developing a statistical model to rank the performance of the postulated laws. Wright's law produces the best forecasts, but Moore's law is not far behind. We discover a previously unobserved regularity that production tends to increase exponentially. A combination of an exponential decrease in cost and an exponential increase in production would make Moore's law and Wright's law indistinguishable, as originally pointed out by Sahal. We show for the first time that these regularities are observed in data to such a degree that the performance of these two laws is nearly the same. Our results show that technological progress is forecastable, with the square root of the logarithmic error growing linearly with the forecasting horizon at a typical rate of 2.5% per year. These results have implications for theories of technological change, and assessments of candidate technologies and policies for climate change mitigation.
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Patent protection, capital accumulation, and economic growth
Tatsuro Iwaisako & Koichi Futagami
Economic Theory, March 2013, Pages 631-668
Abstract:
In this paper, we investigate how strengthening patent protection affects economic growth in an endogenous growth model where both innovation and capital accumulation are the driving forces of economic growth. In this model, stronger patent protection raises the profit flow obtained by innovation but reduces the factor demand for capital. This process accelerates innovation but discourages capital accumulation, and because of the negative effect on economic growth through reducing capital accumulation, strengthening patent protection may then impede economic growth. This result contrasts with earlier studies where innovation is the sole driving force for economic growth. Moreover, in an open economy model where technologies are transferred and capital is imported from abroad, the strictest protection of patents enhances technology adoption from abroad but impedes capital accumulation, and thus, the relation derived between patent protection and output can be nonmonotone. In terms of implications, these findings may be able to partly explain the complex relation found by some empirical studies in this area.
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The dark side of analyst coverage: The case of innovation
Jie (Jack) He & Xuan Tian
Journal of Financial Economics, forthcoming
Abstract:
We examine the effects of financial analysts on the real economy in the case of innovation. Our baseline results show that firms covered by a larger number of analysts generate fewer patents and patents with lower impact. To establish causality, we use a difference-in-differences approach that relies on the variation generated by multiple exogenous shocks to analyst coverage, as well as an instrumental variable approach. Our identification strategies suggest a negative causal effect of analyst coverage on firm innovation. The evidence is consistent with the hypothesis that analysts exert too much pressure on managers to meet short-term goals, impeding firms' investment in long-term innovative projects. We further discuss possible underlying mechanisms through which analysts impede innovation and show that there is a residual effect of analysts on innovation even after controlling for these mechanisms. Our paper offers novel evidence on a previously under-explored adverse consequence of analyst coverage - its hindrance to firm innovation.
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A Dynamic Perspective on Affect and Creativity
Ronald Bledow, Kathrin Rosing & Michael Frese
Academy of Management Journal, forthcoming
Abstract:
The authors argue that creativity is influenced by the dynamic interplay of positive and negative affect: High creativity results if a person experiences an episode of negative affect that is followed by a decrease in negative affect and an increase in positive affect, a process referred to as an affective shift. An experience-sampling study with 102 full-time employees provided support for the hypotheses. An experimental study with 80 students underlined the proposed causal effect of an affective shift on creativity. Practical implications for facilitating creativity in organizations are discussed.
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Learning by Doing and the Locus of Innovative Capability in Biotechnology Research
Amit Jain
Organization Science, forthcoming
Abstract:
Innovative capability, the knowledge a firm uses to innovate, is an input into and an output of the process of innovation. In this paper, I put forward the notion that innovative capability, similar to experience in production, accumulates by learning by doing and that innovation is characterized by a learning curve. Using patent data from 20,886 scientists working in 611 biotechnology firms in the U.S. and Canadian biotechnology industry from 1970 to 2007, I estimate a learning curve in innovation and determine the loci of innovative capability. Although knowledge stocks in the different loci accumulate over time in day-to-day firm activities, empirical results suggest that the individual is the primary repository of innovative capability and that experience working together in teams has a secondary influence on productivity. Contrary to prior learning curve research, accumulated firm experience has no direct effect on productivity. However, when individuals possess relevant domain knowledge and have experience working together, they benefit from knowledge spillovers within the firm. This suggests that knowledge stocks in the different loci are complementary to one another and that the comingling of these disparate bins of knowledge is an important facet of innovative capability.
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Competition and Innovation: The Inverted-U Relationship Revisited
Aamir Rafique Hashmi
Review of Economics and Statistics, forthcoming
Abstract:
I re-examine the inverted-U relationship between competition and innovation (modeled and tested by Aghion et al. [2005]) by using data from publicly traded manufacturing firms in the US. I control for the possible endogeneity of competition by using a trade-weighted average of industry exchange rates as an instrument. I find a mildly negative relationship between competition (as measured by the inverse of markups) and innovation (as measured by citation-weighted patents). The negative relationship is robust to many alternative assumptions and specifications. To reconcile the mildly negative relationship in the US data with the inverted-U relationship that Aghion et al. [2005] find in the UK data, I modify their theoretical model and show that the modified model can explain both negative and inverted-U relationships. The key theoretical assumption is that the UK manufacturing industries are technologically more neck-and-neck than their counterparts in the US. I find support for this assumption in the data. The different empirical results between the two countries may also arise because of differences in data and samples.
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J.P. Eggers
Strategic Management Journal, forthcoming
Abstract:
This article investigates the post-entry implications of pre-entry technological choices made during the uncertain period before a dominant design. Building on work on technological dynamics and organizational inertia, I argue that too early commitments to the winning technology may impede the ability to bring the best product to market, but delaying investment too long limits the ability to accumulate useful knowledge. Using data from the evolution of the flat panel display industry from 1965 to 2005, the study shows empirical support for the two theoretical mechanisms and offers the surprising result that firms starting in the losing technology before switching outperform other firms in terms of product value. Switching, while difficult behaviorally in recovering from failure, both delays difficult-to-reverse technological commitments and develops market knowledge.
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Spending Wisely? How Resources Affect Knowledge Production in Universities
Alexander Whalley & Justin Hicks
Economic Inquiry, forthcoming
Abstract:
Every year billions of dollars are spent on research grants to produce new knowledge in universities. However, as grants may also affect other research funding, the effects of financial resources on knowledge production remain unclear. To uncover how financial resources affect knowledge production, we study the effects of research spending itself. Utilizing the legal constraints on university spending from an endowment we develop an instrumental variables approach. Our approach instruments for university research spending with time-series variation in stock prices interacted with cross-sectional variation in initial endowment market values for research universities in the United States. Our analysis reveals that research spending has a substantial positive effect on the number of papers produced, but not their impact. We also demonstrate that research spending effects are quite similar at private and public universities.
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Knowledge Spillovers from Research Universities: Evidence from Endowment Value Shocks
Shawn Kantor & Alexander Whalley
Review of Economics and Statistics, forthcoming
Abstract:
We estimate the local spillovers from research university activity in a sample of urban counties. Our approach uses the interaction between university endowment values and stock market shocks over time for identification. We find statistically significant local spillover effects from university activity. The effects are significantly larger when local universities are more research intensive or local firms are technologically close to universities. Our results suggest that the longer-term effects that universities have on their local economies may grow over time as the composition of local industries adjusts to take advantage of the heterogeneous knowledge spillovers we identify.
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Unions and Innovation: New Insights From the Cross-Country Evidence
Hristos Doucouliagos & Patrice Laroche
Industrial Relations, April 2013, Pages 467-491
Abstract:
We apply meta-regression analysis to the extant econometric studies and find that unions depress investment in innovation at the firm and industry level in all countries considered. However, this adverse effect has been declining over time and is moderated by country differences in industrial relations and regulations: The adverse effect appears to increase with labor market flexibility.
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Explaining the "unpredictable": An empirical analysis of U.S. patent infringement awards
Michael Mazzeo, Jonathan Hillel & Samantha Zyontz
International Review of Law and Economics, August 2013, Pages 58-72
Abstract:
Patent infringement awards are commonly thought to be unpredictable, which raises concerns that patents can lead to unjust enrichment and impede the progress of innovation. We investigate the unpredictability of patent damages by conducting a large-scale econometric analysis of award values. We begin by analyzing the outcomes of 340 cases decided in US federal courts between 1995 and 2008 in which infringement was found and damages were awarded. Our data include the amount awarded, along with information about the litigants, case specifics and economic value of the patents-at-issue. Using these data, we construct an econometric model that explains over 75% of the variation in awards. We further conduct in-depth analysis of the key factors affecting award value, via targeted regressions involving selected variables. We find a high degree of significance between award value and ex ante-identifiable factors collectively, and we also identify significant relationships with accepted indicators of patent value. Our findings demonstrate that infringement awards are not systematically unpredictable and, moreover, highlight the critical elements that can be expected to result in larger or smaller awards.