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Objective: Define discovery, invention, and innovation. Discuss the interactions between these activities. Discuss the incentive system promoting each. Briefly discuss the evolution of institutions promoting these activities. Next, discuss two learning strategies that promote innovation. Then, discuss the impact of constant advance of technology on industrial organization. The index for this section is:
Definitions for discovery, invention and innovation are:
a. Discovery: A new increment to knowledge. In this course we
consider three types of knowledge of physical, biological or social
systems. Theoretical knowledge is increasingly expressed as a
mathematical model. Empirical knowledge is obtained from observations
of new phenomenon or observations deliberately taken to test a
theoretical hypothesis. Last, but not least, is practical knowledge.
An important economic example is the practical knowledge acquired by
a workforce to make a new manufacturing plant operate efficiently.
This knowledge is intuitive and frequently very difficult to express
as equations.
b. Invention: A new device or process. To qualify for a patent
an invention must pass a test of originality--that is, be sufficiently
different from previous inventions. Most inventions are minor
improvements 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 can
occur in all goal-directed behavior such as profit maximization,
reelection politics and personal lifestyles. Thus an innovation
improves performance in goal directed behavior as measured by a
criterion. An example of a criterion would be profit maximization in
business. The advanced material at the end of this section presents a
deeper development of innovation. [If you want to become a
grader, 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 of
spreadsheets that increases profits is an innovation. An example of an
innovation in government is submitting tax returns to the IRS by E-mail
instead of regular mail. An example of an innovation in personal
lifestyles 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 government
paperwork. Empirically, better performance is not achieved by the new
technology to improve the performance of the old process. Rather, the
manufacturing or paperwork process is redesigned from ground up to
make optimal use of the new combination of technology and people. A
portion of the performance gain is from carefully analyzing the
process to be replaced and asking what really needs to be done to
maximize profits. In the business media, this is the origin of the
word "reorganization".
It is important to note several features concerning the
interaction between discovery, invention and innovation.
a. Invention is promoted by discoveries in the natural sciences and
more recently the biological sciences; whereas, innovation is
promoted by discoveries in the industrial engineering, the social
sciences and the business disciplines.
b. The interaction between discovery and invention is a two-way
street. Obviously, as science advances, it produces opportunities to
create new inventions. However, the development of the full economic
value of an invention requires massive discoveries for many
inventions. For example, the modern airplane required the scientific
development of aerodynamics. The economic development of
superconductivity will require the physicists to develop a theory of
superconductivity.
c. Similarly the interaction between discovery and innovation and
between invention and innovation is two-way.
It is important to understand that discovery, invention and
innovation have very different incentive systems. Moreover, these
differences create problems in transfer from one activity to another.
For example, the culture for discovery and invention are very different
and transfer between the two activities requires incentives.
a. Discovery: Fame. Scientists want to become famous. Such fame brings
them both praise and wealth. With fame as an incentive system,
scientists have powerful incentives to immediately broadcast their
results, thus creating a free flow of ideas. This means that
researchers have at their disposal all the current results in
conducting their ongoing research. However, fame does not create a
sufficient financial incentive for funding basic research.
b. Invention: Intellectual property. There are three important forms of
intellectual property: Patents, copyright, and trade secrets. Without
property rights rivals would immediately copy inventions and the
producer with the lowest costs would claim the financial reward.
Incentives to invent would be diminished. However, the creation of a
socially efficient form of intellectual property rights is difficult
because such rights can grant excessive monopoly rights and create an
atmosphere of secrecy which impedes the free flow of ideas.
Intellectual property law is modified over time to create better
incentives in changing economic conditions. For example, copyright,
which originally was for books, plays and other literary works, has
been extended to software and integrated circuit masks. In the US, a
patent is issued to the first to discover, not the first to file. As
you might expect this leads to endless law suits. Bell's patent for the
telephone is an example. Currently, there is a debate whether patents
should be issued to the first to file, which is the practice in the
rest of the world.
Surf the Net: Check out several intellectual
property sites:
c. Innovation: Better performance. There are no property rights for innovation; consequently, imitators immediately copy any promising innovation. Imitation has become more important in the private sector with increasing international competition. The new buzz word is ``benchmarking'' which means to compare the firm's procedures with the best practice in the world.
During the first hundred years of the republic, there was little
need to promote discovery, invention and innovation because
technology could be adapted from England. Nevertheless, educational
developments in the first hundred years created the foundation for a
much higher rate of discovery, invention and innovation in the second
hundred years. These developments were public primary and secondary
education in the industrializing states and research
universities.
During the second hundred years the rate of invention was increased
by the creation of corporate research and development. In addition,
federal funding of research after WW II, especially through the
National Science Foundation, NSF, further stimulated discovery. While
NSF funds basic research, government departments such as the
Department of Energy and the Department of Defense fund applied
research directly leading to invention.
Another US institutional innovation is the concept of a startup,
which is a small company specializing in new technology. Most startups
fail; however, enough succeed in becoming Fortune 500 companies to
create powerful incentives for entrepreneurs. Startups are financed by
another US institutional innovation, venture capital. Venture
capitalists pool their resources and invest in a large number of
startups with the expectation that all it takes is one success to
become rich. Also, in 1984 the government relaxed the antitrust laws to
allow firms to form consortia to promote invention. Consortia are also
useful to establish industry standards which promote the industry.
Another institutional innovation has been the creation of incubators that
help
promote startups in their initial stages of development.
Currently, there is a considerable effort to increase the rate of
technology transfer from both university and government research
laboratories to the marketplace.
Surf the Internet: Check out two examples of
corporate R &D:
To study what NSF does to promote discovery, click
here. Much of the
information presented is for researchers in order to process their
research proposals. Other information lauds the accomplishments of
NSF.
To check out applied research sponsored by the Department of Energy
check out their Office
of
Industrial Technologies. This office focuses on
reducing energy use in various industries. The Department of Defense
has Defense Advanced Research Projects Agency, DARPA to
promote research related to weapons.
In 1988 Congress initiated several programs to advance
automation. A program to promote technology in small manufacturers is
the Manufacturing Extension Partnership under the National Institute
of Standards and Technology (NIST). To check this program out ,click
here.
An important aspect of our competitiveness is how fast we can
transfer ideas from university and government labs into the private
sector. To view some resources on this topic click on
Since 1984 innovators have created numerous consortia to promote research on joint projects and the development of industry standards. Check out the following:
Many private consulting firms earn their revenues by promoting
innovation and imitation in their public and private clients. The
following list gives such a sample of the various types of consulting
firms:
Go to the Smithsonian Institute Technology,
Invention, and Innovation Collections
that provides numerous examples
of innovation.
To return to the notes remember to click back
at the top of your screen. You may have to click
several times depending how deeply you delve into the NSF files.
Alternatively, you can pull down the GO menu at
the top of your screen and click on the site you want to make
active.
Much less progress has been made to stimulate innovation. Currently
worldwide economic competition is based on the rate of discovery,
invention and innovation. The US is currently weak in the area of
manufacturing innovation; however since the mid 80s progress has been
made in catching up to the Japanese. We have copied many of their
innovations such as creating design teams with members from all
departments of the firm and with the power to make decisions. Most
promotion of innovation takes place in the private sector by
consultants who aid firms and government agencies in implementing
innovation and imitation. Also, to aid in imitation of innovations,
organizations have been created which collect files on the best
practices in each industry. They act as clearing houses disseminating
the information to imitators.
Surf the Net Check out several organizations
which promote benchmarking:
Both inventions and innovations require much applied research to
achieve their market success and their potential performance
respectively. An important aspect of this applied research is the
learning strategy. A simple learning strategy is an
improvisatory strategy which is a trial and error approach to
learning how to achieve market success in an invention and better
performance in an innovation. In the 19th century most invention was
by trial and error methodology, that is improvisatory methodology. An
improvisatory strategy for innovation means the innovator is
simultaneously trying to learn and achieve performance at the same
time. For example, GM in installing new automation equipment in a
factory must simultaneously learn how to effectively use the new
machinery and produce autos for sale at the same time. In an
improvisatory learning strategy for innovation, the participants are
limited in how much experimentation they can perform to achieve
better future performance. This is especially true in government
innovation where equal treatment before the law effectively
eliminates variation in administration.
A better learning strategy is a separation strategy which
requires separating the learning activity into a formal research
setting. For example, corporations currently develop new products in
research and development laboratories. In agricultural innovation
research is performed at research stations before the results are
transmitted to farmers. The second strategy provides a systematic
approach to the learning aspect of invention and innovation. An
example of a systematic approach to learning is the use of
statistically designed experiments to test the affect of variations
in fertilizer application on crop yield. Currently most invention is
done using a separation strategy; however most innovation still uses
an improvisatory strategy.
Surf the Internet: Check out USDA
research
and science
An important empirical fact to remember in the pursuit of wealth
is that existing large firms seldom are capable of making a major
shift in technology. For example, the railroad firms did not create
automobile divisions to shift from one form of transportation to
another. Why is this? The management of a large firm in an existing
technology has invested numerous man years in understanding the
business of the existing technology. They have no expertise in the
new technology and if the shift in technology is large enough, their
knowledge of the existing business actually impedes their learning
the new.
New industries usually evolve out of a large number of startups. Most
of these startups fail. Some are bought out by larger firms wishing
to enter the new industry. A few become corporate giants as the
industry matures.
As new industries rise, they displace older industries. Moreover, in
the world economy as less developed countries master the skills of
advanced country industries, the advanced countries must constantly
be creating new industries to prosper.
The constant advance in technology creates countless opportunities
for those ambitious enough to become entrepreneurs. On the largest
scale is the creation of a whole new industry. Another major
opportunity is the creation of a new service. Much more plentiful are
opportunities to create a new niche market.
Now as economists it is extremely unlikely that any of you are going
to invent a new product which creates a whole new industry.
Nevertheless, many successful enterprises are started by teams. At
Apple Computer, Jobs was the entrepreneur and Wozniack was the
inventor of the Apple line. At Hewlett Packard, Hewlett was the
engineer and Packard was the businessman. In a successful startup the
first 15 people in the door end up millionaires. In the case of
Microsoft the first two ended up billionaires. So one possible route
is to team up with a creative engineer or software type who does not
like the business side.
The advance of technology creates hundreds of opportunities to
perform some service in a new improved manner. One former UT student
became a millionaire by creating a service to tell whether houses or
businesses were in the one hundred year flood plain. He ran the
business through fax machines. Dell's success is due in part to his
marketing strategy of selling computers by mail, telephone and now
the internet.
Currently as the Net becomes secure, a very large number of
businesses will shift to the Net. Could you think up a possible
successful business on the Net? If Java becomes popular as a
language, you could create a niche business renting software for
specified time periods.
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