11EEP143 Lecture2Institutions and InnovationsZhen Lei2Outline:– Introduction of innovation – The roles of institutions in innovation– Brief history of innovation from Ancient Egyptians until the 20thcentury3Definition of Innovation• Stage 1: creation of an idea of how to do or make something (usually by an individual)“the first occurrence of an idea for a new product or process” (Fagerberg 2004)• Stage 2: making an idea for a new product or process real, putting it into practice“the first commercialization of an idea” (Fagerberg 2004)4Innovation supplySupply of an innovation determined by–state of the scientific and technological knowledge (technological opportunity) –cost and availability of inputs to innovation (trained workers, appropriate equipment) –ability to capture the profit from innovation (appropriability) 5Innovation demandDemand for a potential innovation depends on–Amount of cost reduction from that innovation (process innovation; new sources of supply)–Consumer or producer benefit from something new (product innovation)–Consumer or producer benefit from improvement in an existing good (incremental product innovation)6The linear model of innovationA useful conceptualization, but not the whole story. science base → basic research → applied research →prototype → development → commercialization →diffusion → technical progress → economic growth• There are forward and backward feedbacks throughout the process of innovation• Who should fund which stage?27Example – new drug• Basic research – molecular & cell biology• Applied research – screening compounds in test tubes; testing on animals• Development – Phase I,II, III clinical trials• Commercialization – packaging; marketing; • Diffusion – spread throughout the patient/doctor population8Role of Institutions• Innovation processorganized, long, expensive, uncertain• What do innovations need?– Resources (means)– Incentives (will)• In order to provide both, institutions need to be in place9Resource • Resources can be concentrated in several ways, but the most important ones are(1) taxation(2) appropriate benefits of innovation(3) private wealth• Correspondingly, the institutions that support innovation are governments, firms and private patrons or foundations10Incentive mechanisms• Intellectual property rightspatent, copyright, trademark, trade secrecy• Prize and Reward• Patronage• GrantQ1: patents vs. prize? Patronage vs. Grant?Q2: incentives for a Berkeley professor?11Institutions of Innovation• Governments- Education– In house: National labs– Sponsorship: NSF /NIH grants, SBIR grants• Industry– Self-funded– Government-funded12Institutions of Innovation (ctd)• Foundations– Ford, Rockefeller; Gates • Universities- Education- Research funded by self, government, industry, foundation3132006: Industry 65%Federal government 28%, but primary source for academic R&D (64%)14Institutional history of innovation(mostly western)• Scotchmer (with Maurer) Chapter 1• See Mokyr The Lever of Riches for a more in-depth coverage• See Burke’s Connections for a fun treatment of interesting cases of innovation paths15LessonsTwo types of innovations:(1) institutional innovations (2) technological innovationsMany present day phenomena anticipated in history:(1) Importance of public R&D support and patronage for innovation(2) Importance of military and defense needs(3) Targeted research (research with a specific goal)(4) Incentive mechanism: prizes, rewards, patents, patrons16The Ancients• The Egyptians– First known inventor was Imhotep (he build the first pyramid)– Employed by the government (direct gov. procurement model)• The Greeks (600-300 BC)– Society was keen to people involved in science– Greek city-states were purchasing research– Schools – Library of Alexandria to fund scholarship: center of science• The Romans– Inventors were awarded by the government (first type of prizes?)– Improved greatly on technology (i.e. aquaducts and cement)17• Dark Ages:Monasteries: center of learning and technological structures• Middle Ages:Guilds- Tried to keep innovations as secrets to gain market power- Though society didn’t enjoy their benefits, guilds were providing incentive to their membersUniversities:- Invented around 1200. By 1450, 80 universities in Europe• Age of monarchies: Monarchs became patrons1814thCentury-1850 (end of Industrial Revolution)Innovation was understood to be of crucial importance; Thus, incentive mechanisms were born– Patents (1474, Venice):• “First system of intellectual property”– Prizes (important device for both basic science and innovation):• Napoleon: food preservation– Patronage was reinvigorated:• Before 20thcentury, patrons were mostly rich people – Drawbacks of Prizes and Patrons:• Usually the funding was coming ex post•Secrecy• Too centralized (the award process was mostly subjective)41919thCentury• Patents:– There was a rapid increase of innovation activity– light bulb (Edison), telegraph (Marconi), telephone (Bell)• However, several drawbacks:– Reward comes ex postVenture capital, in-house R&D by established firms– How can a patent be capitalized?Should innovators engage in production or sell the invention?– Because of bureaucracy, transaction costs remained high– Enforcement (patent litigation) was extremely costly– Because of existing patents, new innovations were postponed20WWI and WWIIGovernment guided most of the R&D agenda:– Greatest non-military scientific project (since 19thcentury): Explore (map) north America– During WWI, National Center for Aeronautics was founded (NACA), which is the predecessor of NASA, dealt with military and civil aviation.– Office of Scientific Research and Development (OSRD) was the first of the modern government laboratories. It was a product of WWII 21WWI and WWII (ctd)– Formal Government funds (first appeared in Germany, 1884). In the US until 1944 government funds were meant for military research. – From then on, NIH. NSF. In these organizations the review of research proposals is objective and made by peers (peer-review)– Basic research was boosted after Sputnik22Modern hybrid institutions (After WWII)• Military-Industrial Complex:– Research slowly sifted from government armories to national laboratories and private sector.• Basic Research by Industry:–