Patents, prizes and innovation

The use of patents versus prizes to stimulate innovation is a long debated subject. Jean Tirole has written,

"Consider the patent system. It has long been recognized that patents are an inefficient method for providing incentives for innovation since they confer monopoly power on their holders. Information being a public good, it would be ex post socially optimal to award a prize to the innovator and to disseminate the innovation at a low fee. Yet the patent system has proved to be an unexpectedly robust institution. That no one has come up with a superior alternative is presumably due to the fact that, first, it is difficult to describe in advance the parameters that determine the social value of an innovation and therefore the prize to be paid to the inventor, and, second, that we do not trust a system in which a judge or arbitrator would determine ex post the social value of the innovation (perhaps because we are worried that the judge might be incompetent or would have low incentives to become informed, or else would collude with the inventor to overstate the value of the innovation or with the government to understate it). A patent system has the definite advantage of not relying on such ex ante or ex post descriptions (although the definition of the breadth of a patent does) " Jean Tirole, "Incomplete Contracts: Where Do We Stand?" Econometrica, Vol. 67, No. 4 (Jul., 1999), pp. 741-781.

Another round in the debate is about to open with a new NBER working paper on the topic of Prestige and Profit: The Royal Society of Arts and Incentives for Innovation, 1750-1850.

"Debates have long centered around the relative merits of prizes and other incentives for technological innovation. Some economists have cited the experience of the prestigious Royal Society of Arts (RSA), which offered honorary and cash awards, as proof of the efficacy of innovation prizes. The Society initially was averse to patents and prohibited the award of prizes for patented inventions. This study examines data on several thousand of these inducement prizes, matched with patent records and biographical information about the applicants. The empirical analysis shows that inventors of items that were valuable in the marketplace typically chose to obtain patents and to bypass the prize system. Owing to such adverse selection, prizes were negatively related to subsequent areas of important technological discovery. The RSA ultimately became disillusioned with the prize system, which they recognized had done little to promote technological progress and industrialization. The Society acknowledged that its efforts had been “futile” because of its hostility to patents, and switched from offering inducement prizes towards lobbying for reforms to strengthen the patent system. The findings suggest some skepticism is warranted about claims regarding the role that elites and nonmarket-oriented institutions played in generating technological innovation and long-term economic development".

So maybe prizes did not stimulate innovation and possibly patents were more effective. But I'm sure this will not be the last thing we hear on this topic.

How computer automation affects occupations: technology, jobs, and skills

James Bessen deals with this issue in a new column at VoxEU.org. A common argument you see with regard to computers and employment is that computer automation leads to major job losses. A modern version of the Luddite story. Bessen argues that this line of argument, however, ignores the dynamic economic responses that involve both changing demand and inter-occupation substitution. Using US data, he explores the effect of automation on employment growth for detailed occupational categories. Computer-using occupations have had greater job growth to date, while those using few computers suffer greater computer-related losses. The major policy challenge posed by automation is developing a workforce with the skills to use new technologies.

Bessen looks at estimates of employment demand growth.

Taking these considerations into account, I estimate a simple model of occupational demand across industries that allows for changing demand and inter-occupation substitution within industries. As my key independent variable, I measure the extent of computer use by workers in each occupation and industry. These data come from supplements to the Current Population Survey. I assume that occupations that use more computers will have a higher degree of task automation, all else equal. The dependent variable is the relative growth of employment in occupation-industry cells.

The estimates contradict popular assumptions about the impact of computer automation. First, computer-using occupations tend to grow faster, not slower. At the sample mean, computer use is associated with a 1.7% increase in occupational employment per year. In other words, the bank teller example may be typical rather than exceptional.

Second, there is a strong substitution effect between occupations. Occupations tend to have declining growth to the extent that other occupations in the same industry use computers. That is, the story is not about machines replacing humans; rather it is one of humans using machines to replace other humans, as graphic designers with computers replaced typesetters.

The substitution effect largely offsets the growth effect. Counting both, at the sample mean, computer use is associated with positive employment growth but the effect is small, 0.45% per year. This association is not necessarily causal—perhaps some other factor caused computer-using occupations to grow. But this finding does show that computer automation is not associated with major job losses.

The last sentence is the takeaway result. Computer automation is not associated with major job losses meaning our modern day Luddites have less to worry about than they first thought.

A downside to increasing computer use is that while the evidence suggests that computers are not causing net job losses, low wage occupations are losing jobs, likely contributing to economic inequality. The policy problem is how to get the workers effected the new skills they need in order to transition to new, well-paying jobs. Developing a workforce with the skills to use new technologies is the real challenge posed by computer automation.

How copyright improved Italian opera

Petra Moser explains that copyright protection for 19th century Italian operas led to more and better operas being written, but the evidence also suggests that intellectual property rights may do more harm than good if they are too broad or too long-term.

So the takeaway from this video is that intellectual property rights should be narrow and short-lived. Unfortunately when you look around you you see that there is increasing pressure, mainly from the US, for copyrights to be extended and made wider. Its not clear that such expansions are socially beneficial.

The video come from The CORE Project (http://core-econ.org).

Is technological progress history?

When it comes to technological progress and thus economic growth some of the most important questions being asked include, Has technological progress slowed down? Have we really picked all the low-hanging fruit?

A new column by Joel Mokyr at VoxEU.org argues that technological progress is in fact not a thing of the past. Far from it. There are myriad reasons why the future should bring more technological progress than ever before – perhaps the most important being that technological innovation itself creates questions and problems that need to be fixed through further technological progress. If we rethink how innovation happens, we have every reason to suspect that we ain’t seen nothing yet. Not an answer the likes of Robert J. Gordon will take too well.

Technological progress has been the driver of economic growth for the last two centuries. Some authors, such as Robert Gordon and Tyler Cowen, however, are being to suggest that product and process innovation are running out of steam.

• Robert J Gordon and Tyler Cowen, inter alia, have expressed the view that technological progress is slowing down.
• Jan Vijg has suggested that the industrialised West of the 21st century will resemble the declining Empires of late Rome and Qing China .

Their basic point is that technological dynamism is fizzling out. The low-hanging fruits that have improved our lives so much in the 20th century have all been picked. We should be ready for a more stagnant world in which living standards rise little if at all. Joel Mokyr is having none of this. For him "we ain’t seen nothin’ yet, the best is still to come".

My argument concerns both the supply and the demand sides of innovation. Starting with supply, what is it that accounts for sustained technological progress? The relation between scientific progress and technology is a complex two-way street. For example, 19th-century energy-physics learned more from the steam engine than the other way around.

The historical record makes clear that science depends on technology in that it depends on the instruments and tools that are needed for science to advance. New instruments opened new horizons in what Derek Price called "artificial revelation”, observations through instruments that allow us to see things that would otherwise be invisible.

Examples:

• The Scientific Revolution of the 17th century depended critically on the development of the telescope, the microscope, the barometer, the vacuum pump, and similar contraptions.
• The achromatic-lens microscope developed by Joseph J Lister (father of the famous surgeon) in the 1820s paved the way for the germ theory, the greatest breakthrough in medicine before 1900.

The same was true in physics, for instance:

• The equipment designed by Heinrich Hertz allowed him to detect electromagnetic radiation in the 1880s and Robert Millikan’s ingenious oil-drop apparatus allowed him to measure the electric charge of an electron (1911).

In the twentieth century, the impact of instruments on progress is even more apparent. For example:

• X-ray crystallography, developed in 1912, was crucial forty years later in the discovery of the structure of DNA.

If tools and instruments are a key to further scientific progress, it is hard not to be impressed by the possibilities of the 21st century:

• DNA sequencing machines and cell analysis through flow cytometry (to mention but two) have revolutionised molecular microbiology.
• High-powered computers are helping research in every domain conceivable, from content analysis in novels to the (very hard) problems of turbulence.
• Astronomy, nanochemistry, and genetic engineering are all areas in which progress has been mind-boggling in the past few decades thanks to better tools.

To be sure, there is no automatic mechanism that turns better science into improved technology. But there is one reason to believe that in the near future it will do so better and more efficiently than ever before. The reason is access.

Inventors, engineers, applied chemists, and physicians all need access to best-practice science to answer an infinite list of questions about what can and cannot be done. Search engines were invented in the 18th century through encyclopaedias and compendia that arranged all available knowledge in alphabetical order, making it easy to find. Textbooks had indexes that did the same. Libraries developed cataloguing systems and other techniques that made scientific information findable.

But these search systems have their limitations. One might have feared that the explosion of scientific knowledge in the 20th century could outrun our ability to find what we are looking for. Yet the reverse has happened. The development of searchable databanks of massive sizes has even outrun our ability to generate scientific knowledge. Copying, storing, transmitting, and searching vast amounts of information today is fast, easy, and practically free. We no longer deal with megabytes or gigabytes. Instead terms like petabytes (a million gigabytes) and zettabytes (a million petabytes) are being bandied about. Scientists can now find the tiniest needles in data haystacks as large as Montana in a fraction of a second.
And if science sometimes still proceeds by ‘trying every bottle on the shelf’ – as in some areas it still does – it can search with blinding speed over many more bottles, perhaps even peta-bottles.

This brings us to the Cowen question, Have all the low-hanging fruits been picked?

One answer is that the analogy is flawed. Science builds taller and taller ladders, so we can reach the upper branches, and then the branches above them.

• A less obvious answer is that technological progress is fundamentally a dis-equilibrating process.

Whenever a technological solution is found for some human need, it creates a new problem. As Edward Tenner put it, technology ‘bites back’. The new technique then needs a further ‘technological fix’, but that one in turn creates another problem, and so on. The notion that invention definitely ‘solves’ a human need, allowing us to move to pick the next piece of fruit on the tree is simply misleading.

• Each solution perturbs some other component in the system and sows the seed of more needs; the ‘demand’ for new technology is thus self-sustaining.

The most obvious example for such a dynamic is in our never-ending struggles with insects and harmful bacteria. In those wars, evolutionary mechanisms decree that after most battles we win, the enemy regroups by becoming resistant to whatever poison we throw at them. Drug-resistant bacteria are increasingly common and require novel approaches to new antibiotics. The search for novel antibiotics will resume with tools that Chain and Florey would never have dreamed of – but even such new antibiotics will eventually lead to adaptation.

In agriculture, the advance in fertiliser use has helped avert the Malthusian disasters that various doom-and-gloom authors predicted. But the vast increase in nitrate use following Fritz Haber’s epochal invention of the nitrogen-fixing process before World War I has now led to serious environmental problems in aquifer pollution and algae blooms. Again, technology will provide us with a fix, possibly through genetic engineering in which more plants can fix their own nitrates rather than needing fertiliser or bacteria that convert nitrates into nitrogen at more efficient rates.

Another example is energy: For better or for worse, modern technology has relied heavily on fossil fuels: first coal, then oil, and now increasingly on natural gas. The bite-back here has been planetary in scope: climate change is no longer a prospect, it is a reality. Can new technology stop it? There is no doubt that it can, even if nobody can predict right now what shape that will take, and if collective action difficulties will actually make it realistic.

Yes, but what about the workers?!

The big question here is, If technology replaces workers, what will the role of people become? Many commentators have written about having an idle and vapid humanity in a robotised economy. This is a concern for many. There will be disruption and pain, as there always is with progress, but the new technology will also create new demand for workers, to perform tasks that a new technology creates. It is most plausible that in our future new technology will create new occupations we cannot imagine, let alone envisage, as it has in the past.

Furthermore, the task that 20th-century technology seems to have carried out the easiest is to create activities that fill the ever-growing leisure time that early retirement and shorter work-weeks have created. Technological creativity has responded to the growth of free time: a bewildering choice of programmes on TV, the rise of mass tourism, access at will to virtually every film made and opera written, and a vast pet industry are just some examples. The cockfights and eye-gouging contests with which working classes in the past entertained themselves have been replaced by a gigantic high-tech spectator-sports industrial complex, both local and global.

Mokyr closes with a comment on Keynes and his view of the Economic Possibilities for our Grandchildren

In his brief Economic Possibilities for our Grandchildren (1931) Keynes foresaw much of the future impact of technology. His insights may surprise those who regard him as the prophet of unemployment: “all this [technological change] means in the long run [is] that mankind is solving its economic problem” (italics in original). Contemplating a world in which work itself would become redundant thanks to science and capital (Keynes did not envisage robots, but they would have strengthened his case), he felt that this age of leisure and abundance was frightening people because “we have been trained too long to strive and not to enjoy”.

Does offshoring hurt domestic innovation activities?

Concerns about the effects of offshoring around the world, including Europe, focus mainly on the loss of factory jobs, but some also worry that innovation will also be affected in a bad way. A new column at VoxEU.org shows that offshoring firms employ more people in R&D and design, introduce more frequently new products, and invest more frequently in advanced process technologies compared to non-offshoring firms. Concerns that offshoring may hurt innovation because of the lost links between production and product development are not supported by the evidence.

The article, by Bernhard Dachs, Bernd Ebersberger, Steffen Kinkeland and Oliver Som, opens by saying,

Offshoring of production activities has been a topic of economic policy debates for at least the last decade. A central issue in these debates are the economic effects of offshoring on firms in the home country. Most contributions investigated the effects of offshoring on output, employment or skills [...] and find a complementary relationship between foreign and domestic economic activity, at least in the long run.

The effects of offshoring on innovation and technology investment came into focus only recently. Conventional economic wisdom suggests that offshoring changes the internal division of labour between various parts of the firm and strengthens capital-, technology-, and skills-intensive types of economic activity in the home country, including headquarter services such as innovation and research and development. Studies on the changing skills composition of offshoring firms [...] provide empirical support for this assumption.

This view has been challenged by various authors who point to possible negative effects of offshoring on national innovation capabilities. Gary P Pisano and Willy C Shih (2012), for example, state that “mass migration [of manufacturing] has seriously eroded the domestic capabilities needed to turn inventions into high-quality, cost-competitive products”. Pisano and Shith argue that close linkages between production product development are main source for product innovation. This idea goes back to the notion of the ‘factory as a laboratory’ [...] and to interactive models of the innovation process [...], and has also been brought forward recently [...] for Finland. Offshoring cuts these ties.

The big question asked in the article is "Are offshoring firms more innovative"? Dachs, Ebersberger, Kinkeland and Som answer by noting,

We first test for effects of offshoring on innovation input.

• Results suggest that offshoring firms employ a significantly higher share of employees in research and development and design.

Research and development and design personnel accounts for 13.7% of total employment in offshoring firms, compared to 11.9% in non-offshoring firms.

This result supports the view that offshoring firms specialise on skill-intensive, non-routine tasks and rejects fears of a lower innovation performance due to offshoring.

• Offshoring firms are also more likely to introduce new products to the market, including market novelties.

58.7% of the firms which have offshored production between 1999 and 2006 have introduced products new to the market between 2007 and mid-2009. The corresponding share for non-offshoring firms is 51.7%. The difference is significant at 10% error level. Internationalisation via offshoring may increase sales expectations of firms, which in turn spur product development. However, offshoring firms do not yield larger benefits from product innovation than non-offshoring firms. Sales from new products as a share of total turnover reveal no significant difference. This may rather reflect the uncertainties of the innovation process than to adverse effects from offshoring.

To study process innovation, we construct an involvement index that resembles the index used in Bozeman and Gaughan (2007, 2011). This procedure weights up (relatively) rare utilisation of technologies, and weights down (relatively) common ones. We calculate an overall involvement index, and sub-indices for production technologies, value chain integration technologies, and product development technologies.

Results reveal a positive effect of offshoring on process innovation [...]. Offshoring firms invest significantly more frequent in production technologies and in technologies that facilitate the management and integration of global value chains. These technologies are a means to facilitate the integration of production processes between suppliers and clients across firm boundaries and therefore promote the trade in tasks. Investment in technologies for product development show no significant difference.

This result clearly contradicts the assumption that offshoring is associated with a loss of domestic production activity. However, it supports the international economics literature which predicts that offshoring firms in the home country will focus on skill-intensive and capital-intensive activities. An explanation is that offshoring firms concentrate on the most advanced, most productive equipment – which can compete with low wages at locations abroad – in the home country to avoid involuntary knowledge spillovers to foreign competitors and increase flexibility.

and

Overall, we see no negative effect of production offshoring on innovation and technological capabilities of firms in the home country. Most indicators reveal that offshoring is associated with a higher innovation performance at the firm level. We explain this result by the changing specialisation patterns of offshoring firms towards research and development, design and innovation in their home country. Moreover, innovation activities in the home countries may also benefit from additional demand generated abroad. Fears that offshoring hurts innovation because it cuts links between production and product development are not supported by our results. An important limitation of the results, however, is the fact that we cannot observe firms that offshored all their production activities.

What then are implications for future research and policy?

Our findings provide fresh evidence on the relationship between offshoring and innovation, a field where empirical results were scarce so far. They support a view on internationalisation of firms that regards offshoring as a strategy of international expansion, and not a passive reaction of firms to a loss of their competitiveness.

With respect to policy, the analysis does not confirm fears of a weakening of national competitiveness due to offshoring:

• Activities that add to the technological capabilities of firms and their ability to create competitive advantage – such as research and development, design or process innovation – are positively associated with a firm’s decision to offshore production activities.
• Concerns that offshoring may hurt innovation because of lost links between production and product development are not supported by the evidence.

On contrary, offshoring firms have higher propensity to invest in advanced production technologies in the home country than the control group of non-offshoring firms.

Our findings also point to complementarities between domestic education and innovation policies and internationalisation:

• Domestic firms are likely to specialise in knowledge-intensive activities when they internationalise their production activities.
• Policy can help to take full advantage of the benefits from internationalisation by promoting education and qualifying personnel early enough, particularly in countries or regions where talent is short.

So offshoring is good for innovation, something worth keeping in mind when you see people complaining about the offshoring activities of firms.

Refs.:

• Bozeman, B, and M Gaughan (2007), "Impacts of grants and contracts on academic researchers’ interactions with industry", Research Policy, 36(5), 694-707.
• Bozeman, B, and M Gaughan (2011), "How do men and women differ in research collabourations? An analysis of the collabourative motives and strategies of academic researchers", Research Policy 40(10), 1393-1402.
• Pisano, G, and W C Shih (2012), "Does America Really Need Manufacturing?", Harvard Business Review, 90(3), 94-102.