3. Incentives for innovation - UZHffffffff-9db7-2921-ffff... · 2015. 10. 23. · 3. Incentives for innovation 3.1 Innovation and institutions CdilCorrespondingly, the itittiinstitutions

3. Incentives for innovation3.1 Innovation and institutions

Some slides adopted from Suzanne ScotchmerSome slides adopted from Suzanne Scotchmer

Contents May Be Used Pursuant to Attribution‐Noncommercial‐No DerivativeW k 1 0 G iWorks 1.0 Generichttp://creativecommons.org/licenses/by‐nd‐nc/1.0/

University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser

The Economics of InnovationSpring semester 2010

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What is required to support innovative activities?(1) the will, including a good idea(2) the means (resources)( ) ( )

Incentives must provide the means!Research, like art, needs concentrated resourcesR b t t d i l b t th t i t tResources can be concentrated in several ways, but the most importantones are:

TaxationBy appropriating the benefitsPrivate wealth (from saving or investing)

(cc) Suzanne Scotchmer



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C di l th i tit ti th t t i ti tCorrespondingly, the institutions that support innovation are governments,firms (IP), and private patrons or foundations

This history points to two types of invention:This history points to two types of invention:

(1) institutions

(2) innovations themselves(2) innovations themselves

Subsistence conservatism: arises from the inability to concentrateresourcesor appropriate benefitsresourcesor appropriate benefits

For example, why did it take so long to invent the water wheel, wind mill,harness? Societies had to invent institutions before innovations




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Egyptians and Greeks invented institutions as well as technologies andEgyptians and Greeks invented institutions as well as technologies andscience

Pharaohs employed engineers

In Greek city‐states, kings employed inventors to improve war machines(Archimedes)

Greek scholars organized schools and charged tuition.

Greeks built the Library at Alexandria in Egypt to fund scholarship




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Before institutions arose, inventors tended to keep their invention secret:e o e s u o s a ose, e o s e ded o eep e e o sec e

No adoption

No diffusionNo diffusion

Slow progress

(cc) Ulrich Kaiser



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Romans: Did not improve on institutions, but improved greatly on technologies,such as aqueducts and water mills; invented cementsuch as aqueducts and water mills; invented cement

Government funding plus occasional sui generis rewards; funding throughtaxation

Dark ages: Monasteries became centers of learning; funding throughconcentrated wealth

Middle ages: Creativity exploded

Universities invented around 1200

G ild ith k t th i ht th ti ll h i t d b fitGuilds, with market power; they might theoretically have appropriated benefitsof innovation; instead they became a conservative force against upstartinnovators, and eventually vanished


Age of monarchies: Monarchs became patrons



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3. Incentives for innovation3.1 Innovation and institutionsPrizes: an enduring incentive, especially between Middle Ages and now but still

not dead

The French: Napoleon: food preservation, Lyon

I ll l P f “ ” l i lIntellectual Property: came from “patents,” or open letters granting monopolyprivilege. “Patents” were transformed into our modern institution

Statute of Monopolies 1623 to limit “patents” (anticipated in Venice 1400s)p p ( p )

Statute of Anne 1710 (enacted to replace the exclusive right to print which washeld by the Stationers’ Guild, under license from the Crown)

Why was there suddenly a need to protect against copying?




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The problem with prizes:

Secrecy

Too centralized (what to target?)

Crowding out problem

How big should the prize be?

(Centralization problem for government sponsored research, too!)

(cc) Ulrich Kaiser



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Early patents (Scotchmer’s book):

Pendulum clock (1657)

Torsion pendulum clock (1675)

Steam powered pump (1698)

First modern “regenerative” steam engine (1767)

Punch card‐controlled looms (1802)

(cc) Ulrich Kaiser



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19th Century: Invention exploded, largely driven by the lure of patents19th Century: A lot of sui generis funding by governments, some for

commercial gain, but it was not institutionalizedkWave tank experiments in Britain

Experiments with telegraphLaying the transatlantic telegraph cableLaying the transatlantic telegraph cableBabbage and his Difference Engine

19th Century: Private concentrations of wealth looking for something to be19th Century: Private concentrations of wealth looking for something to bespent onPhilanthropic foundations become the main source of R&D funding for


awhile; Invented peer‐review



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3. Incentives for innovation3.1 Innovation and institutionsWWI and (especially) WWII changed the research climate; Until WWII,

foundations were the big funders of university R&D

Afterwards: radar, airplanes, atomic energy

The Military‐Industrial Complex:

After WWII the federal government became the main patron of R&D; In the 1950’s, about 2/3 of total U.S. R&D was paid for by the federal government, and much of it was “given” to firms

DOD DOE contract researchDOD, DOE, contract research

NIH and NSF, peer‐review of proposals

S ik (1959) i i d f d l di


Sputnik (1959): reinvigorated federal spending



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Development of the Late 20th century: Hybridization of public and privateresearchresearch

Should publicly funded research outputs be patented?

Thi i t ti l l t 20th t hThis is not entirely a late‐20th century phenomenon

Universities had long patented discoveries funded with non‐governmentmoneymoney

Consistent with the policy of granting copyrights to university authors.

Bayh Dole Act: patents can issue on federally funded research outputs andBayh‐Dole Act: patents can issue on federally funded research outputs, andgrantee owns the patents.

Does this make sense?




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3. Incentives for innovation3.1 Innovation and institutionsHeller and Eisenberg “Tragedy of the anticommons”

“Tragedy of the commons”: overuse of commonly owned resources

“Tragedy of the anticommons”: too many people have rights to excludeothers

How to avoid tragedy:

No transaction costs

No strategic behavior

No cognitive biases of participants

More likely within close‐knit communities than among hostile

(cc) Ulrich Kaiser

strangers



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The problem: upstream research in the biomedical sciences is increasinglylikely to be “private”:

supported by private funds

carried out in a private institution

privately appropriated through patents, trade secrecy, or agreementsthat restrict the use of materials and data

The resultsObstacles to innovation“Spiral of overlapping patent claims”

(cc) Ulrich Kaiser

Spiral of overlapping patent claimsReaches ever further upstream in biotech



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In biotech: creation of too many “concurrent fragments of intellectualproperty rights in potential future products or by permitting too manyupstream patent owners to stack licenses on top of the future discoveries ofupstream patent owners to stack licenses on top of the future discoveries ofdownstream users”

Is licensing a way out?g y

No, unable to procure full set of licenses

Adds uncertainty of research (pending patents)Adds uncertainty of research (pending patents)

Bundling licenses (as in music), patent pools: heterogeneous interests,asymmetry of actors, no substitutes, cognitive biases

(cc) Ulrich Kaiser



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3. Incentives for innovation3.1 Innovation and institutionsPatent features

Reward ex post how to fund research?

Entrepreneurship (own & family funds, bank loans, Venture Capital,Business Angels, IPO, joint ventures, spin‐offs)

Invention business on its own right; Edison’s “invention factory” ‐ subsidizehi h d h (li ht b lb) ith l d t t hhigh‐end research (light bulb) with low‐end contract research

In‐house innovation; German chemical industry as an example; still manyimportant private R&D labs around (AT&T's Bell Labs, IBM, PARC, seeimportant private R&D labs around (AT&T s Bell Labs, IBM, PARC, seeSection 1.1)

(cc) Ulrich Kaiser



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3. Incentives for innovation3.1 Innovation and institutionsPatent features

Patent application complicated (at least in the early days of the patentsystem) high transaction cost

High enforcement cost (Charles Goodyear is reported to have said hespent more on lawyers than on R&D)

Liti ti t t i t H ll /Ei bLitigation creates uncertainty Heller/Eisenberg paper

(cc) Ulrich Kaiser



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3. Incentives for innovation - UZHffffffff-9db7-2921-ffff... · 2015. 10. 23. · 3. Incentives for innovation 3.1 Innovation and institutions CdilCorrespondingly, the itittiinstitutions