Profiting from innovation (PFI) and the ... - WordPress.com
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Ashish Arora, Fuqua School of Business, Duke Univ, and National Bureau of Economic Research
Profiting from innovation (PFI)and the evolving division of
innovative labor in the American Economy
The basic PFI schema
Anticipated profit
R&D investment
Anticipated profit
Total profit pool: relative invention quality, market size,
competition, ...Innovator’s share = appropriability
regime, complementary assets, timing
Appropriability regime = IP, replicability
Unit of analysis: Invention
Analytical focus: Success at commercialization
Positive & Normative Implications
Market entry strategies: case of weak appropriability regime (fig 3 from Teece, Research Policy, 2006).
Patentroyaltiesaregenerallysolowthattheprofitsfromexploitingone’sowninventionsarenotappreciablygreaterthanthosederivedfromtheuseofothers’knowledge.Itreallyscallsforsomeexplanation,whythefirmthathasdevelopedtheknowledgecannotdemandagreatershareoftheresultingprofits
Arrow, 1962, p 355
Underlying PFI (1986) is more than a decade of extensive scholarship ...
EJ (1976)• – Tech Transfer is costly (tacitness, context dependence,..)
TAAAPS (1981) • –markets for technology
JL & Econ. (w/ Monteverde)., 1982. • Own a specialized asset but hire more efficient outsiders to
use it
JEBO 1982, • Lumpy assets (e.g. know-how) à underuse AND whose
services cannot be efficiently rented out à diversification
JEBO 1980. • Economies of scope cannot explain multiproduct firms.
(explain joint production, not joint ownership)
REStat (w/ Armour) (1980) • common ownership of R&D and production facilities will
enhance technological innovation if different stages of production have technical commonalities à (VI à more R&D)
• Rescue us from the market power and innovation debate
• Transaction cost = Resource cost, not just opportunism
• A theory of the firm, not just the make-buy
– Innovate if have required assets– Acquire assets because innovate
(in past)
… and perhaps the historical context?
Extending the PFI framework
• PFI takes distribution of assets & capabilities as given
– Outcome of past investments
– Reflect anticipated costs and benefits
• Q: distribution of innovative activity – who invents, who commercializes and who profits
– Cf. Dynamic Capabilities (SMJ 1997 w/ Pisano, Shuen); Organizing for innovation (HBR 1999 w/ Chesbrough); Alliance (JEBO 1996); Industrial organization (JEBO 1994)
– But Smith & Ricardo (and Stigler + Bresnahan & Gambardella)
PFI + Economies of specialization
Firm strategy
Industrial organization of innovation
Shifting the focus: The organization of innovative activity
Whoinvents?Whocommercializes?Howhasthisevolvedovertime?
Thereisreallynoneedforthefirmtobethefundamentalunitoforganizationininnovation;...Ifprovisionismadefortherentalofnecessaryequipment,...amuchwidervarietyofresearchcontractswithindividualsaswellasfirms ...couldbearranged....researchinstitutesfinancedbyindustry...couldbemadetoplaymuchlivelierrole.
Arrow, 1962, p 624
Rise (and fall) of corporate research
"I am fully convinced that it has never, is not now, and never will pay commercially, to keep an establishment of professional inventors, or of men whose chief business it is to invent” … the duties of the patent department … (should be) … first and foremost on examining patents or inventions submitted by the public for consideration and second on examining descriptions of inventions forwarded by the company's employees.“ T.D. Lockwood, on the “Duties of the patent department”, at AT&T, 1885. (cited by Lamoreaux and Sokoloff, 1999)
The broad contours• Innovators different from
Inventors• Increasing integration
between complementary assets + invention after WWI till 1980s
• Trend reverses after 1980s?
WhyInternalResearch• Evaluateexternaltechnology• Generateinventions
• Growthimperative• Other:
• Attractsmartpeople• Signaltoregulatorsorcustomers• Windowonfuture
Golden age of independent inventors, 1850-1900
StanleyEdison
westinghouseSperry
Thompson
• Independent inventors – Assigned patents to multiple firms– Decline nationally after 1890– Specialized intermediaries
• Corporations– External technology and inventions– Internal R&D as quality control, absorp
capacitySources: Lamoreaux and Sokoloff, Usselman,
The golden age of corporate research 1930-80
Backtothefuture?DiminishingroleoflargefirmsinindustrialR&DintheUS,marketfortechnology,M&A,
outsourcing…
Source:NSF S&EIndicators
ShareoftotalprivatelyfundedR&DintheUS,byfirmsize,1984-2005
BlockandKeller,2009.
Lessthan500employees
500to999
1,000to4,9995,000to9,999
10,000to24,999
25,000ormore
0%
20%
40%
60%
80%
100%
120%
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 00 01 02 03 04 05
Sector Licensing of Rights to Use IP
Protected as Industrial Property
Licensing of Rights to Use IP
Protected by Trademarks
Licensing of Rights to Use IP
Protected by Copyright
Licensing of Rights to Use a business format under a
franchise
Payments for rights to use Natural Resources and Other intangibles
Total
Manufacturing 59.5 9.4 1.0 2.9 - 72.8 Trade and Transp 1.0 6.9 0.1 5.1 - 13.1 Information 1.9 4.9 6.6 0.0 0.1 13.5 Fin and Ins 0.2 0.7 0.0 1.4 0.0 2.4 Prof and Bus Serv 3.0 0.2 1.6 1.5 0.4 6.7 Other Industries 1.0 0.7 0.1 4.8 0.8 7.5
Total 66.6 22.8 9.4 15.7 1.3 115.9
US distribution of technology licensing receipts by sector 2002, $B; Carol Robbins, BEA 2006, tab 7
shareofcontractR&D,
total
shareofcontractR&Dinmanuf.R&D
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
%oftotalR&D
ContractR&DasshareoftotalR&D,1993-2007
Thedivisionofinnovativelabor:Demand(Innovator)Perspective
Imitation(new-to-firm)
AllUSManuf(n=5500)
Innovation(new-to-mkt)
Nonewproducts
Internalinvention
Externalinvention
58%
42%
27%
16%
51%
49%
Supplier 14%Customer 27
Other Firm 8Consultant Serv provider 8Ind. Inventor 7
Univ 5
All specialists 17%
Sources of external invention
Innovation and the Sources of Invention in American Manufacturing, 2007-09: Arora, Cohen, Walsh, Research Policy 2016
Shareofpatentsacquired
Shareofpatentsacquired
Publicationstock/sales($25B)
Publicationstock/sales($25B)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
centralized decentralized
Shareofpatentsacquired Publicationstock/sales($25B)
Centralizedfirmsinvestininternalresearchandmake
fewerandsmalleracquisitions…Source: Arora, Belenzon, and Rios, SMJ
0
10
20
30
40
50
60
70
centralized decentralized
Numberofacquisitionsper$100mminsalesAvg.patentsperacquisition%ofacquisitionsabsorbed
Structure(centralized
or decentralize
d)
External Knowledge
InternalR&D
InnovationStrategy
PFIrevisited:Innovationstrategyandorgstructure:
Internalvexternalinventions
... and centralized firms also derive proportionately less value from acquired technology relative to internal R&D investment
7 6 7
R&DStock,14
R&DStock,7InternalPatentsStock,9
InternalPatentsStock,7
ExternalPatentsStock,2 ExternalPatents
Stock,6
0
2
4
6
8
10
12
14
16
centralized decentralized
R&DStock
InternalPatentsStock
ExternalPatentsStock
Numberofacquisitionsper$100mminsalesSource: Arora, Belenzon, and Rios, SMJ
Both internal and external knowledge are viable paths to create value, but must be supported by the appropriate org structure.
Structure(centralized
or decentralize
d)
External Knowledge
InternalR&D
InnovationStrategy
Post1990- USfirmsarewithdrawingfromresearch
Shareofpublishingfirms
Shareofpatentingfirms
0
0.05
0.1
0.15
0.2
0.25
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
ShareofpublishingandpatentingUSpublicfirms,1980-2007,Arora,Belenzon,Patacconi,2015
110/1,814 firms
437/1,814 firms
70
147
227
262
26%
Basic+Appliedas%oftotalR&D,3yrmovingaverage
32%
23%
0
50
100
150
200
250
300
15%
17%
19%
21%
23%
25%
27%
29%
31%
33%
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
constant2009$b
illions
Source:NSFS&EIndicators,2016,Appendixtables4.6-4.8
BusinessFundedR&D
USbusinessexpenditureonbasicandappliedresearch,asshareoftotalbusinessfundedR&D,1980-2012,3yearmovingaverage,andtotalbusinessfundedR&Dinconstant2009dollars