THE ECONOMIC DETERMINANTS OF INNOVATION
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THE ECONOMIC DETERMINANTS OF INNOVATION
Fourth Draft, May 11, 2000THE ECONOMIC DETERMINANTS OF INNOVATIONRandall Morck'andBernard Yeung"* Visiting Professor of Economics, Harvard University, THE ECONOMIC DETERMINANTS OF INNOVATION, Cambridge MA 02138, phone (617)495-3442, e-mail rmorck@harvard.edu: Stephen A. Jarislowsky Distinguished Professor of Finance. Faculty of Business, The University of Alberta, Edmonton. Alberta, Canada T6G 2R6. phone: (780)492-5683. e-mail: randall.morck@ualberta.ca.** Krasnoff Professor of Interna THE ECONOMIC DETERMINANTS OF INNOVATIONtional Business, Stem School of Business. New York University, New York NY 10012, phone: (212)998-0425, e-mail: byeung@stern.nyu.edu.0https://khothuviTHE ECONOMIC DETERMINANTS OF INNOVATION
en.cori!Executive SummaryThis paper describes what economists know, suspect, and guess about the underlying determinants of innovation. It evaluates tFourth Draft, May 11, 2000THE ECONOMIC DETERMINANTS OF INNOVATIONRandall Morck'andBernard Yeung"* Visiting Professor of Economics, Harvard University, THE ECONOMIC DETERMINANTS OF INNOVATIONhis frustrating, knowing “what we don’t know” is the beginning of wisdom, and also a guide to avoiding public policy gaffes.A few general facts about innovation are relatively clear. Countries that show more evidence of innovation are richer and grow faster. Companies that show more evidence of inno THE ECONOMIC DETERMINANTS OF INNOVATIONvation post better financial performance and have higher share prices. These broad findings seem quite robust, and justify the current focus of both pTHE ECONOMIC DETERMINANTS OF INNOVATION
ublic policy makers and corporate decision-makers on fostering innovation.In a knowledge-based economy, the primary competition is competition to innoFourth Draft, May 11, 2000THE ECONOMIC DETERMINANTS OF INNOVATIONRandall Morck'andBernard Yeung"* Visiting Professor of Economics, Harvard University, THE ECONOMIC DETERMINANTS OF INNOVATIONaws of perfect competition do not govern innovators. Their monopolies reward their investments in innovation. But unlike monopolies in standard economic theory, innovation-based monopolies are temporary, for they last only until another innovator makes yesterday’s innovation obsolete.Intellectual pr THE ECONOMIC DETERMINANTS OF INNOVATIONoperty rights prolong innovators’ monopolies. Do they encourage more innovation by increasing the economic rewards to successful innovators? Or do theTHE ECONOMIC DETERMINANTS OF INNOVATION
y slow innovation by letting yesterday’s winners rest on their laurels? Economic theorists have generally assumed the former view, but recent empiricaFourth Draft, May 11, 2000THE ECONOMIC DETERMINANTS OF INNOVATIONRandall Morck'andBernard Yeung"* Visiting Professor of Economics, Harvard University, THE ECONOMIC DETERMINANTS OF INNOVATIONnt are required. In general, such capital-intensive research is found in work aimed al modifying, extending, or relining previous innovations. Radical innovations arc associated with smaller firms.Since large firms are required to mobilize the capital needed lor muc h innovation, monopoly problems b THE ECONOMIC DETERMINANTS OF INNOVATIONecome an issue. This is one reason why liberalized international trade and capital flow's are needed in an innovation-based economy. Global markets maTHE ECONOMIC DETERMINANTS OF INNOVATION
ke monopolies more difficult to establish and maintain, but also allow firms to achieve economies of scale in research funding.Small firms appear to bFourth Draft, May 11, 2000THE ECONOMIC DETERMINANTS OF INNOVATIONRandall Morck'andBernard Yeung"* Visiting Professor of Economics, Harvard University, THE ECONOMIC DETERMINANTS OF INNOVATIONinnovations. The evidence does not support this. Industrial policies of this sort seem prone to failure because they invite “rent seeking" and so end up fostering and subsidizing losers. Firms rationally become innovative at extracting money from governments because that is where the highest return THE ECONOMIC DETERMINANTS OF INNOVATIONis. Government policy in (his area must take care to keep corporations’ returns to political lobbying lower than their returns to real innovation.In gTHE ECONOMIC DETERMINANTS OF INNOVATION
eneral, this means subsidizing films thus makes much less sense than subsidizing infrastructure or education. One consistent finding is that innovatioFourth Draft, May 11, 2000THE ECONOMIC DETERMINANTS OF INNOVATIONRandall Morck'andBernard Yeung"* Visiting Professor of Economics, Harvard University, THE ECONOMIC DETERMINANTS OF INNOVATIONre the simplest and most direct way to subsidize winners rather than losets.2https://khothuvien.cori!There is a large literature on the tendency of innovative firms to spontaneously form geographical clusters. Although a number of high-profile theories have been proposed to explain this, the data se THE ECONOMIC DETERMINANTS OF INNOVATIONem most consistent with concentrations of skilled workers attracting the firms that need them, and with those firms attracting more skilled workers, iTHE ECONOMIC DETERMINANTS OF INNOVATION
n a positive feedback loop. If so, concentrated pools of skilled labor would seem to underlie cluster formation.One theory of this ilk. due to Jacobs Fourth Draft, May 11, 2000THE ECONOMIC DETERMINANTS OF INNOVATIONRandall Morck'andBernard Yeung"* Visiting Professor of Economics, Harvard University, THE ECONOMIC DETERMINANTS OF INNOVATION clusters like Silicon Valley and Detroit are less stable than more diversified clusters, like Boston, New York, or London. This suggests that highly focused “Centers of Excellence” might produce limited innovation.Corporate governance also seems to matter. Many of the classical capital budgeting to THE ECONOMIC DETERMINANTS OF INNOVATIONols corporate managers use work poorly in assessing the returns to innovation. Newer techniques that might be more appropriate are being developed, buTHE ECONOMIC DETERMINANTS OF INNOVATION
t are not in use in Canada to any significant extent.Incentive schemes and corporate intellectual property rights systems that let innovative employeeFourth Draft, May 11, 2000THE ECONOMIC DETERMINANTS OF INNOVATIONRandall Morck'andBernard Yeung"* Visiting Professor of Economics, Harvard University, THE ECONOMIC DETERMINANTS OF INNOVATIONo pursue financially rewarding applied research later. Promising people a high monetary' reward for valuable innovations seems superior to having government committees or corporate managers vet funding proposals for basic or applied research.Excessive equality may thus be a problem. Studies of Swede THE ECONOMIC DETERMINANTS OF INNOVATIONn’s current dramatic economic problems show that high taxes and job security clearly reduced worker3https://khothuvien.cori!productivity. High personaTHE ECONOMIC DETERMINANTS OF INNOVATION
l taxes also kept the pay of skilled workers low, and so increased the demand for skilled workers. But the same low wages for skilled workers discouraFourth Draft, May 11, 2000THE ECONOMIC DETERMINANTS OF INNOVATIONRandall Morck'andBernard Yeung"* Visiting Professor of Economics, Harvard University, THE ECONOMIC DETERMINANTS OF INNOVATIONty is also a problem. Countries where established wealthy families control most firms have low rates of innovation. Established wealthy families are content with the status quo, and therefore are understandably unenthusiastic about innovation. Many traditional Canadian policies have the perhaps unin THE ECONOMIC DETERMINANTS OF INNOVATIONtended effect of protecting inherited wealth. These include Canada’s high income taxes (which deter the formation of rival concentrations of wealth),THE ECONOMIC DETERMINANTS OF INNOVATION
low taxes on inherited wealth (which preserve existing wealth concentrations), and tradition of protectionism (which protects established firms from cFourth Draft, May 11, 2000THE ECONOMIC DETERMINANTS OF INNOVATIONRandall Morck'andBernard Yeung"* Visiting Professor of Economics, Harvard University, THE ECONOMIC DETERMINANTS OF INNOVATIONrious economic problems. In such cultures, the elite views business laws that protect entrepreneurs with suspicion. Economic relationships are often confined to relatives and close friends because no legal or cultural penalties enforce business contracts with strangers. Outsiders’ defeating establis THE ECONOMIC DETERMINANTS OF INNOVATIONhed power is part of American cultural mythology. Perhaps government should subsidize American culture and its mythic ideal of "enterprise”.Finally, fTHE ECONOMIC DETERMINANTS OF INNOVATION
inancial development clearly matters. A competitive financial system helps innovative small players grow large quickly and displace established wealthFourth Draft, May 11, 2000THE ECONOMIC DETERMINANTS OF INNOVATIONRandall Morck'andBernard Yeung"* Visiting Professor of Economics, Harvard University, THE ECONOMIC DETERMINANTS OF INNOVATIONall Morck and Bernard Yeung1. What is Innovation?Fourth Draft, May 11, 2000THE ECONOMIC DETERMINANTS OF INNOVATIONRandall Morck'andBernard Yeung"* Visiting Professor of Economics, Harvard University,Gọi ngay
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