Linear Model of Innovation

Models of Innovation

• Historically, economists considered technological innovation as a "black box," focusing solely on inputs and outputs.
• Effective innovation policies require understanding the innovation process.
• The text highlights the Linear and Chain-linked models, and how they relate to different approaches of innovation.

The Linear Model

• The design of innovation follows a sequence of steps: Research, Development, Production, and Marketing.
• Examples include medicines, JETs, nuclear power, and mRNA.
• Origins are in the successes of WWII science programs, e.g., Manhattan Project and top-down Fordist management.
• Aimed to support "big science" policies primarily in the US and UK during the 1940s-60s.
• Used as a justification for public support of science and classifying of R&D statistics.
• Shortcomings include the absence of feedback and trials leads to designs being unoptimized from the start.
• Early commercial jets Boeing 707 and DC-8 exemplify this.
• Boeing corrected the 707's size and flight range based on user feedback.
• Neglecting other sources of innovation, such as "learning by doing", and viewing technology as merely applied science are further drawbacks.
• Innovation is more about design, not science, based on readily available knowledge.

Role of the State in the Linear Model

• Two market failures in knowledge exist, according to the linear model:
• Suboptimal private provision of innovation, originally noted by Arrow in 1962.
• Suboptimal private provision of basic science, originally noted by Nelson in 1959.
• Uncertainty in the application of scientific knowledge leads to states being active in R&D.

Arrow's "Economic Welfare and the Allocation of Resources for Invention" (1962)

• Existing technology allows for constant average costs are labeled c0.
• Non-drastic incremental process innovation is available where c1 < c0 AND pmonopoly(c1) > c0.
• Innovation can be introduced through a lump-sum R&D investment (R.)
• Patents offer full appropriability and infinite length after innovation.
• Monopolists, competitive firms and public planners represent distinct incentives to innovate.
• Perfectly competitive firms can have more incentive to invest in R&D.
• If investment in innovation is left to the public sector, underinvestment occurs, causing market failure.
• Direct public investment in R&D and subsidies helps make up for this failure.

Knowledge and Uncertainty

• Nelson's "The Simple Economics of Basic Research" (1959) addresses uncertainty.
• Arrow's 1962 assumptions include the firm producing only one innovation, complete appropriability, and no uncertainty.
• R&D in the real world differs, especially with basic research.
• The results of basic research tend to be uncertain.
• Big pharmaceutical firms can develop drugs using the "random screening" process.
• Several innovations derive from scientific discovery like genetic engineering which modifies plants, treats diseases, produces insulin.
• Appropriability of basic research is very low.
• Firms can only patent the commercial applications of basic research.
• Innovations emerge far in time, evidenced by the electromagnetism equations by Maxwell in 1862, now x-ray in modern medicine.
• A minimum level of investment is vital for innovation, like size of R&D in pharmaceuticals or the budget for scientific advancement.
• Uncertainty dominates R&D results, especially scientific research, which is at its maximum.
• Marginal benefits (MB) depend on the number of innovations.
• Marginal benefit is bigger for the large firms than for small firms, especially big multi-product firms.
• Marginal cost of research is constant, measured as the wage of an extra scientists.

Nelson (1959) vs Arrow (1962)

• Public planners and monopolists or large firms show greater incentive to invest in basic research, as opposed to competitive firms, or smaller businesses.
• Investment in basic research under private sectors leads to underinvestment causing market failure.
• State basic research, cooperative industry-public efforts and prioritizing dynamic efficiency are remedies.
• Big national institutions specialize in basic disciplines and technologies worldwide.
• The Bayh-Dole Act authorized universities to get patents for federally funded research outputs to make research appealing to firms.
• AT&T’s Bell Labs and other private actors aid innovation.

Rise of Science and R&D Investment Since the 1950s

• There was an explosion of public funding of R&D in the US and Europe from 1950 through 1960.
• There was constant growth of Business R&D.
• East Asia is beginning to emerge in terms of science and R&D investment.
• Large cross-country differences in R&D intensity and composition stem from industrial structure, science policies, military power, and education.

The Chain-Linked Model

• A highly descriptive, endogenous model that is scarcely tractable by formal analysis.
• It serves as critique of US and UK science policies of the 1970s and large firms' approach to R&D.
• Endogeneity of science, complexity of S-T (Science and Technology) links are important.
• Central to this is the central-chain innovation which is a system that starts with feedback loops that highlight hidden sources of innovation.
• The use of science occurs in two stages which criticizes the sharp distinctions between basics vs. applied research.
• The main path is the central-chain innovation labeled "C".
• There a series of feedback links are labeled "f" and "F."
• Feedbacks aid in connecting market needs to improvements of the product or of the service.
• The economic and technological side is important.
• Invention is when something new that is non-obvious is created.
• Analytic design is applying reconfiguration for innovation by changing the technology of already known base components.
• Science to innovation extends alongside development.
• Storing data and forming universities helps in the innovation process, which is time consuming.
• Radical innovations are represented by arrow D, where lasers, semiconductors, and genetic engineering occur.
• Arrow I represents product innovation to science like the microscope and telescope.