NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Internet and the Organization of Innovation

Once released to commercial interests, the Internet became the springboard for a dizzying array of applications that were not envisioned by the sponsoring government agencies.

Both government-based and market-oriented strategies for innovation have contributed to the creation of the modern commercial internet. In Nurturing the Accumulation of Innovations: Lessons from the Internet (NBER Working Paper No. 15905), Shane Greenstein uses the example of the creation of the internet to analyze the strengths and weaknesses of two distinct ways of organizing a long-term program for accumulating innovation. One approach, which characterized the early development of the internet, relies on autonomous research institutions ("skunk works") to organize and nurture innovators. The other, which has applied more recently, relies on commercial markets to aggregate dispersed initiatives from a wide array of entrepreneurial participants.

The "skunk works" approach runs the risk that innovation will veer into areas where there is no demand, and thus no economic value. The pre-commercial Internet avoided some of those dangers because the participants in that phase of the internet assessed value from their own experiences. Their managers, in turn, nurtured them and permitted experimentation to blossom -- leading to useful and innovative applications, such as e-mail and packet switching. In addition, the Department of Defense and the National Science Foundation (NSF) played a pivotal role as "demanders" for innovation. Their substantial funding of research institutions, and their distributed investments to universities, supported the innovative activity that led to the breakthrough technologies that underlie today's Internet. This "skunk works" approach, however, restricted participation and truncated experimentation by excluding innovation along lines that did not support the "acceptable use" requirements of the government agencies. Such restrictions limited learning to an artificially narrow range of issues, and left a wide array of other applications untouched.

In contrast to the early "skunk works" days, the more recent commercial era of the Internet has played to the strength of market-based innovation. It has permitted decentralized exploration from commercial firms facing a wide array of incentives and a wide variety of circumstances. Once released to commercial interests, the Internet became the springboard for a dizzying array of applications that were not envisioned by the sponsoring government agencies. These applications include the World Wide Web and its associated browsing technology.

-- Lester Picker

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