Innovations, Innovators and Knowledge Transfer

Project Outcomes Statement

Innovation and Knowledge Diffusion are two major sources of growth. They are also of concern to policymaking, in particular on the design of policies of intellectual property protection. The research considered three different projects on this area, which are summarized below.

1. On the Direction of Innovation

Most research on innovation has considered the question of whether the market provides too little or excessive incentives for R&D and what are the appropiate policies to provide the right incentives. In contrast, there has been very little attention on the direction of innovation activity: wheter innovation resources are directed to the right areas. This is precisely the focus of this research.

Our major finding is that the market provides incentives to direct innovation resources in the wrong direction: an excessive amount to areas of high immediate return targetting easily solvable problems. We also find that the social cost of this inefficient allocation can be extremely large, orders of magnitude larger than the one associated to the underprovision of R&D resources found by the previous literature. We also argue that while patent policy is concerned mostly to protecting innovations once they have been discovered, i.e. the solutions provded to relevant questions, it does not protect the open problems themselves. This is the source of misallocation of innovation resources that we find. Current IP protection does not provde the appropriate remedies.

2. Knowledge Creation and Diffusion with Limited Appropriation

The creation and diffusion of knowledge have been identified as the major sources of economic growth. The market allocates resources to the improvement of existing ideas, for example in the form of R&D by existing firms, and the creation of new knowledge by startups. The two are interconneced, as startups feed themselves from the stock of ideas and products that are currently in place and developed by existing firms. Both have been recognized as important sources of growth.

Intelectual property (IP) protection in the form of patents, provides incumbent firms with protection from imitation. We argue that it also provides incument firms with the ability of blocking startups from developing related ideas, even if those de not directly compete with the existing ones. This allows existing firms to extract some of the surplus created by innovators. The market and in particular the degree of IP protection determine how the surplus of new innovations is split between tstartups and existing firms that own the intellectual property that is the used to develop new knowledge. It will thus affect the incentives to knowledge creation by incument firms and knowledge creation by startups, what we refer to as diffusion.

This research is concerned on how IP policy and its effect on the distribution of the surplus created by startups affects the incentives for knowledge creation and diffusion. Our research recognizes two important channels. Firstly, the direct effect that higher IP protection discourages startups and thus reduces the entry of new ideas and the displacement of old ones. But at the same time, it could encourage innovation from existing firms.