Innovation: Paradox, Paradigms, and Politics

by on

“Creative destruction” expresses the principle that innovation is not just the accumulation of knowledge and invention over time.  Innovation displaces incumbent ideas, products, business models, entire companies—and sometimes entire industries.  Destruction is a strong term but the message is clear.  The automobile displaced the horse. Like the maxim, “no pain no gain,” “creative destruction” expresses the basic principle that innovation generally comes with a cost.  In a competitive free market economy, benefits win out over the costs, but it takes time, resources, and commitment.  Disruptive innovation must overcome entrenched markets and economic advantages of scale and familiarity.

Joseph Schumpeter, the economist who coined “creative destruction,” thought that innovation would come from large firms that had the resources needed for the high costs of innovation.  Today, we think differently.  Clayton Christensen’s landmark book, The Innovator’s Dilemma, explains why large companies fail to innovate, even though they may invent new technologies and do everything “by the book.”  The problem is that they are locked to a customer base and revenue stream that favors incremental advances over disruptive technologies or business models.  Disruption makes big demands now – in terms of learning and immediate costs – while offering only speculative benefits in the long term.  Large companies with successful business models and dominant positions are especially wary of cannibalizing existing revenue streams – the cash cows that insulate them from the extremes of market competition.  At a behavioral level, this inertia is compounded by the “endowment effect,” the demonstrated human tendency to overvalue what you already own.

Another reason why large companies are not at the vanguard of disruption as frequently as Schumpeter predicted is a political one.  Large companies have the resources and accumulated expertise to influence policymakers and regulators against disruption of their business models.  They have many arguments in their arsenal: preserving jobs, justifying past investments, incentivizing investments that they might make in the future, subsidies to politically important constituencies, supply chains dependent on the status quo, etc.   By contrast, disruptive innovation doesn’t have much of a presence in Washington.  Existing innovators are too busy.  Future innovators don’t exist yet.

Yet even if policymakers are sensitized to the fact that disruptive innovation has few friends and many opponents, that information is difficult to operationalize.  Future innovation is hard to predict, and advocates within government probably won’t be around long enough to take credit for it.  Instead, innovation policy is framed in terms of past success.  Thus, a linear or “pipeline” model of innovation in particular still dominates despite much criticism, academic and otherwise.  The linear model explains innovation in an intuitively simple way and serves well-established interests along the way.  Research goes in the front end, investments in commercialization are secured by patent, and new products emerge from the pipe.  It suggests a simple policy agenda: ”More of the same.”

This is not to say that doubling the NSF budget for basic research is not a good idea.  It’s a great forward-looking idea when you compare it to the backwards-looking subsidies for fossil fuel at double the price.

The problem is that the linear model has worked well enough and offers a simple enough storyline that it crowds out other models and more nuanced, creative thinking about innovation.  As in the large company facing the innovator’s dilemma, success becomes an obstacle to innovation.  Furthermore, success builds up professional and institutional constituencies and interests who believe that the ‘one true path’ is linear.  But we know something about “tunnel vision” and “stove-piped thinking.”

For example: The Obama administration deserves credit for reinvigorating prizes as an innovation policy tool that complements the “technology push” of the linear model.  With little fanfare, a framework for encouraging and managing prizes was incorporated into the reauthorization of the America COMPETES Act at the end of 2010.  Prizes might seem like an obvious tool for eliciting innovation, but they can threaten business as usual.  Not long ago, the Association of University Technology Managers (AUTM) actually urged its members to lobby against prizes.  This might well have escaped notice, except that the particular context was medical treatment in developing countries, and it triggered a reaction that led AUTM to backtrack nine days later.  The underlying problem is that university technology managers measure their value added in terms of technology push: invention disclosures, patents, licenses executed, and income earned.  Prizes don’t fit this model and cut technology managers out of the picture.

The patent system has been especially challenged by changing innovation models and practices, yet patent professionals cling to the principle that a one-size-fits-all patent system can be imposed on all human endeavor.  In its extreme form, the thinking is that quality does not matter because the system is remarkably self-correcting.  As Judge Giles Rich, the erstwhile dean of patent jurisprudence on the Federal Circuit put it:

Patents are not Nobel or Pulitzer prizes! They are not for exceptional inventors but for average inventors and should not be made hard to get…. Why must an invention be a commercially hot number to be patentable? If it is a total dud, how is the public injured by a patent on it? A monopoly on something nobody wants is pretty much of a nullity. That is one of the beauties of the patent system. The reward is measured automatically by the popularity of the contribution.

Judge Rich’s breathtakingly simple vision of a self-regulating commodity patent system that leaves quality to the market. It offers no room for the extraordinary complexity of information technology, where a single product can contain tens of thousands of patentable functions, none of which are marketable in themselves.

It was in fact Judge Rich who gave us the 1998 State Street decision, which swept methods of doing business into the patent system, a decision rightly denounced in Congress last year as judicial activism.  And it was a patent attorney named Giles Rich that Congress hired sixty years ago to draft a comprehensive revision of the patent laws.

Rich’s world is far removed from the holdup, ambush, and thermonuclear war that currently besets a defining innovation of our time: the smartphone. But when you’re a hammer, everything looks like a nail.  (And yes, a stovepipe lying on the ground looks a lot like a pipeline, but it is still a stovepipe.)