Wesley M. Cohen

Innovation and Learning: The Two Faces of R&D

The authors assume that firms invest in R&D not only to generate innovations, but also to learn from competitors and extraindustry knowledge sources (e.g., university and government labs). This argument suggests that the ease of learning within an industry will both affect R&D spending, and condition the influence of appropriability and technological opportunity conditions on R&D. For example, they show that, contrary to the traditional result, intraindustry spillovers may encourage equilibrium industry R&D investment. Regression results confirm that the impact of appropriability and technological opportunity conditions on R&D is influenced by the ease and character of learning. Copyright 1989 by Royal Economic Society.

Links and Impacts: The Influence of Public Research on Industrial R&D

In this paper, we use data from the Carnegie Mellon Survey on industrial R&D to evaluate for the U.S. manufacturing sector the influence of ?public?(i.e., university and government R&D lab) research on industrial R&D, the role that public research plays in industrial R&D, and the pathways through which that effect is exercised. We find that public research is critical to industrial R&D in a small number of industries and importantly affects industrial R&D across much of the manufacturing sector. Contrary to the notion that university research largely generates new ideas for industrial R&D projects, the survey responses demonstrate that public research both suggests new R&D projects and contributes to the completion of existing projects in roughly equal measure overall. The results also indicate that the key channels through which university research impacts industrial R&D include published papers and reports, public conferences and meetings, informal information exchange, and consulting. We also finnd that, after controlling for industry, the influence of public research on industrial R&D is disproportionately greater for larger firms as well as start-ups.

Empirical Studies of Innovation and Market Structure

Publisher Summary This chapter discusses the perceptible movement of empirical scholars from a narrow concern with the role of firm size and market concentration toward a broader consideration of the fundamental determinants of technical change in industry. Although tastes, technological opportunity, and appropriability conditions themselves are subject to change over time, particularly in response to radical innovations that alter the technological regime, these conditions are reasonably assumed to determine inter-industry differences in innovative activity over relatively long periods. Although a substantial body of descriptive evidence has begun to accumulate on the way the nature and effects of demand, opportunity, and appropriability differ across industries, the absence of suitable data constrains progress in many areas. It has been observed that much of the empirical understanding of innovation derives not from the estimation of econometric models but from the use of other empirical methods. Many of the most credible empirical regularities have been established not by estimating and testing elaborate optimization models with published data but by the painstaking collection of original data, usually in the form of responses to relatively simple questions.

A Reprise of Size and R&D

Numerous studies have shown that, within industries, the propensity to perform R&D and the amount of R&D conducted by performers are closely related to the size of the firm, while R&D productivity declines with firm size. These findings have been widely interpreted to indicate that there is no advantage to large firm size in conducting R&D. The authors show how a simple model based on the idea of R&D cost spreading can explain the prior findings about the R&D-firm size relationship, as well as additional features of the R&D-firm size relationship, implying an advantage to large size in R&D. Copyright 1996 by Royal Economic Society.

Firm Size and the Nature of Innovation within Industries: The Case of Process and Product R&D

The effect of firm size on the allocation of R&D effort between process and product innovation is examined. It is hypothesized that, relative to product innovations, process innovations are less saleable in disembodied form and spawn less growth. This implies that the returns to process R&D will depend more on the firms output at the time it conducts its R&D than the returns to product R&D. Incorporating this distinction in a simple model, the authors derive and test predictions about how the fraction of R&D devoted to process innovation varies with firm size within industries. Copyright 1996 by MIT Press.

R&D spillovers, patents and the incentives to innovate in Japan and the United States

National surveys of R&D labs across the manufacturing sectors in the US and Japan show that intraindustry R&D knowledge flows and spillovers are greater in Japan than in the US and the appropriability of rents due to innovation less. Patents in particular are observed to play a more central role in diffusing information across rivals in Japan, and appear to be a key reason for greater intraindustry R&D spillovers there, suggesting that patent policy can importantly affect information flows. Uses of patents differ between the two nations, with strategic uses of patents, particularly for negotiations, being more common in Japan.

Fifty Years of Empirical Studies of Innovative Activity and Performance

This chapter reviews the empirical literature on the determination of firms’ and industries’ innovative activity and performance, highlighting the questions addressed, the approaches adopted, impediments to progress in the field, and research opportunities. We review the “neo-Schumpeterian” empirical literature that examines the effects of firm size and market concentration upon innovation, focusing on robust findings, questions of interpretation, and the identification of major gaps. We also consider the more modest literature that considers the effect on innovation of firm characteristics other than size. Finally, we review the literature that considers three classes of factors that affect interindustry variation in innovative activity and performance: demand, appropriability, and technological opportunity conditions.

The nature, sources, and consequences of firm differences in the early history of the semiconductor industry

Four entrants into the early semiconductor industry—Sprague Electric, Motorola, Shockley Semiconductor Laboratories, and Fairchild Semiconductor—displayed remarkably different performance and behavior. Case studies of the firms demonstrate that the key differences stemmed from the firms’ technological goals and activities and their abilities to integrate R&D and manufacturing. These differences can in turn be related to the firms’ origins and their different conditions upon entry into the semiconductor industry, which had lasting effects due to constraints on change. While the cases offer limited prescriptions for management, they underscore the importance of technological diversity for an industry’s rate of technical advance and, in turn, public policies that support such diversity. Copyright

The tradeoff between firm size and diversity in the pursuit of technological progress

ConclusionOur analysis lends support to both sides of the debate concerning the optimal firm size for achieving technical advance. It provides a basis for why industries composed of many small firms will tend to exhibit greater diversity in the approaches to innovation pursued, and why greater diversity will contribute to more rapid technological change. It also provides a basis for why industries populated by larger firms will achieve a more rapid rate of technical advance on the approaches to innovation that are pursued. These arguments together suggest that a tradeoff exists between the appropriability advantage of large size and the advantages of diversity that accrue from numerous small firms. Others, suchas Nelson (1981), have also recognized a tradeoff between the diversity-inducing advantage of more competitive industry structures and advantages of large firm size, but not the particular tradeoff we have identified. Our analysis has been more appreciative than rigorous and, indeed, often explicity speculative. While we attempted to raise important questions, our framework requires more structuring before we can be confident about any of our conclusions. Even in its inchoate form, however, our analysis demonstrates that much needs to be done before the current debate about firm size can seriously inform policy. If we accept the plausibility of our basic framework, it focuses attention on a range of issues and questions. The fundamental premise of our analysis is that firm capabilities and perceptions differ within industries. This premise is not, however, widely reflected in analyses of industry behavior and performance, which typically take some representative firm as their starting point. Indeed, the analytic utility of our particular premise deserves scrutiny. Are differences in firm capabilities and perceptions as critical to explaining the industry patterns in innovative activity and performance as we suggest? Do these differences persist? Is our abstract characterization of these differences and their effects on innovative activity up to the task of providing a basis for policy?These intraindustry differences in capabilities and perceptions underpin the hypothesized relationship in our framework between the number of firms within an industry and the number of distinct technological activities pursued by the industry as a whole. Surely this hypothesis should be tested. To establish the relationship between numbers of firms and technological diversity, we also made two important assumptions, which themselves should be examined. First, we assumed that firms independently decide upon which approaches to innovation to pursue.This assumption precludes the clustering of firms around innovative activities due to imitation, a phenomenon highlighted by Nelson (1981) and Scott (1991). To the degree that innovative activities yield relatively fast, public results, the assumption may be suspect. While our evidence indirectly suggests that such clustering may not be critical for explaining innovative activity in a wide range of industries, more research would be helpful. Second, we assumed that the number of approaches to innovation pursued by firms is independent of their size, implying large and small firms will tend to pursue the same number of approaches. This assumption probably does not apply to the smallest firms within an industry, particularly to the extent that such firms are often not full line manufacturing firms. Does it apply, however, to the medium to large firms that account for the preponderance of R&D and economic activity inthe manufacturing sector? While our evidence again provides indirect support for this claim, more empirical and theoretical research is indicated.We also made other claims and assumptions that deserve further attention. For example, we argued that greater technological diversity stimulates technical advance and provides gross increments to social welfare. Assuming it exists, the mechanism linking diversity and technical advance has never been examined empirically and is not obvious. Our assumption that expected firm growth due to innovation is increamental played an important role in permitting usto hypothesize an appropriability advantage of large size. Again, both the assumption and its alleged effect on innovative activity are worth examining. Finally, we also need to test whether the relationship between R&D and firm size within industries depends upon appropriability conditions, particularly upon the extent to which firms can sell their innovations or grow rapidly due to innovation.Cohen and Klepper (1990) demonstrate that if firms can sell some fraction of their innovations in disembodied form or if growth due to innovation is unconditioned by existing output levels, then large firm size will confer less of an advantage and R&D effort should rise less than proportionally with firm size. In conclusion, this litany of reasonable but unsubstantiated assumptions and arguments should make clear that this paper is only a modest beginning of a daunting research agenda.

Patents and Appropriation: Concerns and Evidence

For over the past twenty years, the United States has witnessed a pro-patent movement. In response, numerous concerns have been raised, including possible impediments to innovation in cumulative technologies, emergence of anti-commons, barriers to entry and an elevation of costs of innovation associated with defensive patenting, growth in patent litigation and poor quality patents. Although there is little systematic evidence that these concerns have materialized in any substantial way, vigilance is nonetheless warranted.