The science of innovation
Governments want business to spend more on research and development. But even if, through tax breaks and other inducements, the amount of investment in R&D; is stepped up, it will not necessarily lead to more innovation.
What matters is how well companies manage the innovation process, how they organize and motivate their scientists, how they decide which ideas to pursue and which to discard.
In a new book, “The Architecture of Innovation: The Economics of Creative Organizations,” Harvard professor Josh Lerner provides an authoritative analysis of the strengths and weaknesses of the American system. The book is published by Harvard Business Review Press.
As Lerner explains, the organization of research in large companies has changed markedly in recent decades. The days of big central laboratories are over — Bell Laboratories is the classic example — as companies break up their scientific staff into smaller units and make more use of external providers.
There has also been more attention to incentives, a tricky issue in research since so much of it is done in teams. Scientists respond to monetary rewards, but they need to be linked to the long-term success of the group to which they belong.
Individual incentives based, say, on the number of patents filed, may lead researchers to neglect collaboration. A useful device is the internal prize scheme, which rewards teams rather than individuals and gives the winners public recognition as well as money.
As a source of innovation the large corporation has been overshadowed by start-up companies, often backed by venture capital. But this model has shortcomings, not least the lack of flexibility over timing.
Because investors in venture-backed companies generally seek an exit within 10 years, they tend to focus on sectors such as software or social networking that offer an early return, rather than advanced materials where research takes longer to pay off. They are also highly dependent on volatile public markets.
Lerner favors a hybrid model, between the corporate research laboratory and the venture-backed start-up. This is the corporate venture capital arm of the large corporation, charged with investing in young companies pursuing technologies relevant to the parent’s business.
Although these entities have had a mixed record, the best of them are run in a way that exploits the staying power of the big company — it does not have to seek a quick exit — but is less prone to bureaucratic inertia. It is easier for the company’s venture-capital arm to pull the plug on an outside organization (which is normally co-owned with other investors) than to abandon an internal project.
As for the role of governments, Lerner writes, their main task is to create an environment in which entrepreneurial companies can flourish. A necessary ingredient is an effective intellectual property regime, and here the U.S. seems to have gone seriously awry; patent protection has been broadened far too widely, leading to a flood of unproductive litigation.
Direct funding of innovation by government should be seen as a long-term investment, not a quick fix. Lerner criticizes the Pentagon’s Defense Advanced Research Projects Agency, famous for the early research that led to the Internet, for steering away from projects that would take more than five years to come to fruition.
The defense agency’s managers may think that by focusing on short-term results they will get more “bang for the buck.” But, as Lerner points out, the effect may be the opposite.
Geoffrey Owen is a former editor of the Financial Times of London, in which this review first appeared. He is a senior fellow in the London School of Economics’ Department of Management.
