Notes on innovation

Sanjeev Sabhlok

Preliminary Draft 21 March 2014Happy to receive input at sabhlok@gmail.com

Work in progress.This is a preliminary set of ideas/research on innovation.

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Contents

1. Three ways to create value...............................................................11.1 Method 1: Trade....................................................................................................11.2 Method 2: Imitation...............................................................................................21.3 Method 3: Innovation............................................................................................2

2. Salient aspects of innovation............................................................32.1 Types of innovation................................................................................................32.2 Innovation is hard: Knowledge is growing expontentially, but innovation (value

add) is barely keeping pace....................................................................................32.3 Difference between innovation and entrepreneurship..........................................42.4 Entrepreneurs don’t get richer, mostly go broke...................................................52.5 More entrepreneurs is not necessarily a great policy............................................52.6 Key implications.....................................................................................................6

2.6.1 We are only interested in ideas that create new value.............................62.6.2 We are not interested in “best” ideas.......................................................62.6.3 Innovation must be distinguished from waste..........................................6

3. Market failure theory of innovation..................................................73.1 Intellectual theory (Francis Bacon): Knowledge drives innovation.........................73.2 Market Failure Economists...................................................................................103.3 Kenneth Arrow (IPA paper)..................................................................................103.4 Richard Romano (IPA paper)................................................................................103.5 Romer (Kealey).....................................................................................................103.6 Baumol (Kealey)...................................................................................................10

4. Competition theory of innovation...................................................114.1 Adam Smith’s theory............................................................................................114.2 Schumpeter’s theory............................................................................................114.3 Endogenous growth theory..................................................................................11

4.3.1 Romer’s theory........................................................................................114.3.2 Innovation can occur in research labs, but mostly ‘on the shop floor’....12

4.4 Testing the two theories......................................................................................134.4.1 Whether innovators are highly qualified.................................................134.4.2 Anecdotes...............................................................................................134.4.3 Inventions...............................................................................................134.4.4 Competition as a key driver.....................................................................144.4.5 Signalling by the price system.................................................................14

4.5 Planned innovation..............................................................................................144.5.1 Continuous improvement/ business R&D...............................................144.5.2 Discontinuous (significantly new) innovation..........................................15

4.6 Limitations of planning.........................................................................................164.7 Scientists do not innovate; innovators pose questions for science......................174.8 Science was largely privately funded in the past, and through philanthropic

efforts 18

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4.8.1 Western governments have funded science only since 1940s................184.9 Basic science may be a public good, but commercial R&D is not.........................184.10 Government R&D usually displaces private R&D.................................................18

4.10.1 Paul David and Bronwyn Hall, 2000........................................................184.10.2 Paul David, Bronwyn Hall and Andrew Toole, 2000................................184.10.3 OECD 2003..............................................................................................19

5. Institutional frameworks.................................................................215.1 Liberty and dignity (egalitarianism)......................................................................215.2 Stable, predictatble institutional environment....................................................215.3 Property rights.....................................................................................................225.4 Free market competition: Say’s law (Walrasian market equilibrium)...................225.5 Profit 22

5.5.1 Do not fix prices!.....................................................................................225.5.2 EIU innovation environment index..........................................................23

6. Enablers: Cultural factors................................................................246.1 Social rewards and respect for wealth generation...............................................246.2 Absence of “tall poppy syndrome”......................................................................24

7. Key ingredient 1: Entrepreneur.......................................................257.1 Academic courses in entrepreneurship and innovation.......................................25

7.1.1 The University of Swinburne...................................................................257.1.2 257.1.3 Teaching lateral thinking and innovation in schools and universtities....257.1.4 Lean startup (Eric Ries)............................................................................267.1.5 Learning organisation (John Seddon/Peter Senge) (double loop learning/

system thinking)......................................................................................267.1.6 Wall St. Journal debate...........................................................................26

7.2 Incentives for academics to innovate...................................................................30

8. Key ingredient 2: Risk taking and venture capital...........................328.1 Entrepreneur must always risk his own capital....................................................328.2 Institutions of risk capital.....................................................................................32

8.2.1 Market based options if you HAVE to fund.............................................328.3 Venture capital and angel investors.....................................................................32

8.3.1 The Indus Entrepreneurs.........................................................................33

9. Enablers: individual factors.............................................................349.1 Drive 349.2 Number of people................................................................................................349.3 Quality/capability of the individual......................................................................35

9.3.1 Immigration matters, but only high-end brainpower..............................359.4 Knowledge and specialisation..............................................................................38

9.4.1 Adam Smith’s theory of innovation: specialization and competition......389.5 Ability to take risks...............................................................................................38

10. What are governments doing?........................................................3910.1 Commonwealth: innovation.gov.au.....................................................................39

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10.1.1 Seven innovation priorities.....................................................................3910.1.2 Funding startups.....................................................................................4010.1.3 Tax breaks for R&D..................................................................................42

10.2 Western Australia: Vouchers................................................................................42

11. Role of government: arguments in favour......................................4311.1 R&D 4311.2 Information gaps?................................................................................................4311.3 Coordination?.......................................................................................................4311.4 Protection of intellectual property.......................................................................4311.5 Risk? 4611.6 Successful examples.............................................................................................4611.7 Preventing brain drain?........................................................................................4711.8 Moral hazard........................................................................................................4711.9 Displacement or crowding out of private research..............................................4711.10 Public choice question: how can bureacurats without any capacity to

innovate support innovation?..............................................................................47

12. Role of government: arguments against.........................................4812.1 Businesses are the “smartest” in their field.........................................................4812.2 No skin in the game..............................................................................................4812.3 Picking winners is a bad idea: Solyndra................................................................48

13. List of investions..............................................................................50

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1. Three ways to create value

1.1 Method 1: Trade Economic models of competitive general equilibrium (e.g. Edgeworth box), or Walrasian equilibrium, are based on exchange.

Schumpeter called this the “circular flow”. The circular flow does not drive long term growth. If there was no innovation, it would merely opitimise existing value.

Schumpeter showed that the circular flow has its limitations. He therefore identified a key role for the entrepreneur who identifies new opportunities. The availability of profits signals where money should be invested.

Standard growth models (e.g. Solow’s model) are based on the idea that growth is based on capital accumulation. Dierdre McCloskey has shown that exchange (‘shuffling’) and capital accumulation can modestly increase prosperity but can’t drive the growth mankind has seen in the past few centuries. That requires breaking out of the capital accumulation phase into innovation. No amount of collecting gold will help if there are no new ways to create value.

She calls the entire capitalistic system ‘innovation’, to distinguish it from capital accumulation, which was a common characteristic of pre-captialistic societies.

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1.2 Method 2: Imitation Imitating those who are successful can increase wealth. This can be considered to be a low level of innovation, in which existing technology and methods are copied and value created. This is a crucial part of the growth. Every society needs to imitate (“technology transfer”).

Imitation is driven by the availability of information about existing methods. However, profit-seeking activity will usually motivate such transfer of technology

Is there a role for government in helping businesses imitate?There might be a role for the government to ensure that information is widely available, subject to intellectual property right constraints. In this highly globalised world, it is unlikely that many opportunities to imitate are left lying on the roadside.

There is a cost to systematic attempts to innovate. Businesses in Victoria can grow either through innovation or by imitation.

It can be rational to not innovate but to copy. Australian companies prefer to bring technology from abroad and modify to suit Australian conditions.

1.3 Method 3: InnovationInnovation is the process of generating new value by creating and adopting new or significantly improved ways of doing things.

Marx realised this when he noted that “The bourgeoisie cannot exist without constantly revolutionizing the instruments of production” (Communist Manifesto).

As indicated above, Schumpeter showed that entrepreneurs breakes out of the competitive equilibrium by either deploying own capital or other’s capital (profits) towards new forms of production. Society must generate profits before it begins to innovate.

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2. Salient aspects of innovation

2.1 Types of innovationAccording to Schumpeter, there are 5 types of innovation:

(1) The introduction of a new good – or a new quality of a good.

(2) The introduction of a new method of production.

(3) The opening of a new market.

(4) The conquest of a new source of supply of raw-materials or half-manufactured goods.

(5) The carrying out of a new organization.1

Four types of innovation: goods and services, organisational process, operational process, and marketing.

Innovation refers to the use of a novel idea or method to create value. Invention refers only to the the idea or method.

2.2 Innovation is hard: Knowledge is growing expontentially, but innovation (value add) is barely keeping paceThere is no doubt that “the rate of technical progress amongst humans has been exponentially increasing”2. E.g. scientific knowledge doubles every 15 years, or quicker (see figure below). [ Moore's Law is perhaps the most prominent of these examples.3 If productivity had advanced at this pace, the world would have been wealthier by many orders of magnitude. The rapid advances in education technology, robotics, 3D printing, solar cell technology, and many others, point to rapidly increasing knowedge.

1 http://www.startup-book.com/2012/03/31/prophet-of-innovation-joseph-schumpeter-and-creative-destruction/2 http://en.wikipedia.org/wiki/Accelerating_change#Kurzweil.27s_The_Law_of_Accelerating_Returns3 Moore's law describes an exponential growth pattern in the complexity of integrated semiconductor circuits.

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[Figure: http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2909426/]

However, the West has been growing quite modestly, compared to the growth in knowledge.

Why?

Growth theory suggests the catch-up hypothesis, that (subject to ability to absorb new technology, attract capital and participate in global markets4) countries farthest from the PPF will grow quicker, and others, slower. Those closest to PPD have to innovate, and innovation is hard. Innovation (conversion of ideas into value) is much harder than increasing knowledge.

It is made particularly because of competition, and changes in people’s expectations. People are not willing to pay for outdated technology. The value of ‘outdated’ technology drops to zero quickly. This is the process of creative destruction.

2.3 Difference between innovation and entrepreneurshipEntrepeneurship is a complex commercial skill, including people management, finance, technology, marketing, etc.

Type of firm Type of innovation Source of people

Source of funds

Issue/s

4 http://en.wikipedia.org/wiki/Convergence_(economics)#Limitations

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New startup (entrepreneurial)

Copying (e.g. a new café)

Existing firms Bank No role for government

Continuous improvement (e.g. a better café)

Existing firms Bank No role for government

Discontinuous improvement (e.g. Facebook)

Innovators/ researchers

Venture capital

Most discussion occurs in this space

Existing firm Copying Existing firms Bank No role for government

Continuous improvement

Existing firms Bank No role for government

Discontinuous improvement

Innovators/ researchers

Mostly bank, but some equity; private equity

No role for government

We note that a bulk of innovative activity occurs on its own momentum, in response to market forces. It is difficult, if not impossible, for a government to get involved in innovation or entrepeneurship.

2.4 Entrepreneurs don’t get richer, mostly go brokeShane's book reveals a bleak picture of entrepreneurship in the U.S. It shows the average new venture will fail within five years, and even successful founders usually earn 35% less over 10 years than they would working for others. At the individual level, the core fact here is the typical, median, right-smack-in-the-middle entrepreneur is a failure.5

2.5 More entrepreneurs is not necessarily a great policyYou write that "encouraging startups is lousy public policy," based on the data you've examined. What would you propose as policy alternatives? The part that's lousy public policy is the idea that entrepreneurs, regardless of what kind, are good, and if we just have more of them, it's better. But what's a good public policy is if we picked certain kinds of startups, and we emphasized the increase in those. But the way the policies are set up, they don't encourage the specific high-potential startups. Most of the policies are: More entrepreneurs—just let's get volume. It's a very volume-oriented strategy. That's bad public policy. 6

2.6 Key implications

2.6.1 We are only interested in ideas that create new valueWe are not interested in invention for the sake of invention.

5 http://www.businessweek.com/stories/2008-01-23/the-entrepreneurship-mythbusinessweek-business-news-stock-market-and-financial-advice6 http://www.businessweek.com/stories/2008-01-23/the-entrepreneurship-mythbusinessweek-business-news-stock-market-and-financial-advice

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2.6.2 We are not interested in “best” ideasIt is not necessary that the “best” product wins in a market (and thus adds value). Factors that make a product attractive to a market can include intangibles, being earliest in the marketplace, and many random factors.

2.6.3 Innovation must be distinguished from wasteInnovation does not bear a direct relationship between the skill and effort put into the innovation.

Following innovative activities:

research and development (R&D)

product development and testing.

It is possible that some such activities might result in added value. However, by themselves there is no reason to expect that these create value.

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3. Market failure theory of innovation

3.1 Intellectual theory (Francis Bacon): Knowledge drives innovation

In 1620 Bacon wrote: ‘Printing, gunpowder and the magnet [compass] . . . have changed the whole face and state of things throughout the world.’ In his most famous quote, he said: ‘Knowledge is power.’

it was by his study of the Portuguese historians that Bacon concluded that Spain had acquired its power and wealth by copying Henry the Navigator. And how had Henry made his great discoveries? By scientific research. From the chroniclers Bacon learned that in 1419 Henry had retreated to Sagres, an isolated promontory in Algarve in southwest Portugal where, leading a celibate life of austere study and research, he had collected a group of geographers and astronomers and cartographers and shipbuilders to plan a systematic programme of scientific exploration. Under his direction, Henry’s research group had improved the compass, developed the caravelle (a small, rakish ship with fore-and-aft sails and a large rudder that was especially manoeuvrable against the wind) and had constructed novel star maps and other navigational aids, including superior charts. Henry had created the science that had powered first the Portuguese and then the Spanish to global dominance.

Bacon thus concluded that Henry had confirmed that scientific research was the precondition for improvements in technology: ‘If any man think philosophy and universality [science] to be idle studies, he doth not consider that all professions [technology] are from thence served and supplied.’ (Second Book, p. 62.) It was therefore Bacon who first proposed the ‘linear model’ for economic growth:

science → technology → wealth

Bacon said that: ‘The benefits inventors confer extend to the whole human race’ – that is, inventors benefit the whole human race, not any particular individual. Consequently, no one will pay for its development because no one will pay for the development of a concept that cannot be monopolized but that will be used largely by others, including competitors, enemies and the unborn. So Bacon concluded (in an early claim of ‘market failure’) that for science ‘there is no ready money’, which was why governments had to pay for it. Bacon’s full linear model therefore was:

government money → science → technology → wealth

To propagate this idea Bacon in 1605 wrote The Advancement of Learning (which is still in print) to urge the British government to copy Henry the Navigator and to put money into university science.

[But Bacon was wrong]

[Henry] was not a scholar who maintained at Sagres an academic college of disinterested researchers; he was instead a professional soldier who employed technologists opportunistically, as cunning warriors do. And Henry’s involvement with dispassionate science was negligible. [H]e was instead a professional soldier who employed technologists opportunistically, as cunning warriors do.

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As for Bacon’s magic trio of gunpowder, the magnetic compass and printing, the first two had been developed in China by around the time of Christ, spreading to Europe via the Silk Road, while printing with movable type, though also developed by the Chinese, was independently invented in Europe by Johann Gutenberg, a goldsmith, around 1440. In none of these cases are the inventors believed to have been anything other than artisans or traders. They were not scholarly researchers.

The key point is that Bacon’s idea was a hypothesis, but that it was never tested. It continues to remain untested.

The opposition’s opening remarks Jul 24th 2012 | Terence Kealey

In his 1605 book "The Advancement of Learning", Francis Bacon described research as a public good: "The benefits derived from inventions may extend to mankind in general." But because private individuals will pay only for private goods, Bacon argued that it fell to governments to subsidise a public good like research.

People still agree with Bacon yet, oddly, their belief is not strongly supported by facts. As Paula Stephan, an economist, wrote in her 2012 book "How Economics Shapes Science": "The ratio of empirical evidence to theory is relatively low."

So, during the 18th and 19th centuries, the French and German governments subsidised science exhaustively, yet the two lead economies were successively those of Britain and America, whose governments barely funded any. The federal government in Washington started to support research significantly only in 1940, 50 years after America had become the richest country in the world, while the British government started to fund research significantly only in 1913, over a century after it had launched the Industrial Revolution.

The contemporary economic evidence is also ambiguous. In 2003 the Organisation for Economic Co-operation and Development (OECD) surveyed a large number of factors that might explain the different growth rates of the world's 21 leading economies between 1971 and 1998, and found that publicly funded research and development (R&D) was not one of them. Unlike privately funded science, publicly funded science does not create wealth.

Why not? One reason, as explained by Paul Romer, an American economist, is that research findings—particularly industrial research findings—can be held as reasonably private goods. A combination of corporate secrecy and patents can provide companies with some exclusivity over the results of their research, so to some degree they will fund it anyway, especially as surveys find a strong correlation between a company's investment in research and its subsequent profits.

Further, companies need not fear that others will easily copy them. When Edwin Mansfield, an economist, examined 48 products that, during the 1970s, had been copied by companies in the chemicals, drugs, electronics and machinery industries of New England, he found that the costs of copying were, on average, 65% of the costs of the original innovation.

Copying is expensive partly because it is hard to acquire the so-called "tacit" knowledge embedded in every innovation. No blueprint can convey all the subtleties of an innovation, which can therefore be copied by others only if they recapitulate the actual innovatory steps. Such recapitulation is expensive.

But there is a further cost to copying, which brings its full cost to 100%. The only people capable of copying innovations are active researchers, and they can remain active only if they produce their own research. Yet active researchers, even in industry, must publish if they are to benchmark their work. So the hidden cost of accessing the research of others is

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that you have to produce and share your own, which thus acts as the full fee of copying. The fee may be paid indirectly, in the form of knowledge shared with the scientific community at large, but it is so substantial that it pre-empts concerns that innovating companies are necessarily undercut by copying competitors.

Indeed, companies do research in part to trade it. In a 1983 international survey of 102 firms, Thomas Allen of MIT's Sloan School of Management found that no fewer than 23% of their important innovations came from swapping information with rivals: "Managers approached apparently competing firms in other countries directly and were provided with surprisingly free access to their technology."

We see therefore that industrial research is largely a private good (and thus attracts private money), the copying of which forces copiers to invest as fully in their own research. This is why the OECD has speculated that, when governments fund research, they might only displace or crowd out its private funding. Companies fund their own research, so, when governments fund it, companies may simply withdraw their own money.

Clearly there are non-economic reasons for governments to fund science: lung cancer research cannot be entrusted to tobacco companies, or public-health research to drug companies, or economic research to bankers. Defence research is, moreover, a special case, as is research into orphan diseases, climate change and so-called "big science", such as NASA's space science or CERN's Large Hadron Collider.

Yet even the purest of science might be funded by philanthropists if governments did not crowd them out (witness the private funding of Goddard's original space research or of the early cyclotrons, as well as the Gates Foundation's current support for rare diseases)—and, until we know more about crowding out, we should not assume that governments need fund any research.7

Full debate: http://www.economist.com/debate/days/view/863

The myth that science comes prior to innovation is widespread, and shows no sign of abatement.

Pavitt (2005)8 identifies three broad, overlapping sub-processes of industry innovation, presented in the diagram below.

The production of scientific and technological

knowledge

The translation of

knowledge into working artefacts

(products, systems, processes, services)

The continuous

matching of artefacts to market needs and

demands

Pavitt views innovation as essentially a matching process, as the exploration and exploitation of opportunities for new or improved working artefacts is based either on an advance in technical practice or a change in market demand. Furthermore, he argues that innovation is inherently uncertain, as it is impossible to predict the cost, performance and stakeholder reception of a new artefact ex ante.9

7 http://www.economist.com/debate/days/view/863/print8 Pavitt, K., 2005. Innovation processes. In: Fagerberg, J., Mowery, D., Nelson, R. (Eds.), Handbook of Innovation. Oxford University Press, Oxford, pp. 86–114.9 From DTF paper on innovation (Intern Sharon Lai).

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In the intellectual model, the entrepreneur (horse) is supposed to be driven by the cart (science).

3.2 Market Failure Economists

3.3 Kenneth Arrow (IPA paper)

3.4 Richard Romano (IPA paper)

3.5 Romer (Kealey)

3.6 Baumol (Kealey)

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4. Competition theory of innovation

4.1 Adam Smith’s theory“Over two centuries ago, Adam Smith proposed that trade was the instinct that underpinned cooperation and that trade, in its turn, fed technological growth because it fostered specialization, it being specialists who perform research to improve their technologies. He proposed that industrial competition underpinned innovation.10

Chemists who subscribed to the phlogiston theory (that fire is a substance) or to the caloric theory (that heat is a substance) or who tried to build perpetual motion machines were not to be of use to engineers. Indeed, during much of the eighteenth and nineteenth centuries, the reverse was true; the scientists scrambled to catch up with the engineers. It was on Joseph Black’s discovery of ‘fixed air’ that Lavoisier could show that fire represented oxidation, not phlogiston. The technology came first and the science followed.11

Our results strongly suggest that firms with an exclusive focus on developing their science and technology base are foregoing important gains that could be reaped by adopting practices and measures designed to promote informal learning by using, doing and interacting.12

Adam Smith demonstrated that we do not owe (the innovation) of our bread to the goodwill of the baker. The price system is the greatest driver of innovation (through profits)

4.2 Schumpeter’s theorySchumpeter put considerable emphasis on capital as a key driver. The key question for the entrepreneur is how get some of the capital that is already engaged in the circular flow.

4.3 Endogenous growth theory

4.3.1 Romer’s theory

4.3.2 Innovation can occur in research labs, but mostly ‘on the shop floor’Most inventions did not come from R&D labs. See inventions at the end of this paper. “We know where most of the creativity, the innovation, the stuff that drives productivity lies - in the minds of those closest to the work.” - Jack Welch13

10 Terence Kealey (2010-10-31). Sex, Science And Profits. Random House UK. Kindle Edition.11 Terence Kealey (2010-10-31). Sex, Science And Profits. Random House UK.12 Morten Berg Jensen, et. al, “Forms of knowledge and modes of innovation”, 21 March 2007, Research Policy 36 (2007) 680–693: http://hp.gredeg.cnrs.fr/Edward_Lorenz/Papers/RP%202007.pdf13 http://www.taproot.com/content/wp-content/uploads/2008/05/innovationcreativesolutions.pdf

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Hayek: [Constitution of Liberty]

“Who will prove to possess the right combination of aptitudes and opportunities to find the better way is just as little predictable as by what manner or process different kinds of knowledge and skill will combine to bring about a solution of the problem. The successful combination of knowledge and aptitude is not selected by common deliberation, by people seeking a solution to their problems through a joint effort; it is the product of individuals imitating those who have been more successful and from their being guided by signs or symbols, such as prices offered for their products or expressions of moral or aesthetic esteem for their having observed standards of conduct—in short, of their using the results of the experiences of others.

What is essential to the functioning of the process is that each individual be able to act on his particular knowledge, always unique, at least so far as it refers to some particular circumstances, and that he be able to use his individual skills and opportunities within the limits known to him and for his own individual purpose.”

4.4 Testing the two theories

4.4.1 Whether innovators are highly qualified

4.4.2 Anecdotes

4.4.3 Inventions

In most cases, entreprneurs are NOT inventors.

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Innovation = f(#of brains, quality of brains, self-regard, challenge to these brains, opportunity)

Proxies:

#of brains = population quality of brains = proportion educated, and quality of education self-regard = level and type of freedoms challenge faced by brains = level of openness and competition in society opportunity = infrastructure, access to information, rule of law (property rights protection), protection of innovation, speed of justice, freedom to exchange

This model can be tested. Some of these factors are correlated and inter-related (quality of brains = f (self-regard) and vice-versa). After further analysis an empirical model can be established.

Note: Given sufficient challenge and opportunity, even an uneducated brain will innovate. This is typically known as jugaad.

Addendum

I'm reverting to this blog post today (14 Sep 2012) to emphasise dignity. Dignity is not just self-regard but the way one is treated by others. It seems to me to be very hard to expect someone who is treated without dignity to be innovative. Possible, but hard.

Innovation is skewed towards the smarter people. Hence government should encourage immigtation policies that attract smarter people. Today there is a significant base of information that people need to imbibe before they enter into innovation.

The left believes that innovation was caused by the State, the right thinks by Science.

Neither are right: it was caused by creativity unchained by bourgeois dignity and liberty14

A review of several recent major industry successes in developing countries by Pack and Saggi (2006) provides little evidence in favor of activist government policy. Take the cases of India’s software sector, Bangladesh’s clothing industry, and China’s special economic zones. In the first two, the government’s main role was one of “benign neglect,” while in the latter China imitated the earlier success of Singapore by enabling the location of foreign investment in enclaves that were well provided with infrastructure.15

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4.4.4 Competition as a key driverIn a competitive marketplace, the nature of competition, and the nature of demand and supply is constantly changing. It is these forces of competition that keep businesses agile. Firms that do not innovate, die. This is known as creative destruction.

As Marx noted, “The bourgeoisie cannot exist without constantly revolutionizing the instruments of production” (Communist Manifesto). This revolutionising is motivated by the sheer need for existence. This applies both to large and small firms.

Most innovation is driven by competition:

14 “A Dialogue on Market Innovation and Laissez Faire”, Deirdre McCloskey∗, John Lyne, Volume 7, Issue 1 2011 Article 2 , Iowa Research Online. http://ir.uiowa.edu/poroi/vol7/iss1/215 Itzhak Goldberg, John Gabriel Goddard, Smita Kuriakose, Jean-Louis Racine, Igniting Innovation, Rethinking the Role of Government in Emerging Europe and Central Asia, World Bank, 2011.

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“Most innovation is driven by businesses and individuals operating and interacting in competitive markets. The PC and ABS study found that ‘stronger competition is associated with a higher propensity for firms to innovate’. They found ‘statistically significant association[s]…between certain competition-related variables and the presence of a larger number of different types of innovation being completed and a higher degree of novelty of those innovations’ (Soames et al. 2011, pp. 1–2).”

For instance, discontinuous innovation, such as frugal innovation/ jugaad/ Gandhian innovation (e.g. Dr. Mashelkar’s work) is largely motivated by pressure to survive.

4.4.5 Signalling by the price system“Within the market society the working of the price mechanism makes the consumers supreme. They determine through the prices they pay and through the amount of their purchases both the quantity and quality of production. They determine directly the prices of consumers’ goods, and thereby indirectly the price of all material factors of production and the wages of all hands employed [...] In that endless rotating mechanism [i.e. a market society] the entrepreneurs and capitalists are the servants of the consumers. The consumers are the masters, to whose whims the entrepreneurs and capitalists must adjust their investments and methods of production. The market chooses the entrepreneurs and the capitalists and removes them as soon as they prove failures. The market is a democracy in which every penny gives a right to vote and where voting is repeated every day.” [Ludwig von Mises]

4.5 Planned innovation

4.5.1 Continuous improvement/ business R&DThis is also a kind of “planned” innovation, based on managerial processes such as better business processes (inventory management, analytics around customer segmentation) and business models (online retailing and offshoring operations), business driven R&D. The key driver of this is good management practice, which includes access to information. Trial and error also forms part of this process.

Is there a role for government in continuous improvement?Businesses are best placed to examine data carefully, to get feedback from customers and employees, etc. There is no reason to believe that Australian managers are incapable of making continuous improveemnts.

There might be a role for Governement to ensure that information is widely available.

This includes creating a culture of innovation.

The key problem with this method of continuous improvement is that it suffers from diminishing returns. One can extract only so much from an existing business or manufacturing process.

4.5.2 Discontinuous (significantly new) innovationThis includes new technologies, products, and services. The key driver for this is invention and serenditipity. This is rarely achieved through planning.

“Entrepreneurship, as conceptualised by Schumpeter, is only associated with discontinuous innovation outside the circular flow as described by his

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five cases. Continuous, incremental innovation, including new versions of existing products, is executed entirely within the circular flow and does not require the specific attributes that Schumpeter ascribes to an entrepreneur, but is within the capabilities of line management within that circular flow.”16

This process is likely to yield increasing returns.

Is there a role for government in discontinuous improvement?All businesses must innovate just to survive. That is a basic principle of the competitve economy. We see that most clearly in the IT industry today. As a results, businesses like Apple, Microsoft, etc. invest a very significant amount of money into R&D. It is a great mistake to imagine, like Richard Romano, that “In the frictionless perfectly mpetitive market, with no barriers to the use of information, the market will provide no R&D investment” [Richard Ramano, 1989, “Aspects of R&D subsidization”. The Quarterly Journal of Economics. 104: 863 – 873, pg. 863].

Assured property rights and a competitive economy are certain to motivate ongoing innovation, without any Government intervention.

4.6 Limitations of planningMost innovation is unplanned. It might require a prepared mind, but beyond that is it largely unpredictable. As noted earlier, it is not necessary that what is considered the “best” product wins in the market (and thus adds value). Factors that make a product attractive to a market can include intangibles, being earliest in the marketplace, and a host of andom factors. A “lucky” break might help in some cases, as well. It is important to be in the right place at the right time.

Even the process of copying badly can lead to innovation .17

This remarkably studied paper is entitled ‘Uncertainty, Evolution and Economic Theory’, and it was written by the American economist Armen Alchian. The paper says that economic growth can be understood only as an evolutionary phenomenon.

Before Alchian wrote, people had believed that economic growth could be planned rationally, not only by governments but also by companies. Companies would assess opportunities and invest their resources accordingly: Mice Catching Mega Corporation might decide that the world needed a better mousetrap, it would assign a budget to its R&D department, the researchers would produce a better mousetrap and, hey presto, Mice Catching Mega would be mega indeed.

Except, as Alchian pointed out, there are no ‘hey prestos’ in research. The Mega researchers might, quite simply, fail to produce a better mousetrap, or in developing a stronger spring

16 Analysing Discontinuous Innovation: Some Implications of Schumpeter's The Theory Of Economic Development by Jerry Courvisanos, The Business School, University of Ballarat, j.courvisanos@ballarat.edu.au, and Stuart Mackenzie, The Business School, University of Ballarat, s.mackenzie@ballarat.edu.au . [Found on the internet]

17 Alchian, Armen, Uncertainty, Evolution and Economic Theory, Journal of Political Economy, Vol. 58, No. 3 (June 1950), pp.211-221.

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they might, inadvertently, invent a better wire, and the company would diversify and call itself Wired instead.

So, for example, when Upjohn was trying to develop a new treatment for high blood pressure, they discovered instead a therapy for baldness (Regaine, Rogaine, minoxidil). When Pfizer was trying to develop its own new treatment for high blood pressure, it discovered instead a therapy for impotence (Viagra). But other companies, on trying to invent their own treatments for high blood pressure, discovered nothing. Science, being unpredictable, does not always yield results.

By definition, research is unpredictable because if it were predictable it would not be research. And because economic growth is ultimately based on innovation – managerial as well as scientific – it too is unpredictable. Managerial innovations often fail, and marketing, too, is unpredictable. The slogan ‘You’re never alone with a Strand’ killed a brand that was thereafter stuck with the image of Freddy No-Friends. As Lord Leverhulme of Unilever used to say, half of his advertising was wasted, but he never knew which half.

Because economic growth is based on an unpredictable entity, namely innovation, Alchian showed that only the evolutionary model explained growth. In a competitive market companies must innovate but, innovation being unpredictable, the inventions that companies bring to the market will be unpredictable. Purchasers will then select among them, and only some products will flourish.

We thus see great similarities between economic growth under markets and evolution by natural selection. In Nature, a system evolves by natural selection if: siblings vary randomly, offspring are abundant, they are selected among, and their descendants inherit their traits. In markets economic growth depends on innovations being created randomly and abundantly by investment in R&D departments and other innovators, on their being marketed, and on selection being made by customers. One unexpected similarity between genetics and companies is inheritance. Companies inherit their differences.18

4.7 Scientists do not innovate; innovators pose questions for scienceInventors like Edison did not take a PhD in science before inventing the bulb. There is evidence that technology drives science. When technology is unable to find an answer, that’s when science begins. Adam Smith pointed out:

A great part of the machines in manufactures were initially the inventions of common workmen who naturally turned their thoughts to finding easier and readier methods of performing their work. (Wealth of Nations)

The improvements which, in modern times, have been made in several different branches of philosophy have not, the greater part of them, been made in universities, though some no doubt have. The greater part of universities have not even been very forward to adopt those improvements after they were made; and several of those learned societies have chosen to remain, for a long time, the sanctuaries in which exploded systems and obsolete prejudices found shelter and protection after they had been hunted out of every other corner of the world. (Wealth of Nations)

Kealey cites a recent example19:

18 Terence Kealey (2010-10-31). Sex, Science And Profits. Random House UK. 19 Terence Kealey (2010-10-31). Sex, Science And Profits. Random House UK. Kindle Edition.

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The science of radioastronomy – that apparently purest of sciences – emerged during the 1930s when Karl Jansky (1905–50), an engineer working on long-distance radiotelephony for Bell Telephone Laboratories, a commercial outfit, discovered a source of electromagnetic ‘noise’ as coming from the stars. Out of that industrial finding a whole academic discipline was born.

Hayek has pointed out that much innovation comes from amateurs:

Another factor that has contributed to the belief in the superiority of directed research is the somewhat exaggerated conception of the extent to which modern industry owes its progress to the organized teamwork of the great industrial laboratories. In fact, as has been shown recently in some detail, a much greater proportion than is generally believed even of the chief technological advances of recent times has come from individual efforts, often from men pursuing an amateur interest or who were led to their problems by accident.20

4.8 Science was largely privately funded in the past, and through philanthropic efforts

The list of inventions (at the end of this paper) demonstrate that the vast majority of scientific advances were made by private efforts.

Most science was also funded by philanthropic efforts, e.g Smithsonian, Carnegie Foundation, Ford Foundation, etc.

4.8.1 Western governments have funded science only since 1940s

“The federal government in Washington started to support research significantly only in 1940, 50 years after America had become the richest country in the world, while the British government started to fund research significantly only in 1913, over a century after it had launched the Industrial Revolution.”21

4.9 Basic science may be a public good, but commercial R&D is notBusinesses have a very strong incentive to invest in R&D.

Many defend the government funding science through universities on the basis that it is a public good, a good that the whole of society benefits from, that would not be funded to the same extent privately.

However, although it can indeed be a public good, it is also, and to a greater degree, a private good.

Edwin Mansfield and Zvi Griliches have found strong correlations between companies' investment in scientific research and profits.”22

20 Constitution of Liberty.21 Kealey, T, http://www.economist.com/debate/days/view/863/print22 Science is better off without the government By Philip Salter, Programmes Director, Adam Smith Institute, http://www.bbc.co.uk/news/science-environment-11579956

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4.10 Government R&D usually displaces private R&D

4.10.1 Paul David and Bronwyn Hall, 2000Study: Paul A David and Bronwyn H Hall, 2000, ‘Heart of darkness: modeling public – private interactions inside the R&D black box’, Research Policy, 29: 1165 – 1183.

Finding They find that the supply of trained scientists is very important in determining this question. If public intervention simply increases the wages of scientists and engineers then crowding out can occur.

4.10.2 Paul David, Bronwyn Hall and Andrew Toole, 2000Study: Paul A David, Bronwyn H Hall and Andrew A Toole, 2000, ‘Is public R&D a complement or substitute for private R&D? A review of the econometric evidence’, Research Policy, 29: 497 – 529.

Finding They conclude: “the overall findings are ambivalent”. However, a critique has noted that this paper does not include the deadweight loss of taxation.

4.10.3 OECD 2003The 2003 OECD report, The Sources of Economic Growth in OECD Countries, notes that althougth ‘a significant effect of R&D activity on the growth process’:

regressions including separate variables for business-performed R&D and that performed by other institutions (mainly public research institutes) suggest that it is the former that drives the positive association between total R&D intensity and output growth . . .

The negative results for public R&D are surprising and deserve some qualification. Taken at face value they suggest publicly performed R&D crowds out resources that could be alternatively used by the private sector, including private R&D. There is some evidence of this effect in studies that have looked in detail at the role of different forms of R&D and the interaction between them.

In brief, unlike privately funded science, publicly funded science does not create wealth.

http://www.bbc.co.uk/news/science-environment-11579956

Science is better off without the government

By Philip Salter, Programmes Director, Adam Smith Institute

In fact, this is how a great deal of scientific research is still funded and how it has been through the ages.

The modern world was built upon private investment and we continue to thrive because of it.

The economists, while in the sweeping Sex, Science and Profits, Dr Terence Kealey has done much to demonstrate that the government is not necessary for science to flourish.

This is why, despite government funding, IBM is one of the largest research institutions in the world.

Crucially, not all spending on science has equal bang for its buck.

A thorough Organisation for Economic Co-operation and Development (OECD) report in 2003 concluded that it is private sector money, not government money, that turns scientific research into economic growth.

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Other people's money

In the same way that people are always less careful spending other people's money, the government is less careful spending money on scientific research than the companies that are set to rise or fall on the backs of their decisions.

Added to this, the OECD report concluded that money spent by the government is crowding out private sector investments.

In other words, inefficient government funding is displacing more efficient private funding.

By collectively taxing all companies for scientific research, the centralised planning of the government has usurped the dispersed and local knowledge of the private sector.

In the real world, free markets, trade and competition drive economic growth, not the government pulling money out of the productive private sector and distributing it amongst universities.

If the government wants to encourage increased spending on science, the least inefficient tactic would be to offer increased tax breaks to companies investing in research through universities, but even this is not essential given how integral research is to many companies' profitability.

Philip Salter is programmes director for the Adam Smith Institute, UK-based policy institute dedicated to free market policies

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5. Institutional frameworks

5.1 Liberty and dignity (egalitarianism)

“the greater the freedom of experimentation allowed in the existing arrangements, the greater will be the likelihood that the changes will be made in the right direction.”23

“There is a positive correlation between indidvidualism and innovative potential. The greater the freedom of the individual to explore his world of experience and to organize its elements in accordance with his private interpretation of his sense impressions, the greater the likelihood of new ideas coming into being”24

“Science thrives on freedom, which in turn thrives on egalitarianism and democracy.”25

Deirdre McCloskey, in particular, has highlighted the associated factor of dignity. It is a culture of freedom and individuality that enables innovation.

“Innovation depends upon the free and unbounded exercise of our intellect as no other human activity does. It requires completely fresh, new thinking. It requires the mind to be free of ‘hangovers’, biases and misconceptions that can prevent it from forming new links between disparate concepts. To say that ‘necessity is the mother of invention’ is only partly true. Primitive tribal societies had the greatest necessity in comparison to us, but were the least inventive. Only free societies respond to necessity with fresh, new thought. Tribal societies merely look in confused amazement at the heavens and dance around a fire with paint smeared on their bodies, hoping that the frenzy so generated, which dulls the brain, will appease the Gods and lead them to their next meal. The rate and level of innovation is therefore predominantly related to the level of freedom in a society. Tribal collectivist societies and socialist societies generally prevent innovation by blocking new ideas. In free societies the mind is allowed to range freely across the entire universe of known and unknown human thought. As a consequence of this different mindset towards life and its opportunities – a mindset that does not resist free exploration – free societies constantly churn up a storm of innovation in every sphere of life.”26

5.2 Stable, predictatble institutional environmentThis includes rule of law, effective justice system, etc.

5.3 Property rightsStrong property rights are a major enabler of innovation.

23 Hayek, Constitution of Liberty – electronic edition.24 Homer Garnet Barnett, Innovation: The Basis of Cultural Change (New York: McGraw-Hill, 1953), cited in Hayek’s Conistitution of Liberty hard copy edition, p. 7925 Terence Kealey (2010-10-31). Sex, Science And Profits. Random House UK. Kindle Edition.26 Breaking Free of Nehru.

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“[I]n his Politics Aristotle linked the Athenian tradition of private property to its commercial success.”27

5.4 Free market competition: Say’s law (Walrasian market equilibrium)

Using the language of the classics, it is “demand is constituted by supply”. To buy something you must first produce and sell something. The selling is what gets you the money, but the production of value adding output is what first allows you to sell. Without value adding activity, there is nothing to sell and therefore there is no basis for demand.28

Consider the iPhone 5. The following options exist to get someone to create iPhone 5 (innovation):

a) Keynesian: Increase demand: The government could have created an iPhone5 through stimulus (subsidising buyers). Seeing all this money, Apple would have created an iPhone5. This is the Keynesian model

b) Mercantalistic/ Paternalistic: Increase funding for development of iPhone5: The second model says that there is a market failure. Apple is not enthused by potential profits it can make through iPhone5, and so will not invest in research and development. Therefore according to the paternalistic model, government (being much smarter than Apple, and with deeper pockets) should subsidise its R&D and product development.

c) Institutions for markets: Say’s law shows that there is sufficient incentive in the market for Apple to invest in its own R&D. There is no need for a Keynesian stimulus, nor for paternalistic dabbling in ‘innovation’ by government. So long as the government ensures a decent intellectual property framework (patents), Apple will invest in developing iPhone5 to exploit the market by offering it a new experience. The Say’s law encourages a government to build institutions that ensure property rights, bankruptcy systems, and other supporting mechanisms.

5.5 ProfitThe free markets sends the best signal to innovate. Profit.

5.5.1 Do not fix prices!There is considerable innovation in the illegal drugs market since the prices are high due to scarcity conditions created by government. But there is no innovation in the bus market since the government has created monopolies in the bus industry.

The message: do no mess with prices.

As a general rule, ‘states crush innovation—look at the computers used by air traffic controllers, or the seizure of state-run schools by unions’. 29

5.5.2 EIU innovation environment indexEIU consider the following as part of the background of innovation:

27 Terence Kealey (2010-10-31). Sex, Science And Profits, Random House UK. Kindle Edition.28 http://catallaxyfiles.com/2012/10/03/krugman-invokes-says-law-and-thinks-its-keynes/29 “A Dialogue on Market Innovation and Laissez Faire”, Deirdre McCloskey∗, John Lyne, Volume 7, Issue 1 2011 Article 2 , Iowa Research Online. http://ir.uiowa.edu/poroi/vol7/iss1/2

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1. Political stability

2. Macroeconomic stability

3. Institutional framework

4. Regulatory environment

5. Tax regime

6. Flexibility of labour market

7. Openness of national economy to foreign investment

8. Ease of hiring foreign nationals

9. Openness of national culture to foreign influence

10. Popular attitudes towards scientifi c advancements

11. Access to investment finance

12. Protection of intellectual property

13. Effectiveness of government fuding of innovation

These are detailed here: http://graphics.eiu.com/PDF/Cisco_Innovation_Methodology.pdf

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6. Enablers: Cultural factors

6.1 Social rewards and respect for wealth generationThis compares with social rewards for the aristocrats, leisured classes, “intellectuals”, academics, and the like.

The society that undermines its wealth producers will have fewer innovators.

6.2 Absence of “tall poppy syndrome”This is related to the above. A society with jealousy as its principle culture will have fewer innovators.

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7. Key ingredient 1: Entrepreneur

7.1 Academic courses in entrepreneurship and innovation

7.1.1 The University of Swinburne

7.1.2

7.1.3 Teaching lateral thinking and innovation in schools and universtitiesEdward de Bono and his ideas?30 Examples from marketing brochures:

MDS SCIEX launches innovative new product faster, increasing revenues by $20-million

In an aggressive bid to break new competitive ground, MDS SCIEX, a division of healthcare giant MDS Inc., recently launched its most innovative new product of a decade in record time, earning $20 million in extra revenues for the company and netting a 20 per cent market share in a new line of business for MDS SCIEX in just its first year of sales.

In addition, the product, called QSTAR™ is better than its original concept. It performs better, is quicker and less costly to manufacture and is much easier and less expensive to ship.

MDS SCIEX credits the success of QSTAR™ to its use of Six Thinking Hats™, a method developed by creative thinking guru Edward de Bono, through its product design process.

Enhanced teamwork and collaboration helped Boeing Toronto, Ltd.’s Management and Union achieve breakthrough agreement

Motivated by a strong desire to reach a positive outcome a Boeing Toronto, Ltd. Committee of union and management representatives recently turned to Edward de Bono’s powerful thinking methodology, Six Thinking Hats™. Using the methodology the committee – more accustomed to squaring off at opposite sides of the table than working collaboratively toward a common goal – was able to break down the traditional barriers that exist between management and unions to reach a win-win solution.

Using Six Hats, committee members were able to move away from their partisan stances and collectively focus on resolving the issues in a collaborative, results focused manner.

“Six Hats changed the dynamics of our working relationship and gave us a completely new way of tackling the problem, “says Boeing Toronto, Ltd. Senior Manager of Compensation and Benefits, Christene Elias. “It took everything threatening off the table and enabled us to work toward a solution in a compassionate, collaborative way.”31

30 http://www.debonogroup.com/index.php31 http://www.taproot.com/content/wp-content/uploads/2008/05/innovationcreativesolutions.pdf

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Is there a role for government in serendipity?The market sends competitive signals and forces firms to innovate. There is a bustling marketplace for ‘techniques’ to assist in innovation. While such techniques could be taught to entrepreneurs, there seems to be no role for government to fund such programs.

7.1.4 Lean startup (Eric Ries)

7.1.5 Learning organisation (John Seddon/Peter Senge) (double loop learning/ system thinking)

7.1.6 Wall St. Journal debate

Can Entrepreneurship Be Taught?

Across the country, schools are rushing to introduce entrepreneurship classes. Self-help books for business founders are topping the best-seller lists.

All of which is rekindling an age-old debate in the business world: Is entrepreneurship a skill

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that can be taught, or one you have to develop by doing?

Education proponents argue that if you can teach people general skills that are useful in business, you can instill lessons about running their own companies, too. What's more, the proponents argue, research in the field of entrepreneurship has improved by leaps and bounds in recent years, so educators can do much more to help entrepreneurs avoid common problems.

But many critics think that the education boosters' logic is flawed. Starting and running a business, these critics say, requires skills that a person can only develop in the real world, not in a classroom setting—everything from dealing with many different types of people to handling the constant uncertainty that so often comes with a start-up company.

Yes: Learn About the Pitfalls By Noam Wasserman

Eighty years ago, Ralph Heilman, the dean of Northwestern University's School of Commerce, wrote an article entitled, "Can Business Be Taught?" His answer: yes. Take the lessons about what works and what doesn't, analyze and organize them, and then teach them—just as we do with engineers, doctors and lawyers.

Clearly, the process works for training M.B.A.s. So, why not entrepreneurs? After all, entrepreneurs are the ultimate general managers. They can benefit from much of the same knowledge that business students gain about marketing, finance and other topics, complemented by lessons that are specifically tailored to start-ups.

And those lessons are getting better all the time.

Early entrepreneurial education was largely based on case studies and anecdotes. Over the past decade, though, academics have brought a new level of sophistication to analyzing what leads to entrepreneurial success or failure. We're now developing a "Moneyball for Founders"—rigorous data with which to scrutinize anecdotes and rules of thumb—that promises to revolutionize entrepreneurial education just as a similar movement revolutionized baseball a decade ago.

Beyond Gut Feelings

Founders tend to put a lot of stock in their gut feelings, but sometimes the data say just the opposite. We can teach founders to use that data to avoid common hazards.

For instance, with the passion and confidence they feel early in a venture, entrepreneurs often dramatically underestimate the resources and time that it will take to put everything in place. Likewise, most founding chief executives are too optimistic about their personal prospects. They anticipate staying in place when the venture is successful, but by the time of a start-up's third round of financing, more than half of founding CEOs have been replaced.

Learning about these pitfalls, and what the data suggest to be better choices, helps entrepreneurs to make more informed decisions from the outset, rather than having to fail and try again.

Founders of start-ups clearly believe that they can learn. Over the past two decades, demand for entrepreneurship programs and courses has skyrocketed. In 2011, "The Lean Startup" was not only a best seller but was also considered by many to be the best business book of the year.

Of course, sticking to the classroom entirely is a mistake. Entrepreneurship can and should

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employ other modes of learning as well, such as role playing, self-evaluation exercises and work with mentors. In fact, a host of programs are available that mix formal education with experiential learning and mentorship.

Common Problems

Are there elements of entrepreneurship that can't be taught? Sure, just as there are elements of engineering, medicine and law that can't be taught. And, as some critics point out, these unteachable elements involve people skills: for instance, how salespeople can figure out how to get to "yes" with potential customers after hearing "no" after "no."

But everybody has to develop people skills to get along in the world. Everybody has some experience building relationships and motivating people. Harnessing those experiences and then extending them through real-world experience applies to all walks of life.

Some critics further argue that the real world is more uncertain than any classroom lesson could possibly be. The real world is indeed messy. Doesn't that make it even more important to educate people about the common challenges they will face, so that they're better armed to deal with the remaining messiness?

Then there's the argument that failures and mistakes are an inevitable—and, indeed, valuable—part of an entrepreneur's education. That line of thinking ignores the fact that many types of failure are predictable and avoidable.

Wouldn't we teach a scientist that lighting gunpowder is dangerous? Would we let the scientist learn that critical fact firsthand? By learning about common mistakes, the scientist will become a more effective experimenter. The same goes for entrepreneurship.

Consider some more numbers. Nearly two-thirds of high-potential start-ups fail due to tensions within the founding and executive team. Our research is showing that many of those tensions are caused by early, ill-advised decisions about whom to involve in the start-up and how to involve them. These are problems that founders with some entrepreneurial education will be much better equipped to avoid.

Every day, ill-advised, and easily avoidable, decisions are killing off great ideas that could help restore entrepreneurial magic to our economy. By educating founders about those kinds of pitfalls, we may be able to increase their success rates—and give the country a boost along the way.

Dr. Wasserman is a professor of entrepreneurship at Harvard Business School and the author of "The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup." He can be reached at reports@wsj.com.

No: The Best Class Is Real Life By Victor W. Hwang

Entrepreneurship can't be taught in a regular classroom any more than surfboarding can. To learn it, you have to get your feet wet in the real world.

Why? Entrepreneurship is messy. For an entrepreneur, there are rarely clear-cut right or wrong decisions day to day. Real life gives entrepreneurs the ability to better make those kinds of judgment calls.

Entrepreneurship is also a team sport, not a solo skill. We all know the myth of the "lone wolf" entrepreneur, tucked away in a basement or garage tinkering with an invention. In reality, an entrepreneur has to deal with lots of different people daily, all of whom present

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social barriers to overcome, whether it's geography, culture, language or just plain distrust.

Entrepreneurs have to understand people well enough to get them to surmount their barriers and deliver their best efforts. Those kinds of skills can't be taught in a formal classroom, and they can't be fully developed in the span of a semester or even a few years. Entrepreneurship is learned through the aggregate experience of a life that is lived.

A Different World

That's why comparisons with traditional business education don't hold up. M.B.A. training helps you learn to allocate resources and calculate risk, which are skills that can be quantified and taught. The life skills needed for entrepreneurship can't be.

I have seen successful executives who left corporations and joined start-ups and were unprepared for the experience. They knew how to manage, but they weren't ready for the uncertainty in almost every aspect of decision-making, informal handshakes in place of formal agreements, raw conflicts among company founders and investors and the need to do everything oneself—from emptying garbage cans to fixing jammed copiers.

Leading a start-up also demands a deep understanding of people that can only come from real-world experience.

Imagine a potential employee who's trying to decide between joining a large company or a tiny start-up. Just looking at the numbers, it would be insane to go with the smaller firm. You would almost certainly make less money, you would take on huge personal risk and emotional burden, and you could even wreck your reputation if the venture failed.

An entrepreneur has to help that potential employee see beyond all of the negative incentives, to see why joining this little company is worthwhile. One person, for instance, might want a chance to change the world. Another, meanwhile, might be motivated by the joy of adventure, the thrill of a challenge or the love of novelty.

Which approach is going to work best with the prospective hire? You're not going to find that out sitting in a classroom, talking to the same people day after day.

The same logic applies to every aspect of running a start-up. Imagine you've got a new product to sell that promises to change your industry. But having a better mousetrap isn't enough. You must be able to read your potential customers and answer crucial questions about them.

For instance, who's the right person to pitch, someone who will really understand your idea and be in a position to act on it? What are the buyer's incentives to take such a huge risk with a start-up product?

Free to Fail

Admittedly, there's a booming interest in entrepreneurship education these days, and its proponents claim that there's more science behind the subject these days. But I think that much of what traditional entrepreneurship classes teach—the best ways to avoid mistakes—is misguided.

Telling entrepreneurs to avoid failure risks causing them harm. They're tempted to fall into endless planning and product engineering, without real-world experimentation. Failures and mistakes are inevitable and are the equivalent of testing hypotheses and learning in the scientific world. Just as we would never tell scientists to avoid running experiments that

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might fail, we shouldn't tell entrepreneurs to avoid making mistakes and risking failure.

Entrepreneurs hone their craft through experimentation and collaboration in the real world. They learn best by rolling up their sleeves and building companies, while surrounded by a supportive mentor and peer community.

We can't teach entrepreneurship in the traditional sense. But we should come up with ways to help entrepreneurs help themselves to learn more effectively. This means finding ways to provide them with a network of mentors and advisers and nurturing a business culture around them that says: dream big, open doors and listen to new people, trust and be trusted, experiment, make mistakes, treat others fairly and pay it forward.

Working this way means looking beyond the traditional focus on individual entrepreneurs and finding ways to cultivate the communities that surround them. But it's a move that can pay tremendous dividends.

Mr. Hwang is co-author of "The Rainforest: The Secret to Building the Next Silicon Valley" and managing director of T2 Venture Capital in Silicon Valley. He can be reached at reports@wsj.com.

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7.2 Incentives for academics to innovate

As a young man Smith had studied philosophy at Glasgow University, then a good institution, but he moved for further study to Balliol College, Oxford University, which was not a good institution. At Glasgow Smith had met eminent scholars, such as Francis Hutcheson the philosopher, Joseph Black the chemist, and eventually James Watt of steam engine fame. But at Oxford there was . . . nobody. As Smith was to write: ‘In the University of Oxford the greater part of the public professors have, for these many years, given up altogether even the pretence of teaching.’ Smith’s contemporary at Magdelen College, Oxford, Edward Gibbon the historian, was to write: ‘My tutors were monks who supinely enjoyed the gifts of the founder [endowments]. My own [tutor] well remembered he had a salary to receive, and only forgot he had a duty to perform. [My] fourteen months at Oxford were the most unprofitable and idle of my whole life.’

These experiences inspired Smith to seek an explanation for the superiority of the Scottish over the English universities, which he found in the market. The Scottish universities had to earn their money by fees, whereas Oxford (and Cambridge, then no better) fed off their endowments: ‘Improvements were more easily introduced into some of the poorer universities which were obliged to pay more attention to the current opinions of the world.’ Academics at Glasgow and Edinburgh, unlike those at Oxford or Cambridge, were paid by the students, so the lecturers had to please those students – and different academics competed to teach similar courses to the same students. But Oxford and Cambridge limited entry, admitting as lecturers only unmarried men who were ordained in the Church of

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England. The average age of an Oxford or Cambridge academic then was around twenty-seven, and most were only waiting to be appointed to a vacant parish, where they were allowed to marry. So, for example, the Rev. Dr John Michell FRS, who first postulated black holes as early as 1784, resigned his Cambridge post for a parish in Yorkshire when he wanted to get married. Such moves were not likely to foster scholarship, though it was by watching the young fellows wait for their livings that Smith conceived of his Law of Population.

Terence Kealey (2010-10-31). Sex, Science And Profits (Kindle Locations 744-760). Random House UK. Kindle Edition.

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8. Key ingredient 2: Risk taking and venture capital

A key point to note is that investors do not invest in a product. They invest in a business. But most importantly, it is about:

* Integrity

* Passion

* Knowledge

* Skills

* Leadership

* Commitment

* Coachable [http://www.venturecapitalcentre.com.au/2012/04/03/david-s-rose-on-pitching-to-vcs/]

The key is organising and operating.

Innovation and entrepreneurs are in the COMMERCIAL world, not in the RESEARCH world.

8.1 Entrepreneur must always risk his own capitalWithout this, there is no chance of getting any venture capital funding.

8.2 Institutions of risk capitalThis includes institutions that provide risk capital (e.g. venture capitalists/ banks).

8.2.1 Market based options if you HAVE to fundYou get paid if you line up venture capital

You get paid if your product is voted by thousands of potential consumers

See this for good ideas: http://www.mbs.edu/home/jgans/papers/Submission-Gans-Innovation-08-04-10.pdf

8.3 Venture capital and angel investors Computer hardware and software, semiconductors, communication, and biotechnology account for 81 percent of all venture capital dollars, and seventy-two percent of the companies that got VC money over the past fifteen or so years. VCs only fund about 3,000 companies per year and only about one quarter of those companies are in the seed or start-up stage. In fact, the odds that a start-up company will get VC money are about one in 4,000. That’s worse than the odds that you will die from a fall in the shower.32

8.3.1 The Indus Entrepreneurshttps://melbourne.tie.org/chapter/tie-melbourne

32 http://blog.guykawasaki.com/2008/01/top-ten-myths-o.html#axzz29RFlHI97

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9. Enablers: individual factors

9.1 DriveMust have the drive to make money: to convert ideas into profit. Without such drive, the innovator will be unable to exploit the opportunity. But isn’t this drive in-built? When people find they can make a living without going to college, they tend to drop out.

Eric Anderson [Source] notes that dreaming big is a key part of entrepreneurship and innovation

The Moon landing changed the way that people think about the limits of human accomplishment. The Space Age gave birth to a commonly used phrase in popular discourse: “If we can put a man on the Moon, why can’t we do X,” where X can be any one of a thousand dreams of humanity, whether old or new.

In the decades following the Moon landing, in sectors ranging from the explosive growth of computers and the Internet to advances in biotechnology and agriculture, thousands of scientists, engineers, visionaries and entrepreneurs were propelled by the inspirational backdrop of Apollo. It provided an “existence proof” that willpower, determination and thinking big could lead to truly amazing things. There is no limit to what determined minds can achieve.

In the 21st century, the role of thinking big in entrepreneurship and business is nothing short of an indispensable characteristic. We face so many opportunities and challenges in this new era that thinking small is simply not an option. Audacity, endurance, determination and vision must be part and parcel of the fabric of entrepreneurs.

9.2 Number of people

McCloskey: If you like that you are going to love the opening chapters of the new book, Bourgeois Dignity. I retail there the overwhelming evidence, collected mainly by other historians, that the post-1800 Age of Innovation (as I prefer to call it) led to a jump of real, price- corrected ability-to- consume in places that took advantage of it from about $3 a day to about $100 a day. The magnitude is why, as the subtitle says, “economics [whether bourgeois or Marxist] can’t explain the modern world.” Exploitation or colonies or slavery or peaceful trade or virtuous saving or sensible reallocation or routine exploration for oil or corporate laboratories for inventions are the events that economists talk about. Such events might explain a doubling of consumption, a factor of two (though, by the way, stealing from poor people in the Third World has never been a successful business plan; commonly it hurts ordinary people in the imperial country, so imperialism, contrary to your leftish students and mine, can’t explain an increase). But the routine economics can’t explain the actual factor after 1800 of about thirty. That depended on Simon’s “ultimate resource,” innovation from true creativity— which incidentally was something increased by rising population.33

33 “A Dialogue on Market Innovation and Laissez Faire”, Deirdre McCloskey∗, John Lyne, Volume 7, Issue 1 2011 Article 2 , Iowa Research Online. http://ir.uiowa.edu/poroi/vol7/iss1/2

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9.3 Quality/capability of the individual

9.3.1 Immigration matters, but only high-end brainpower

In 1999, AnnaLee Saxenian published the first study to provide a quantitative analysis of the economic contributions of high-skilled immigrants in Silicon Valley. In “Silicon Valley’s New Immigrant Entrepreneurs,” she examined the transnational circulation of capital and labor of Silicon Valley’s economy during the 1980s and 1990s. She found that immigrants comprised one-third of the region’s scientific and engineering workforce. Moreover, in 1998, Chinese and Indian engineers were responsible for operating one-quarter of technology businesses in the region, accounting for more than $16.8 billion in sales and 58,282 jobs. At the time of its release, the report succeeded in validating the prevailing belief that immigrants were major contributors to the U.S. economy and the high-tech industry.

Finding that the period from the 1980s and 1990s had experienced such a vast upswing in the number of immigrant-founded companies, Saxenian surmised that the growth rate of immigrant entrepreneurship would continue to accelerate in subsequent decades. Her initial forecasts were ultimately proven right. In 2007, a study conducted by researchers at Duke University and the Berkeley School of Information, drawing on Saxenian’s earlier work, concluded that high-skilled immigrants were playing an even more expanded role than before as the driving forces of technological innovation and capital growth. The study found that, between 1995 and 2005, 52 percent of high-tech companies started in Silicon Valley.

The 2007 study also examined companies founded between 1995 and 2005 nationwide. Researchers found that 25.3 percent of these engineering and technology companies had at least one key founder who was foreign-born. In 2005, these immigrant-founded companies collectively generated roughly $52 billion in sales and employed 450,000 workers. These findings were documented in a paper titled, “America’s New Immigrant Entrepreneurs.”

A subsequent research project analyzed the backlog of immigrants in the United States waiting for legal permanent residence in the first three employment-based categories. It documented that, as of October 1, 2006, there were almost half a million such foreign-born persons, and the number including family members was more than one million. But there were only about 120,000 visas available per year in these employment-based visa categories (plus visas not used in the family preferences). So the wait times for permanent residence visas, or green cards, as these commonly are called, was about a decade. The researchers saw reason for concern and forecast that this wait increasingly would lead to these workers getting frustrated and returning home or moving to other countries. The prediction of a “reverse brain drain” was published in a Kauffman Foundation paper titled, “Immigrants, Intellectual Property, and the Reverse Brain-Drain—America’s New Immigrant Entrepreneurs, Part III.”

To test this hypothesis and to learn whether the trend of increasing immigrant entrepreneurship in the technology sector had continued, researchers at Duke University, the Berkeley School of Information, and Stanford University conducted a follow-up study to the 2007 report to determine what has happened to the rate of immigrant entrepreneurship from 2006 to 2012. Here we present our findings.

This study examined the complex relationships between immigration and economic development in an increasingly globalized economy. It sought to update the findings of the 2007 report by analyzing whether changes in the pace of immigrant entrepreneurship have occurred. Out of a total of 107,819 engineering and technology companies founded in the last six years, it examined a random sample of 1,882 companies to identify whether a key founder was foreign-born.

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The study found that, for the first time in decades, the growth rate of immigrant-founded companies has stagnated, if not declined. In comparison with previous decades of increasing immigrant-led entrepreneurism, the last seven years has witnessed a flattening out of this trend. The proportion of immigrant-founded companies nationwide has dropped from 25.3 percent to 24.3 percent since 2005. While the margins of error of these numbers overlap, they nonetheless indicate that immigrant-founded companies’ dynamic period of expansion has come to an end.

We also performed a special analysis of Silicon Valley, which is widely known as the international hub for technological development and innovation. The findings indicate that 43.9 percent of Silicon Valley startups founded in the last seven years had at least one key founder who was an immigrant. This represents a notable drop in immigrant-founded companies since 2005, when 52.4 percent of Silicon Valley startups were immigrant-founded.

Below is a summary of the key findings about engineering and technology companies founded in the United States between 2006 and 2012:

24.3 percent of these companies had at least one key founder who was foreign-born. In Silicon Valley, this number was 43.9 percent.

Nationwide, these companies employed roughly 560,000 workers and generated $63 billion in sales in 2012.

Of the total of immigrant-founded companies, 33.2 percent had Indian founders, up about 7 percent from 2005. Indians have founded more such companies than immigrants born in the next top seven immigrant-founder-sending countries combined.

The top ten sending countries of immigrant entrepreneurs in descending order were India (33.2 percent), China (8.1 percent), the United Kingdom (6.3 percent), Canada (4.2 percent), Germany (3.9 percent), Israel (3.5 percent), Russia (2.4 percent), Korea (2.2 percent), Australia (2.0 percent), and the Netherlands (2.0 percent).

The 458 immigrant-founded companies sampled collectively created a total of 9,682 jobs. They employed an average of 21.37 workers.

While the mix of immigrants varies by state, Indians tend to dominate the immigrant-founding groups of the top six states with the greatest representation of immigrant founders.

The states with the highest concentration of immigrant-founded companies were California (31 percent), Massachusetts (9 percent), Texas (6 percent), Florida (6 percent), New York (5 percent), New Jersey (5 percent).

Some immigrant groups showed a greater tendency to start companies in particular states. Of Indian-founded companies, 26 percent were founded in California and 8 percent in Massachusetts. Of Chinese-founded companies, 40 percent were founded in California and 16 percent in Maryland. While immigrant groups tended to concentrate the most in California, German immigrants demonstrated a preference for starting businesses in Ohio (22 percent), followed by California (17 percent).

Across engineering and technology fields, immigrant entrepreneurs displayed the greatest concentration in the innovation/manufacturing-

related services (45 percent) and software (22 percent) fields.

This study demonstrates that the rate of immigrant entrepreneurship nationwide has plateaued. Silicon Valley remains the rubric against which national trends in the technology sectors are measured. That the proportion of immigrant founders in the Silicon Valley has

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declined since 2005 should raise questions about the United States’ future ability to remain economically competitive in the international market.34

There have been pockets of collaboration between Australia and India

by Bernard Lane, The Australian October 03, 2012

Hyderabad IIT director Uday Desai says competition for student places is intense. Picture: James Croucher Source: The Australian

IN Australia, IITan is not a household word. It's shorthand for engineering celebrity: a graduate from one of the elite Indian institutes of technology.

"If you go to Silicon Valley, that is where we started getting our fame," says Uday Desai, director of Hyderabad's new IIT. "Almost 60 per cent of the start-ups from Silicon Valley have a representative from an IIT."

So many IITans went to the US, accumulating doctorates, inventions and patents, that the US congress gave voice to the admiration of the US people with a special resolution in 2005.

Now, for many reasons, far fewer IITans go abroad to make careers but their US legacy has made many other countries seek collaborations with these dynamic, autonomous universities of engineering.

Last week, Professor Desai toured six institutions in Perth and Sydney, his visit a hint of the potential for deeper links between Australian and India.

There have been pockets of collaboration between Australia and India, but it is difficult to get an overall picture, says Sydney-based Pradeep Khanna, international business consultant and IITan.

If not many Australians know the IIT story, the top echelon of Indian students are oblivious to the world-beating claims of Australia's leading universities. "Very few IITans would have looked at Australia as a place of higher education," Mr Khanna says.

Among the IIT alumni who still go abroad for postgraduate work, the US remains the favoured destination.

Even so, there have been Australian initiatives that enlarge the possibilities.

A joint PhD program between Monash University and IIT Bombay has 90 students and a half-dozen are expected to finish this year. With projects built around themes such as water and clean energy, the students spend at least six months on Monash's Clayton campus.

"Collaborations between professors have existed since the day dot _ that's nothing new," says Mohan Krishnamoorthy, chief executive of the IITB-Monash Research Academy.

"But I'm not aware of any other institution based on a cross-disciplinary, cross-country partnership collaboration model that is looking at operating on a scale of 250 to 300 research students."

34 America’s New Immigrant Entrepreneurs: Then and Now: Part VII http://www.kauffman.org/uploadedFiles/Then_and_now_americas_new_immigrant_entrepreneurs.pdf

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Another initiative making a difference is the 2006 Australia-India Strategic Research Fund. "Putting money there has actually made it very clear that, yes, Australia is interested and India is interested," Professor Desai says.

"They are funding exchange of faculty and students, research projects and grand challenge projects (such as infectious diseases)."

IITans understand intense competition: "To get into an IIT is extremely difficult. Nearly 500,000 students apply and maybe 8000 students make it," Professor Desai says.

9.4 Knowledge and specialisation

9.4.1 Adam Smith’s theory of innovation: specialization and competition

9.5 Ability to take risksThis is a vital part of innovation (and particularly entrpreneurship).

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10. What are governments doing?

10.1 Commonwealth: innovation.gov.au

10.1.1 Seven innovation prioritiesPriority 1: Public research funding supports high-quality research that addresses national challenges and opens up new opportunities.

The Australian Government’s ambition is to increase the number of research groups performing at world-class levels, as measured by international performance benchmarks. Investments in public sector research will continue to be guided by the National Research Priorities, which will be updated periodically to reflect changing circumstances.

Priority 2: Australia has a strong base of skilled researchers to support the national research effort in both the public and private sectors.

Skilled people are the single most important prerequisite for successful innovation. The Australian Government’s objective is to significantly increase the number of students completing higher degrees by research over the next decade.

Priority 3: The innovation system fosters industries of the future, securing value from the commercialisation of Australian research and development.

The Australian Government rejects the proposition that Australia is a technology-taker, and that policy-makers should not be concerned about the capacity of Australian companies to develop new-to-the-world innovations. It aims to see a continuing increase in the number of businesses investing in R&D.

Priority 4: More effective dissemination of new technologies, processes, and ideas increases innovation across the economy, with a particular focus on small and medium-sized enterprises.

The Australian Government’s goal is to achieve a 25 per cent increase in the proportion of businesses engaging in innovation over the next decade. This would bring Australia up to the present European average and — depending on what other countries do — place us in the top third globally.

Priority 5: The innovation system encourages a culture of collaboration within the research sector and between researchers and industry.

Australia has a poor record of collaboration between businesses, between businesses and researchers, and between research agencies. The Australian Government’s ambition is to double the level of collaboration between Australian businesses, universities and publicly-funded research agencies over the next decade.

Priority 6: Australian researchers and businesses are involved in more international collaborations on research and development.

Australia produces 3 per cent of the world’s formal research. Our capacity to innovate depends very much on how effectively we harness and apply the other 97 per cent. The Australian Government has therefore adopted the long-term aim of increasing international collaboration in research by Australian universities.

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Priority 7: The public and community sectors work with others in the innovation system to improve policy development and service delivery.

10.1.2 Funding startups

Funding Innovation in Start Ups and Small Business in Australia35

Access to finance has always presented a significant challenge to innovators and entrepreneurs in Australia, particularly for small business involved in cutting edge technologies. However, the availability of risk capital to finance start-ups is essential to ensure that new ideas with commercial potential are able to reach the market and deliver economic and other benefits.

There is a range of financing options available, across private and public sectors. The Australian Government is focusing on creating an environment in Australia in which technologically intensive start ups can grow and develop their business. It aims to provide support for innovation across the stages of enterprise development, from invention through to commercialisation, particularly in the high-risk early stages where the market forces fall short of supporting innovation. The support offered by both government and privately funded programs often includes mentoring and advice, as well as finance.

New innovations require a significant level of funding to take a prototype or working idea and develop it into a marketable product. Private funding may be hard to access. This is where governments tend to step in to provide finance for such activities as product development and prototyping, market validation and execution of IP strategy.

The Australian Government’s support for start ups and small businesses to undertake innovation activity includes programs such as R&D Tax Incentive and Commercialisation Australia. The Government has just completed public consultation on the R&D tax incentive quarterly credits program scheduled to start in 2014. Commercialisation Australia offers grants that cover finance as well as providing extensive business assistance and mentoring.

The main sources of funding for most start ups formed to commercialise R&D, and in the very earliest stages of their development, are friends and family followed by angel investors. A more recent approach, particularly in the USA and UK, is Crowd Funding which may be a suitable mechanism for raising capital to support some types of projects. In Australia, friends and family and angel investors generally address funding requirements before a company has reached a point where it is able to attract formal venture capital.

Angel investors are high net worth individuals who invest their own capital and often offer business mentoring to help guide new managers who frequently lack business and financial skills. Collectively, Angel investors support a wider range of innovation than venture capital firms, across a broader range of sectors, but at earlier stages of development. Traditionally, they invest locally.

Angel investing is growing rapidly around OECD countries. Policy interventions in the angel funding in some OECD countries have been relatively recent, and have included tax incentives and co-funding. However the issue of government involvement in angel funding remains a contested issue.

Crowd sourced equity funding (CSEF) is defined by the Australian Securities and

35 Innovation Policy Report, September 2012,

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Investment Commission (ASIC) as activities involving the use of the internet or social media to raise funds in support of a specific project or business idea, with sponsors typically receiving some reward in return for their funds. ASIC recently released advice on CSEF warning of potential legal obligations for the operators.

Given the emergence of CSEF models overseas, it is important for Australia to consider the impact that continuing to restrict, or failing to regulate for, crowd funding may have on its innovation system.

Crowd funding has generally been used to develop creative industry products with relatively small budgets ranging from a few thousand dollars upwards. However the scale is rapidly beginning to change. Crowd funding is now evolving separate forms of the model in which commercial ventures are funded by a large number of individuals on a profit sharing basis rather than receiving set incentives. Countries such as UK and US are considering crowd funding through provision of equity.

Access to venture capital is essential to a robust innovation system that values the creation of new competitive companies and jobs. The venture capital market in Australia is relatively small but developing. Venture capital programs currently delivered by the Australian Government include the Innovation Investment Fund (IIF), the Early Stage Venture Capital Limited Partnerships (ESVCLP) and the Venture Capital Limited Partnerships (VCLP) programs. The IIF is an equity co-investment program to increase access to risk capital and management expertise for innovative new knowledge-based Australian companies involved in research commercialisation. The ESVCLP and VCLP programs are tax concession programs which assist in attracting capital into the Australian venture capital market.

Recent years have seen a growing number of government programs in OECD countries which target supporting innovation in SMEs. Thus the EU Innovation and SMEs Program promotes awareness of the need for innovation in the present day globalised market, as well as providing specialist innovation services to researchers, enterprises and policy-makers. A special helpdesk, called LIFT (Linking Innovation, Finance and Technology), provides free advice to EU researchers wishing to obtain financing in order to set up a business venture. The advice aims to improve understanding of the issues involved in attracting investment in business ideas and helps to identify appropriate sources of finance.

The German Government has launched “Central Innovation Programme SME (ZIM)”. The aim of the Programme is to provide sustainable support to the innovative capabilities and competitiveness of companies, particularly SMEs, and collaborating research organisations. The program funds innovation activities in SMEs, as well as research carried out by research institutions collaborating with SMEs in the area of developing cutting-edge technologies.

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10.1.3 Tax breaks for R&D

10.2 Western Australia: Vouchers

Applications for round three of the West Australian Government’s Innovation Vouchers Program (IVP) opened on 15 August 2012. The vouchers will provide SMEs with funding of up to $20,000 to engage professional skills or services to assist with commercialisation. The program aims to enable West-Australian based SMEs to access and establish collaborative relationships with research providers and specialist commercialisation support services.

Applications close on 27 September 2012 and applicants will be notified in November 2012.

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11. Role of government: arguments in favour

11.1 R&D

11.2 Information gaps?It is argued that business don’t know where comparative advantage lies.

This is incorrect. Businesses receive signals very quickly about market conditions and realise where their advantage lies.

Rodrik (2004) … argues that the right way of thinking about industrial policy is as a discovery process—one where firms and the government learn about underlying costs and opportunities and engage in strategic coordination. His view is that industrial policy is more about eliciting information from the private sector than addressing distortions by first-best instruments. He envisions industrial policy as a strategic collaboration between the private and public sectors—the primary goal of which is to determine areas in which a country has a comparative advantage.

Brahmbhatt (2007) has argued that there is a circularity problem in Rodrik’s hypothesis that second-best policies, such as industrial policy, are needed to address market failures affecting modern sector activities because first-best policies like strengthening governance and building institutions are too broad and unrealistic. If it is true that to make industrial policy work there is a need for quite sophisticated governance and institutional mechanisms, then might not the original first-best policies also make sense? Perhaps only a few developing countries can muster the institutional strengths needed to make industrial policy work. At any rate, practical implementation would require close attention to the necessary governance and institutional underpinnings of industrial policy. 36

Action: The government could provide access to academic journal databases?

11.3 Coordination?But businesses are able to organise get-togethers on their own. In Victoria examples include: Linkedin groups, meetup groups, facebook groups, etc.

11.4 Protection of intellectual propertyPatents (but ther are many who oppose> Jefferson/ Varian)

36 Itzhak Goldberg, John Gabriel Goddard, Smita Kuriakose, Jean-Louis Racine, Igniting Innovation, Rethinking the Role of Government in Emerging Europe and Central Asia, World Bank, 2011.

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Do patent and copyright law restrict competition and creativity excessively? Posner [Source]

I am concerned that both patent and copyright protection, though particularly the former, may be excessive.

To evaluate optimal patent protection for an invention, one has to consider both the cost of inventing and the cost of copying; the higher the ratio of the former to the latter, the greater the optimal patent protection for the inventor. The ratio is very high for pharmaceutical drugs. The cost of inventing a new drug, a cost that includes the extensive testing required for the drug to be approved for sale, is in the hundreds of millions of dollars, yet for most drugs the cost of copying—or producing an identical substitute—is very low. And so the ratio of the first to the second cost is very high, making it hard for the inventor to recover his costs without patent protection (and for the additional reasons that the present value of the revenue from sale of the drug is depressed because of the length of time it takes to get approval, and that the effective patent term is truncated because the patent is granted, and the period patent protection begins to run, when the patent is granted rather than, years later, when the drug can begin to be sold).

Pharmaceutical drugs are the poster child for patent protection. Few other products have the characteristics that make patent protection indispensable to the pharmaceutical industry. Most inventions are inexpensive, and even without patent protection, or any other legal protection from competition, the first firm to invent a product usually has significant protection from competition in the near term. The first firm gets a headstart on moving down his cost curve as experience demonstrates ways of cutting costs and improving the product. And the public is likely to identify his brand with the product, and keep buying it even after there is competition, and at a premium price. Moreover, many new products have only a short expected life, so that having 20 years of patent protection would confer no real benefit—except to enable the producer to extract license fees from firms wanting to make a different product that incorporates his invention.

When patent protection provides an inventor with more insulation from competition than he needed to have an adequate incentive to make the invention, the result is to increase market prices above efficient levels, causing distortions in the allocation of resources; to engender wasteful patent races—wasteful because of duplication of effort and because unnecessary to induce invention (though the races do increase the pace of invention); to increase the cost of searching the records of the Patent and Trademark Office in order to make sure one isn’t going to be infinging someone’s patent with your invention; to encourage the filing of defensive patents (because of anticipation that someone else will patent a similar product and accuse you of infringement); and to encourage patent “trolls,” who buy up large numbers of patents for the sole purpose of extracting licensee fees by threat of suit, and if necessary sue, for infringement.

The problem of excessive patent protection is at present best illustrated by the software industry. This is a progressive, dynamic industry rife with invention. But the conditions that make patent protection essential in the pharmaceutical industry are absent. Nowadays most software innovation is incremental, created

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by teams of software engineers at modest cost, and also ephemeral—most software inventions are quickly superseded. Software innovation tends to be piecemeal—not entire devices, but components, so that a software device (a cellphone, a tablet, a laptop, etc.) may have tens of thousands, even hundreds of thousands, of separate components (bits of software code or bits of hardware), each one arguably patentable. The result is huge patent thickets, creating rich opportunities for trying to hamstring competitors by suing for infringement—and also for infringing, and then challenging the validity of the patent when the patentee sues you.

Further impediments to effective patent policy in the software industry include a shortage of patent examiners with the requisite technical skills, the limited technical competence of judges and jurors, the difficulty of assessing damages for infringement of a component rather than a complete product, and the instability of the software industry because of its technological dynamism, which creates incentives both to patent and to infringe patents and thus increases legal costs.

The pharmaceutical and software industries are the extremes so far as the social benefits and costs of patent protection are concerned, and there are many industries in between. My general sense, however, bolstered by an extensive academic literature, is that patent protection is on the whole excessive and that major reforms are necessary.

Turning to copyright, I note first an interesting contrast with patent law. Although there are some industry-specific differences in patent law, for the most part patents are “one size fits all,” so far as length of protection and criteria and procedures for the grant of a patent are concerned. In contrast, copyright protection tends to vary considerably across different media. For example, when recorded music came into being, instead of providing it with the same copyright regime as already governed books and other printed material, Congress devised a separate regime tailored to what were considered the distinctive characteristics of music as a form of intellectual property. Patent law could learn from that approach.

The problem of copyright law is less acute than the problem of patent law, partly because copyright infringement is limited to deliberate copying; patent infringement does not require proof even that the infringer was aware of the patent that he was infringing. Nevertheless, as in the case of patent law, copyright protection seems on the whole too extensive. Granted, with modern action movies often costing hundreds of millions of dollars to make, yet copiable almost instantanteously and able to be both copied and distributed almost costlessly, the need for copyright protection is comparable to that in the pharmaceutical industry. At the other extreme is academic books and articles (apart from textbooks), which are produced as a byproduct of academic research that the author must conduct in order to preserve his professional reputation and that would continue to be produced even if not copyrightable at all. It is doubtful that there is any social benefit to the copyrighting of academic work other than textbooks, which require a lot of work and generally do not enhance the author’s academic reputation and may undermine it.

The most serious problem with copyright law is the length of copyright protection, which for most works is now from the creation of the work to 70 years after the author’s death. Apart from the fact that the present value of

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income received so far in the future is negligible, obtaining copyright licenses on very old works is difficult because not only is the author in all likelihood dead, but his heirs or other owners of the copyright may be difficult or even impossible to identify or find. The copyright term should be shorter.

The next most serious problem is the courts’ narrow interpretation of “fair use.” The fair use defense to copyright infringement permits the copying of short excerpts from a copyrighted work without a license, since the transaction costs of negotiating a license for a short excerpt would tend to exceed the value of the license. The problem is that the boundaries of fair use are ill defined, and copyright owners try to narrow them as much as possible, insisting for example that even minute excerpts from a film cannot be reproduced without a license. Intellectual creativity in fact if not in legend is rarely a matter of creation ex nihilo; it is much more often incremental improvement on existing, often copyrighted, work, so that a narrow interpretation of fair use can have very damaging effects on creativity. This is not widely recognized.

The need for reform is less acute in copyright than in patent law, but it is sufficiently acute to warrant serious attention from Congress and the courts.

11.5 Risk?The idea here is that the risks are often too high for private entrepreneurs to bear.

11.6 Successful examples

A recent blog post by the American Enterprise Institute’s (AEI) Mark Perry insists on solely crediting “market forces” for the shale gas revolution. Perry continues to push a false narrative that the market alone developed and deployed the technologies used today to extract shale natural gas, which has resulted in dirt-cheap prices and natural gas industry growth – natural gas is now tied with coal as America’s top source of electricity. It follows a similar piece earlier this year by AEI’s Steven Hayward that characterized the shale gas revolution as occurring “away from the greedy grasp of Washington,” thus completely overlooking any government role whatsoever. “If the political class had known this was going on,” he declares, “surely Washington would have done something to slow it up, tax it more, or stop it altogether.” In reality, the government deserves ample credit for not only developing the next generation natural gas technologies used today but also for partnering with industry to accelerate deployment of those technologies to market.

Oakland-based think-tank the Breakthrough Institute conducted an investigation that sheds light on the extent to which the government helped foster technology innovation in the natural gas sector (and an ITIF blog post summarizes here):

From the 1970’s through the 1990’s, the federal government partnered with the gas industry to develop horizontal drilling installations, hydraulic fracturing, and the mapping technologies that make shale gas even possible. These technologies got their start in at the Morgantown Energy Research Center, which provided investments for RD&D into new natural gas drilling technologies. From that center and subsequent government funded

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demonstration projects came directional drilling. Ultimately, a private company – Mitchell Energy – commercialized the technology. But government energy innovation policy didn’t stop there. Mitchell Energy and the Department of Energy (DOE) continued partnering, as DOE (through the Federal Labs and the Gas Research Institute) provided vital mapping R&D to understand and exploit shale gas formations. Targeted ‘non-conventional’ gas tax credits sustained development of these technologies when no market existed and a gas rate-payer surcharge was used to fund early research.

In other words, the shale natural gas revolution is an inconvenient reality for those that want to push the Solyndra-narrative that government can do no right in addressing U.S. energy challenges. In fact, as the last century of breakthrough technology development has shown (including the shale natural gas revolution) government can and has done right. So instead of pushing a false narrative, the energy policy debate would be much better served by teasing out the research, development, deployment, and public-private partnership models that worked (like the Breakthrough Institute did in their study) and didn’t work to make better government investments in breakthrough technologies and energy policies. http://www.innovationfiles.org/inconvenient-reality-the-government-role-in-the-shale-gas-revolution/ [CLIFTON YIN AND MATTHEW STEPP · AUGUST 24, 2012]

Also: http://rogerpielkejr.blogspot.com.au/2011/12/government-role-in-shale-gas-innovation.html

11.7 Preventing brain drain?

11.8 Moral hazard

11.9 Displacement or crowding out of private research

11.10 Public choice question: how can bureacurats without any capacity to innovate support innovation?

Bad apples pick you

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12. Role of government: arguments against

12.1 Businesses are the “smartest” in their fieldIt is in the interest of a business to know exactly what is going on his field. He is not only likely to subscribe to relevant professional journals but to actively use google and other electronic databases.

Give them access to JSTOR if absolutely needed

12.2 No skin in the gameIt appears that some “innovation” projects funded by government do well while others do extremely badly. A key obstacle to identification of the best funding of opportunities is the fact that bureaucrats have no skin in the game. To the extent that a significant portion of compensation of government officials can be linked to the performance of their investments (of taxpayer funds), some of these constraints could be reduced. However, it is unlikely that bureaurats are going to be willing to put their money where their mouth is. Nor will politicians do that. In general, therefore it is theoretically impossible for bureacrats to put in the due diligence that investors will put in, into their ‘investments’.

Since a government cannot, for very basic fundamental reasons, pick winners, it could (instead) consider providing low interest loans to venture capitalists who put their own money on the line. For instance, if a venture capitalist is willing to shell out $100 of his own money on a venture, the government could provide $50 of that as a low interest loan to the benture capitalist.

http://www.theaustralian.com.au/national-affairs/climate/cheap-imports-a-blow-for-locals/story-e6frg6xf-1226484942467 http://www.becker-posner-blog.com/2012/09/do-patent-and-copyright-law-restrict-competition-and-creativity-excessively-posner.html

INNOVATION http://marginalrevolution.com/marginalrevolution/2012/09/innovation-economics.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+marginalrevolution%2Ffeed+%28Marginal+Revolution%29&utm_content=Bloglines INNOVATION http://organizationsandmarkets.com/2012/09/09/the-wrong-way-to-measure-returns-to-public-science-funding/

12.3 Picking winners is a bad idea: Solyndra

Solyndra, explained37

by Rachel Weiner at 1 June 2012

Solyndra was founded in Silicon Valley in 2004. The company planned to build solar panels without polysilicon. While Solyndra’s panels were more expensive to make, they were supposed to be cheaper to install, and the skyrocketing price of polysilicon gave the company a chance to compete in the market.

The following year, the company was invited to apply for a government-guaranteed loan under the Energy Policy Act of 2005. A full application came in 2008, and the Department of

37 http://www.washingtonpost.com/blogs/the-fix/post/solyndra--explained/2012/06/01/gJQAig2g6U_blog.html

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Energy began a review. In March 2009, Energy Secretary Steven Chu announced a $535 million conditional loan guarantee to Solyndra — making it the first to receive a loan since the 2005 program began. The loan was funded with stimulus money and formally announced in September 2009.

But Solyndra was already in trouble. In February of 2008 the price of polysilicon began to fall sharply, while Solyndra’s claims of cheaper installation costs were also in doubt. Chinese firms started to crowd out American ones on the solar panel market. Natural gas prices also fell, making investments in more or comparatively more expensive alternative energy less attractive. Management at the firm also made questionable spending decisions, wasting loan money on state-of-the-art equipment that went unused.

The DOE learned in December 2010 that Solyndra could not make its loan payment, in violation of its federal loan deal. Solyndra executives had been privately warning administration officials that the firm was at risk of liquidation. Yet in February 2011, the department restructured the loan, with some investors agreeing to provide Solyndra $75 million more in financing.

Part of the deal was that private investors, including family funds connected to Obama fundraising bundler George Kaiser, would be paid back before the government if Solyndra collapsed. The Kaiser-tied funds were already the largest investors in Solyndra. In August 2011, the company filed for bankruptcy.

Nearly $4 billion in federal grants and financing, however, flowed to 21 companies backed by firms with connections to five Obama administration staffers and advisers on energy policy, according to a Post examination.

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13. List of investions

This list, obtained from the internet, is indicative of the fact that Governemnt has played a very limited role in innovation.

INVENTION YEAR INVENTOR COUNTRYthermometer 1592 Galileo Italytelescope, optical 1608 Hans Lippershey The Netherlandssubmarine 1620 Cornelis Drebbel The Netherlandsbarometer 1643 Evangelista Torricelli Italyclock, pendulum 1656 Christiaan Huygens The Netherlandsengine, steam 1698 Thomas Savery Englandsunglasses 1752 James Ayscough UKchronometer 1762 John Harrison Englandsoft drinks, carbonated 1772 Joseph Priestley UKthreshing machine 1778 Andrew Meikle Scotlandballoon, hot-air 1783 Joseph & Étienne Montgolfier Francebifocal lens 1784 Benjamin Franklin USoil lamp 1784 Aimé Argand Switzerlandshoelaces 1790 — Englandguillotine 1792 Joseph-Ignace Guillotin Francecotton gin 1793 Eli Whitney USball bearing 1794 Philip Vaughan Englandmetric system of measurement 1795 French Academy of Sciences Francevaccination 1796 Edward Jenner Englandparachute, modern 1797 André-Jacques Garnerin Francebattery, electric storage 1800 Alessandro Volta Italysteamboat, successful 1807 Robert Fulton UScanning, food 1809 Nicolas Appert FranceAmerican Sign Language 1817 Thomas H. Gallaudet US

bicycle 1818Baron Karl de Drais de Sauerbrun Germany

stethoscope 1819René-Théophile-Hyacinthe Laënnec France

Fresnel lens 1820 Augustin-Jean Fresnel FranceBraille system 1824 Louis Braille Francecement, portland 1824 Joseph Aspdin Englandstove, gas 1826 James Sharp UKmatches, friction 1827 John Walker Englandlocomotive 1829 George Stephenson Englandthermostat 1830 Andrew Ure UKreaper, mechanical 1831 Cyrus Hall McCormick UStelegraph 1832 Samuel F.B. Morse US

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INVENTION YEAR INVENTOR COUNTRYmotor, electric 1834 Thomas Davenport USrevolver 1835 Samuel Colt USplow, steel 1836 John Deere US

photography 1837Louis-Jacques-Mandé Daguerre France

Morse code 1838 Samuel F.B. Morse USfuel cell 1839 William R. Grove UKrubber, vulcanized 1839 Charles Goodyear USstamps, postage 1840 Sir Rowland Hill UKsewing machine 1841 Barthélemy Thimonnier Francefacsimile (fax) 1842 Alexander Bain Scotlandrefrigerator 1842 John Gorrie USgreeting card, Christmas 1843 John Callcott Horsley Englandrubber band 1845 Stephen Perry UKsaxophone 1846 Antoine-Joseph Sax Belgiumdoughnut (ring) or donut 1847 Hanson Crockett Gregory USsafety pin 1849 Walter Hunt USairship 1852 Henri Giffard Franceelevator, passenger 1852 Elisha Graves Otis UShypodermic syringe 1853 Charles Gabriel Pravaz Francepotato chips 1853 George Crum USdry cleaning 1855 Jean Baptiste Jolly Francesteel, mass-production 1856 Henry Bessemer UKtissue, toilet 1857 Joseph Gayetty UScan opener 1858 Ezra J. Warner USengine, internal-combustion 1859 Étienne Lenoir Franceoil well 1859 Edwin Laurentine Drake USlinoleum 1860 Frederick Walton UKpasteurization 1864 Louis Pasteur Francestapler 1866 George W. McGill USconcrete, reinforced 1867 Joseph Monier Francedynamite 1867 Alfred Nobel Swedenstock ticker 1867 Edward A. Calahan UStypewriter 1868 Christopher Latham Sholes UScelluloid 1869 John Wesley Hyatt USmargarine 1869 Hippolyte Mège-Mouriès Francebag, flat-bottomed paper 1870 Margaret Knight USpetroleum jelly 1870 Robert Chesebrough UScardboard, corrugated 1871 Albert Jones USperiodic table 1871 Dmitry Ivanovich Mendeleyev Russiacatalog, mail-order 1872 Aaron Montgomery Ward USpolyvinyl chloride (PVC) 1872 Eugen Baumann Germanyjeans 1873 Levi Strauss, Jacob Davis USbarbed wire 1874 Joseph Glidden US

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INVENTION YEAR INVENTOR COUNTRYDDT 1874 Othmar Zeidler Germanytelephone, wired-line 1876 Alexander Graham Bell Scotland/Canada/USphonograph 1877 Thomas Alva Edison UScream separator (dairy processing) 1878 Carl Gustaf Patrik de Laval Swedenmicrophone 1878 David E. Hughes UK/UScash register 1879 James Ritty USlight bulb, incandescent 1879 Thomas Alva Edison US

saccharin 1879Ira Remsen, Constantin Fahlberg US, Germany

iron, electric 1882 Henry W. Seely USfilm, photographic 1884 George Eastman US

rayon 1884Louis-Marie-Hilaire Bernigaud, count of Chardonnet France

roller coaster 1884 LeMarcus A. Thompson USskyscraper, steel-frame 1884 William Le Baron Jenney US

motorcycle 1885Gottlieb Daimler, Wilhelm Maybach Germany

dishwasher 1886 Josephine Cochrane UScontact lenses 1887 Adolf Fick Germanycamera, portable photographic 1888 George Eastman USdoor, revolving 1888 Theophilus von Kannel US

electric chair 1888Harold P. Brown, Arthur E. Kennelly US

straw, drinking 1888 Marvin Stone UStire, pneumatic 1888 John Boyd Dunlop UKautomobile 1889 Gottlieb Daimler Germanyjukebox 1889 Louis Glass USslot machine 1890 Charles Fey US

camera, motion picture 1891Thomas Alva Edison, William K.L. Dickson US

escalator 1891 Jesse W. Reno USflask, vacuum (Thermos) 1892 Sir James Dewar Scotlandtractor 1892 John Froehlich UStoaster, electric 1893 Crompton Co. UKzipper 1893 Whitcomb L. Judson UScereal flakes, breakfast 1894 John Harvey Kellogg UScoupon, grocery 1894 Asa Candler USX-ray imaging 1895 Wilhelm Conrad Röntgen Germanyradio 1896 Guglielmo Marconi Italystove, electric 1896 William Hadaway USaspirin 1897 Felix Hoffmann (Bayer) GermanyJELL-O (gelatin dessert) 1897 Pearle B. Wait USanswering machine, telephone 1898 Valdemar Poulsen Denmarkflashlight, battery- 1899 Conrad Hubert Russia/US

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INVENTION YEAR INVENTOR COUNTRYoperated portablepaper clip 1899 Johan Vaaler Norwayrazor, safety 1900 King Camp Gillette USvacuum cleaner, electric 1901 Herbert Cecil Booth UKair conditioning 1902 Willis Haviland Carrier USteddy bear 1902 Morris Michtom USairplane, engine-powered 1903 Wilbur & Orville Wright UScrayons, children's wax 1903 Edwin Binney, C. Harold Smith USelectrocardiogram (ECG, EKG) 1903 Willem Einthoven The Netherlandshanger, wire coat 1903 Albert J. Parkhouse USsilicone 1904 Frederic Stanley Kipping UKcoffee, decaffeinated 1905 Ludwig Roselius Germanyirradiation, food 1905 — US/UK

drinking fountain 1905Luther Haws, Halsey W. Taylor (invented separately) US

animation, motion-picture 1906 J. Stuart Blackton USBakelite 1907 Leo Hendrik Baekeland USmotor, outboard 1907 Ole Evinrude Norway/USwashing machine, electric 1907 Alva J. Fisher UScoffee, drip 1908 Melitta Bentz GermanyGeiger counter 1908 Hans Geiger Germanyglass, safety 1909 Édouard Bénédictus Franceneon lighting 1910 Georges Claude Francecellophane 1911 Jacques E. Brandenberger Switzerlandassembly line 1913 Henry Ford USbrassiere (bra) 1913 Mary Phelps Jacob UScrossword puzzles 1913 Arthur Wynne USsteel, stainless 1914 Harry Brearley UKlipstick, tube 1915 Maurice Levy USsonar 1915 Paul Langevin France

tank, military 1915Admiralty Landships Committee UK

corn, hybrid 1917 Donald F. Jones USmobile home 1919 Glenn H. Curtiss US

blow-dryer 1920

Racine Universal Motor Co., Hamilton Beach Manufacturing Co. US

radio, car 1920 William P. Lear USbandage, adhesive 1921 Earle Dickson USinsulin, extraction and preparation of 1921

Sir Frederick Grant Banting, Charles H. Best Canada

polygraph (lie detector) 1921 John A. Larson USMuzak 1922 George Owen Squier USsnowmobile 1922 Joseph-Armand Bombardier Canada

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INVENTION YEAR INVENTOR COUNTRYtraffic lights, automatic 1923 Garrett A. Morgan US

television 1923Vladimir Kosma Zworykin, Philo Taylor Farnsworth Russia/US, US

loudspeaker 1924Chester W. Rice, Edward W. Kellogg US

tissue, disposable facial 1924 Kimberly-Clark Co. USfoods, frozen 1924 Clarence Birdseye USaerosol can 1926 Erik Rotheim Norwayengine, liquid-fueled rocket 1926 Robert H. Goddard USbaby food, prepared 1927 Dorothy Gerber USclock, quartz 1927 Warren A. Marrison Canada/USKool-Aid (fruit drink mix) 1927 Edwin E. Perkins USaudiotape 1928 Fritz Pfleumer Germanybread, sliced (bread-slicing machine) 1928 Otto Frederick Rohwedder USrazor, electric 1928 Jacob Schick USelectroencephalogram (EEG) 1929 Hans Berger Germany

particle accelerator 1929Sir John Douglas Cockcroft, Ernest Thomas Sinton Walton Ireland/UK

engine, jet 1930 Sir Frank Whittle UKScotch tape 1930 Richard Drew (3M) USsupermarket 1930 Michael Cullen USpaper towel 1931 Arthur Scott USstereophonic sound recording 1931 Alan Dower Blumlein UKtampon, cotton 1931 Earle Cleveland Haas USparking meter 1932 Carl C. Magee UScan, metal beverage 1933 American Can Co. USmicroscope, electron 1933 Ernst Ruska Germanylaundromat 1934 J.F. Cantrell USlight bulb, fluorescent 1934 Arthur Compton USMonopoly (board game) 1934 Charles B. Darrow USpolyethylene 1935 Eric Fawcett, Reginald Gibson UK

Richter scale 1935Charles Francis Richter, Beno Gutenberg US

nylon 1937 Wallace H. Carothers USphotocopying (xerography) 1937 Chester F. Carlson USfiberglass 1938 Owens Corning (corp.) USpen, ballpoint 1938 Lazlo Biro HungaryTeflon 1938 Roy Plunkett UScomputer, electronic digital 1939

John V. Atanasoff, Clifford E. Berry US

helicopter 1939 Igor Sikorsky Russia/USlawn mower, gasoline- 1940 Leonard Goodall US

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INVENTION YEAR INVENTOR COUNTRYpoweredguitar, electric 1941 Les Paul USmissile, guided 1942 Wernher von Braun Germanynuclear reactor 1942 Enrico Fermi US

scuba gear 1943Jacques Cousteau, Émile Gagnan France

rifle, assault 1944 Hugo Schmeisser Germanysunscreen 1944 Benjamin Green USbomb, atomic 1945 J. Robert Oppenheimer, et al. USmicrowave oven 1945 Percy L. Spencer USbikini 1946 Louis Réard Francecarbon-14 dating 1946 Willard F. Libby USfoods, freeze-dried 1946 Earl W. Flosdorf UStelephone, mobile 1946 Bell Laboratories UScat litter 1947 Edward Lowe USphotography, instant 1947 Edwin Herbert Land US

transistor 1947John Bardeen, Walter H. Brattain, William B. Shockley US

holography 1948 Dennis Gabor Hungaryrecord, long-playing (LP) 1948 Peter Carl Goldmark USVelcro 1948 George de Mestral SwitzerlandZamboni (ice resurfacing machine) 1949 Frank J. Zamboni US

credit card 1950Frank McNamara, Ralph Schneider (Diners' Club) US

diapers, disposable 1950 Marion Donovan USremote control, television 1950 Robert Adler USvideotape 1950 Charles Ginsburg UScorrection fluid, white 1951 Bette Nesmith USairbag, automotive 1952 John Hetrick USbar code 1952 Joseph Woodland USbomb, thermonuclear (hydrogen) 1952 Edward Teller, et al. USdefibrillator 1952 Paul M. Zoll USpacemaker, cardiac 1952 Paul M. Zoll USdiamond, artificial 1955 General Electric Co. USfiber optics 1955 Narinder S. Kapany Indiasynthesizer, music 1955 Harry Olson, Herbert Belar USrespirator 1955 Forrest M. Bird USPlay-Doh 1956 Noah W. & Joseph S. McVicker USsatellite, successful artificial earth 1957 Sergey Korolyov, et al. USSRintegrated circuit 1958 Jack S. Kilby US

laser 1958

Gordon Gould and Charles Hard Townes, Arthur L. Schawlow (invented separately) US

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INVENTION YEAR INVENTOR COUNTRYskateboard 1958 Bill & Mark Richards USultrasound imaging, obstetric 1958 Ian Donald UKseat belt, automotive shoulder 1959 Nils Bohlin (Volvo) Swedensatellite, communications 1960 John Robinson Pierce USlight-emitting diode (LED) 1962 Nick Holonyak, Jr. USliquid crystal display (LCD) 1963 George Heilmeier USmouse, computer 1963 Douglas Engelbart USaspartame 1965 James Schlatter US

AstroTurf 1965James M. Faria, Robert T. Wright US

Kevlar 1965 Stephanie Kwolek UScalculator, electronic hand-held 1967 Jack S. Kilby USautomated teller machine (ATM) 1968 Don Wetzel USpersonal watercraft, motorized 1968 Bombardier, Inc. Canada

detector, home smoke 1969Randolph Smith, Kenneth House US

Internet 1969

Advanced Research Projects Agency (ARPA) at the Dept. of Defense US

videocassette recorder 1969 Sony Corp. Japancloning, animal 1970 John B. Gurdon UKwristwatch, digital 1970 John M. Bergey USmagnetic resonance imaging (MRI) 1970

Raymond Damadian, Paul Lauterbur US

Post-it Notes 1970 Arthur Fry (3M) USelectronic mail (e-mail) 1971 Ray Tomlinson USfood processor 1971 Pierre Verdon Francecomputed tomography (CT scan, CAT scan) 1972

Godfrey Hounsfield, Allan Cormack UK, US

Prozac 1972Ray W. Fuller, Bryan B. Molloy, David T. Wong US

video games 1972 Nolan Bushnell US

genetic engineering 1973Stanley N. Cohen, Herbert W. Boyer US

computer, personal 1974MITS (Micro Instrumentation Telemetry Systems) US

in vitro fertilization (IVF), human 1978

Patrick Steptoe, Robert Edwards UK

stereo, personal 1979 Sony Corp. Japan

compact disc (CD) 1980 Philips Electronics, Sony Corp.The Netherlands, Japan

synthetic skin 1981Ioannis V. Yannas, John F. Burke US

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INVENTION YEAR INVENTOR COUNTRYcamcorder 1982 Sony Corp. Japancomputer, laptop 1983 Radio Shack Corp. USDNA fingerprinting 1984 Alec Jeffreys UKvision correction, laser 1987 Stephen Trokel USvirtual reality 1989 Jaron Lanier USWorld Wide Web 1989 Tim Berners-Lee UK

digital videodisc (DVD) 1995consortium of international electronics companies

Japan, US, The Netherlands

Viagra 1997 Pfizer Inc. US

How to Avoid a Bonfire of the Humanities

'English majors are exactly the people I'm looking for,' one successful Silicon-Valley entrepreneur recently told me.By MICHAEL S. MALONEA half-century ago in his famous "Two Cultures" speech, C.P. Snow defined the growing rift between the world of scientists (including, increasingly, the commercial world) and that of literary intellectuals (including, increasingly, the humanities). It's hard to imagine the sciences and the humanities ever having been united in common cause. But that day may come again soon.

Today, the "two cultures" not only rarely speak to one another, but also increasingly, as their languages and world views diverge, are unable to do so. They seem to interact only when science churns up in its wake some new technological phenomenon—personal computing, the Internet, bioengineering—that revolutionizes society and human interaction and forces the humanities to respond with a whole new set of theories and explanations.Not surprisingly, as science has grown to dominate modern society, the humanities have withered into increasing irrelevancy. For them to imagine that they have anything approaching the significance or influence of the sciences smacks of a kind of sad, last-ditch desperation. Science merely nods and says, "I see your Jane Austen monographs and deconstructions of 'The Tempest' and raise you stem-cell research and the iPhone"—and then pockets all of the chips on the table.

All of this may seem like a sideshow—in our digital age the humanities will limp along as science consolidates its triumph. There is, after all, a distinct trajectory to industries and disciplines that are about to be annihilated by technology. Typically, those insular worlds operate along with misplaced confidence. They expect an industry evolution; they fail to recognize that they are facing a revolution—and if they don't utterly transform themselves, right now, it will destroy them. But of course, they never do.I watched this happen in almost every tech industry, and now it is spreading to almost every other industry and profession. Medicine, education, governance, the military and my own profession of journalism. And so I found myself earlier this year talking with the head of the English department where I teach. The department's tenured faculty had been reduced to just a handful of professors, many nearing retirement; the rest of the staff was mostly part-time adjunct lecturers. And the students? Little more than half the number of majors of just a decade earlier. I had seen this before.

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I asked him: How bad is it? "It's pretty bad," he said. "And this economy is only making it worse. There are parents now who tell their kids they will only pay tuition for a business, engineering or science degree."

Aversion to risk, lack of research money, dwindling market share, a declining talent pool. That is how mature industries die; perhaps it is the same story with aging fields of thought. But hope for the humanities may be on the horizon, coming from an unlikely source: Silicon Valley.A few months back I invited a friend to speak in front of my professional writing class. Santosh Jayaram is the quintessential Silicon Valley high-tech entrepreneur: tech-savvy, empirical, ferociously competitive, and a veteran of Google, Twitter and a new start-up, Dabble. Afraid that he would simply run over my writing students, telling them to switch majors before it was too late, I asked him not to crush the kids' hopes any more than they already were.

Santosh said, "Are you kidding? English majors are exactly the people I'm looking for." He explained: Twenty years ago, if you wanted to start a company, you spent a month or so figuring out the product you wanted to build, then devoted the next 10 or 12 months to developing the prototype, tooling up and getting into full production.

These days, he said, everything has been turned upside down. Most products now are virtual, such as iPhone apps. You don't build them so much as construct them from chunks of existing software code—and that work can be contracted out to hungry teams of programmers anywhere in the world, who can do it in a couple of weeks.

But to get to that point, he said, you must spend a year searching for that one undeveloped niche that you can capture. And you must also use that time to find angel or venture investment, establish strategic partners, convince talented people to take the risk and join your firm, explain your product to code writers and designers, and most of all, begin to market to prospective major customers. And you have to do all of that without an actual product.

"And how do you do that?" Santosh said. "You tell stories." Stories, he said, about your product and how it will be used that are so vivid that your potential stakeholders imagine it already exists and is already part of their daily lives. Almost anything you can imagine you can now build, said Santosh, so the battleground in business has shifted from engineering, which everybody can do, to storytelling, for which many fewer people have real talent. "That's why I want to meet your English majors," he said.

Asked once what made his company special, Steve Jobs replied: "It's in Apple's DNA that technology alone is not enough—it's technology married with liberal arts, married with the humanities, that yields us the result that makes our heart sing."

Could the humanities rebuild the shattered bridge between C.P. Snow's "two cultures" and find a place at the heart of the modern world's virtual institutions? We assume that this will be a century of technology. But if the competition in tech moves to this new battlefield, the edge will go to those institutions that can effectively employ imagination, metaphor, and most of all, storytelling. And not just creative writing, but every discipline in the humanities, from the classics to rhetoric to philosophy. Twenty-first-century storytelling: multimedia, mass customizable, portable and scalable, drawing upon the myths and archetypes of the ancient world, on ethics, and upon a deep understanding of human nature and even religious faith.

The demand is there, but the question is whether the traditional humanities can furnish the supply. If they can't or won't, they will continue to wither away. But surely there are risk-takers out there in those English and classics departments, ready to leap on this opportunity. They'd better hurry, because the other culture won't wait.Mr. Malone is the author of the recently published "The Guardian of All Things: The Epic Story of Human Memory" (St. Martin's Press). This op-ed is based on his speech at the Rothermere American Institute at Oxford University on Oct. 18.

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