Collective invention

Collective invention, R. C. Allen, 1983, Journal of Economic Behavior and Organization

All too often R&D and innovation are used interchangeably. Obviously, innovation doesn't always happen in a lab, under a dedicated budget or even with the explicit intention of increasing profits.

Allen describes an alternative way of organizing innovation: collective invention.

Allen focuses on the iron industry and the development of blast furnaces in the 19th century. He finds that competing firms freely exchanged information on improvements to the design of their furnaces through a) informal networks and b) engineering societies and their publications. This meant that current and potential competitors could easily acquire knowledge of best practices. The first firm to experiment with a new design would carry the risk that the change would increase production cost. Subsequent adopters of the design could then benefit from the first firm's experience and data. This let firms "leapfrog" each other and led to a high rate of innovation.

Why would firms share valuable information so freely with their competitors and even potential entrants to the industry? Allen identifies several reasons:

- Design improvements were incremental and didn't legally qualify as "novel," i.e., they couldn't be patented.Under circumstances of competition and non-approbriablility, an individual inventor or a firm allocating resources to invention could expect an economic return far less than the social value of any invention.

- Once a new furnace was built, it was very costly if not impossible to keep the design changes secret since industry consultants and many (poorly paid and easily bribed) workers were involved in setting it up and running it.

- Since returns on design improvements couldn't be appropriated, there was nothing to be gained from keeping the innovations secret. Yet, there could be some gains in making it available.

- There was no R&D budget -- any design improvements were tested and implemented when a new furnace was built, severely limiting the pace of innovation that any single firm could achieve. Firms expected that their sharing of information would be reciprocated so that they would benefit from industry-wide experience and best practices when they built the next furnace. By spreading costs and risks among firms, collective invention meant that competitive industries could have high rates of invention even if the enventions were not patentable.

- Managers of the firm often had professional ambitions that could be advanced by releasing information about the operation of their firms. Under those circumstances the profits of the firm might be sacrificed and information released.

- Firms seem often to have engaged in competitions in advancing size or output. ... Since you cannot win the contest unless you reveal valuable information, these competitions fostered information release.

- Another reason that firms might have released technical information is that that behaviour might have been profitable. Hirschleifer (1971) has argued that inventors can be compensated for their efforts if they successfully speculate in assets that appreciate in value due to the invention. ... The characteristics of the situation that made collective invention profitable were the specificity of the resulting technical progress to lacal conditions and the fact that the Cleveland industry was only a small part of the world industry so that the price of iron could be regarded as exogenous. Under these circumstances, the owners of the natrual resource would actively foster information propagation since they could not lose by it and might well gain.