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This introduction canvasses broad themes relating to the nexus of innovation and institutions. It first examines the notion of a “new combination” – a core analytical concept in economic theories of innovation and explanations of emergent novelty through bottom-up processes. Following Schumpeter, different theorists have made different claims about the composition and structure of new combinations. Possible constituent elements include factors of production, capital goods, routines, information, ideas, technologies, and property rights. The article then looks synoptically at the institutional dimensions of innovation from alternative perspectives that focus upon different kinds of institutional rules and policy solutions to innovation problems. Neoclassical and evolutionary approaches tend to emphasize specific policy interventions in markets to channel behavior toward particular desired outcomes, whereas institutional and Austrian approaches tend to focus upon general institutional rules (e.g. property and contract) that frame markets and innovation processes. Finally, this article summarizes the papers in the special issue.
Was technological progress during and after the Industrial Revolution top-down or bottom-up? The technology that created the great inventions was driven by a combination of pathbreaking ideas and the dexterity and skills of trained artisans. While those forms of human capital were quite different, they both came out of small elites of intellectuals and craftsmen, what are rapidly becoming known as “upper-tail human capital.” I analyze the institutions that drove the incentives for both, and show that they came together to produce the Great Enrichment. These incentives were both material and social: between 1500 and 1700, the search for financial security and reputation cooperated in producing a unique institutional environment in which the elites in Western Europe produced the three legged-stool of European modernity: the Reformation, the Scientific Revolution, and the Enlightenment. Once these three movements had succeeded, the foundation for modern economic growth had been laid.
This paper analyses the origin of innovation using institutional economic theory. Because of distributed information and fundamental uncertainty, an efficient institutional context for the economic organization of innovation in its early stages is often that of a common pool resource. The theory of the innovation commons draws upon Hayek, Williamson and Ostrom to present the innovation problem as a combined knowledge problem, implicit contracting problem and collective action governance problem. Innovation commons theory also implies that Kirzner's model of entrepreneurial opportunity discovery extends to higher-order groups, suggesting a multilevel selection model of economic evolution.
Does innovation proceed from the top down or the bottom up? This is a crucial question for those who think about the sources of economic growth and especially for those who think about policies and institutions to promote innovation. The answer lies in part with the structure of the existing system of production and the array of assets that an innovation would displace, especially on the extent of complementarity and modularity in that structure. But it also depends on institutions. This paper argues for the centrality of decision rights to the process of innovation. Especially if it takes place in a systemic, non-modular way, innovation may require unified decision rights, often implying integrated control of complementary stages of production, in order to overcome the dynamic transaction costs of change. But the processes of subdivision, differentiation, and learning – the processes of fission, forking, and fine tuning – may also require changes in decision rights in order to overcome dynamic transaction costs. I illustrate these points with a case study of three generations of an American family of inventor-entrepreneurs in electricity and electronics.
We examine brand building from the perspective of complex adaptive systems. Brand building is a neglected engine of capital formation, innovation and institutional change in market economies. The nature of brands and the service streams they generate have been construed too narrowly. Brands are capital: entrepreneurs use brands as market-making devices that create value and capture profit, while consumers use brands to derive psychic income and lifestyle benefits. Brands are building blocks that can be combined in production to fill perceived gaps in brand architectures and capital structures. These structures are themselves complex adaptive systems. In an era of digital technological platforms, complex generative networks are the institutional locus of brand creation and brand extensions. Innovation in brand building is a socially distributed, service-intensive and interpretive process; it entails combinatorial experiments in resource integration by heterogeneous and socially connected actors, such as entrepreneur-producers, end-users and distributors. Legal brand owners never have total control over their brands – customer networks often exercise substantial de facto control rights (economic property rights) over the use and transformation of brands. Both the entire branding system (as a form of organization) and individual iconic brands can crystallize into relatively stable institutions that orient and coordinate market behaviour.
Digital markets offer abundant free content but exhibit extreme concentration among content aggregation intermediaries. These characteristics are linked. Weak copyright environments select against stand-alone content-delivery structures and select for bundled aggregation structures in which free content for users promotes positively priced advertising and data-collection services for firms. Dominant intermediaries promote commoditization, and the reallocation of market rents from content producers to content aggregators, through litigation and free content distribution that weaken copyright protections. The potential net welfare effects raise concern. Network effects, compounded by weak inventory constraints, scale economies, and learning effects, promote winner-takes-all outcomes in the intermediary services market while weak copyright may generate output distortions in the content production market.
Since the end of the shakeout following the bursting of the dot com bubble, we have seen substantial innovation in the institutions and organizational arrangements used to finance early-stage high growth technology companies. This paper will document the emergence of business accelerators, angel groups, micro venture capital funds and online equity crowdfunding platforms, and show the rapid growth in angel investing over this period. It will also document the corresponding movement away from traditional venture capital activity at the early stage of company development. The paper will explain how technological advance, specifically the decline in the cost of bringing a new software product to market, has driven this shift in the institutions of early-stage finance.
The use of information technology in healthcare has accelerated progress toward the long-term goal of a learning healthcare system, in which data from prior clinical experience provides an ever-expanding resource to guide continuous improvements in health care. Although still in its early stages, the use of data from clinical experience to supplement data from premarket testing is changing the roles of Food and Drug Administration (FDA) and public and private health insurers in healthcare innovation and technology assessment. It could change who decides what research questions to pursue, whose evidentiary standards decide what counts as actionable knowledge, and who pays the costs of research. The shape and direction of resulting changes will depend on which actors and institutions decide to step forward and claim a larger role in healthcare innovation in response to technological and regulatory change.