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Markets and Innovation

A guide to how markets impact innovation

Published onFeb 13, 2023
Markets and Innovation

This post provides a quick overview of claim articles in New Things Under the Sun related to how markets (broadly) affect innovation. See also this index for a guide to articles on the related idea of the link between science and technology.

Can’t find what you’re looking for? The easiest thing is to just ask me: I’m happy to point you to the best article, if there is a relevant one.

When extreme necessity is the mother of invention

  • Global crises vividly illustrate the linkage between need and innovation, without the need for any fancy statistical techniques.

    • Covid-19 led to a clear surge in the number of clinical trials related to the disease, and the number of patent applications related to remote work

    • The energy crisis of the 1970s led to a marked shift in the trajectory of energy efficiency progress

    • World War II led to a rapid increase in the productivity of airplane manufacturing

  • Most of these innovations though, built on knowledge that had been built up over a long time though.

  • (go to article)

Pulling more fuel efficient cars into existence

  • Fuel prices exert a strong effect on the direction of technological progress, as measured by patents.

  • Emissions standards, measured properly, exert the same kind of effect.

  • Measures of technological progress which are based on the actual attributes of vehicles, rather than counting patents, also accelerate during times of high fuel prices or more stringent standards.

    • This is true even when you restrict your attention to the set of cars sold in one market with broadly stable fuel prices and emissions standards, but who are facing pressure to meet higher emissions standards in other markets.

  • That said, most of the evidence considered relates to incremental changes; it is less clear policies that influence demand for certain characteristics are as effective at promoting radical innovation.

  • (go to article)

Medicine and the limits of market-driven innovation

  • Examines the relationship between profit motives and R&D in healthcare.

  • Financial incentives can lead to an increase in clinical trials and approved treatments, but appear to have little impact on basic research.

  • This is suggested by several studies examining the relationship between:

    • policy changes / financial incentives and vaccine development

    • market size and R&D in the pharmaceutical industry

    • the US Medicare Part D extension and the direction of medical research.

    • COVID-19 and the number therapies and academic publications of different types

  • (go to article)

Big firms have different incentives

  • R&D spending appears to increase proportionally as firms grow larger, even as R&D productivity seems to fall. Why would firms spend at the same rate if the return on R&D is falling?

  • One possible explanation is that the decline in R&D productivity is partly illusory.

    • Large firms have more incentive to spend on process innovations

    • Process innovations may be harder to observe

  • Another possible explanation for declining R&D productivity is that large firms may be disincentivized to invent products that compete with their existing product lines

    • We see some evidence that large firms behave this way, based on studies looking at what happens to acquired new drug R&D projects, and inventors who move to large firms versus small ones.

  • (go to article)

Training enhances the value of new technology

  • The diffusion of new inventions out of rich frontier countries into the world at large is very slow.

  • One reason might be that realizing the value of new technology requires complementary training and know-how that is harder to acquire

    • One study of a program to provide technology and training to Italian firms in the 1950s found those that received both experienced greater productivity gains than the sum of either alone.

    • Another study of a program to provide technology and training to Chinese heavy industry in the 1950s found the effects of receiving technology alone mostly faded away after time.

    • In contrast, receiving technology plus training set the productivity on a long-run upward trend.

  • (go to article)

How to impede technological progress

  • Sometimes, we may want to slow technological progress: to do this, policies can either raise research costs or reduce innovation rewards.

    • US stem cell research saw a (temporary) decline in citations after 2001 federal R&D funding restrictions.

    • Stricter safety regulations caused some labs to reduce their use of dangerous compounds, though overall research output remained stable.

    • Carbon taxes can reduce R&D related to fossil fuel emissions.

    • Liability exposure in the medical device sector slowed innovation in implants, relative to sectors that did not see an increase in exposure.

    • Secrecy orders, like wartime restrictions, halted firms from commercializing inventions, leading some to abandon specific R&D fields post-war.

  • These policies tend to have the largest impact on marginal R&D performers; leaders are often significantly less impacted.

  • (go to article)

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