Notes On Innovation

Notes on innovation
Sanjeev Sabhlok
Preliminary Draf 25 May 2014

Happy to receive input at sabhlok@gmail.com
Work in progress.This is a preliminary set of ideas/research on innovation.
DOWNLOAD SLIDES FROM HERE.
Download also this paper by Sinclair Davidson.

And this.
i
Contents
1. Three ways to create value.................................................................................1

1.1 Method 1: Trade.........................................................................................................................1
1.2 Method 2: Imitation...................................................................................................................2
1.3 Method 3: Innovation.................................................................................................................2
2. Salient aspects of innovation.............................................................................3

2.1 Types of innovation....................................................................................................................3
2.2 Innovation is hard: Knowledge is growing expontentially, but innovation (value
add) is barely keeping pace........................................................................................................3
2.3 Difference between innovation and entrepreneurship..............................................................4
2.4 Entrepreneurs dont get richer, mostly go broke........................................................................5
2.5 More entrepreneurs is not necessarily a great policy.................................................................5
2.6 Key implications.........................................................................................................................6
2.6.1 We are only interested in ideas that create new value.................................................6
2.6.2 We are not interested in best ideas...........................................................................6
2.6.3 Innovation must be distinguished from waste..............................................................6
3. Market failure theory of innovation...................................................................7

3.1 Intellectual theory (Francis Bacon): Knowledge drives innovation.............................................7
3.2 Market Failure Economists.......................................................................................................10
3.3 Kenneth Arrow (IPA paper).......................................................................................................10
3.4 Richard Romano (IPA paper).....................................................................................................10
3.5 Romer (Kealey).........................................................................................................................10
3.6 Baumol (Kealey).......................................................................................................................10
4. Competition theory of innovation....................................................................11

4.1 Adam Smiths theory................................................................................................................11
4.2 Schumpeters theory................................................................................................................11
4.3 Endogenous growth theory......................................................................................................11
4.3.1 Romers theory............................................................................................................11
4.3.2 Innovation can occur in research labs, but mostly on the shop floor........................12
4.4 Testing the two theories...........................................................................................................13
4.4.1 Whether innovators are highly qualified.....................................................................13
4.4.2 Anecdotes...................................................................................................................13
4.4.3 Inventions...................................................................................................................13
4.4.4 Competition as a key driver.........................................................................................14
4.4.5 Signalling by the price system.....................................................................................14
4.5 Planned innovation..................................................................................................................14
4.5.1 Continuous improvement/ business R&D...................................................................14
4.5.2 Discontinuous (significantly new) innovation..............................................................15
4.6 Limitations of planning.............................................................................................................16
4.7 Scientists do not innovate; innovators pose questions for science...........................................17
4.8 Science was largely privately funded in the past, and through philanthropic
efforts 18
Error! No text of specified style in document.

ii Happy to receive input at sabhlok@gmail.com
4.8.1 Western governments have funded science only since 1940s....................................18
4.9 Basic science may be a public good, but commercial R&D is not.............................................18
4.10 Government R&D usually displaces private R&D.....................................................................18
4.10.1 Paul David and Bronwyn Hall, 2000.............................................................................18
4.10.2 Paul David, Bronwyn Hall and Andrew Toole, 2000.....................................................18
4.10.3 OECD 2003..................................................................................................................19
5. Institutional frameworks..................................................................................21
5.1 Liberty and dignity (egalitarianism)..........................................................................................21
5.2 Stable, predictatble institutional environment.........................................................................21
5.3 Property rights.........................................................................................................................22
5.4 Free market competition: Says law (Walrasian market equilibrium).......................................22
5.5 Profit 22
5.5.1 Do not fix prices!.........................................................................................................22
5.5.2 EIU innovation environment index..............................................................................23
6. Enablers: Cultural factors.................................................................................24

6.1 Social rewards and respect for wealth generation...................................................................24
6.2 Absence of tall poppy syndrome..........................................................................................24
7. Key ingredient 1: Entrepreneur........................................................................25

7.1 Academic courses in entrepreneurship and innovation...........................................................25
7.1.1 The University of Swinburne.......................................................................................25
7.1.2 25
7.1.3 Teaching lateral thinking and innovation in schools and universtities.........................25
7.1.4 Lean startup (Eric Ries)................................................................................................26
7.1.5 Learning organisation (John Seddon/Peter Senge) (double loop learning/
system thinking)..........................................................................................................26
7.1.6 Wall St. Journal debate...............................................................................................26
7.2 Incentives for academics to innovate.......................................................................................30
8. Key ingredient 2: Risk taking and venture capital............................................32

8.1 Entrepreneur must always risk his own capital........................................................................32
8.2 Institutions of risk capital.........................................................................................................32
8.2.1 Market based options if you HAVE to fund.................................................................32
8.3 Venture capital and angel investors..........................................................................................32
8.3.1 The Indus Entrepreneurs.............................................................................................33
9. Enablers: individual factors..............................................................................34

9.1 Drive 34
9.2 Number of people....................................................................................................................34
9.3 Quality/capability of the individual..........................................................................................35
9.3.1 Immigration matters, but only high-end brainpower..................................................35
9.4 Knowledge and specialisation..................................................................................................38
9.4.1 Adam Smiths theory of innovation: specialization and competition..........................38
9.5 Ability to take risks...................................................................................................................38
10. What are governments doing?.........................................................................39

10.1 Commonwealth: innovation.gov.au..........................................................................................39
iii
10.1.1 Seven innovation priorities.........................................................................................39
10.1.2 Funding startups.........................................................................................................40
10.1.3 Tax breaks for R&D......................................................................................................42
10.2 Western Australia: Vouchers....................................................................................................42
11. Role of government: arguments in favour.......................................................43

11.1 R&D 43
11.2 Information gaps?....................................................................................................................43
11.3 Coordination?...........................................................................................................................43
11.4 Protection of intellectual property...........................................................................................43
11.5 Risk? 46
11.6 Successful examples.................................................................................................................46
11.7 Preventing brain drain?............................................................................................................47
11.8 Moral hazard............................................................................................................................47
11.9 Displacement or crowding out of private research...................................................................47
11.10 Public choice question: how can bureacurats without any capacity to
innovate support innovation?..................................................................................................47
12. Role of government: arguments against..........................................................48

12.1 Commonly held myths that government funding leads to innovation.....................................48
12.1.1 Internet 48
12.2 Businesses are the smartest in their field.............................................................................48
12.3 No skin in the game..................................................................................................................48
12.4 Picking winners is a bad idea: Solyndra....................................................................................49
12.5 Creating Publicly Funded Inequality (misuse of public funds)..................................................50
13. List of investions...............................................................................................51

iv Happy to receive input at sabhlok@gmail.com
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. Solows 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 cant 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.

Happy to receive input at sabhlok@gmail.com 1
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 lef 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: Innovation

Innovation 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 others capital (profits) towards new forms of
production. Society must generate profits before it begins to innovate.
2
2. Salient aspects of innovation
2.1 Types of innovation

According 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 pace
There is no doubt that the rate of technical progress amongst humans has been
exponentially increasing2. 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_
Returns
3
Moore's law describes an exponential growth pattern in the complexity of integrated
semiconductor circuits.

[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 markets 4) 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 peoples 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 entrepreneurship

Note that dropouts ofen do better than college graduates:
http://venturebeat.com/2013/05/07/how-these-college-dropouts-beat-harvard-grads-in-
competition-for-jobs/
Entrepeneurship is a complex commercial skill, including people management, finance,
technology, marketing, etc.
Type of firm Type of innovation Source of Source of Issue/s

people funds
4
http://en.wikipedia.org/wiki/Convergence_(economics)#Limitations
4
New startup Copying (e.g. a new Existing firms Bank No role for
(entrepreneurial) caf) government
Continuous Existing firms Bank No role for

improvement (e.g. a government
better caf)
Discontinuous Innovators/ Venture Most discussion

improvement (e.g. researchers capital occurs in this
Facebook) space
Existing firm Copying Existing firms Bank No role for

government
Continuous Existing firms Bank No role for

improvement government
Discontinuous Innovators/ Mostly bank, No role for

improvement researchers but some government
equity;
private equity
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 dont get richer, mostly go broke

Shane'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 policy

You 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
entrepreneursjust 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 value
We 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-advice
6
http://www.businessweek.com/stories/2008-01-23/the-entrepreneurship-
mythbusinessweek-business-news-stock-market-and-financial-advice

2.6.2 We are not interested in best ideas
It 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 waste

Innovation 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.
6
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, Henrys research group had
improved the compass, developed the caravelle (a small, rakish ship with fore-and-af 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. Bacons 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 Henrys involvement with dispassionate
science was negligible. [H]e was instead a professional soldier who employed technologists
opportunistically, as cunning warriors do.
As for Bacons 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 Bacons idea was a hypothesis, but that it was never tested. It continues to
remain untested.
The oppositions 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 afer America had become
the richest country in the world, while the British government started to fund research
significantly only in 1913, over a century afer 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
findingsparticularly industrial research findingscan 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
8
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
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 The translation of The continuous

scientific and knowledge into matching of artefacts
technological working artefacts to market needs and
knowledge (products, systems, demands
processes, services)
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/print
8
Pavitt, K., 2005. Innovation processes. In: Fagerberg, J., Mowery, D., Nelson, R. (Eds.),
Handbook of Innovation. Oxford University Press, Oxford, pp. 86114.

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)
9
From DTF paper on innovation (Intern Sharon Lai).
10
4. Competition theory of innovation
4.1 Adam Smiths 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 Blacks 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 Schumpeters theory

Schumpeter 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 Romers 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 Welch 13
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) 680693:
http://hp.gredeg.cnrs.fr/Edward_Lorenz/Papers/RP%202007.pdf
13
http://www.taproot.com/content/wp-
content/uploads/2008/05/innovationcreativesolutions.pdf

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 conductin 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.
12
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). Afer 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 lef 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 liberty 14
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
Indias sofware sector, Bangladeshs clothing industry, and Chinas special economic zones.
In the first two, the governments 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
adsf
4.4.4 Competition as a key driver

In 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/iss1/2
15
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.

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. 12).
For instance, discontinuous innovation, such as frugal innovation/ jugaad/ Gandhian
innovation (e.g. Dr. Mashelkars 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&D
This 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.
14
4.5.2 Discontinuous (significantly new) innovation
This 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
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, Microsof, 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 planning

Most 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
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.

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
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 ofen fail, and marketing,
too, is unpredictable. The slogan Youre never alone with a Strand killed a brand that was
thereafer 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 science

Inventors 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, thats
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
18
Terence Kealey (2010-10-31). Sex, Science And Profits. Random House UK.
16
afer 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 afer they had been hunted
out of every other corner of the world. (Wealth of Nations)
Kealey cites a recent example19:
The science of radioastronomy that apparently purest of sciences
emerged during the 1930s when Karl Jansky (190550), 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 afer America had become the richest country in the world, while the British
government started to fund research significantly only in 1913, over a century afer it had
launched the Industrial Revolution. 21
4.9 Basic science may be a public good, but commercial R&D is not
Businesses 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.
19
20
Constitution of Liberty.
21
Kealey, T, http://www.economist.com/debate/days/view/863/print

Edwin Mansfield and Zvi Griliches have found strong correlations between
companies' investment in scientific research and profits. 22
4.10 Government R&D usually displaces private R&D

4.10.1 Paul David and Bronwyn Hall, 2000
Study: 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, 2000

Study: 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 2003

The 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
22
Science is better off without the government By Philip Salter, Programmes Director, Adam
Smith Institute, http://www.bbc.co.uk/news/science-environment-11579956
18
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.
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

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 environment

This includes rule of law, effective justice system, etc.
5.3 Property rights

Strong 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 Hayeks Conistitution of Liberty hard copy edition, p. 79
25
26
Breaking Free of Nehru.
20
[I]n his Politics Aristotle linked the Athenian tradition of private property to its commercial
success.27
5.4 Free market competition: Says 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: Says 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 Says law encourages a government
to build institutions that ensure property rights, bankruptcy systems, and other supporting
mechanisms.
5.5 Profit
The 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 innovationlook at the computers used by air traffic
controllers, or the seizure of state-run schools by unions. 29
5.5.2 EIU innovation environment index

EIU 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

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
22
6. Enablers: Cultural factors
6.1 Social rewards and respect for wealth generation

This 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.

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 universtities
Edward 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 Bonos 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.php
31
http://www.taproot.com/content/wp-
content/uploads/2008/05/innovationcreativesolutions.pdf
24
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

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 settingeverything from dealing with many different types of people to
handling the constant uncertainty that so ofen comes with a start-up company.
1
2Yes: 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
themjust as we do with engineers, doctors and lawyers.
Clearly, the process works for training M.B.A.s. So, why not entrepreneurs? Afer 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 thumbthat
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
ofen 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
26
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 afer hearing "no" afer "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 inevitableand, indeed,
valuablepart 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 ratesand 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.
3No: 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

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 lef 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 oneselffrom 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 afer 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 teachthe 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
28
might fail, we shouldn't tell entrepreneurs to avoid making mistakes and risking failure.
Entrepreneurs hone their craf 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.
Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved
This copy is for your personal, non-commercial use only. Distribution and use of this material
are governed by our Subscriber Agreement and by copyright law. For non-personal use or to
order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit
www.djreprints.com
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. Smiths contemporary at Magdelen College, Oxford, Edward
Gibbon the historian, was to write: My tutors were monks who supinely enjoyed the gifs 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 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.
30
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 capital

Without this, there is no chance of getting any venture capital funding.
8.2 Institutions of risk capital

This includes institutions that provide risk capital (e.g. venture capitalists/ banks).
8.2.1 Market based options if you HAVE to fund

You 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 sofware, 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 fifeen 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.
Thats worse than the odds that you will die from a fall in the shower. 32
8.3.1 The Indus Entrepreneurs

https://melbourne.tie.org/chapter/tie-melbourne
32
http://blog.guykawasaki.com/2008/01/top-ten-myths-o.html#axzz29RFlHI97

32
9. Enablers: individual factors
9.1 Drive
Must have the drive to make money: to convert ideas into profit. Without such drive, the
innovator will be unable to exploit the opportunity. But isnt 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 cant 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] cant 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 lefish students and
mine, cant explain an increase). But the routine economics cant explain the actual factor
afer 1800 of about thirty. That depended on Simons ultimate resource, innovation from
true creativity which incidentally was something increased by rising population.33
33

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 Valleys New
Immigrant Entrepreneurs, she examined the transnational circulation of capital and labor of
Silicon Valleys economy during the 1980s and 1990s. She found that immigrants comprised
one-third of the regions 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 Saxenians 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, Americas 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-DrainAmericas 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.
34
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 sofware (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
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."
Another initiative making a difference is the 2006 Australia-India Strategic Research
34
Americas New Immigrant Entrepreneurs: Then and Now: Part VII
http://www.kauffman.org/uploadedFiles/Then_and_now_americas_new_immigrant_entrep
reneurs.pdf
36
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 Smiths theory of innovation: specialization and competition
9.5 Ability to take risks

This is a vital part of innovation (and particularly entrpreneurship).

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

10.1.1 Seven innovation priorities
Priority 1: Public research funding supports high-quality research that addresses national
challenges and opens up new opportunities.
The Australian Governments 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 Governments 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 Governments 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 Governments
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 worlds 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.
38
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 Australia 35
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 ofen 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 Governments 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
ofen 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,

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.
40
10.1.3 Tax breaks for R&D
10.2 Western Australia: Vouchers

Applications for round three of the West Australian Governments 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.

11. Role of government: arguments in favour
11.1 R&D
11.2 Information gaps?

It is argued that business dont 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 processone 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 sectorsthe 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 Rodriks
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 property

Patents (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.
42
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 substituteis 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
afer 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 benefitexcept 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 isnt going to be infinging someones 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
sofware 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 sofware innovation is incremental, created
by teams of sofware engineers at modest cost, and also ephemeralmost

sofware inventions are quickly superseded. Sofware innovation tends to be
piecemealnot entire devices, but components, so that a sofware device (a
cellphone, a tablet, a laptop, etc.) may have tens of thousands, even hundreds of
thousands, of separate components (bits of sofware 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 sofware 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 sofware industry because of its technological dynamism, which
creates incentives both to patent and to infringe patents and thus increases legal
costs.
The pharmaceutical and sofware 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 ofen 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 authors 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 afer the authors death. Apart from the fact that the present value of
income received so far in the future is negligible, obtaining copyright licenses on
44
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 ofen incremental improvement on existing, ofen
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 ofen too high for private entrepreneurs to bear.
11.6 Successful examples
A recent blog post by the American Enterprise Institutes (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 Americas top source of electricity. It follows a
similar piece earlier this year by AEIs 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 1970s through the 1990s, 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
demonstration projects came directional drilling. Ultimately, a private company Mitchell
Energy commercialized the technology. But government energy innovation policy didnt
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 didnt 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
46
12. Role of government: arguments against
12.1 Commonly held myths that government funding leads to innovation

12.1.1 Internet
"The government did create Arpanet, the world's first decentralized computer network. It
was supposed to help the Department of Defense communicate afer a nuclear attack. Even
then, government scientists relied heavily on inventions by private companies.
Arpanet introduced TCP/IP, the protocol that the internet uses to transfer information. That
was useful, but for decades, the government possessed the technology it needed to create
the Internet, and did very little with it.
In 1969, Arpanet linked 4 computers. Over the next three years, Email and instant messaging
were invented, but they weren't useful to you, because the government's Arpanet linked
only 37 computers." [Source]
"the American Defense Department made a large investment in the Arpanet (the precursor
of the internet), but distributed computing was a technology whose time was coming, and
Defense was merely anticipating the inevitable." Kealey demolishes the many commonly
held but false exaggerations about government "innovation". [Kealeys book]
12.2 Businesses are the smartest in their field

It 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
12.3 No skin in the game

It 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/
12.4 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 Solyndras 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
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 Solyndras 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.
12.5 Creating Publicly Funded Inequality (misuse of public funds)

https://www.project-syndicate.org/commentary/publicly-funded-inequality-by-kemal-dervi--
2015-03
37
http://www.washingtonpost.com/blogs/the-fix/post/solyndra--
explained/2012/06/01/gJQAig2g6U_blog.html
48
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 COUNTRY
thermometer 1592 Galileo Italy
telescope, optical 1608 Hans Lippershey The Netherlands
submarine 1620 Cornelis Drebbel The Netherlands
barometer 1643 Evangelista Torricelli Italy
clock, pendulum 1656 Christiaan Huygens The Netherlands
engine, steam 1698 Thomas Savery England
sunglasses 1752 James Ayscough UK
chronometer 1762 John Harrison England
sof drinks, carbonated 1772 Joseph Priestley UK
threshing machine 1778 Andrew Meikle Scotland
balloon, hot-air 1783 Joseph & tienne Montgolfier France
bifocal lens 1784 Benjamin Franklin US
oil lamp 1784 Aim Argand Switzerland
shoelaces 1790 England
guillotine 1792 Joseph-Ignace Guillotin France
cotton gin 1793 Eli Whitney US
ball bearing 1794 Philip Vaughan England
metric system of
measurement 1795 French Academy of Sciences France
vaccination 1796 Edward Jenner England
parachute, modern 1797 Andr-Jacques Garnerin France
battery, electric storage 1800 Alessandro Volta Italy
steamboat, successful 1807 Robert Fulton US
canning, food 1809 Nicolas Appert France
American Sign Language 1817 Thomas H. Gallaudet US
Baron Karl de Drais de
bicycle 1818 Sauerbrun Germany
Ren-Thophile-Hyacinthe
stethoscope 1819 Lannec France
Fresnel lens 1820 Augustin-Jean Fresnel France
Braille system 1824 Louis Braille France
cement, portland 1824 Joseph Aspdin England
stove, gas 1826 James Sharp UK
matches, friction 1827 John Walker England
locomotive 1829 George Stephenson England
thermostat 1830 Andrew Ure UK
reaper, mechanical 1831 Cyrus Hall McCormick US
telegraph 1832 Samuel F.B. Morse US

motor, electric 1834 Thomas Davenport US
revolver 1835 Samuel Colt US
plow, steel 1836 John Deere US
Louis-Jacques-Mand
photography 1837 Daguerre France
Morse code 1838 Samuel F.B. Morse US
fuel cell 1839 William R. Grove UK
rubber, vulcanized 1839 Charles Goodyear US
stamps, postage 1840 Sir Rowland Hill UK
sewing machine 1841 Barthlemy Thimonnier France
facsimile (fax) 1842 Alexander Bain Scotland
refrigerator 1842 John Gorrie US
greeting card, Christmas 1843 John Callcott Horsley England
rubber band 1845 Stephen Perry UK
saxophone 1846 Antoine-Joseph Sax Belgium
doughnut (ring) or donut 1847 Hanson Crockett Gregory US
safety pin 1849 Walter Hunt US
airship 1852 Henri Giffard France
elevator, passenger 1852 Elisha Graves Otis US
hypodermic syringe 1853 Charles Gabriel Pravaz France
potato chips 1853 George Crum US
dry cleaning 1855 Jean Baptiste Jolly France
steel, mass-production 1856 Henry Bessemer UK
tissue, toilet 1857 Joseph Gayetty US
can opener 1858 Ezra J. Warner US
engine, internal-
combustion 1859 tienne Lenoir France
oil well 1859 Edwin Laurentine Drake US
linoleum 1860 Frederick Walton UK
pasteurization 1864 Louis Pasteur France
stapler 1866 George W. McGill US
concrete, reinforced 1867 Joseph Monier France
dynamite 1867 Alfred Nobel Sweden
stock ticker 1867 Edward A. Calahan US
typewriter 1868 Christopher Latham Sholes US
celluloid 1869 John Wesley Hyatt US
margarine 1869 Hippolyte Mge-Mouris France
bag, flat-bottomed paper 1870 Margaret Knight US
petroleum jelly 1870 Robert Chesebrough US
cardboard, corrugated 1871 Albert Jones US
periodic table 1871 Dmitry Ivanovich Mendeleyev Russia
catalog, mail-order 1872 Aaron Montgomery Ward US
polyvinyl chloride (PVC) 1872 Eugen Baumann Germany
jeans 1873 Levi Strauss, Jacob Davis US
barbed wire 1874 Joseph Glidden US
50
DDT 1874 Othmar Zeidler Germany
telephone, wired-line 1876 Alexander Graham Bell Scotland/Canada/US
phonograph 1877 Thomas Alva Edison US
cream separator (dairy
processing) 1878 Carl Gustaf Patrik de Laval Sweden
microphone 1878 David E. Hughes UK/US
cash register 1879 James Ritty US
light bulb, incandescent 1879 Thomas Alva Edison US
Ira Remsen, Constantin
saccharin 1879 Fahlberg US, Germany
iron, electric 1882 Henry W. Seely US
film, photographic 1884 George Eastman US
Louis-Marie-Hilaire Bernigaud,
rayon 1884 count of Chardonnet France
roller coaster 1884 LeMarcus A. Thompson US
skyscraper, steel-frame 1884 William Le Baron Jenney US
Gottlieb Daimler, Wilhelm
motorcycle 1885 Maybach Germany
dishwasher 1886 Josephine Cochrane US
contact lenses 1887 Adolf Fick Germany
camera, portable
photographic 1888 George Eastman US
door, revolving 1888 Theophilus von Kannel US
Harold P. Brown, Arthur E.
electric chair 1888 Kennelly US
straw, drinking 1888 Marvin Stone US
tire, pneumatic 1888 John Boyd Dunlop UK
automobile 1889 Gottlieb Daimler Germany
jukebox 1889 Louis Glass US
slot machine 1890 Charles Fey US
Thomas Alva Edison, William
camera, motion picture 1891 K.L. Dickson US
escalator 1891 Jesse W. Reno US
flask, vacuum (Thermos) 1892 Sir James Dewar Scotland
tractor 1892 John Froehlich US
toaster, electric 1893 Crompton Co. UK
zipper 1893 Whitcomb L. Judson US
cereal flakes, breakfast 1894 John Harvey Kellogg US
coupon, grocery 1894 Asa Candler US
X-ray imaging 1895 Wilhelm Conrad Rntgen Germany
radio 1896 Guglielmo Marconi Italy
stove, electric 1896 William Hadaway US
aspirin 1897 Felix Hoffmann (Bayer) Germany
JELL-O (gelatin dessert) 1897 Pearle B. Wait US
answering machine,
telephone 1898 Valdemar Poulsen Denmark
flashlight, battery- 1899 Conrad Hubert Russia/US

operated portable
paper clip 1899 Johan Vaaler Norway
razor, safety 1900 King Camp Gillette US
vacuum cleaner, electric 1901 Herbert Cecil Booth UK
air conditioning 1902 Willis Haviland Carrier US
teddy bear 1902 Morris Michtom US
airplane, engine-powered 1903 Wilbur & Orville Wright US
crayons, children's wax 1903 Edwin Binney, C. Harold Smith US
electrocardiogram (ECG,
EKG) 1903 Willem Einthoven The Netherlands
hanger, wire coat 1903 Albert J. Parkhouse US
silicone 1904 Frederic Stanley Kipping UK
coffee, decaffeinated 1905 Ludwig Roselius Germany
irradiation, food 1905 US/UK
Luther Haws, Halsey W. Taylor
drinking fountain 1905 (invented separately) US
animation, motion-
picture 1906 J. Stuart Blackton US
Bakelite 1907 Leo Hendrik Baekeland US
motor, outboard 1907 Ole Evinrude Norway/US
washing machine, electric 1907 Alva J. Fisher US
coffee, drip 1908 Melitta Bentz Germany
Geiger counter 1908 Hans Geiger Germany
glass, safety 1909 douard Bndictus France
neon lighting 1910 Georges Claude France
cellophane 1911 Jacques E. Brandenberger Switzerland
assembly line 1913 Henry Ford US
brassiere (bra) 1913 Mary Phelps Jacob US
crossword puzzles 1913 Arthur Wynne US
steel, stainless 1914 Harry Brearley UK
lipstick, tube 1915 Maurice Levy US
sonar 1915 Paul Langevin France
Admiralty Landships
tank, military 1915 Committee UK
corn, hybrid 1917 Donald F. Jones US
mobile home 1919 Glenn H. Curtiss US
Racine Universal Motor Co.,
Hamilton Beach
blow-dryer 1920 Manufacturing Co. US
radio, car 1920 William P. Lear US
bandage, adhesive 1921 Earle Dickson US
insulin, extraction and Sir Frederick Grant Banting,
preparation of 1921 Charles H. Best Canada
polygraph (lie detector) 1921 John A. Larson US
Muzak 1922 George Owen Squier US
snowmobile 1922 Joseph-Armand Bombardier Canada
52
traffic lights, automatic 1923 Garrett A. Morgan US
Vladimir Kosma Zworykin,
television 1923 Philo Taylor Farnsworth Russia/US, US
Chester W. Rice, Edward W.
loudspeaker 1924 Kellogg US
tissue, disposable facial 1924 Kimberly-Clark Co. US
foods, frozen 1924 Clarence Birdseye US
aerosol can 1926 Erik Rotheim Norway
engine, liquid-fueled
rocket 1926 Robert H. Goddard US
baby food, prepared 1927 Dorothy Gerber US
clock, quartz 1927 Warren A. Marrison Canada/US
Kool-Aid (fruit drink mix) 1927 Edwin E. Perkins US
audiotape 1928 Fritz Pfleumer Germany
bread, sliced (bread-
slicing machine) 1928 Otto Frederick Rohwedder US
razor, electric 1928 Jacob Schick US
electroencephalogram
(EEG) 1929 Hans Berger Germany
Sir John Douglas Cockcrof,
particle accelerator 1929 Ernest Thomas Sinton Walton Ireland/UK
engine, jet 1930 Sir Frank Whittle UK
Scotch tape 1930 Richard Drew (3M) US
supermarket 1930 Michael Cullen US
paper towel 1931 Arthur Scott US
stereophonic sound
recording 1931 Alan Dower Blumlein UK
tampon, cotton 1931 Earle Cleveland Haas US
parking meter 1932 Carl C. Magee US
can, metal beverage 1933 American Can Co. US
microscope, electron 1933 Ernst Ruska Germany
laundromat 1934 J.F. Cantrell US
light bulb, fluorescent 1934 Arthur Compton US
Monopoly (board game) 1934 Charles B. Darrow US
polyethylene 1935 Eric Fawcett, Reginald Gibson UK
Charles Francis Richter, Beno
Richter scale 1935 Gutenberg US
nylon 1937 Wallace H. Carothers US
photocopying
(xerography) 1937 Chester F. Carlson US
fiberglass 1938 Owens Corning (corp.) US
pen, ballpoint 1938 Lazlo Biro Hungary
Teflon 1938 Roy Plunkett US
computer, electronic John V. Atanasoff, Clifford E.
digital 1939 Berry US
helicopter 1939 Igor Sikorsky Russia/US
lawn mower, gasoline- 1940 Leonard Goodall US

powered
guitar, electric 1941 Les Paul US
missile, guided 1942 Wernher von Braun Germany
nuclear reactor 1942 Enrico Fermi US
Jacques Cousteau, mile
scuba gear 1943 Gagnan France
rifle, assault 1944 Hugo Schmeisser Germany
sunscreen 1944 Benjamin Green US
bomb, atomic 1945 J. Robert Oppenheimer, et al. US
microwave oven 1945 Percy L. Spencer US
bikini 1946 Louis Rard France
carbon-14 dating 1946 Willard F. Libby US
foods, freeze-dried 1946 Earl W. Flosdorf US
telephone, mobile 1946 Bell Laboratories US
cat litter 1947 Edward Lowe US
photography, instant 1947 Edwin Herbert Land US
John Bardeen, Walter H.
transistor 1947 Brattain, William B. Shockley US
holography 1948 Dennis Gabor Hungary
record, long-playing (LP) 1948 Peter Carl Goldmark US
Velcro 1948 George de Mestral Switzerland
Zamboni (ice resurfacing
machine) 1949 Frank J. Zamboni US
Frank McNamara, Ralph
credit card 1950 Schneider (Diners' Club) US
diapers, disposable 1950 Marion Donovan US
remote control, television 1950 Robert Adler US
videotape 1950 Charles Ginsburg US
correction fluid, white 1951 Bette Nesmith US
airbag, automotive 1952 John Hetrick US
bar code 1952 Joseph Woodland US
bomb, thermonuclear
(hydrogen) 1952 Edward Teller, et al. US
defibrillator 1952 Paul M. Zoll US
pacemaker, cardiac 1952 Paul M. Zoll US
diamond, artificial 1955 General Electric Co. US
fiber optics 1955 Narinder S. Kapany India
synthesizer, music 1955 Harry Olson, Herbert Belar US
respirator 1955 Forrest M. Bird US
Play-Doh 1956 Noah W. & Joseph S. McVicker US
satellite, successful
artificial earth 1957 Sergey Korolyov, et al. USSR
integrated circuit 1958 Jack S. Kilby US
Gordon Gould and Charles
Hard Townes, Arthur L.
Schawlow (invented
laser 1958 separately) US
54
skateboard 1958 Bill & Mark Richards US
ultrasound imaging,
obstetric 1958 Ian Donald UK
seat belt, automotive
shoulder 1959 Nils Bohlin (Volvo) Sweden
satellite, communications 1960 John Robinson Pierce US
light-emitting diode (LED) 1962 Nick Holonyak, Jr. US
liquid crystal display (LCD) 1963 George Heilmeier US
mouse, computer 1963 Douglas Engelbart US
aspartame 1965 James Schlatter US
James M. Faria, Robert T.
AstroTurf 1965 Wright US
Kevlar 1965 Stephanie Kwolek US
calculator, electronic
hand-held 1967 Jack S. Kilby US
automated teller machine
(ATM) 1968 Don Wetzel US
personal watercraf,
motorized 1968 Bombardier, Inc. Canada
Randolph Smith, Kenneth
detector, home smoke 1969 House US
Advanced Research Projects
Agency (ARPA) at the Dept. of
Internet 1969 Defense US
videocassette recorder 1969 Sony Corp. Japan
cloning, animal 1970 John B. Gurdon UK
wristwatch, digital 1970 John M. Bergey US
magnetic resonance Raymond Damadian, Paul
imaging (MRI) 1970 Lauterbur US
Post-it Notes 1970 Arthur Fry (3M) US
electronic mail (e-mail) 1971 Ray Tomlinson US
food processor 1971 Pierre Verdon France
computed tomography Godfrey Hounsfield, Allan
(CT scan, CAT scan) 1972 Cormack UK, US
Ray W. Fuller, Bryan B. Molloy,
Prozac 1972 David T. Wong US
video games 1972 Nolan Bushnell US
Stanley N. Cohen, Herbert W.
genetic engineering 1973 Boyer US
MITS (Micro Instrumentation
computer, personal 1974 Telemetry Systems) US
in vitro fertilization (IVF), Patrick Steptoe, Robert
human 1978 Edwards UK
stereo, personal 1979 Sony Corp. Japan
The Netherlands,
compact disc (CD) 1980 Philips Electronics, Sony Corp. Japan
Ioannis V. Yannas, John F.
synthetic skin 1981 Burke US

camcorder 1982 Sony Corp. Japan
computer, laptop 1983 Radio Shack Corp. US
DNA fingerprinting 1984 Alec Jeffreys UK
vision correction, laser 1987 Stephen Trokel US
virtual reality 1989 Jaron Lanier US
World Wide Web 1989 Tim Berners-Lee UK
consortium of international Japan, US, The
digital videodisc (DVD) 1995 electronics companies 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. MALONE
A 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 phenomenonpersonal computing, the Internet,
bioengineeringthat 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 sideshowin 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.
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
56
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 enoughit'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.
http://www.venturecapitalcentre.com.au/category/news/
Joseph Schumpeter and the German Historical School

Panayotis G. Michaelides (pmichael@central.ntua.gr) and John G. Milios
Cambridge Journal of Economics, 2009, vol. 33, issue 3, pages 495-516
58

Notes On Innovation

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Notes On Innovation

Uploaded by

Copyright:

Available Formats

Notes on innovation

Preliminary Draf 25 May 2014

DOWNLOAD SLIDES FROM HERE.

Download also this paper by Sinclair Davidson.

1. Three ways to create value.................................................................................1

2. Salient aspects of innovation.............................................................................3

3. Market failure theory of innovation...................................................................7

4. Competition theory of innovation....................................................................11

Error! No text of specified style in document.

6. Enablers: Cultural factors.................................................................................24

7. Key ingredient 1: Entrepreneur........................................................................25

8. Key ingredient 2: Risk taking and venture capital............................................32

9. Enablers: individual factors..............................................................................34

10. What are governments doing?.........................................................................39

11. Role of government: arguments in favour.......................................................43

12. Role of government: arguments against..........................................................48

13. List of investions...............................................................................................51

Error! No text of specified style in document.

1.1 Method 1: Trade

Error! No text of specified style in document.

Is there a role for government in helping businesses imitate?

1.3 Method 3: Innovation

2.1 Types of innovation

2.2 Innovation is hard: Knowledge is growing expontentially, but

Error! No text of specified style in document.

2.3 Difference between innovation and entrepreneurship

Type of firm Type of innovation Source of Source of Issue/s

Continuous Existing firms Bank No role for

Discontinuous Innovators/ Venture Most discussion

Existing firm Copying Existing firms Bank No role for

Continuous Existing firms Bank No role for

Discontinuous Innovators/ Mostly bank, No role for

2.4 Entrepreneurs dont get richer, mostly go broke

2.5 More entrepreneurs is not necessarily a great policy

2.6 Key implications

Error! No text of specified style in document.

2.6.3 Innovation must be distinguished from waste

3.1 Intellectual theory (Francis Bacon): Knowledge drives innovation

Error! No text of specified style in document.

The oppositions opening remarks Jul 24th 2012 | Terence Kealey

The production of The translation of The continuous

Error! No text of specified style in document.

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)

4.1 Adam Smiths theory

4.2 Schumpeters theory

4.3 Endogenous growth theory

Error! No text of specified style in document.

4.4 Testing the two theories

In most cases, entreprneurs are NOT inventors.

4.4.4 Competition as a key driver

Error! No text of specified style in document.

4.4.5 Signalling by the price system

4.5 Planned innovation

Is there a role for government in continuous improvement?

This includes creating a culture of innovation.

Is there a role for government in discontinuous improvement?

4.6 Limitations of planning

Error! No text of specified style in document.

4.7 Scientists do not innovate; innovators pose questions for science