Innovation
Management and
Strategy
,ENTREPRENEURIAL ENTERPRISES, LARGE ESTABLISHED FIRMS AND
OTHER COMPONENTS OF THE FREE-MARKET GROWTH MACHINE –
WILLIAM J. BAUMOL
Influence for the unprecedented growth and innovation performance.
Oligopolistic competition forces firms to keep innovating. This leads them to
internalize innovative activities. Yet, revolutionary breakthrougs continue to come
predominantly from small entrepreneural enterprises
INTRODUCTION
Schumpeter:
Entrepreneur = partner of the inventor, the one who recoginezes the
value of the invention and brings it to the market.
Economies with many entrepreneurs will grow faster.
Yet, his conclusion was that the expanding role of routinized innovation by
big firms was threatening to make the entrepreneur obsolete (overbodig).
Baumol:
The entrepreneur is important!
But in the modern economy the entrepreneur, working alone in the
marketplace, cannot carry ou thte task most efectively.
The market mechanism has provied the partners that the entrpereneur
needs.
Important to stress that large and small firms are complementary;
together they have contributed far more than either would have by itself.
Also two groups outside the market who contribute to innovation:
universities and government
there are four important groups who need to get the right incentives to
take their role: entrepreneurs, big firms, government & universities
MARKET PRESSURES FOR AN ENHANCED LARGE-FIRLM ROLE IN
TECHNICAL PROGRESS
Importance of oligopolistic firms:
use innovation as their battle weapon
innovation to protect themselves from competitors and beat
competitors out
each film is drvien to conclude that its very existence depends on
mathcing its rivals’ efforts and spending on innovation
constant stream of innovations
very hard for a little entrepreneur to come up with a lot of money to keep track
of their innovations
That’s why Schumpeter concluded that entrepreneurs can’t make it
anymore
Baumol: the entrepreneurs still play an improtant role!
2
,REVOLUTIONARY BREAKTROUGHS: A SMALL-FIRLM SPECIALITY
Large firms have a lot of money that they can spend on R&D, but they also have
a lot of bureaucracy which can prevent revolutionary innovations. They are
consvervative and tend to avoid the risk of the unknown of a revolutionary
breakthrough.
large firms specialize in incremental improvements
Revolutionary new ideas are provided by small businesses
(entrepreneurs)
REVOLUTIONARY CONSEQUENCES OF AGGREGATED INCREMENTAL
IMPROVEMENTS
Incremental improvements (from large firms) may not be underestimated.
Together they can become very spectacular (e.g. computing power of a
computer).
Relatief gezien is de verbetering van de processors in een computer veel groter
dan toen hij voor het eerst bestond. Maar het uitvinden van de processor, was
minstens even belangrijk. Dus het is pas het gecombineerde dat zorgt voor
verbetering.
THE ROLE OF THE GOVERNMENT AND THE UNIVERSITY IN
INNOVATION
Government has 2 important roles
1. Legal infrastructure
Property rights, enforaceability of contracts, access to patented
intellectual property, …
2. Support of basic research
For the market mechanism, expenditure on basic research is a
wasteful expenditure, because the outcome is unpredictable and
therefore they don’t know if it will be profitable for the firm.
As a consequence, the government and universities have to step
in, because basic research is very important for innovation
DISSEMINATION OF INVENTION AND RAPID TERMINATION OF THE
OBSOLETE
Key activity for growth by market forces:
Incentive for rapid dissimination and widespread utilization of new or
improved products.
3
, dissemination can threathen the innovator’s reward
business try to guard their innovations with patents, secrecy, … this is
unfortunate for economic progress
Fortunately, price mechanism enables licenses
Other incentives:
o Consortium
Reduced R&D cost
Information = public good, so it’s easy to spread
Less risk
…
INDICATORS OF THE MAGNITUDE OF THE FREE-ENTERPRISE GROWTH
MIRACLE
Overview of the exponential growth path. (niet zo belangrijk, er is sinds 1850-
1900 een exponentiële groei te zien)
THE INVALUABLE CONTRIBUTION OF “MERE IMITATION”
The average country should expect some 24/25th of its new technology to come
from abroad.
The notion is that the imitation process is not an innovative activity, but this is
incorrect!
Improvements are elicited by the need to adapt the technolgy to local conditions,
so there is noting inferior about a process of organized imitation of foreign
technology.
GOVERNMENTAL POLICY FOR PROMOTION OF INNOVATION AND
GROWTH
The role of the government as facilitator of the innovative work of others.
funding and executing of basis research
acquisition of foreign technology
o education and training
o immigration of foreign technicians and related personnel
o establishment of observer staff in the country’s embassies
o study of measures taken by governments in other countries to
facilitate absorption of foreign technology by their industry
4
, 5
Management and
Strategy
,ENTREPRENEURIAL ENTERPRISES, LARGE ESTABLISHED FIRMS AND
OTHER COMPONENTS OF THE FREE-MARKET GROWTH MACHINE –
WILLIAM J. BAUMOL
Influence for the unprecedented growth and innovation performance.
Oligopolistic competition forces firms to keep innovating. This leads them to
internalize innovative activities. Yet, revolutionary breakthrougs continue to come
predominantly from small entrepreneural enterprises
INTRODUCTION
Schumpeter:
Entrepreneur = partner of the inventor, the one who recoginezes the
value of the invention and brings it to the market.
Economies with many entrepreneurs will grow faster.
Yet, his conclusion was that the expanding role of routinized innovation by
big firms was threatening to make the entrepreneur obsolete (overbodig).
Baumol:
The entrepreneur is important!
But in the modern economy the entrepreneur, working alone in the
marketplace, cannot carry ou thte task most efectively.
The market mechanism has provied the partners that the entrpereneur
needs.
Important to stress that large and small firms are complementary;
together they have contributed far more than either would have by itself.
Also two groups outside the market who contribute to innovation:
universities and government
there are four important groups who need to get the right incentives to
take their role: entrepreneurs, big firms, government & universities
MARKET PRESSURES FOR AN ENHANCED LARGE-FIRLM ROLE IN
TECHNICAL PROGRESS
Importance of oligopolistic firms:
use innovation as their battle weapon
innovation to protect themselves from competitors and beat
competitors out
each film is drvien to conclude that its very existence depends on
mathcing its rivals’ efforts and spending on innovation
constant stream of innovations
very hard for a little entrepreneur to come up with a lot of money to keep track
of their innovations
That’s why Schumpeter concluded that entrepreneurs can’t make it
anymore
Baumol: the entrepreneurs still play an improtant role!
2
,REVOLUTIONARY BREAKTROUGHS: A SMALL-FIRLM SPECIALITY
Large firms have a lot of money that they can spend on R&D, but they also have
a lot of bureaucracy which can prevent revolutionary innovations. They are
consvervative and tend to avoid the risk of the unknown of a revolutionary
breakthrough.
large firms specialize in incremental improvements
Revolutionary new ideas are provided by small businesses
(entrepreneurs)
REVOLUTIONARY CONSEQUENCES OF AGGREGATED INCREMENTAL
IMPROVEMENTS
Incremental improvements (from large firms) may not be underestimated.
Together they can become very spectacular (e.g. computing power of a
computer).
Relatief gezien is de verbetering van de processors in een computer veel groter
dan toen hij voor het eerst bestond. Maar het uitvinden van de processor, was
minstens even belangrijk. Dus het is pas het gecombineerde dat zorgt voor
verbetering.
THE ROLE OF THE GOVERNMENT AND THE UNIVERSITY IN
INNOVATION
Government has 2 important roles
1. Legal infrastructure
Property rights, enforaceability of contracts, access to patented
intellectual property, …
2. Support of basic research
For the market mechanism, expenditure on basic research is a
wasteful expenditure, because the outcome is unpredictable and
therefore they don’t know if it will be profitable for the firm.
As a consequence, the government and universities have to step
in, because basic research is very important for innovation
DISSEMINATION OF INVENTION AND RAPID TERMINATION OF THE
OBSOLETE
Key activity for growth by market forces:
Incentive for rapid dissimination and widespread utilization of new or
improved products.
3
, dissemination can threathen the innovator’s reward
business try to guard their innovations with patents, secrecy, … this is
unfortunate for economic progress
Fortunately, price mechanism enables licenses
Other incentives:
o Consortium
Reduced R&D cost
Information = public good, so it’s easy to spread
Less risk
…
INDICATORS OF THE MAGNITUDE OF THE FREE-ENTERPRISE GROWTH
MIRACLE
Overview of the exponential growth path. (niet zo belangrijk, er is sinds 1850-
1900 een exponentiële groei te zien)
THE INVALUABLE CONTRIBUTION OF “MERE IMITATION”
The average country should expect some 24/25th of its new technology to come
from abroad.
The notion is that the imitation process is not an innovative activity, but this is
incorrect!
Improvements are elicited by the need to adapt the technolgy to local conditions,
so there is noting inferior about a process of organized imitation of foreign
technology.
GOVERNMENTAL POLICY FOR PROMOTION OF INNOVATION AND
GROWTH
The role of the government as facilitator of the innovative work of others.
funding and executing of basis research
acquisition of foreign technology
o education and training
o immigration of foreign technicians and related personnel
o establishment of observer staff in the country’s embassies
o study of measures taken by governments in other countries to
facilitate absorption of foreign technology by their industry
4
, 5
