Here on our website, we've listed the chapter synopsis from the book's expanded Table of Contents. Thesis statements are then provided for the main source(s) discussed in each section of the chapter, along with a list of additional readings discussed in the section. Where possible, we've provided links to publicly available sources. To read our detailed synopsis, discussion, and thoughts about the practical application of the ideas presented in the sources listed below, buy the chapter by clicking on the cover image (or buy the entire book).
Chapter 6: Innovation
Contexts for innovation vary based on location, industry, and country. We look here at how innovation diffuses or spreads and thus how current technology such as the web and social media might affect the adoption of innovative outputs. It is essential that managers understand the contexts for innovation at the firm, industry, and country levels in creating and managing innovation strategies.
Issues in Technology and Strategy
Ideas, information, invention, and innovation are related, and require the innovator's investment to extract returns. The economics related to perfect markets and the market for information may lead to underinvestment in innovative activities, thwarting invention and subsequent economic growth. Managers must develop strategies and policies to promote innovative company cultures and practices.
KENNETH ARROW. 1962. "Economic Welfare and the Allocation of Resources for Invention." In The Rate and Direction of Inventive Activity: Economic and Social Factors, National Bureau of Economic Research. Princeton, Princeton University Press. pp. 609–626.
Thesis: Perfect competition results in a non-optimal allocation of resources and leads to underinvestment in invention due to underproduction of the information needed to pursue new invention. The "Arrow paradox" describes how owners of information cannot convince potential buyers of its value without disclosing the information.
ROBERT M. SOLOW. 1957. "Technical Change and the Aggregate Production Function." Review of Economics and Statistics 39(3), 312–320. Available from JSTOR.
Thesis: Technical change is a critical element in modeling production.
ZVI GRILICHES. 1990 "Patent Statistics as Economic Indicators: A Survey." Journal of Economic Literature 28(4), 1661–1707.
Thesis: Patent statistics are useful economic indicators, and can be a good measure of differences in inventive activity across different large firms.
ZVI GRILICHES. 1998. "Issues in Assessing the Contribution of R&D to Productivity Growth." In E. Wolff (editor), The Economics of Productivity, vol. 1. Cheltenham, UK, Edward Elgar. pp. 256–280.
Thesis: It is possible to quantitatively measure some effects of R&D investment, but real returns on R&D cannot be predicted using such measures.
RICHARD R. NELSON. 1962. "The Link Between Science and Invention: The Case of the Transistor." In The Rate and Direction of Inventive Activity: Economic and Social Factors, National Bureau of Economic Research. Princeton, Princeton University Press. pp. 549–586.
Thesis: Bell Labs succeeded by letting scientists pursue pure science research of their own choosing. Learning and advancing knowledge led to serendipitous discovery.
KEITH PAVITT. 1990. "What We Know about the Strategic Management of Technology." California Management Review 32(3), 17–26.
Thesis: Successful firms recognize that their company structure and competitive strategy impact their technology strategy. These firms develop routines to align their technology strategy, use trial and error, learn from experience, and train their employees well.
ANDREW VAN DE VEN. 1986. "Central Problems in the Management of Innovation." Management Science 32(5), 590–607.
Thesis: Companies must create a culture of innovation by maintaining a balance between dividing work into reasonable tasks (differentiation) and coordinating activities into a meaningful whole (integration).
SCOTT STERN. 2004. "Do Scientists Pay to Be Scientists?" Management Science, 50(6), 835–853.
Thesis: More scientifically-oriented researchers tend to be paid less; in other words, scientists pay to be scientists.
- Milgrom, Paul and John Roberts. 1990. "The Efficiency of Equity in Organizational Decision Processes." American Economic Review 80(2), 154–159.
- Jaffe, Adam B., Manuel Trajtenberg, and Rebecca Henderson. 1993. "Geographic Localization of Knowledge Spillovers as Evidenced by Patent Citations." Quarterly Journal of Economics 108(3), 577–598. Available from JSTOR.
- Florida, Richard. 2002. "Bohemia & Economic Geography." Journal of Economic Geography 2(1), 55–71.
Patterns of Technological Innovation, Technology Trajectories, and Industry Lifecycles
Economic theory may not be the best for explaining the birth, growth, and death of firms. Innovation associated with venture emergence and growth is path-dependent: the history of the entrepreneur and of the company matter. Despite societal variance in creative individuals and economic growth, innovation and industry lifecycles follow standard patterns, the knowledge of which can aid strategic decision-making.
RICHARD NELSON and SIDNEY WINTER. 1982. An Evolutionary Theory of Economic Change. Cambridge, Harvard University Press.
Thesis: Evolutionary theory does a better job than traditional economic theory at explaining the birth, growth, and death of firms.
PAUL DAVID. 1985. "Clio and the Economics of QWERTY." American Economic Review 75(2), 332–337.
Thesis: Innovation is path-dependent and history matters in the adoption of innovation; the "best" innovation may not ultimately be the winner.
JOEL MOKYR. 1990. The Lever of Riches: Technological Creativity and Economic Progress. New York, Oxford University Press.
Thesis: Invention and innovation are complements. The existence of knowledge is necessary, but not sufficient—it must also be disseminated and stored. Societies and their knowledge of innovation evolve via "technological DNA."
WILLIAM J. ABERNATHY and James M. UTTERBACK. 1978. "Patterns of Industrial Innovation." Technology Review 80(7), 40–47.
Thesis: Firms at different stages of development approach innovation differently. As firms grow, they establish a dominant product design and move from radical to evolutionary product innovation.
RICHARD FOSTER. 1986. "The S-curve: A New Forecasting Tool." In R. Foster, Innovation: The Attacker's Advantage. New York, Summit Books. Ch. 4.
Thesis: Innovations follow an S-curve: The impact of effort on performance varies over time from low to high to low.
JAMES M. UTTERBACK. 1994. Mastering the Dynamics of Innovation. Boston, Harvard University Press.
Thesis: Technology cycles through the emergence of dominant designs from product innovation by many firms, after which the few surviving firms focus on process innovations to improve efficiency.
MICHAEL L. TUSHMAN and LORI ROSENKOPF. 1992. "Organizational Determinants of Technological Change: Towards a Sociology of Technological Evolution." In B. M. Staw and L. L. Cummings (editors), Research in Organizational Behavior. Greenwich, JAI Press. pp. 311–347.
Thesis: Technological progress is not rational but rather infused with value beyond the technical requirements of the current need. The community of practitioners defines the norms that drive science.
STEVEN KELPPER. 1996. "Entry, Exit, Growth, and Innovation Over the Product Life Cycle." American Economic Review 86(3), 562–583.
Thesis: A simple model can explain all the features of the product life cycle theory of industry evolution. The model suggests that larger firms are better able to appropriate returns from R&D, and that firms with different expertise will pursue different types of production innovations.
ZVI GRILICHES. 1957. "Hybrid Corn: An Exploration in the Economics of Technological Change." Econometrica 25(4), 501–522.
Thesis: Innovation consists of the availability and acceptance of a new product, and can be studied using economic analysis. As an example, economic analysis shows that the hybrid seed industry expanded rationally by allocating its resources first to the areas of highest returns.
BRYCE RYAN and NEAL C. GROSS. 1943. "The Diffusion of Hybrid Seed Corn in Two Iowa Communities." Rural Sociology 8, 15–24.
Thesis: Social factors impact the diffusion of innovation. Knowledge and adoption of an innovation by others have differential influence over time.
MICHAEL GORT and STEVEN KLEPPER. 1982. "Time Paths in the Diffusion of Product Innovations." Economic Journal 92(367), 630–653.
Thesis: The probability of a new product entry depends on the returns that can be maximized based on information regarding its technology. Innovation plays a critical role in entry rates and in the number of firms in an industry.
- Klepper, Steven and Elizabeth Graddy. 1990. "The Evolution of New Industries and the Determinants of Market Structure." The RAND Journal of Economics 21(1), 27–44. Available from JSTOR.
- Jovanovic, Boyan and Glenn MacDonald. 1994. "Competitive Diffusion." Journal of Political Economy 102(1), 24–52.
- McGahan, Anita M. 2004. How Industries Evolve. Boston, Harvard Business School Press.
Innovation and innovative competition may vary based on the size and position of the firm and the nature of the industry. Innovation may be driven by industry incumbents, entrants, or by users. Protecting proprietary information is key for innovators, as getting the value from innovation motivates innovative activities.
REBECCA M. HENDERSON and KIM B. CLARK. 1990. "Architectural Innovation: The Reconfiguration of Existing Product Technologies and the Failure of Established Firms." Administrative Science Quarterly 35(1), 9–30. Available from JSTOR.
Thesis: Innovation can be incremental, radical, or architectural. Architectural innovation changes the way product components are linked together without changing the core design concept.
ERIC VON HIPPEL. 1988. The Sources of Innovation. New York, Oxford University Press.
Thesis: Sources of innovation vary, and include manufacturers, suppliers, and users, based on expectations of appropriation of profits. Lead users—users at the front of a trend—are those who innovate in the application of new products and services in an attempt to gain innovation profits. Product innovation occurs more in industries in which such users expect to realize these rents (i.e., returns in excess of the resource owner's opportunity cost).
DAVID J. TEECE. 1987. "Profiting From Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy." In D. J. Teece (editor), The Competitive Challenge: Strategies for Industrial Innovation and Renewal. Cambridge, Ballinger. pp. 185–219. Available from Science Direct.
Thesis: Innovators do not always outperform followers. The innovator's share of profits is determined by the appropriability regime, the dominant design paradigm, and complementary assets.
RICHARD C. LEVIN, ALVIN K. KLEVORICK, RICHARD R. NELSON, and SIDNEY G. WINTER. 1987. "Appropriating the Returns From Industrial Research and Development." Brookings Papers on Economic Activity 3(3), 783–831.
Thesis: Patents are only one mechanism preventing general access to new innovation. Appropriability is imperfect; imitation is costly and takes time.
IAIN COCKBURN and ZVI GRILICHES. 1988. "Industry Effects and Appropriability Measures in the Stock Market's Valuation of R&D and Patents." American Economic Review 78(2), 419–423.
Thesis: Appropriability may be higher in some industries than in others. Patents are more highly valued in industries with stronger patent protection.
JOSHUA GANS and SCOTT STERN. 2003. "The Product Market and the Market for Ideas: Commercialization Strategies for Technology Entrepreneurs." Research Policy 32(2), 333–350.
Thesis: A firm's commercialization strategy should reflect its environment. The value earned on ideas is greater than that from access to specialized assets. Returns depend on the timing of collaboration and the pacing of competition. Investments in innovation should align with the highest-return option (e.g., selling products vs. ideas).
WESLEY M. COHEN and DANIEL A. LEVINTHAL. 1990. "Absorptive Capacity: A New Perspective on Learning and Innovation." Administrative Science Quarterly 35(1), 128–152. Available from JSTOR.
Thesis: The ability to recognize the value of new information—as well as accumulate it, assimilate it, and exploit it—is based on related prior knowledge.
BRUCE KOGUT and UDO ZANDER. 1992. "Knowledge of the Firm, Combinative Capabilities, and the Replication of Technology." Organization Science 3(3), 383–397.
Thesis: Firms are better than markets at creating, sharing, and transferring knowledge through a dynamic process of learning new skills by recombining current capabilities.
ANITA M. McGAHAN, LESLIE L. VADASZ, and DAVID YOFFIE. 1996. "Creating Value and Setting Standards: The Lessons of Consumer Electronics for Personal Digital Assistants." In D. Yoffie (editor), Competing in the Age of Digital Convergence. Boston, Harvard Business Review Press. pp. 227–264.
Thesis: First-mover advantage is powerful but may be lost when the market develops slowly or the speed of imitation increases. Network externalities drive toward separate hardware and software industries to generate buyer value. Products need backward compatibility to utilize previous standard technology.
LYNNE G. ZUCKER, MICHAEL R. DARBY, and MARILYN B. BREWER. 1998. "Intellectual Human Capital and the Birth of U.S. Biotechnology Enterprises." American Economic Review 88(1), 290–306.
Thesis: Basic scientific research by "star" scientists is central to the formation of new high-technology industries and is a powerful predictor of firms' geographic distribution.
ANNALEE SAXENIAN. 1994. Regional Advantage: Culture and Competition in Silicon Valley and Route 128. Cambridge, Harvard University Press.
Thesis: A set of geographic, sociological, and regulatory differences led Silicon Valley and Route 128 to develop different cultures, which led to differences in economic performance. The more flexible form generated more innovation.
GAUTAM AHUJA. 2000. "Collaboration Networks, Structural Holes, and Innovation: A Longitudinal Study." Administrative Science Quarterly 45(3), 425–455. Available from JSTOR.
Thesis: Structural holes, direct ties, and indirect ties can each affect a firm's innovative output, but the context determines the nature of the effect.
OLAV SORENSON and TOBY STUART. 2001. "Syndication Networks and the Spatial Distribution of Venture Capital Investments." American Journal of Sociology 106(6), 1546–1588.
Thesis: The likelihood of a venture capitalist's investment in a new venture declines sharply with the physical and industry distance between the investor and the target.
- Gilbert, Richard and David M. Newbery. 1982. "Preemptive Patenting and the Persistence of Monopoly." American Economic Review 72(3), 514–526. Available from JSTOR.
- Reinganum, Jeniffer F. 1983. "Uncertain Innovation and the Persistence of Monopoly." American Economic Review 73(4), 741–748. Available from JSTOR.
- Acs, Zoltan J. and David B. Audretsch. 1988. "Innovation in Large and Small Firms: An Empirical Analysis." American Economic Review 78(4), 678–690. Available from JSTOR.
- Acs, Zoltan J. and David B. Audretsch. 1993. "Innovation and Technological Change: The New Learning." In G. Libecap (editor), Advances in the Study of Entrepreneurship, Innovation and Economic Growth. Greenwich, CT, JAI Press. pp. 109–140.
- Henderson, Rebecca M. and Ian Cockburn. 1994. "Measuring Competence? Exploring Firm Effects in Pharmaceutical Research." Strategic Management Journal 15(Special Issue: Competitive Organizational Behavior), 63–84.
- Audretsch, David B. and Maryann P. Feldman. 1996. "R&D Spillovers and the Geography of Innovation and Production." American Economic Review 86(3), 630–640.
Institutions and Innovation: The Role of the Government in Innovation and University-Industry Interactions
Governments can play a role in the creation of environments conducive to innovation, entrepreneurship, and economic growth. Governmental actions can facilitate the development of systems of innovation, but may be less important than the actions of entrepreneurs.
RICHARD R. NELSON. 1993. National Innovation Systems. Oxford, Oxford University Press.
Thesis: Countries have significant similarities and differences in their systems of innovation, with implications for national policy.
JEFFREY L. FURMAN, MICHAEL E. PORTER, and SCOTT STERN. 2002. "The Determinants of National Innovative Capacity." Research Policy 31(6), 899–933.
Thesis: National innovative capacity is the ability of a country to make and profit from a flow of new technology over the long term. R&D inputs have a significant impact on the level of this capacity for each country.
AMY FINKELSTEIN. 2003. "Health Policy and Technological Change: Evidence from the Vaccine Industry." NBER Working Paper 9460.
Thesis: Economic incentives influence technological progress. Supply-side oriented policies to increase the return on investing in vaccine development do, in fact, increase that activity. Demand-side policies have a lesser impact.
VICTOR HWANG and GREG HOROWITT. 2012. The Rainforest: The Secret to Building the Next Silicon Valley. Los Altos Hills, Regenwald.
Thesis: Innovation requires a complex system of individuals, social behaviors, capital, and policies.
- Cohen, Linda R. and Roger G. Noll. 1991. Introduction and Conclusion. The Technology Pork Barrel. Washington, The Brookings Institution. pp. 1–16, 363–390.
- Owen-Smith, Jason, Massimo Riccaboni, Fabio Pammolli, and Walter W. Powell. 2002. "A Comparison of U.S. and European University–Industry Relations in the Life Sciences." Management Science 1(48), 24–43. Available from JSTOR.
Research on international entrepreneurship has two main components: the study of differences in entrepreneurship across countries, and the study of ventures that enter foreign markets at an early age.
LOWELL BUSENITZ, CAROLINA GOMEZ, and JENNIFER SPENCER. 2000. "Country Institutional Profiles: Unlocking Entrepreneurial Phenomena." Academy of Management Journal, 43(5), 994–1003.
Thesis: Country variance in rates of entrepreneurship is based in part on differences in regulatory, cognitive, and normative institutional differences. Understanding these differences—and the competitive advantages they offer to entrepreneurs—is critical for managers seeking to operate in foreign countries.
RAPHAEL LA PORTA, FLORENCIO LOPEZ-DE-SILANES, ANDREI SHLEIFER, and ROBERT VISHNY. 2000. "Investor Protection and Corporate Governance." Journal of Financial Economics 58(1–2), 3–27.
Thesis: Countries differ with regard to firm ownership concentration and capital access, but one common element to these differences is the degree to which investors are protected by law from expropriation by the firm's managers and controlling shareholders. The legal basis of these differences may both explain and provide insights into strategies of corporate governance reform.
BENJAMIN M. OVIATT and PATRICIA P. McDOUGALL. 1994. "Toward a Theory of International New Ventures." Journal of International Business Studies 25(1), 45–64.
Thesis: New ventures that do business in foreign countries challenge existing international business theory, as they neither possess significant tangible resources nor advantages associated with internationalization.
BENJAMIN M. OVIATT and PATRICIA P. McDOUGALL. 2005. "Defining International Entrepreneurship and Modeling the Speed of Internationalization." Entrepreneurship Theory and Practice 29(5), 537–554. Available from Wiley.
Thesis: Internationalization speed is influenced by a variety of internal and external forces.
SHAKER A. ZAHRA and DENNIS M. GARVIS. 2000. "International Corporate Entrepreneurship and Firm Performance: The Moderating Effect of International Environmental Hostility." Journal of Business Venturing 15(5–6), 469–492. Available from Science Direct.
Thesis: Executives' perceptions of the characteristics of the firm's international environment, especially hostility, moderate the relationship between international corporate entrepreneurship and performance.
GARY A. KNIGHT and S. TAMER CAVUSGIL. 1997. "Emerging Organizational Paradigm for International Marketing: The Born Global Firm." in Proceedings: 1997 Annual Meeting, Academy of International Business, Honolulu.
Thesis: Early and successful international market expansion is distinctly different from traditional patterns.
GARY A. KNIGHT and S. TAMER CAVUSGIL. 2005. "A Taxonomy of Born Global Firms." Management International Review 45(3), 15–35.
Thesis: "Born global" companies are a distinct type of new venture.
ERKKO AUTIO, HARRY J. SAPIENZA, and JAMES ALMEIDA. 2000. "Effects of Age at Entry, Knowledge Intensity and Imitability on International Growth." Academy of Management Journal 43(5), 909–924. Available from JSTOR.
Thesis: Internationalization early in a company's life is associated with faster international growth and the knowledge intensity of the venture. Early international activities induce greater entrepreneurial behavior and confer a growth advantage.
- Coviello, Nicole E. and Hugh J. Munro. 1995. "Growing the Entrepreneurial Firm: Networking for International Market Development." European Journal of Marketing 29(7), 49–61. Available from Emerald Insight.
- Bell, James, Rod McNaughton, and Stephen Young. 2001. "'Born-Again Global' Firms: An Extension to the 'Born Global' Phenomenon." Journal of International Management 7(3), 173–189. Available from Science Direct.
- Sapienza, Harry J., Erkko Autio, Gerald George, and Shaker A. Zahra. 2006. "A Capabilities Perspective on the Effects of Early Internationalization on Firm Survival and Growth." Academy of Management Review 31(4), 914–933. Available from JSTOR.