The Sources of Innovation

Presents a series of studies showing that the sources of innovation vary greatly; possible sources include innovation users, suppliers of innovation-related components, and product manufacturers. These types of roles are known as functional areas. Specific areas of innovation are marked by having innovators predominantly in one specific functional area. Using empirical data from industrial histories, the authors show that this innovation-function relationship has held in scientific instrument, semiconductor and printed circuit board assembly process innovations. Users are predominantly the innovators in these fields. Also identifies a few industries where manufacturers are typically the innovators and a few others where suppliers tend to be. Analysis of the economic rents of innovation expected by potential innovators can often, if not always, by itself predict the functional source of innovation. Innovating firms will do so only when these rents prove attractive. Two factors suggest that this will tend to limit exploitation of the innovation to a functional area. First, it is difficult for innovators to adopt new functional relationships to their innovations. Second, innovators face a poor ability to capture innovation rents by licensing their innovation-related knowledge to others. This hypothesis and its implications are tested against the empirical datasets used initially. The role of informal R&D know-how trading is also discussed and analyzed using the Prisoner's Dilemma. Guidance is given to innovation managers and policymakers. (CAR)