In this multi-part series, I will explore innovation from a wide variety of angles. What is innovation, and what different types can there be? Who is responsible for the most innovation, and why? How can we set up public institutions to stimulate innovation? This will be as much a learning exercise as a writing one; I hope that you will point me toward additional readings, authors, and resources so that I can expand my perspective as I go. In this first post, I take a look at one of the underappreciated sides of innovation: diffusion.
There are two ways that innovation improves the world: invention and diffusion. Most of our attention (and therefore resources) go toward invention, but there are significant unrealized gains to be had if we shift some of our attention (and resources) toward diffusion.
First, let’s look at invention. Invention is what pushes out the frontiers of human knowledge. In 1750 we didn’t know what a light bulb was; by 1879, Thomas Edison had invented the world’s first commercially viable one. The world of human understanding extended its boundaries.
We spend a huge amount of attention and capital on spurring invention. Each year, the NIH spends roughly $30 billion on medical research projects, and that pales in comparison to defense R&D, where the federal government has spent at least $60 billion every year since 2002.
Our financial focus on invention is mirrored by a cultural fixation on inventors themselves, as my colleague Colin has covered extensively. This invention-obsession makes sense – invention is exciting, inspiring, and creates obvious tangible gains for society.
However, we often ignore invention’s critical counterpart: diffusion. In formal terms, diffusion is “the process by which individuals and firms in a society/economy adopt a new technology, or replace an older technology with a newer” (Hall 2004). In other words, diffusion is what allows vast numbers of people to access, buy, and enjoy society’s wonderful inventions. For light bulbs, for example, this means having affordable electrical infrastructure, and (probably large) corporations to handle manufacturing, marketing, distribution, etc.
Based on our resource allocation, we seem to take this second half of innovation for granted. It is essential to realize, however, that diffusion is neither instantaneous, nor free, and most crucially it is not inevitable.
When frictions to diffusion pop up, we see a great deal of lost welfare. This is easiest to see outside of product markets, when the invention is not a physical object, but a new and more productive idea. Researchers Nick Bloom and John Van Reenen indirectly demonstrate this notion through their work on best management practices. Unsurprisingly, they have shown that the quality of management practices varies widely both within a given country, and across countries. They find that poor management practices are especially prevalent where there is weak product-market competition, and where we see primogeniture (business-ownership is passed to the eldest son). In another study, Bloom et al. discovered that mere informational barriers can hold back firms from adopting best-management practices. As a result, firms’ productivity suffers, and by extension so does countrywide GDP.
Through Bloom’s work, we can see how the mere act of invention does not automatically yield all of its potential benefits to society. The invention (best-practices in management) is inside the scope of human knowledge, but worldwide, companies are not taking advantage of that invention – despite a clear economic incentive to do so. The invention is there, but it is not fully diffused. The reasons behind this lack of diffusion vary, but the consequences remain the same: losses in productivity, translating to losses in wealth, and ultimately losses in welfare.
A great deal of our energy is spent on pursuing and accelerating innovation, but that expenditure is too tilted toward one half of the equation: invention. Whether the innovation is a new light bulb or a new management practice, there are significant welfare gains to be reaped if we focus not just on invention, but on smoothing and spurring the process of diffusion as well.
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