Okay, I will go through the presentation and explain the key concepts related to innovation.

Introduction to Innovation
This presentation provides an overview of innovation, its types, and related concepts,
particularly within the context of Intellectual Property Rights (IPRs). Here's a breakdown of the
key topics covered:

Course Overview
The course focuses on:

●​ Macro Aspects of IPRs: Innovation, its relation to IPRs, economic growth, and catching
up.​

●​ Micro Understanding of IPRs: Copyrights, trademarks, geographical indications,

industrial designs, patents, and utility models.​

●​ Patents: Legal, economic, and strategic aspects.​

What is Innovation?
●​ Origin: The word "innovation" comes from the Latin "innovare," meaning "to make new."​

●​ Schumpeter's Definition: Innovation drives the capitalist engine through new consumer
goods, production methods, markets, and industrial organization.​

●​ A capitalist is a person who invests large amounts of money in businesses, often with the
goal of generating profit. In a broader context, capitalism refers to an economic system
where private individuals or businesses own and control property and resources, making
decisions based on their interests. It's important to note that what benefits an individual
capitalist may not always benefit society as a whole.

●​ Key Aspects: Innovation involves chance and unpredictability, feedback, multiple

factors, and a bidirectional relationship between science and innovation.​
 ●​ Schumpeter's Inclusions:​

○​ New consumer goods.​

○​ New markets.​

○​ New forms of industrial organization.​

○​ New methods of production or transportation.​

Types of Innovation
1.​ Product Innovation:​

○​ Definition: Introduction of a new or significantly improved good or service

(OECD, 2005).​

○​ Includes: Improvements in technical specifications, components, materials,

software, user-friendliness, or functionality.​

○​ Examples: Cameras in mobile phones, fastening systems in clothing, breathable

textiles, GPS in transport equipment.​

2.​ Process Innovation:​

○​ Definition: Implementation of a new or significantly improved production or

delivery method (OECD, 2005).​

○​ Includes: New methods, techniques, software, and equipment in support

activities.​

○​ Examples: Laser cutting tools, automated packaging, computer-assisted product

development, digitization of printing processes.​

3.​ Marketing Innovation:​

○​ Definition: Introduction of new marketing methods involving significant changes

in product design, placement, promotion, or pricing (OECD, 2005).​

○​ Objective: To better address customer needs, penetrate new markets, or

reposition a firm's product to increase sales.​
 4.​ Organizational Innovation:​

○​ Definition: Implementation of a new organizational method in the firm's business

practice, organization, or external relations.​

○​ Includes: Renewing organizational systems, procedures, and routines to

encourage team cohesiveness, coordination, collaboration, information sharing,
and knowledge sharing.​

○​ Impact: Improves firm performance by reducing administrative and transaction

costs and enhancing workplace satisfaction.​

Nature of Innovation
1.​ Radical Innovation:​

○​ Definition: An innovation that significantly impacts a market and the economic

activity of firms in that market.​

○​ Impact: Changes the structure of the market, creates new markets, or renders
existing products obsolete.​

2.​ Incremental Innovation:​

○​ Definition: Concerns an existing product, service, process, organization, or

method whose performance has been significantly enhanced or upgraded.​

○​ Examples: Improving a product through higher-performance components or

materials.​

○​ Impact: Substantial contributions to addressing socioeconomic challenges,

especially in development contexts.​

Sectoral Differences in Innovation

●​ Innovation varies by sector, with some sectors characterized by rapid, radical changes
and others by smaller, incremental changes.​

●​ High-tech sectors rely on R&D, while others depend on adopting existing knowledge and
technology.​
 ●​ Low- and medium-technology industries (LMTs) often focus on incremental innovation
and adoption.​

Other Concepts of Innovation

1.​ Sustaining Innovation:​

○​ Definition: Improving existing products.​

○​ Strategy: Used by successful companies to create better products for their best
customers to pursue higher profit margins.​

2.​ Disruptive Innovation:​

○​ Definition: Reinventing a technology or business model, or inventing it

altogether.​

○​ Impact: Generates new markets and values, disrupts existing ones, and
significantly alters and improves a product or service in unexpected ways.​

○​ Examples: Airbnb and Uber.​

3.​ Inclusive Innovation:​

○​ Definition: Innovations in products and processes that address the needs and
improve the welfare of the excluded due to poverty, handicap, or location.​

○​ Impact: Fosters inclusion in production, consumption, and the innovation

process, promoting the agency of the excluded.​

4.​ Frugal Innovation:​

○​ Definition: Generating more business and social value while significantly

reducing the use of scarce resources ("doing more with less").​

○​ Characteristics: A flexible approach that perceives resource constraints as a

growth opportunity.​

○​ Examples: M-PESA in Kenya, SELCO in India.​

5.​ Grassroots Innovation:​

 ○​ Definition: Developed by individuals or groups at the grassroots level for their
own or their community's use.​

○​ Objective: To strengthen grassroots technological innovations and traditional

knowledge.​

6.​ User-Centered vs. Manufacturer-Centric Innovation:​

○​ User Innovation: Users develop what they want instead of relying on

manufacturers.​

○​ Manufacturer Innovation: Manufacturers identify needs and fill them by

designing and producing new products.​

○​ Key Difference: User innovation benefits the user directly, while manufacturer
innovation benefits the seller.​

7.​ Under the Radar Innovation:​

○​ Innovative activities, projects, or advancements that occur discreetly or remain

unnoticed by mainstream attention.​

○​ Also known as Quiet, Low-profile, Unrecognized, Unheralded, Subtle, or Hidden

innovation.​

○​ Examples: Certain surgical techniques, biodegradable materials, eco-friendly

packaging.​
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○​ —------------------------------------------------------------------------------------------------

Okay, I'll break down the key concepts from the presentation on the innovation process and
diffusion.

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Chapter 2: The Innovation Process (Hall & Helmers)

This chapter provides an overview of the innovation process, including different models and key
factors influencing it.
Key Insights About the Innovation Process
1.​ Economic Factors and Unpredictability: Economic factors are important, but
innovation also involves chance and unpredictability.​

2.​ Feedback Loops: Innovation is not always a linear process; feedback from later stages
can influence earlier stages.​

3.​ Environmental Factors: Innovations require the right environment, including consumer
demand and complementary products.​

4.​ Science and Innovation: Science is often a precondition for innovation, but sometimes
innovations can happen before the scientific understanding for them is understood​

Elements of Innovation
●​ Invention: Creation of a new idea (often by individuals or small teams). It is defined as
an increment in technical knowledge or a prescription for a producible product/operable
process that wasn't obvious to someone skilled in the art.​

●​ Innovation: Making the invention real, including development and commercialization

(usually by a team or company).​

●​ Diffusion: The spread of the innovation throughout society.​

Technological Innovation and R&D

Technological innovation usually stems from Research and Development (R&D), which the
OECD Frascati Manual defines as:

●​ Basic Research: Acquiring new knowledge without a specific application in view.​

●​ Applied Research: Directed towards a specific practical aim or objective.​

●​ Experimental Development: Using existing knowledge and research to produce new

materials, products, devices, processes, or improvements.​

Linear Model of Innovation

●​ A simplified view of innovation as a linear process from basic research to
commercialization.​

●​ Examples: Pharmaceutical and software industries are used to illustrate this model.​
​

○​ Software Innovation: Relies on mathematics and logic, applied research

(algorithms, data storage), invention (program concept), development (coding,
testing), commercialization (beta testing, marketing), and diffusion (customer
 adoption). Involves prolonged incremental process.​

●​ Comparison:​

Pharma Software

Costs Highest in development Highest in diffusion

Market Share Therapeutic indication & patent First to market, rapid diffusion

Uncertainty Feasibility & regulatory response First to market, successful diffusion

Innovation Stand-alone Modular

Learning During development, patient use During use by customers

●​ ​

Science from Technology

●​ Innovation can lead to scientific development in two ways:​

○​ Understanding why something works.​

○​ Improving a technology requires understanding the science behind it.​

●​ Example: Louis Pasteur's work on wine fermentation led to both the germ theory of
disease and the commercial innovation of pasteurization.​
Feedback to the Science Base
Technological knowledge often precedes scientific knowledge, leading to scientific
developments that improve technology.

Pasteur’s Quadrant
Highlights the interplay between applied and basic research.

Instrumentation for Science

Better technology (instrumentation) can lead to progress in science.

Coupling Model of Innovation

●​ New needs of market + new technology == new idea generation.​

●​ Initiation: Linking societal/market needs with new technology.​

●​ Feedback Mechanism: A feedback mechanism exits, Not unidirectional, unlike the

linear model.​
 ●​ Drawbacks: Doesn't identify the channels through which feedback is coming, or at what
levels should feedback happenk, or no redressal mechanism(compensation to people).​

Chain-Linked Model of Innovation

●​ Five paths of activities: centralized chain, feedback links, direct links to research,
knowledge links to research, and support of scientific research.​

●​ Advantages: Surpasses the linear model by focusing on dynamic coupling between

technology and market dynamics.​

●​ Disadvantages: Doesn't focus on organizational dimensions or wider institutional

settings.​

Multi-Channel-Interactive Learning Model

●​ Doesn't discriminate where the first step in innovation is.​

●​ Outcomes can be product, process, market, or business approach.​

●​ Innovation happens in a complex, multi-layered environment with knowledge pools in

science, technology, organization, governance, marketing, and customer behavior.​

Learning by Doing
●​ Experience with a new technology leads to knowledge and productivity growth.​
 ●​ Learning Curve: Production process becomes more efficient as it is repeated.​

●​ Reasons: Worker experience, better management, design/material improvements.​

Learning by Using

●​ Products are improved based on user experience, •Learning that takes place as a result
of experience with using a new innovative product.
●​ .​

●​ Technological change continues after diffusion due to user feedback.​

●​ Common in complex capital goods, performance not fully understood until they are used.​

●​ Contributes to product differentiation.​

●​ Example: Evolution of Boeing 747 aircraft through improvements based on usage,

longer and larger models.​

Uncertainty and Timing

●​ Inventors often can't forecast the ultimate uses of their inventions.​
 ●​ Examples: Early forecasts for computers, radio, and the Internet underestimated their
impact.​

General Purpose Technologies (GPTs)

​
Diffusion (Chapter 7)
This chapter discusses the spread of innovations throughout the economy.

Introduction to Diffusion
●​ Why innovations spread (or not).​

●​ How fast innovations spread.​

●​ Factors explaining diffusion rates.​

●​ Factors determining the speed of technology substitution.​

●​ Important for policy, innovation management, and marketing.​

Adoption and Diffusion

●​ Adoption: the choice by people to use a new invention or innovation
●​ Necessary for innovation to impact economic growth.​

●​ Diffusion: Spread of an innovation throughout the economy.​

●​ Diffusion follows an S-curve.​

S-Curve of Diffusion
●​ Displays the rate of technology diffusion in a population.
●​ Time of tech release vs how much of population is now using it
●​ Starts slow, becomes steeper, and eventually flattens out.​

●​ Often, diffusion is less than complete, reached limit below 100% adoption.​

Models of the S-Curve

1.​ Heterogeneous Consumer Tastes: Benefits of the technology vary across adopters,
and cost of adoption fall over time.​
 2.​ Epidemic Model: Adoption spreads as consumers learn from others who have adopted.​

Heterogeneous Consumer Tastes

●​ The model assumes distributions of benefit and cost overlap.​

●​ Truncated results are possible if benefits never exceed costs.

●​
●​ S-CURVE HAS A CUMULAITVE NORMAL DISTRIBUTION​

●​
Epidemic Model
●​ No hetero consumer tastes or has willingess to pay
●​ Assumes adoption spreads through people who already adopted and learning.​

●​ Initiated by early adopters.​

Adoption as Investment Under Uncertainty

●​ Adoption involves uncertainty, where adopters compare upfront costs with uncertain
future benefits.​

●​ Modeled as a real options model.​

Factors Affecting Diffusion

●​ Demand for the new technology.​

●​ Cost of adoption.​

●​ Uncertainty and information availability.​

●​ Network externalities.​

●​ Market structure.​

●​ Cultural and social determinants.​

●​ Regulatory and institutional environment.​

●​ Competition from old technologies.​

●​ Invention during diffusion (tweaking and adaptation).​

Benefits of Adoption
 ●​ Perceived improvements afte ruse​

●​ Closeness of substitutes new or old.​

●​ Network support .​

●​ Availability of complementary goods - tools, skills.​

Costs of Adoption
●​ Price of the new technology.​

●​ Financing costs.​

●​ Switching costs.​

●​ Scale of potential use.​

Network Goods and Standards

●​ Network Goods: Value to one depends upon us eof other, generating network
externalities.
●​ Sms, email, fax​

●​ Require standards and coordination.​

●​ Types:​

○​ Direct Networks (e.g., telephone) depend whom they can communicate wiht ​

○​ Indirect Networks (e.g., hardware/software systems) - depends upon number of

people using it – more use, more production.​

General Purpose Technologies and Standards

●​ GPTs often require further investments in infrastructure and education—USe of
electricity .​
Slow Diffusion and Productivity Slowdown
●​ Slow diffusion of GPTs results in slow productivity growth.​

Network Externalities and Diffusion

●​ Adoption rates can be too slow (excess inertia) - large switching costs, very little
advtange
●​
●​ too fast (excess momentum) – small switching cost, ​

●​ Better technology may not win network competition.​

Path Dependence and Lock-In

●​ Path Dependence: Outcomes depend on previous outcomes.​

●​ Lock-In: Market gets stuck with a standard, even if alternatives are better.​

Diffusion of Hybrid Corn Technology

●​ Early empirical diffusion study explaining differences using potential market size, cost of
adaptation, and expected profitability.​

I hope this comprehensive breakdown is helpful! Let me know if you have any specific
questions.

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Okay, I will go through the presentation and explain the key concepts related to the demand and
supply of innovation.

Chapter 3: Supply and Demand for Innovation (Hall &

Helmers)
This presentation, based on Chapter 3 of Hall & Helmers, discusses the factors that determine
the level and direction of innovation, focusing on both supply-side and demand-side influences.

Overview
●​ Introduction: Examples illustrating the interplay of supply and demand in innovation.​

●​ Supply Factors: Technological opportunity, appropriability, absorptive capacity, and

financing.​

●​ Demand Factors: Market size, consumer taste and willingness-to-pay, regulatory

mandates, and war.​

●​ Direction of Innovation: Factors influencing the specific paths innovation takes.​

●​ Simultaneous Innovation: The phenomenon of multiple inventors developing similar

ideas around the same time.​

Introduction
The presentation starts with two contrasting examples:

●​ COVID-19 Vaccines: Rapid development driven by urgent demand and significant

government support.​

●​ Human Flight: A long-term quest driven by desire, with achievement dependent on the
gradual development of necessary technologies and understanding.​

COVID-19 Vaccines
●​ Operation Warp Speed (OWS): A U.S. government initiative to accelerate the
development, manufacturing, and distribution of COVID-19 vaccines.​
 ●​ OWS Strategies: Simultaneous FDA review, manufacturing before approval, and
Department of Defense coordination.​

●​ Results: Multiple successful vaccines developed by the end of 2020.​

●​ Key takeaway: Highlights the importance of a clearly identified need (strong demand
signal) and focused government effort.​

Human Flight
●​ A long-standing aspiration, with early attempts dating back centuries.​

●​ Achieved in the early 1900s due to:​

○​ Desire to be first.​

○​ Supply of basic components.​

○​ Understanding of mechanics from previous failures.​

○​ Potential for profit.​

●​ Key takeaway: Demonstrates that demand alone is insufficient; the supply of necessary
inputs is crucial.​

Determinants of Invention and Innovation

●​ Innovative outcomes are determined by:​

○​ Supply of inputs (knowledge, resources, capabilities).​

○​ Demand for innovative output (market need, potential profit).​

●​ The COVID-19 vaccine example illustrates demand-driven innovation, while human flight
highlights the necessity of both demand and sufficient supply.​

Supply of Innovation
 ●​ Most important supply factor: availability of innovators, which depends on capabilities
and incentives.​

○​ Capabilities/ability: Nutrition, income level, education, and level of science and

technology.​

○​ Incentives: Ability to finance and secure returns, life expectancy, willingness to

bear risks, religion, and values.​

Technological Opportunity
●​ Refers to the availability of relevant scientific and technological knowledge.​

●​ Rapid COVID-19 vaccine development depended on prior knowledge from earlier SARS
viruses.​

●​ Human flight required sufficient development of materials science and engine

technology.​

●​ Access to S&T is not equal:​

○​ Lack of appropriate education (“missing Einsteins”).​

○​ Lack of absorptive capacity.​

Missing Einsteins and Marie Curies?

●​ Innovation is unequally distributed across the population with respect to gender, race,
and family background.​

●​ Exposure to innovative activity during childhood is critical.​

○​ Female invention is linked to childhood exposure to female invention.​

○​ Parental background STEM education and inventorship predict entry into

inventing (more so for males).​

Absorptive Capacity
 ●​ The ability of a firm (or individual) to recognize the value of new, external information,
assimilate it, and apply it to commercial ends.​

●​ Prior related knowledge plays a critical role in building absorptive capacity.​

●​ Firms may invest in basic research to increase their absorptive capacity, even if it leads
to broader knowledge spillovers. Spilloveres her emean that this knowledge can be
publicly available and can benefit other companies as well​

●​ Countries also vary in their ability to absorb and use frontier science and technology,
impacting the success of development strategies.​

Financing Innovation
●​ A key cost element – financing needed to invent and bring a product to market.​

●​ Financing innovation is challenging due to:​

○​ Asymmetric information​

○​ Moral hazard​

○​ Lack of securable assets​

●​ This can lead to projects not being undertaken and unequal access to funds ("missing
Einsteins").​

●​ The main sources of finance for innovative startups are self and bank loans.​

Demand for Innovation

●​ Demand comes from:​

○​ Consumers: More important for incremental innovations to familiar technologies.

Less for radical innovation​

○​ Firms: Depends on expected profit from investments and innovation choices.

Driven by signals from customers/consumers.​
 ○​ Governments: Policy goals (e.g., environmental mandates) and
defense/geo-political considerations (public procurement).​

War and Demand for Innovation

●​ War has been the impetus behind many important innovations.​

○​ Examples: Cannon boring machines led to steam engine development.​

○​ World War II: Atom bomb, radar, microwaves, and medical advancements. Also
led to the creation of national science policy and organizations like the NSF.​

○​ More recent: Improvements in drone technology.​

Direction of Innovation
●​ Refers to the specific paths pursued at a given point in time.​

●​ Choice is determined by the same factors that determine the overall level of innovation:
science base, expected innovation cost, expected profit, risk, etc.​

●​ Innovation studies classify paths by:​

○​ Broad science/technology field​

○​ Process-oriented vs. product-oriented​

○​ Incremental vs. radical​

●​ Influence of supply:​

○​ Current state of scientific or technological knowledge (tech opportunity)​

○​ Composition of potential innovators​

●​ Influence of demand:​

○​ Technological bottleneck or imperative need for improvement​

○​ Relative factor prices/interruption of supply​

Simultaneous Invention
●​ The phenomenon of two or more individuals independently developing the same or
similar ideas at almost the same time.​

●​ Examples: Calculus, theory of natural selection, telephone, flying machines.​

●​ Why it's common: Supply and demand factors often apply to the economy or society as
a whole, increasing the likelihood that multiple individuals will perceive the same
opportunities for a scientific discover or a potential profit

Summary
●​ The level and direction of innovation are determined by the interaction of supply and
demand.​

●​ Non-economic factors and chance also matter, but are less amenable to policy targeting.​

●​ Supply factors:​

○​ Current science and technology base​

○​ Individuals and institutions with relevant knowledge​

○​ Availability of finance​

○​ Cultural attitudes​

●​ Demand factors:​

○​ Consumer needs and willingness to pay​

○​ Market size​

○​ Shocks to relative input costs​

○​ Regulatory mandates​

○​ Perceived benefit of potential innovation​

●​ Simultaneous inventions are common due to broad economic and societal influences.​
I hope this explanation is helpful! Let me know if you have any further questions.

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Okay, I will go through the presentation and explain the key concepts related to appropriation
mechanisms for innovation, as discussed in Chapter 4 of Hall & Helmers.

Chapter 4: Appropriation Mechanisms (Hall & Helmers)

This presentation discusses how innovators secure returns from their innovative efforts,
focusing on both informal and formal appropriation methods, especially intellectual property
rights (IPRs).

The Barbed Wire?

●​ The presentation starts with an interesting fact: barbed wire is considered one of the
most important inventions that shaped the modern economy.

●​ ​

●​ Barbed Wire's Impact: Barbed wire allowed people to protect their land and farms.​

●​ Inventors: John Warne Gates and Joseph Glidden. Glidden received a patent in 1874,
leading to a massive increase in barbed wire production.
​

Concept of IPRs

Definition of Intellectual Property (IP) in Simple Terms:

Intellectual Property (IP) refers to creations of the mind that have value and can be legally
owned, like inventions, brand names, artistic works, and designs.

Economic Definition:

In economics, IP is a non-physical (intangible) asset that provides exclusive rights to creators

or firms, allowing them to earn profits from their ideas while preventing others from copying
them. It creates incentives for innovation and economic growth by rewarding creativity.

Examples:

●​ Patents (new inventions) → Encourage research by giving exclusive rights to inventors.

●​ Trademarks (brand names & logos) → Help businesses build reputation and consumer
trust.
●​ Copyrights (books, music, films) → Ensure creators are paid for their work.
●​ Geographical Indications (Champagne, Darjeeling Tea) → Protect region-specific
products.

​
 Breakdown of the Diagram:

1.​ IPRs (Intellectual Property Rights) – The overarching term covering all forms of legal
instruments for intellectual property protection. The give ht einnoavator exclusiv rights
over the use of his or her IP. ​

2.​ Two Main Categories of IPRs:​

○​ Industrial Property: Covers inventions and industrial creations.

■​ Patents: Protect new inventions and technologies.
■​ Industrial Designs: Protect the appearance or design of a product.
■​ Trademarks: Protect brand names, logos, and symbols that distinguish
products/services from each other.
■​ Geographical Indications: Protect the names of products linked to
specific locations (e.g., Champagne from France).
○​ Copyrights and Related Rights: Protect creative works like books, music, films,
and artistic works.

Purpose of IPRs:

●​ Encourage innovation and creativity.

●​ Provide exclusive rights to creators or inventors.
●​ Prevent unauthorized use of protected works.

Would you like a more detailed explanation of any category?

Introduction
●​ Innovation as a Quasi-Public Good: Innovation benefits society, but without incentives,
it might be underproduced.​

●​ Appropriation: The process by which innovators secure returns on their innovative

efforts.​
 ●​ Informal Appropriation: Methods based on actions taken by the innovator without legal
protection.​

●​ Formal Appropriation: Methods defined by the legal system, often requiring

registration.​

Intellectual Property
●​ Focus: The presentation focuses on formal appropriation mechanisms, specifically
intellectual property. It also mentions informal mechanisms like secrecy.​

●​ Definition of Intellectual Property: Intangible products of human creativity, including:​

○​ Knowledge of how to make or do something.​

○​ Creative works (books, movies, music).​

○​ New designs for commercial use.​

○​ Original product markings and trade names.​

○​ New plant varieties.​

●​ Characteristics of IP:​

○​ Often non-rival (one person's use doesn't diminish another's) and non-excludable
(difficult to prevent others from using).​

○​ Legal protection is necessary to exclude others from use.​

○​ Not really property in the traditional sense.​

Types of IP
●​ The presentation lists several types of intellectual property:​

○​ Patents​

○​ Copyright​
 ○​ Trademarks​

○​ Design rights​

○​ Plant patents​

○​ Geographical designations​

○​ Sui generis protection (e.g., semiconductor masks)​

○​ [Trade secrets]​

Arguments for IP - why is the concept of IP imp

●​ IP addresses the problem created by non-excludability - it can help to exclud eothers
from using.​

●​ Other justifications for IP:​

○​ Moral Rights: To protect the creator's control over their work.​

○​ Consumer Protection: To prevent confusion and fraud.​

●​ Geographic Restriction: IP rights are generally restricted to the country or region that
grants them, although there is some international cooperation.​

IP Use by Top R&D Performers

●​ The presentation shows that many more firms use trademarks than patents.​

●​ About half of patenting firms also use trademarks.​

 ●​

Effectiveness of Appropriability Mechanisms

●​ Product Innovations: Informal mechanisms (lead time, sales and service) are generally
more important than formal methods for securing returns.​

●​
●​

●​
●​ Process Innovations: Secrecy is now the most important mechanism for securing
returns. Coca-Cola’s beverage formula and bottling process.​
 ●​

Summary
●​ Creators of ideas and intangible products are motivated by the ability to capture some
returns from their innovative activities.​

●​ Benefits of IP:​

○​ Ensures development of future prospects from an invention.​

○​ Provides disclosure of technical information that might otherwise be kept secret.​

○​ Enables trade in technology.​

○​ Ensures “moral rights” for creators.​

○​ Provides protection via geographical indications.​

●​ IP comes at a cost, creating a trade-off in designing and using the IP system.​

—----------------------------------------------------------------------------------------------------------------------------

Okay, I'll break down the key concepts discussed in Chapter 8 of Hall & Helmers, which focuses
on innovation strategy.

Chapter 8: Innovation Strategy (Hall & Helmers)

This chapter explores how firms create and capture value from innovation, covering strategic
goals, research strategies, network effects, and competition.

Overview
The chapter covers:

●​ Value Creation and Capture: How firms generate and then profit from innovation.​

●​ Strategic Goals: Objectives for both established firms and startups.​

●​ Research Strategies: Open innovation, make-or-buy decisions, and collaboration.​

●​ Network Effects: Impact on innovation strategy.​

●​ Strategies for Network Competition: How firms compete in markets with network
effects.​

Introduction
●​ Innovation strategies are vital for creating value for a firm.​

●​ The "best" strategy depends on the firm's characteristics, like whether it's an established
company or a startup.​

●​ Established firms typically focus on incremental innovation, building on existing

technologies.​

●​ Start-ups often pursue radical innovation, aiming for entirely new combinations of
knowledge.​
 ●​ Platform technologies are increasing in importance, so they introduce new challenges for
innovation strategy.​

How Platform Technologies Create New Challenges for Innovation

Strategy

Platform technologies (like operating systems, e-commerce platforms, and cloud computing)
are widely used and connect multiple users, businesses, or devices. As these platforms become
more important, they bring new challenges for innovation.

Key Challenges:

1.​ Network Effects → "Winner Takes Most"​

○​ Platforms become more valuable as more users join (e.g., social media, app
stores).
○​ New companies struggle to compete if a few big platforms dominate.
2.​ Interoperability & Standards​

○​ Companies must ensure their innovations work with existing platforms (e.g., apps
must follow Apple’s iOS rules).
○​ This can limit creativity and increase dependency on big platforms.
3.​ Control & Access​

○​ Platform owners (like Google, Microsoft, or Amazon) set the rules, controlling
what innovations succeed.
○​ Smaller firms may struggle for visibility or fair terms.
4.​ Data & Privacy Issues​

○​ Platforms collect massive amounts of data, raising concerns about security,

ownership, and regulation.
○​ Companies must balance innovation with ethical and legal responsibilities.
5.​ Fast-Paced Competition​

○​ Platforms evolve rapidly, forcing companies to adapt quickly or risk becoming

obsolete.
○​ Example: Blackberry failed to keep up with smartphone app platforms.
Value Creation and Strategic Goals
●​ The objective of innovation is value creation: innovating a product or service that
provides benefits to customers, making them willing to pay more than the cost of
production.​

Value Creation and Strategic Goals: Established Firms

●​ Innovation is often driven by threats and opportunities in the firm’s environment:​

○​ Threats: New entrants, existing competitors, or technological shifts.​

○​ Opportunities: Following a technological trajectory.​

●​ Sources of sustainable competitive advantage (brand recognition, distribution network,

customer list, loyalty programs) help determine the direction of innovation.​

●​ Incremental innovation reinforces existing core competencies.​

Value Creation and Strategic Goals: Start-Ups

●​ The main asset is often the idea itself.​

●​ Start-ups typically seek a competitive advantage, aiming to create a new industry, a

niche in an existing one, or replace existing firms with better technology.​

●​ They are more likely to succeed if their innovation is:​

○​ Radical​

○​ Disrupts existing business models​

○​ An architectural innovation (reconfiguring an existing system to link

components in a new way), potentially making entire systems obsolete.​

Lessons from Industry Evolution

 ●​ A generic need for innovation transforms into a specific paradigm over time.

Example: need to communicate over distance without wires —-- smart phones with big
screen, camera

Transport of people—--- internal combustion engine​

●​ Following radical innovation, there's often a lot of experimentation (mainly by start-ups).​

●​ Eventually, a dominant design or paradigm emerges, and incremental innovation takes

off as the technological trajectory becomes clearer.​

Value Capture
●​ Value created by innovation must be captured as profits.​

●​ Value capture: A firm's ability to obtain some of the benefits of innovation via pricing
above cost.​

●​ Also referred to as appropriability.​

●​ Value capture can be achieved through formal (intellectual property) and informal
(secrecy, first-mover advantage) methods.​

Value Capture: Complementary Assets

●​ In areas with weak appropriability, possessing specialized assets needed to exploit the
innovation enables subsequent entrants to capture the innovation's value.​

●​ Complementary assets: Assets whose value, when combined with an innovation, is

greater than their standalone value.​

●​
●​ Examples include manufacturing, marketing and distribution, and after-sales service.​

●​ Types of complementary assets:​

 ○​ Generic: Easily imitated and generates no rents.​

○​ Specialized: Necessary for exploiting innovation and generate rents.​

○​ Co-specialized: Generate rents.​

●​ In weak appropriability contexts with a dominant design, specialized assets are crucial
for value capture.​

●​

Research Strategy
●​ A key question is how much (basic) research a firm should undertake.​

●​ Especially relevant for research with wide and uncertain application, spillovers, uncertain
appropriation, and long-term payoff.​

●​ Basic research is often conducted by large, established, diversified multi-product firms

with market power.​
Open Innovation
●​ A shift towards using knowledge external to the firm.​

●​ Open innovation: "An idea that assumes that firms can and should use external ideas
as well as internal ideas, and internal and external paths to market, as the firms look to
advance their technology."​

●​ Innovation from external sources is important for innovating firms, but it requires effort
and management to assimilate ideas and inventions. ​

Make or Buy?
●​ Should a firm make or buy the new technology needed to pursue particular strategic
choices?​

●​ Purchase of new technology often takes the form of acquiring a firm that owns it.​

●​ Acquisitions can be difficult to assimilate; there's a risk of losing human capital from the
acquired firm via the exit of key employees.​

●​ Factors influencing the decision include speed, how closely linked the technology is to
the firm’s core competencies, and the IP rights associated with the technology.​

●​ Large firms - internal plsu external

●​ Small firms- either one

Transaction Cost Theory

●​ Transaction cost theory: Costs surrounding a transaction determine whether it takes
place within the firm or is transacted in the market.​

●​ Key ideas:​

○​ Contracts are incomplete.​

○​ There's uncertainty surrounding the transaction.​

○​ The need for transaction-specific investments.​

 ●​ This creates incentives for opportunistic conduct. Therefore, activities at risk of such
conduct are more likely to be moved inside the firm.​

●​ Most R&D is conducted in-house.​

Or Collaborate?
●​ An alternative option is collaboration via strategic alliances, joint ventures, technology
licensing, or collective research organizations.​

●​ Advantages include increased flexibility, speed, risk sharing, knowledge exchange, and
the creation of new knowledge.​

●​ Disadvantages include challenging value capture and firms potentially being reluctant to
reveal their most valuable knowledge.​

Goods with Network Effects

●​ A static analysis of markets with network effects suggests they don't necessarily create
network externalities.​

●​ However, in a dynamic analysis, technology adoption depends on expectations about

others' future decisions.​

●​ This creates a network externality where one person’s demand increases if another
person purchases the technology.​

●​ Consumers' expectations of network size matter, and can lead to underutilization or

delayed adoption if consumers fear lock-in.​

Competition Among Systems

●​ When standards are important, competing systems with different standards behave like
network goods.​

●​ Increased demand for a system leads to increasing returns, resulting in intense

competition among manufacturers.​
 ●​ Consumer heterogeneity and inertia limit standardization.​

Game-Theoretic Analysis
●​ A simple two-player game illustrates how incompatibility or compatibility can arise
between competing standards.​

●​ Incompatibility is more likely when firms are similar in size and market share, while
compatibility is more likely when demand greatly depends on a single standard.​

Strategies for Network Competition

●​ To Induce Adoption: Firms need to signal to consumers that they won't be stranded
with a defunct network.​

●​ To Create or Break Lock-In: Induce lock-in through switching costs (contracts,

proprietary data formats) or break lock-in through rebates and free training.​

Summary
●​ The goal of firm-level innovation is value creation and capture.​

●​ Strategy involves understanding an industry's lifecycle and a firm's stage (start-up,

young, or established).​

●​ Established firms need to adapt to radical and architectural inventions.​

●​ Start-ups capture value through appropriation via IP and complementary assets.​

●​ Different technologies may favor different make-or-buy or collaboration decisions.​

●​ Platform technologies require choosing a level of compatibility and ensuring platform

survival.​

Citations:

1.​ https://ppl-ai-file-upload.s3.amazonaws.com/web/direct-files/28951210/394245c3-1ae0-
482a-90dc-525d313dceb3/Chapter-8-1.pptx