The challenges facing the
financing of innovation have always been a combination of ability and
incentive. The solutions that have been developed historically for this are patents,
prizes and patrons. Patents have emerged as the leading driver to aid in the incentive
for financing innovation, while patronage of private wealthy individuals and
companies, as well as government funding, have provided the main means or
ability for the funding of R&D.
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| Financing Innovation |
Although monasteries, guilds and
universities played a role as institutions in unlocking medieval creativity, it
is perhaps more interesting to focus on the early modern period in Europe when science
grew explosively from the beginning of the Renaissance through the Industrial
Revolution. The growing realisation that innovation could lead to prosperity
persuaded European governments to make unprecedented efforts to promote it.
Thus the first systems of intellectual property rights were introduced and the existing
institutions based on prizes, patronage and other rewards.
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| Universities |
Patents became a reward for
innovation, with the first formal patent statute in Venice in 1474 and in England
in 1623. Particularly lucrative early patents included the pendulum clock in
1657 and the steam engine in 1767. The lure of patents played a crucial roles
in a golden age of innovation of the last half of the 19
th century
to the early 20
th century, with the invention of the electric light,
phones and planes, which would all prove crucial to the rapid development of
the 20
th century. One unavoidable difficulty that Schotmer points
out is that patents reward inventors ex post, which leaves them the problem of
funding their research up front. The solution to this funding problem was for inventors
to become entrepreneurs, to become R&D contractors, or for companies to
develop inventions in-house. Indeed, this last path became a crucial one: by 1940
industry operated 13,500 labs, investing $200 million per year. However, patents
were still not perfect: patent applications were complex, which led to high
transactions costs, and the enforcement costs could be ruinous.
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| Patents |
Prizes also became an important
device for stimulating innovation. However, drawbacks were that inventors kept
their innovations secret in order to win future prizes, and that they had to fund
themselves or find financial backers, which was a deterrent to innovation.
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| Prizes |
Patronage was another important
method of financing innovation. An important early example of this is the Danish
King’s support of Brahe, whose research led to the understanding that the Earth
revolves around the Sun. Modern patrons in the Gilded Age put unprecedented fortunes
into private hands. This resulted in a growth in patronage with around 70
foundations established between 1900 and 1930, and spending in the late 1930s
of $80 million per year on R&D compared with only $2 million by
universities.
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| Patronage |
The problems of ability and
incentive for the financing of innovation were overcome with a combination of
patents, prizes and patrons interacting with institutions such as universities.
Though patents have perhaps become the most important of these factors, particularly
in encouraging corporate investment in R&D, the recognition by governments
of innovation as a key driver of prosperity was also key to securing funding.
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