Saturday, August 1, 2015

Some Reflections on Localism, Innovation, and Jim Bessen's New Book "Learning by Doing"

I highly recommend Jim Bessen's new book, Learning by Doing: The Real Connection Between Innovation, Wages and Wealth (2015), published by Yale University Press. I was lucky to present alongside Jim at Yale's first Beyond IP Conference, where he discussed his ideas about the importance of education and worker training for a successful innovation economy. As Bessen puts it in his book,
innovation can suffer from two distinct problems: markets can fail to provide strong incentives to invest in R&D, and they can fail to provide strong incentives for learning new skills. Underinvestment in R&D is not the only problem affecting innovation. It might not even be the most important problem. ... There is simply no justification for focusing innovation policy exclusively on remedying underinvestment in R&D, especially since most firms report that patents, which are supposed to correct this underinvestment, are relatively unimportant for obtaining profits on their innovations.
The takeaway is that protecting inventions with patents and copyrights can't be the sole function of an effective innovation policy. Governments need to focus on a much broader range of policies to "encourage broad-based learning of new technical skills, including vocational education, government procurement, employment law, trade secrecy, and patents."

At IP Scholars in Chicago this year, I'll be presenting my new paper Patent Nationally, Innovate Locally.  Like Bessen, I will talk about a broad range of innovation incentives that focus on research and technology commercialization, as well as public investments in STEM education, worker training, and public infrastructure. I'll argue, however, that when intellectual property rights are not the chosen mechanism, many of these incentives should come from sub-national governments like states and cities because they are the smallest jurisdictions that internalize the immediate economic impacts of public investments in innovation.*  While states cannot internalize the benefits of patent and copyright regimes that result in widespread disclosure of easily transferable information, they can internalize the benefits of innovation finance (direct expenditures of taxpayer revenues on innovation) especially when those expenditures go towards improving the education, skills, and knowledge-base of the local labor force.

Innovation finance (IF) is an important new frontier in IP law scholarship. Not only does innovation finance supplement federal IP rights by correcting market failures in technology commercialization and alleviating some of the inefficiencies created by patents and copyrights, it also takes into account Bessen's point: "markets can fail to provide strong incentives to invest in R&D, and they can fail to provide strong incentives for learning new skills." Both market failures are important, and the latter may be even more important than the former. But if we really want to focus on a broader range of policies like government procurement and support for public education to "encourage broad-based learning of new technical skills," as Bessen suggests, then we need to start looking at state and local governments.

To understand this point, take the example of a government prize for developing a better way to manufacture cars without using as many resources (e.g. 3D printing). If the federal government gives the prize, this makes some sense: assuming the prize hits its mark, national taxpayers will eventually benefit when the innovation is perfected and widely adopted, and the information on how to do it becomes public. But the impacts of the prize are going to be very different for different parts of the country. First off, the prize winner has to locate its research and operations somewhere. Presumably, it's going to choose a state like Michigan or Ohio with the resources, facilities, and human knowledge-base to do this kind of research and experimentation. The immediate benefits for local firms and residents are obvious: jobs, tax revenues, business for local companies. There is also a less perceptible but far more important benefit: easier access to new technical knowledge coming out of the experiments and inside information on emerging market developments. Plentiful research suggests that a lot of knowledge is hard to transfer and that effective exchange requires proximity, especially when science-based research and unfamiliar technology are involved. The implication for local officials seeking to boost the regional economy is clear: the more innovation that happens in your jurisdiction and the more residents who gain skills in an important new field, the better off your state or city will be. (This is the basis for innovation cluster theory and the idea that regions gain competitive advantages from localized knowledge exchange, originally discussed by UC Berkeley's AnnaLee Saxenian.)

Given that the immediate economic impacts of the 3D printing prize, including the tax revenues and most of the spillovers, are geographically localized to certain regions, do we really want federal policymakers designing these types of incentives, and do we really want taxpayers in states like Alaska and Arizona footing the bill? Or do we want significant input –  both political and financial – from the places in which the innovation is occurring? I think the answer is the latter. The benefits of decentralizing fiscal policy are numerous. I see at least two major benefits in this case: fairer shouldering of tax burdens, and more efficient innovation policies as a result of the better information and stronger incentives of local officials. Not only are they aware of the capabilities and needs of the local economy but they can act swiftly in response to local problems, liberated from the wrangling of "earmark politics" at the national level. The same principles apply to education and incentives for learning new skills – the second prong of Bessen's revitalized innovation policy. For example, would we expect national policymakers, who act in the national interest and are beholden to federal taxpayers, to supply the right amount of vocational training for future workers in the newly invented 3D printing automobile industry of my hypothetical? No: we would expect the main push for this kind of training to come from a state like Michigan with the right mix of interested workers and industry players.

In short, I suggest that innovation policy in the United States is not federal. It is bifurcated: the federal government protects exclusive rights in new inventions and original expression using patents and copyrights; states, cities and sub-national governments use innovation finance to capture the geographically localized economic benefits of innovation.

There are several responses to my argument. If innovation finance were all local, then wouldn't there be a major under-supply of research, especially for innovations without a clear market, like research into rare debilitating diseases or (until Elon Musk) space exploration? Wouldn't states compete with each other and end up spending way too much to attract firms into their jurisdictions? Aren't local politicians vulnerable to capture by local industries? I agree that all these risks exist. This is why I discuss a variety of instances where the federal government has an important role to play. Besides protecting copyrights and patents in new inventions, the federal government does a lot of direct financing for innovation too. This money goes towards education, basic research, and mission R&D (mainly in national defense) – all of which produce pervasive national spillovers as well as localized ones. On the flip side, the federal government also has a variety of means for controlling and coordinating the actions of sub-national governments in order to reduce corruption, wasted expenditures and "beggar thy neighbor" competition. Some of these preemptive forces come from discretionary judicial doctrines like the Dormant Commerce Clause (admittedly a weak source of limits on states); others are or perhaps should be statutory (the Patent Act??).

If you have comments or seek a draft of Patent Nationally, Innovate Locally, or my other working paper, Cluster Competition, which argues that the federal government is trying to "manage" state competition to grow innovation clusters through the America Competes Act's regional innovation program, please email me at: or

* The basic principle of fiscal decentralization is "the presumption that the provision of public services should be located at the lowest level of government encompassing, in a spatial sense, the relevant benefits and costs." 

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