Accelerating Energy Innovation: Insights from Multiple Sectors

This PDF is a selection from a published volume from the National Bureau of Economic Research Volume Title: Accelerating Energy Innovation: Insights from Multiple Sectors Volume Author/Editor: Rebecca M. Henderson and Richard G. Newell, editors Volume Publisher: University of Chicago Press Volume ISBN: 0-226-32683-7 ISBN13: 978-0-226-32683-2 Volume URL: http://www.nber.org/books/hend09-1 Conference Date: April 3, 2009 Publication Date: May 2011 Chapter Title: Nurturing the Accumulation of Innovations: Lessons from the Internet Chapter Authors: Shane Greenstein Chapter URL: http://www.nber.org/chapters/c11755 Chapter pages in book: (189 - 223) 6 Nurturing the Accumulation of Innovations Lessons from the Internet Shane Greenstein As the Internet diffused throughout the 1990s, it touched a wide breadth of economic activities. The diffusion transformed the use of information technology throughout the economy. It led to improvements in products, lower prices, the development of new capabilities, and the development of many innovations that enabled productivity improvements among business users. It diffused to the majority of homes and businesses, altering the way people shop, research, play, and relate socially. The Internet began as a government sponsored operation in the 1970s and 1980s and grew into a commercial industry in the 1990s. At fi rst, the Internet lacked market- oriented focusing devices or economic inducement mechanisms typically associated with directing efforts toward the most valu- able innovative outcomes.1 There were contracts for carrier services between government buyers and commercial suppliers, for example, but no general market orientation toward the pricing of the exchange of traffic between car- riers. There also were a few providers of Internet equipment for government users but no waves of inventive entrepreneurial entry. There were managers who understood the specifi c needs of their niche user communities but no Shane Greenstein is the Elinor and Wendell Hobbs Professor of Management and Strategy at the Kellogg School of Management, Northwestern University, and a research associate of the National Bureau of Economic Research. I thank Guy Arie, Tim Bresnahan, David Clark, David Crocker, Rebecca Henderson, Franco Malerba, Richard Newell, Bonnie Nevel, John Quarterman, Craig Partridge, Richard Schmalensee, Alicia Shems, Scott Stern, and Stephen Wolff for extraordinarily useful con- versations and comments. This chapter is part of a larger project funded by the Kaufman Foundation, the Searle Center at Northwestern University, and the dean’s office at the Kellogg School of Management at Northwestern. I am grateful for the funding. I am responsible for all remaining errors. 1. For more on focusing devices in general, see, for example, Rosenberg (1977). 189 190 Shane Greenstein possibility for tailoring new products and services to every potential new set of users. How could an institutional setting that lacked market- orientation yield a set of innovations that supported the creation of massive market value only a few years later? This chapter helps explain the progression. The chapter divides the Internet’s development into a precommercial and commercial era. The precommercial period encompasses the 1970s and 1980s and some of the early 1990s, when the government controlled the research and development of the Internet and its components. The commercial period, which arose after the government opened control of the network to commercial interests, encompasses the mid- 1990s and onward to present day. These two eras illustrate two distinct models for accumulating innovations over the long haul. The precommercial era illustrates the operation of several useful nonmarket institutional arrangements. It also illustrates a potential drawback to government sponsorship—in this instance, truncation of exploratory activity. The commercial era illustrates a rather different set of lessons. It highlights the extraordinary power of market- oriented and widely distributed investment and adoption, which illustrates the power of market experimentation to foster innovative activity. It also illustrates a few of the conditions necessary to unleash value creation from such accumulated lessons, such as standards development and competition, and nurturing legal and regulatory policies. 6.1 The Precommercial Internet under DARPA It may be tempting to compare the Internet to historically archetypical big inventions sponsored by government, such as the Manhattan and the Apollo projects.2 However, these archetypes for developing technical breakthroughs are not good models for understanding what happened during the creation of the Internet. The Internet was not a single urgent project in a single lab devoted to engineering a single object. In fact, the early development of the Internet is rather less exciting than commonly assumed. The Internet began as a government- sponsored project with a restricted set of users and uses. It occurred at a time when theory pointed in a few promising directions, but nobody, not even the experts, knew where imple- mentation would lead. The project involved a vastly dispersed set of techni- cally adept participants with a shared interest in the project but otherwise heterogeneous needs and outlooks. The Internet developed slowly, and through a rather mundane process, accumulating capabilities over time from a vast number of contributors. The Internet’s early development fi t into an archetype called “collective invention.” Collective invention is “a process in which improvements 2. Much of the material in this fi rst section summarizes Greenstein (2010a). Nurturing the Accumulation of Innovations 191 or experimental fi ndings about a production process or tool are regularly shared.”3 There was no single user who demanded a technology such as the Internet, nor any single inventor for it. Rather, fi ve partially overlap- ping groups played a role in shaping attributes that each valued, with an accumulation of innovative contributions over time. The fi rst two groups were the primary decision makers at funding agencies: the Department of Defense (DOD) and the National Science Foundation (NSF). The other three were programmers/ inventors, administrators, and application users. Many were funded by the government agencies and given considerable dis- cretion. Others became participants over time and added their own contributions within their own budgetary limitations. The U.S. military budget served as the fi rst source of funds for the precommercial Internet, while the NSF largely served as the source of funds from 1986 to the end of government involvement in 1995. At a very basic level, the U.S. government paid for much of the research and development (R&D) of the Internet during this period, and the government was the organization behind the early “demand” for the breakthrough technical achievements that became recognized as the Internet. This effort did not begin like a military procurement project, as if the Internet were a military rocket procured from several suppliers. In such a procurement process, a group of expert U.S. military personnel consider and deliberate at great length with great foresight about the needs of the government, and then they issue a set of specifi cations for a product or service with a predetermined set of attributes. However, in the case of the Internet, the DOD’s Department of Advanced Research Projects Agency (DARPA) funded the core research and development work that led to the Internet— indeed, this work was but one of many DARPA projects on the frontiers of computer science.4 The project fi rst intended to build prototypes for a packet- switching data- communications network of networks, which pushed the boundaries of computing at the time. Both “packet- switching” and “a network of networks” were budding theoretic concepts. The Department of Advanced Research Project Agency’s administrators wanted innovations in the form of ideas, new designs, and new software. The administrators also desired all of these innovations be portable to military operations in the long run, as required under the Mansfi eld Amendment (stipulating that DOD funding be relevant to military’s mission). While the demand for these innovative solutions was quite general, the specifi cs were undetermined. The U.S. military faced issues with its own computing facilities and operations 3. See Allen (1983) for the introduction and illustration of the concept. The quote is from Meyer (2003, 4), who provides further extensions to modern examples. 4. This organization was originally founded as the Advanced Research Projects Agency (ARPA) and became DARPA in 1972. For the sake of simplicity, I use only the name DARPA throughout this chapter. See Norberg, O’Neill, and Freedman (1996) and Roland and Shiman (2002). 192 Shane Greenstein that justifi ed the R&D expense, even though its own managers could not concretely describe the object that would result.5 The military sought a robust design for a communications network, and its potential value was self- evident. Keeping communications functioning in spite of a blown/ cut line, for example, has military value in hostile battlefi eld conditions. Packet switching held the promise to achieve this attribute by allowing data to fl ow along multiple paths, unlike a circuit- switched telephone network in which calls follow a preset path programmed into central office telephone switches. In principle, an inexpensive packet switching network could also cover vast geographic

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