Financing Laboratories: The role of RCA’s patent management in the 1930s Shigehiro Nishimura Introduction Studies in the past have shown that the US patent system promoted technological development and economic growth.1 In addition to this, some studies have focused on linkages between research and development (R&D) and economic growth. Achieving economic growth based on new technologies requires pouring resources into R&D and commercialization of innovative technologies. It has been pointed out that financing innovative companies and entrepreneurs has remarkably affected the patent system as well as market development, personal networks (informal finance) and institutional finance, such as the stock market.2 These studies are particularly true of the 19th century, when innovative individuals, small companies and startups were the main players in the economy. In the 20th century, however, in-house research laboratories of modern enterprises conducted a substantial portion of R&D activities. At about the same time, patent management was internalized in parallel with the progress of R&D in large enterprises. While some studies made it clear that development of the technology market needed intermediaries that promoted the use of the 1 H. I. Dutton, The Patent System and Inventive Activity during the Industrial Revolution (Manchester, 1984); Christine MacLeod, Inventing the Industrial Revolution: The English Patent System, 1660-1800 (New York, 1988); B. Zorina Khan, The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920 (New York, 2009). 2 Naomi R. Lamoreaux & Kenneth L. Sokoloff, Financing Innovation: In the United States 1870 to the Present (Cambridge, MA, 2007). 1 patent system and economic growth, 3 intermediaries such as patent attorneys and individuals who were competent to manage patents were internalized and organized as patent departments in modern enterprises. Although the studies mentioned above described how individuals and firms secured resources from the market and invested them in R&D, so far, little attention has been paid to how enterprises arrange for, or manage the flows, of such resources internally. The aim of this paper is to clarify the kind of organizations that coordinated resource allocation and financing in R&D of radio-related technology through the case study of Radio Corporation of America (RCA) from the 1930s to the first half of the 1940s. This paper considers the financing for R&D as a part of patent management. The definition of patent management is “to make personnel control or regulate rights, technology, information, etc., in order to maximize profits by taking advantage of the patent system.”4 Patent management is relatively independent of R&D management. A study pointed out that in the radio-related fields, the direction of R&D targeted the acquisition of patents, that is, strategic R&D for patents existed.5 On the other hand, some studies emphasized that patent management systematically promoted and arranged global technology flows.6 This paper will examine how patent management of RCA controlled the 3 Naomi R. Lamoreaux & Kenneth L. Sokoloff, “Intermediaries in the U.S. Market for Technology, 1870-1920,” in Stanley L. Engerman, et al. (eds.), Finance, Intermediaries, and Economic Development (Cambridge, UK, 2003); Naomi R. Lamoreaux, Kenneth L. Sokoloff, and Dhanoos Sutthiphisal, “Patent Alchemy: The Market for Technology in US History,” Business History Review 87 (Spring 2013): 3-38; Tom Nicholas and Hiroshi Shimizu, “Intermediary Functions and the Market for Innovation in Meiji and Taishō Japan, Business History Review 87 (Spring 2013):121-149; David E. Andersson and Fredrik Tell, “Patent Agencies and the Emerging Market for Patenting Services in Sweden, 1885-1914,” Entreprises et Histoire 82 (Avril 2016):11-31. 4 Shigehiro Nishimura, International Patent Management in Japan: The Formation and Development of Local Patent Management via Cooperation between GE and Toshiba (Tokyo, 2016). 5 Leonard S. Reich, “Research, Patents, and the Struggle to Control Radio: A Study of Big Business and the Use of Industrial Research,” Business History Review 51 (2): 208-235. 6 Shigehiro Nishimura, “The Adoption of American Patent Management in Japan: The Case 2 finance for R&D. The primary sources for this study are David Sarnoff Research Center records of Hagley Museum & Library, and Minutes of Directors’ Meeting of RCA, in Owen D. Young Papers, held in the St. Lawrence University. The patent data and related publications issued by the USPTO have also been used. The rest of the paper is organized as follows. The first part examines RCA’s patent management during the 1920s, when it was an enormous radio patent pool. The next section describes the changes in business structure and in patent management, in which Otto S. Schairer is a key member to be made note of. Finally, the patent management system which financed R&D activities in the latter part of the 1930s and in 1941 will be analyzed. Business and patent management, 1919-1930 A Telecom Carrier RCA was formed when General Electric Company (GE) acquired the Marconi Wireless Telegraph Company of America (American Marconi), a subsidiary of Marconi’s Wireless Telegraph Company Ltd., of the UK (British Marconi). Prior to World War I, British and American Marconi companies controlled US international radio communications. But from the viewpoint of national security, the US Government required GE to buy it out and put international radio communications under American control.7 of General Electric” in Pierre-Yves Donzé and Shigehiro Nishimura (eds.), Organizing Global Technology Flows: Institutions, Actors, and Processes (New York and London, 2014). 7 Federal Trade Commission, Report of the Federal Trade Commission on the Radio 3 In order to operate an international radio telecom business, RCA needed to secure essential patents covering radio-related technology. Although American Marconi, which GE bought, held some of the essential patents such as those of Marconi, Fleming, and Fessenden, it was not sufficient. In order to collect all the essential patents, GE had to make some companies, which held important radio-related patents, participate in RCA. American Telephone & Telegraph Company (AT&T) and its manufacturing subsidiary, Western Electric Company, held triode patents of De Forest (No. 841386, No. 841387, No. 879532). As a result of the negotiations, AT&T acquired ordinary shares and preferred shares of RCA, and concluded mutual patent license agreements without fees for 10 years with RCA, in 1920. 8 The United Fruits Company and its subsidiary, Wireless Specialty Apparatus Company, which had operated wireless communication services, both, internally and publicly, and had crystal radio patents, participated in RCA as well. Furthermore, Westinghouse Electric and Manufacturing Company (Westinghouse) participated in RCA in 1921. Westinghouse engaged in wireless-related business through its subsidiary company named The International Radio Telegraph Company. It held heterodyne patents of Fessenden, and also acquired Armstrong’s regenerative circuit patents and Pupin’s patents in 1920.9 Therefore, in the beginning, the directors were elected from among the main shareholders, as shown in Table 1. The Board comprised four directors from GE, two from Westinghouse, two from AT&T, and one each from United Fruits and International Radio Telegraph. Furthermore, Walter J. Gifford and Frederick A. Stevenson from AT&T retired in 1922 with the sale of common stocks by AT&T. Industry (Washington, DC, 1924): 18-22. 8 Although AT&T sold common stocks and withdrew directors in 1922, it maintained the license agreement with RCA for ten years. 9 FTC, Report, 22-24. 4 RCA’s business of the 1920s was composed of four departments: traffic, sales, marine and engineering. 10 The traffic department was engaged in international commercial wireless telecommunications business and ship-to-ship or coastal communications business. The main competitors for this department were submarine cable service companies. The sales department was in charge of the sales of wireless equipment to the governments and wireless stations. Initially, it was for business. Sales of radio receivers became a big business with the spread of radio broadcasting. The marine department did the business of leasing or selling wireless equipment to steam ship companies. The engineering department worked on the erection and improvement of wireless stations. Table 2 shows the business structure of RCA through 1928, as viewed from its sales. In 1921, sales billed by inter-oceanic wireless communications were larger than their other business, however, from 1922 onward, the sales of wireless equipment, especially that of radio receivers, expanded rapidly, accounting for the majority of sales billed. As will be seen later, the radio receivers sold by RCA were manufactured by GE and Westinghouse. Managing the Patent Pool Having surveyed RCA’s business in the 1920s, the patent management during this period will be clarified in this section. RCA was an international wireless telecommunication carrier and a distributor of equipment for it. It was a gigantic, exclusive patent pool at the same time. The patent pool consisted of both, international and domestic agreements. Internationally, RCA concluded agreements for patent and international wireless 10 Radio Corporation of America, Annual Report for the year 1921, 1922. 5 communication with British Marconi, Compagnie Generale