How should one create institutions which drive innovation activities and create technologies improving welfare ? Is Venture Capital model of investment a good model to support innovation?
1mattclancy1yDifferent kinds of institutions are good at different kinds of things, and you
ideally want a portfolio of different institutions.
* Academic research is good at promoting non-commercial exploratory research
that hews close enough to the community of experts to take advantage of
critical feedback and allow for people to build on top of each other's ideas
(classic article here
[https://www.sciencedirect.com/science/article/pii/0048733394010021])
* Venture capital is good at innovation that is very valuable if it works, very
uncertain if it will work, but where it is possible to learn relatively
easily if an idea will work. (classic article here
[https://www.aeaweb.org/articles?id=10.1257/jep.28.3.25])
* Incumbent firms are probably pretty good at incremental improvement of their
technologies, provided they face a bit of competition (citation needed!)
* Large corporate science labs are good at projects that require a lot of
resources, a longer time horizon, and a focus on integrating disparate
results into a coherent package (classic article here
[https://www.nber.org/papers/w25893])
There are probably other institutional arrangements better suited to different
kinds of innovation too; most of these institutional arrangements are not that
old, as institutions go! I think, for example, that there are probably ways to
improve the organization of academic research. And the private sector has to
some extent retreated from basic science, and we may need new
[https://www.spec.tech] institutions
[https://www.nature.com/articles/d41586-022-00018-5] to fulfill the kind of role
they used to do.
How should one create institutions which drive innovation activities and create technologies improving welfare ? Is Venture Capital model of investment a good model to support innovation?