SOME EMPIRICAL RESULTS

Introduction

Innovation is the term coined and disseminated by Schumpeter to describe the application by entrepreneurs of that new knowledge that raises real per capita income. This happens in two ways. First, firms introduce new products or improve existing ones. These directly benefit their customers. Second, firms learn how to lower their costs of making and distributing existing products. The economy benefits from these changes as well. However, this distinction, better or new products and better or new ways of making them, is more useful as a theoretical device than as an exact description of reality. The fuzzy boundary is illustrated by the use of new products in order to lower production costs.

Actual innovations fall between two extremes. At one extreme, the knowledge of the innovator is secret. No one can learn what he knows or imitate what he does without his consent. It is prohibitively costly for anyone to obtain or copy the new knowledge of the innovator. At the other extreme, anyone who desires can obtain at little or no expense the newly found knowledge of the innovator. The first extreme implies the innovation is a private good and the second that it is a public good. It is hardly novel to remark that valuable new knowledge, costly to discover but costless to copy, poses a free-rider problem.