The producer innovation paradigm
The long-established producer innovation paradigm centers on development and diffusion activities carried out by producers. The basic sequence of activities in that paradigm is shown on the lower arrow of figure 1.1. Moving from left to right on that arrow, we see profit-seeking firms first identifying a potentially profitable market opportunity by acquiring information on unfilled needs. They then invest in research and development to design a novel product or service responsive to that opportunity. Next, they produce the innovation and sell it on the market. In sharp contrast to household sector innovators, producers' innovation activities are not self-rewarding: the producer is rewarded by profit obtained via compensated transactions with others. (Of course, employees within firms may find their work personally self-rewarding. This can sometimes be reflected in their wages. In labor economics it has long been argued that firms can pay a lower wage as compensation for work that employees find more desirable in other ways. See Smith 1776, 111; Stern 2004.)
The producer innovation paradigm can be traced back to Joseph Schumpeter, who between 1912 and 1945 put forth a theory of innovation in which profit-seeking entrepreneurs and corporations played the central role. Schumpeter argued that "it is ... the producer who as a rule initiates economic change, and consumers are educated by him if necessary” (1934, 65). The economic logic underlying this argument is that producers generally expect to distribute their costs of developing innovations over many consumers, each of whom purchases one or a few copies. Individual or collaborating free innovators, in contrast, depend only on their own in-house use of their innovation and other types of self-reward to justify their investments in innovation development. On the face of it, therefore, a producer serving many consumers can afford to invest more in developing an innovation than can any single free innovator, and so presumably can do a better job. By this logic, individuals in the household sector must simply be "consumers” who simply select among and purchase innovations that producers elect to create. After all, why would consumers innovate for themselves if producers can do it for them?
Schumpeter's views and the producer innovation paradigm came to be widely accepted by economists, business people, and policymakers, and that is still the case today. Sixty years later, Teece (1996, 193) echoed Schumpeter: "In market economies, the business firm is clearly the leading player in the development and commercialization of new products and processes.” Similarly, Romer (1990, S74) viewed producer innovation as the norm in his model of endogenous growth: "The vast majority of designs result from the research and development activities of private, profit-maximizing firms.” And Baumol (2002, 35) placed producer innovation at the center of his theory of oligopolistic competition: "In major sectors of US industry, innovation has increasingly grown in relative importance as an instrument used by firms to battle their competitors.”
Details of the producer paradigm have changed over time. Significant producer innovations once were viewed as starting from advances in basic research (Bush 1945; Godin 2006). Later, studies of innovation histories showed that there often was not a clearly demarked research event initiating important innovations—although "technology first” innovations do exist and can be important (Sherwin and Isenson 1967). Still later, it was argued that research findings fed into all phases of innovation in what was called a "chain link” model of innovation (Kline and Rosenberg 1986). Today, many would argue that, while research inputs are indeed important, producers' innovation projects are more frequently triggered by discovery of unfilled needs. Hence the marketing mantra: "Find a need and fill it.” In line with this view, current prescriptions for the management of innovation by producers generally follow the market-demand-initiated version of the producer paradigm shown in figure 1.1 (Urban and Hauser 1993; Ulrich and Eppinger 2016).
Finally, when contrasting the two paradigms, I note that the definition of free innovation differs from the "official” definition of producer innovation with respect to mode of diffusion. A free innovation is defined as one that diffuses for free, as I said at the start of this chapter. Within the OECD, in contrast, the definition for an innovation includable in government statistics requires that it be introduced onto the market: "A common feature of an innovation is that it must have been implemented. A new or improved product is implemented when it is introduced on the market” (Oslo Manual 2005, paragraph 150). (Note that the focus of both definitions is on availability for diffusion. There is no requirement that anyone actually adopt a free innovation that is available outside of the market or actually buy a producer innovation that has been introduced onto the market.)
In the Internet era, the OECD's producer-centric, definitional restriction that innovations must be "introduced on the market”—that is, made available for sale—is obsolete, I believe. Today it is also possible to make free innovations available for widespread diffusion independent of markets, often via the Internet. For example, the Nightscout innovations are widely diffused outside of markets via Internet-based free transfer. Open source software and open source hardware very generally are diffused in that same way. Excluding free innovations from government statistics via the present market-focused definition distorts our understanding of the innovation process. It will be important to update the OECD's definition, and there are calls to do this (Gault 2012).