Novel Policymaking for Free Innovation

The basic justification for public policy interventions to support innovation is to increase social welfare. Gambardella, Raasch, and I (2016) have made the case that social welfare increases when there is a division of labor between free innovation and producer innovation. Novel policies related to both development and diffusion of free innovations could be useful to support a transition to this improved condition.

Clearly, policy initiatives to support free innovation can include measures to reduce free innovators' development costs. These could include public funding of the development of open standards for the exchange of design information among free developers. Also, and analogous to the R&D subsidies provided to producers by government, support could be given to upgrading physical facilities used by free innovators, such as makerspaces (also sometimes called fab labs or hackerspaces) equipped with sophisticated tools that are beyond the means of most individual free innovators (Svennson and Hartmann 2016). Other infrastructure improvements could include support for the development of "big data” methods to identify, collect, and organize open public data on consumers' unmet needs. The net result would likely be an increase in both the number and the average social value of innovation opportunities worked upon by free innovators.

Recall from chapter 5 that free innovators are unlikely to have incentives to invest sufficiently in diffusing their innovations for free. Policy initiatives to support and reduce the costs to free innovators of the diffusion of their designs might help to reduce this investment shortfall. For example, free, easy-to-use public repositories of design information could serve this purpose. Such repositories should feature open documentation standards. In the absence of a strong push for open standards, proprietary repositories of free design information are likely to emerge, each tied to the proprietary standards of the sponsoring producer.

Gambardella, Raasch, and von Hippel (2016) explain that policy measures supporting producers' investments in supporting innovation development by free innovations should be designed to distinguish carefully between investments that complement free innovation and those that substitute for it. Public incentives for corporate R&D unambiguously raise welfare if they induce firms to invest in activities that are synergistic with free innovation. However, if public incentives instead support producer R&D that substitutes for innovative work that free innovation would do, the net effect can be to redistribute welfare from free innovators to firms, and perhaps also to lower aggregate social welfare.

Viable opportunities for free innovators are continuously increasing, due to technological trends that have been discussed. Accordingly, the appropriate division of labor between free innovators and producer innovators must continuously be updated. As an illustration, consider that patients and clinicians, during the course of regular medical practice, regularly discover new applications for drugs no longer under patent (DeMonaco, Ali, and von Hippel 2006). Producers, very reasonably, see no profit in investing in clinical trials to document the effectiveness of such new applications without the availability of monopoly rights. A producer-centered solution to this problem would be to grant pharmaceutical firms additional monopoly rights to new applications in such cases (Roin 2013). A free innovator-centered solution, in contrast, would be to support patients' and clinicians' capability to design and carry out clinical trials independent of producers. As was noted in chapter 10, the practicality of that route has been demonstrated in a trial of potential therapies for ALS (Wicks, Vaughan, Massagli, and Heywood 2011).

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