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By Root 678 0

of innovation gradually moved inside firms in the twentieth century. Private sector companies, haunted by the Schumpeterian fear that innovation can pull their whole market from them, and equally dazzled by dreams that they can pull the whole market from under their rivals, had gradually learnt to sew innovation into their culture and to set aside budgets for it. Corporate research and development budgets are only a century old and they have been growing pretty steadily all that time. The proportion of GDP spent by firms on research and development in America has more than doubled, to nearly 3 per cent, over the past half-century. Little wonder that there has been a corresponding increase in invention and application.

Delve beneath the statistical surface though, and the picture changes. Far from being able to spend their way into novelty and growth, companies are perpetually discovering that their R&D budgets get captured by increasingly defensive and complacent corporate bureaucrats, who spend them on low-risk, dull projects and fail to notice gigantic new opportunities, which thereby turn into threats. The pharmaceutical industry, having tried again and again to instil a sense of radical thinking into its research departments, has largely given up the attempt and now simply buys up small firms that have developed big ideas. The history of the computer industry is littered with examples of big opportunities missed by dominant players, which thereby find themselves challenged by fast-growing new rivals – IBM, Digital Equipment, Apple, Microsoft. Even Google will suffer this fate. The great innovators are still usually outsiders.

Though they may start out full of entrepreneurial zeal, once firms or bureaucracies grow large, they become risk-averse to the point of Luddism. The pioneer venture capitalist Georges Doriot said that the most dangerous moment in the life of a company was when it had succeeded, for then it stopped innovating. ‘This telephone has too many shortcomings to be considered as a means of communication. The device is of inherently no value to us,’ read a Western Union internal memo in 1876. That is why Apple, not IBM, perfected the personal computer, why the Wright brothers, not the French army, invented powered flight, why Jonas Salk, not the British National Health Service, invented a polio vaccine, why Amazon, not the Post Office, invented one-click ordering and why a Finnish lumber-supply company, not a national telephone monopoly, became the world leader in mobile telephony.

One solution is for companies to try to set their employees free to behave like entrepreneurs. Sony did this after it discovered in the 1990s that its famously pioneering technologists had succumbed to a ‘not-invented-here’ mentality. General Electric under Jack Welch managed it for a while by fragmenting the company into smaller competing units. 3M – flush with success after its employee Art Fry dreamed up the idea of nonstick sticky notes (Post-its) while trying to mark the place in his hymn book in church in 1980 – told its technologists to spend 15 per cent of their time working on their own projects and by harvesting customers’ ideas.

Another solution is to out-source problems to be solved by a virtual market of inventors with the promise of a prize, as the British government did with the problem of measuring longitude at sea in the eighteenth century. The internet has revived this possibility in recent years. Sites like Innocentive and yet2.com allow companies both to post problems they cannot solve, promising rewards for their solution, and to post technologies they have invented that are looking for applications. Retired engineers can make good money and have good fun pitting their wits on a freelance basis through such sites. The old model of in-house R&D will surely rapidly give way to this marketplace in innovation, or ‘idea-agora’ as Don Tapscott and Anthony Williams call it.

Money is certainly important in driving innovation, but it is by no means paramount. Even in the most entrepreneurial of economies, very