The big can, the small do

By R.A. | WASHINGTON

MIKE KONCZAL has written an interesting post considering whether large corporate oligopolists or small fry are more likely to do the heavy lifting of innovation. He quotes Arpit Gupta, who says:

We don't want the people who made a lot of money in the ‘90s deciding what to invest in today; in general people and organizations don't manage to remain at the entrepreneurial frontier all of the time. We want shareholders to take the billions they made from Microsoft and give it to the Microsoft of tomorrow.

And Karl Smith:

My sense is that this Burning of the Corporate Commons is a major source of loss in the US economy. In essence Microsoft is captured by its corporate bureaucracy, a group that is more interested in the continued existence of the company than in maximizing profits. The entire point of capitalism is creative destruction, that old firms die as new innovators come along. However, modern firms lock up much of their profits in a war chest designed to keep them from dying. This is pure economic loss. It's bad for shareholders and its bad for America.

But presents a counterargument from Michael Lind:

Far from celebrating small businesses as the laboratories of innovation, Schumpeter argued that a major incentive for private-sector innovation was the prospect that a business could obtain a monopoly or near-monopoly position on the basis of inventions and be assured that a stream of assured profits would repay its investment. Schumpeter believed that in modern industrial capitalism, which he called “trustified capitalism,” the solitary inventor like Alexander Graham Bell or the young Thomas Edison had been replaced by the corporate laboratory like mid-century Bell Labs, which existed only because AT&T was a monopoly. Undercapitalized firms in a competitive market have no money to invest in basic R&D, and the few firms with deep pockets have little incentive to bring about technological breakthroughs that will be shared by their competitors.

It's true: well-capitalised firms reaping big profits from semi-monopolies in established industries are the ones with the dough to plough into big R&D operations. Moreover, monopoly profits are, in economic modeling anyway, the reason to innovate. The justification for intellectual property protections is that firms need the possibility of a period of monopoly profits to justify the initial investment in a new product or technology.

But how often have corporate labs stumbled on something potentially huge only to have that innovation stifled by inertial corporate bureaucracy or internal constituencies opposed to big change? In the new print edition of The Economist a Briefing compares the remarkably resilient IBM with a foundering Microsoft that is in many ways the more typical corporate case.

[T]he company appears to be suffering from similar ailments to those that laid IBM low before Lou Gerstner was hired in 1993 to get it back on its feet. These include arrogance bred of dominance of a particular area—mainframe computers at IBM, personal computers at Microsoft—and internal fiefs that hamper swift change. For instance, the division that champions cloud computing must deal with one that is the cheerleader for Windows, which is likely to want computing to stay on desktops for as long as possible to maximise its own revenues.

Start-ups might not have the cash to run big research operations, but they do have the ability and the incentive to seize underappreciated technologies and use them to disrupt fat, static industries. Big profits can fund new corporate initiatives (wise and foolish ones alike), and there is a role for oligopoly in a market economy. But entrepreneurs are an important check on the big corporate interests that often stand in the way of innovation. And for this reason societies should be careful not to allow intellectual property protections to become too generous or regulatory barriers to entry to onerous.

Except, perhaps, in the world of banking.