Innovation : intellectual property, transactions costs and the institutions of idea trading
Date
1990
Authors
Richard, Greg
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Abstract
This thesis addresses the economic theory surrounding innovation. It notes anomalies in existing theory and by resolving these anomalies suggests a new conceptual basis from which to theorize.
The first step is to suggest an economic conceptualization of the innovation process which is different from that commonly used. The new innovation process starts from the simple premise that the application of new ideas towards production generates economic returns. The second step is to apply the new institutional economics to the new innovation process. The sale of ideas is subject to high transactions costs and the new institutional economics is uniquely suited to understanding these costs. Transactions costs differ according to the characteristics of the idea produced and are partly ameliorated by the institutional legacy surrounding the inventor. (Institutional legacy meaning the general business culture surrounding the industry in which the inventor operates.) In light of these factors, contractual relations governing the exchange will adapt in ways which tend to allow a greater realization of the gains from trade. The general conclusion is that if an idea is widely applicable, then contractual relations will develop which reduce transactions costs and allow greater gains from trade to be realized. These contractual relations will often involve organizational design or be implicit. Where trading occurs, legal institutions such as intellectual property play a supporting role. If the idea is not widely applicable the inventor will then try to embody it in a product and defend it from imitation. In this case intellectual property fulfills its traditionally assumed role of protecting the idea from imitators.