Patents dating back 85 years show that technological innovation significantly contributes to total wealth.
Since the economist Joseph Schumpeter immortalized “creative destruction,” many economists argue that technological innovation produces both winners and losers but that the entire economy benefits.
It’s difficult to prove that tech innovation increases wealth or disrupts the market, moving money from losers to winners.
A new study that examines millions of patents from the last century provides concrete answers to these questions.
The study, co-authored by Amit Seru, a professor of Finance at Stanford Graduate School of Business, confirms that the pace of innovation can be a disrupting force for competitors, perhaps even more than was previously believed.
It also found that rapid technological innovation in the 1920s and 1960s increased productivity and economic growth.
Seru: “We wouldn’t care if innovation was only about McDonald’s beating Burger King. “But our research shows that something else is happening.” “When firms innovate, we see an increase in aggregate growth.
Seru, along with his colleagues at the Massachusetts Institute of Technology (Leonid KOGANopen in a new window, Dimitris PANAKIKOLAOUopen in a new window, and Noah Stoffmanopen in a new window of Indiana University), came to this conclusion by devising a unique method of measuring the economic impact of all of those millions of patents received by companies between 1926 and 2011
Many studies on patents and innovation are based on measuring the apparent scientific significance of patents. This is usually done by counting how often a particular patent has been cited in subsequent patents as “prior art.”
Researchers note that some patents are of great scientific value but have little economic value. IBM, for instance, patented a method to reserve bathrooms on airplanes. IBM’s patent was cited in several other patents, but it never did anything with the patent.
Seru and his co-workers took a slightly different approach. They looked at the impact of news about a patent issuance on the stock value of the company receiving it. Researchers examined nearly 1.8 million patents granted to and assigned to publicly traded companies between 1926 and 2011.
They found that after using statistical techniques to filter random fluctuations and noise in the market, news of a granted patent had a tangible impact on a company’s stock price a day or two following the announcement.
Researchers then examined what happened to the companies that were quicker or slower in obtaining market-moving invention patents. They found a strong relationship between the speed of this activity and future growth and competitive advantage.
Seru states that companies in the top 10% of innovators have experienced growth rates of between 1 and 3 points per year over the next five years. This is compared to companies with a slower pace of innovation. This is a significant advantage, given that a 10% growth rate is fast for most companies.
Companies that lag behind the pace of innovation in their industries saw their growth rate over the next five years slow down by up to 2.5 percentage points.
The study’s results are similar to earlier studies, which only looked at the scientific value. However, the new findings show more evidence for “creative destruction” and less damage done to the less innovative competitors.
The larger question is, of course, Does innovation increase the size of the overall economy? Does innovation only benefit the innovators and not competitors or workers who lose their jobs?
Seru and colleagues created an “innovation index” using their data about market-moving inventions. They then examined how this index tracked increases in economic growth and productivity.
The results again confirmed the theory of creative destruction. The results showed a significant increase in the overall innovative output, or statistical terms, an increase of one standard deviation, was correlated with an increase in economic output between 0.6 to 6.5 percentage points. This is a big boost for the U.S., as it typically expands at less than 4% annually.
Seru says the wide range in the estimated economic impact of the study is because researchers have plugged the results into many different models of how the economy functions. According to him, the most basic and popular economic models indicate that an innovation surge can increase total economic growth by 4.5 percentage points. This is a significant impact.