Innovation and economic growth: the bottom line

By Tobias Boyd, Communications Division, WIPO

WIPO recently published the World Intellectual Property Report 2015 – Breakthrough Innovation and Economic Growth, an in-depth study of the links between innovation, intellectual property (IP) and economic output. Chief Economist Carsten Fink (photo on Flickr) explains what makes some innovations amount to breakthroughs and why the age of rapidly rising living standards may be over.

What do you mean by “breakthrough innovation”? Isn’t every innovation by definition a breakthrough?

Every innovation is new, but some innovations are far more important than others – they entail much greater change. By breakthrough innovations we mean those that have a really transformative impact on the economy and society and in particular those that lead to significant economic growth.

Growth is a fascinating subject. In developed countries, we tend to think of it as the normal state of affairs. Sometimes there are recessions, but most years see an increase in total economic output. We expect that GDP will rise most of the time, because that has been the case for the best part of our lifetime.

But if you take a longer view and look at economic growth data over several centuries, the picture is very different. For most people in most societies throughout human history, growth has been flat or at best very gradual. That only really changed with the first industrial revolution in the eighteenth century. With industrialization, the most developed economies started to see average annual growth rates of more than one percent, and that increased to more than two percent per year after the Second World War.

Was this unusually high growth caused by breakthrough innovations?

They were definitely an essential part of it. Many innovations were associated with the process of industrialization. For example, improvements in agriculture made it more productive and freed up people to work in industry, while the development of rail transport revolutionized supply chains, opened up new markets and stimulated demand. There have been many more transformations since then, of course.

That said, from an economic perspective, causation is complicated. The relationship between innovation and growth is intricate and multifaceted. It is reciprocal: innovation enables growth, but growth is also necessary for the investment and demand that lead to innovation.

The World Intellectual Property Report 2015 explores some of the complexities in that relationship. It looks at the types of conditions that might support breakthrough innovations and how they feed through into growth. And – very importantly for WIPO – it examines the role of the IP system in the development and spread of breakthrough innovations.

These must have been difficult issues to study. How did you go about that?

With this type of research, you know you are not going to come up with a definitive answer. The issues are too profound, too broad and much too diverse. The best you can do is to formulate questions, concepts and ideas as rigorously as possible to encourage informed debate.

With that aim in mind, we decided to base our analysis on case studies. While case studies do not allow us to make generalizations, they make it possible to really dig into details, including interrogating some very rich and robust data on patents from the WIPO Statistics Database and other sources.

We chose three innovations that are generally agreed to have been breakthroughs in the past – aviation, antibiotics and semiconductors – plus three developing technologies that are often cited as potential breakthrough innovations: 3D printing, nanotechnology and robotics. We established a profile of the “ecosystem” underpinning the development of each technology, assessed its past or potential contribution to economic growth and examined the role played by the IP system.

And what did you find?

While we were not aiming to develop a grand theory, we came up with many interesting insights. There are some striking parallels among the cases. One thing that stands out is the importance of government in driving investment in a lot of breakthrough innovations. Aviation, antibiotics and semiconductors all benefited from government spending on research and government action to encourage their early rollout. More recently, governments have been pivotal in enabling research into 3D printing, nanotechnology and robotics, among others.

Also critical are links between scientific research organizations and business. For example, Germany led the world in the early decades of aviation because its industry had a strong science base – a lot of early flight enthusiasts in Germany were actually trained physicists. And all the indications suggest that scientific expertise is even more crucial in contemporary innovation. Universities and research institutes account for an impressive proportion of the patents relating to 3D printing, nanotechnology and robotics, the three potential breakthrough innovations that we studied.

Are there any standout findings relating to IP?

Overall, we found evidence that the IP system has supported innovation.  In addition, we did not see any indication that the large number of patent filings in 3D printing, nanotechnology, and robotics has resulted in increased litigation over patents or other friction over IP rights.

The studies also document the importance of knowledge-sharing for innovations to flourish. Sometimes this involves free sharing; for example, there are significant open-source communities in 3D printing and robotics. But proprietary approaches are also important, as illustrated by the frequent cross-licensing of semiconductor patents. The IP system generally enables knowledge-sharing by providing a flexible tool for innovators to decide which technologies to share, with whom, and on what terms.

Given the parallels between past and present, are you reasonably confident that the three potential breakthroughs you looked at will generate economic growth?

That, unfortunately, is where things get difficult. Logically, the answer should be yes. There ought to be plenty of scope for growth in the global economy. There has been a huge fall in poverty globally over the past few decades, thanks largely to rapid development in China and India, but obviously many countries have not yet developed economically and many, many people remain very poor. So there is room for development. And it is clear that some of the innovations now underway – including the three we studied – have astonishing potential.

However, we really cannot take growth for granted. As I said earlier: the growth enjoyed after the Second World War was both spectacular and exceptional. It may prove to have been an historical anomaly. Growth has been consistently disappointing since the global financial crisis in 2007-08, and some economists now argue that low or no growth is “the new normal”. This is what Larry Summers, the former US Secretary of the Treasury, meant when he famously warned of “secular stagnation”.

For me, the bottom line is this: even if we invest in innovation, we cannot be sure that we will return the growth rates of the past 50 years. But if governments and businesses stop investing, those days are definitely over.