A recent blogpost by the economist Diane Coyle quoted JK Galbraith as saying in 1952: “The modern industry of a few large firms is an excellent instrument for inducing technical change. It is admirably equipped for financing technical development and for putting it into use. The competition of the competitive world, by contrast, almost completely precludes technical development.” Coyle describes this as “complete nonsense” -“ big firms tend to do incremental innovation, while radical innovation tends to come from small entrants.” This is certainly conventional wisdom now – but it needs to be challenged.
As a point of historical fact, what Galbraith wrote in 1952 was correct – the great, world-changing innovations of the postwar years were indeed the products, not of lone entrepreneurs, but of the giant R&D departments of big corporations. What is true is that in recent years we’ve seen radical innovations in IT which have arisen from small entrants, of which Google’s search algorithm is the best known example. But we must remember two things. Digital innovations like these don’t exist in isolation – they only have an impact because they can operate on a technological substrate which isn’t digital, but physical. The fast, small and powerful computers, the world-wide communications infrastructure that digital innovations rely on were developed, not in small start-ups, but in large, capital intensive firms. And many of the innovations we urgently need – in areas like affordable low carbon energy, grid-scale energy storage, and healthcare for ageing populations – will not be wholly digital in character. Technologies don’t all proceed at the same pace (as I discussed in an earlier post – Accelerating change or innovation stagnation). In focusing on the digital domain, in which small entrants can indeed achieve radical innovations (as well as some rather trivial ones), we’re in danger of failing to support the innovation in the material and biological domains, which needs the long-term, well-resourced development efforts that only big organisations can mobilise. The outcome will be a further slowing of economic growth in the developed world, as innovation slows down and productivity growth stalls.
So what were the innovations that the sluggish big corporations of the post-war world delivered? Jet aircraft, antibiotics, oral contraceptives, transistors, microprocessors, Unix, optical fibre communications and mobile phones are just a few examples. (more…)