Rent-an-Idea for Frequent and Radical Innovations

In a knowledge economy, ideas are traded. In fact, ideas have always diffused. However, this has typically followed mechanisms other than markets. For example, economists speak of spillovers, or as the sociologists of science know, knowledge diffuses through conferences or publications.

But can knowledge economies thrive without markets for ideas? Of course, this is not to mean that they should replace mechanisms like spillovers, or the public diffusion of science, or even modern forms of knowledge exchange, like open source arrangements. The point is that as ideas become important economic goods, the mechanisms with which they are exchanged expands. It is therefore not surprising that during the past 20 years licensing royalties and deals, or high-tech alliances, have increased considerably, argue Alfonso Gambardella (Department of Management and Technology and KITeS) and Ashish Arora (Fuqua School of Business and NBER) in Ideas for Rent: An Overview of Markets for Technology (Industrial and Corporate Change, Vol. 19 (3), 775-803, doi:10.1093/icc/dtq022).

The most important advantage of these markets is that the producers of knowledge and ideas are seldom their best users. This is apparent in the observation that a lot of knowledge and technological ideas come from universities. However, the issue is relevant within firms as well. Typically, the lack of technology markets means that if a firm has the assets and capabilities to manufacture and commercialize innovations, it should also have the skills and structures – normally Research & Development (R&D) – to produce them. Similarly, if a firm is good at producing ideas, it can profit from them only if it also owns the – often lumpy and costly – downstream assets to embody them into final products. This means giving up one of the most important advantages of market economies, to wit specialization and trade based on comparative advantages.

By contrast, when markets for technology function, any firm, including small firms or individuals, who develop an idea, can invest in it without having to invest in the bulky downstream assets. This raises the entry rate of idea-producers, with implied increase in the number of ideas brought to the market. At the same time, because these firms enter with less bulky capital assets, they can take greater risks, as failure is a less dramatic event. Thus, not only technology markets raise the innovation rate, but they also lead to more radical innovations. Of course, this can also arise through open source mechanisms or via the scientific community. However, the rise of small research-intensive firms in biotechnology, semiconductors, software, and many other technology-based sectors, which sell their semi-worked technologies to larger manufacturing firms, are manifestations of technology diffusion orders of magnitude beyond academia or open source. It is not unfair to say that without technology markets, innovation in knowledge economies will be slowed down severly.

These markets are still in their infancy. In particular, they do not yet function efficiently. Among others, the way technology prices are determined is far less transparent than standard product markets – for example, the parties face severe asymmetric information. More generally, many licensing deals fail for the complexity of the contracts. For the reasons hinted at here, the solution of these problems is central for the innovation-based growth of firms and economies. The lack of these solutions also makes markets for technology an intriguing and exciting topic for research in management, economics and legal studies.