Research of David J. Teece

Key Research Topic:

Profiting from Technological Innovation

 


Citation and Abstract

Profiting from Innovation: Introduction and Discussion

Research Policy web page for original article

Research Policy 20th anniversary special issue of the publication of “Profiting from Innovation”

Research Policy conference agenda, Berkeley CA, September 21, 2006

 

 

Citation and Abstract

Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy,” by David J. Teece, Research Policy , Volume 15, Issue 6 , December 1986, Pages 285-305

This paper attempts to explain why innovating firms often fail to obtain significant economic returns from an innovation, while customers, imitators and other industry participants benefit Business strategy — particularly as it relates to the firm's decision to integrate and collaborate — is shown to be an important factor. The paper demonstrates that when imitation is easy, markets don't work well, and the profits from innovation may accrue to the owners of certain complementary assets, rather than to the developers of the intellectual property. This speaks to the need, in certain cases, for the innovating firm to establish a prior position in these complementary assets. The paper also indicates that innovators with new products and processes which provide value to consumers may sometimes be so ill positioned in the market that they necessarily will fail. The analysis provides a theoretical foundation for the proposition that manufacturing often matters, particularly to innovating nations. Innovating firms without the requisite manufacturing and related capacities may die, even though they are the best at innovation. Implications for trade policy and domestic economic policy are examined.

 

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Introduction to Profiting from Technological Innovation

 

Published in 1986, Profiting from technological innovation, (Research Policy, Volume 15, Issue 6, December 1986) is the most cited paper ever published in Research Policy with over 800 citations as of July 2007, and was selected by the editors as one of the best papers published by Research Policy over the period 1971-1991.  In October 2006, Research Policy published a special issue, Volume 35, Issue 8, commemorating the 20th Anniversary of David Teece's article. This is the single most cited paper ever published by Research Policy, with 740 cites as of May 2007. 

A conference sponsored by Research Policy was held at the Haas School of Business on September 21, 2006, in which the special issue papers were presented, as well as special guest lectures, including one by Dean of the Haas School Tom Campbell on “Innovation and the Law:  The Contributions of David Teece.”  Papers and panel topics included Economics and Innovation, Innovation and IP Protection, and extensions to Profiting from Innovation.

 

Discussion of Profiting from Technological Innovation

 

Excerpted and adapted from the Introduction to the Research Policy 20th anniversary special issue of the publication of “Profiting from Innovation” by David J. Teece, by editors Henry Chesbrough , Julian Birkinshaw,  and Morris Teubal, Research Policy, Volume 35, Issue 8, October 2006, Pages 1091-1099.

David Teece's research has made lasting contributions to the study of innovation by treating the management of innovation within far more realistic conceptions of the firm than those that have prevailed in more traditional economics theories. Instead of viewing the firm as a production function, or simply as a black box (to use Nathan Rosenberg's term), Teece has studied the innovation process in firms where rationality is bounded, history matters, change is costly, and firm endowments are heterogeneous…

Profiting From Technology Innovation, (Research Policy, Volume 15, Issue 6, December 1986) is the single most cited paper ever published by Research Policy, with 740 cites as of May 2007. And, befitting this impressive citation count, the importance of the paper extends beyond technology and innovation management to broader topics of business strategy, science and technology policy, and the theory of the firm, just to identify some of the most salient areas of its influence. With the publication of this article, Teece left forever the relatively narrow confines of economic analyses of innovation, and forged a much broader, multidisciplinary approach to the study of innovation. For in this single article, he combines economics with organizations, technologies, intellectual property, and markets (or the lack thereof) for complementary assets. If one reads his earlier work, prior to 1986, and compares it to the research that Teece has performed subsequent to this article, one cannot help but be struck by his shift in scope following this article.

Teece's article was so influential in large part because it asked – and then answered – a very important question: under what conditions do firms profit from innovation? Why do Alfred Chandler's “first movers” prevail in the market with certain innovations, while in other situations the “followers” gain the lion's share of the profits? Teece's answer transcended traditional economic approaches to the question (which would largely hinge on so-called “first mover” advantages in Porter (1980) that in turn emanated from earlier industrial organization theories of entry barriers), or game theoretic treatments of sunk investments in two stage games, as in Shapiro (1989) by insisting that aspects of economic organization, business strategy, technology and innovation must all be understood in order to give a satisfactory answer to this question.
Teece's answer, in his own words, combined these various perspectives. To quote from the abstract for his article (Teece, 1986, p. 285)

“… when imitation is easy, markets don’t work well, and the profits from innovation may accrue to the owners of certain complementary assets, rather than to the developers of the intellectual property. This speaks to the need, in certain cases, for the innovating firm to establish a prior position in these complementary assets […] innovators with new products and processes which provide value to consumers may sometimes be so ill positioned in the market that they necessarily will fail”.

Conclusion

What Teece has taught us is that the limits of what markets can coordinate are at the heart of what a firm must organize in order to profit from innovation. The boundary of what activities should be organized within the firm, and what activities may be coordinated through the market will shift over time. Innovations will continue to emerge, and the choices firms make in how to appropriate value from them will also vary over time. But there will always be a boundary between the firm and its markets. It is the firms who negotiate that boundary, take the risks, make the investments, access the requisite specific complementary assets, and manage them effectively, who will be positioned to profit from their innovative activities.

 

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David Teece
David J. Teece