Naomi Lamoreaux, Kenneth Sokoloff, and Dhanoos Sutthiphisal have a working paper entitled, The Reorganization of Inventive Activity in the United States during the Early Twentieth Century.


The standard view of U.S. technological history is that the locus of invention shifted during the early twentieth century to large firms whose in-house research laboratories were superior sites for advancing the complex technologies of the second industrial revolution. In recent years this view has been subject to increasing criticism. At the same time, new research on equity markets during the early twentieth century suggests that smaller, more entrepreneurial enterprises were finding it easier to gain financial backing for technological discovery. We use data on the assignment (sale or transfer) of patents to explore the extent to which, and how, inventive activity was reorganized during this period. We find that two alternative modes of technological discovery developed in parallel during the early twentieth century. The first, concentrated in the Middle Atlantic region, centered on large firms with in-house R&D labs and superior access to the region’s rapidly growing equity markets. The other, located mainly in the East North Central region, consisted of smaller, more entrepreneurial enterprises that drew primarily on local sources of funds. Both modes seem to have made roughly equivalent contributions to technological change through the 1920s. The subsequent dominance of large firms seems to have been propelled by a differential access to capital during the Great Depression that was subsequently reinforced by the regulatory and military procurement policies of the federal government.

The standard view of inventive activity is that individuals dominated technological discovery until the early 1900s, when large, in-house R&D departments took over (2).  The big R&D departments had advantages such as big budgets and more resources, and as it became more and more expensive (such as requiring more equipment) to perform scientific experiments, naturally, the big firm became the generator of inventive value.

Using the assignment (either sale or transfer) of patents as a measure (3), the authors argue that this is not really the case.  Instead, in-house departments had both advantages in disadvantages:  yes, they had more resources, more concentrated resources, access to manufacturing, and easier internal sale (4-5), but big R&D departments also had information and contracting problems, as well as little real connection to the “real world” (5).  The most valuable patents acquired by large firms in the 1920s actually started outside the firms’ R&D departments (7).

This isn’t to say that large firms weren’t increasing their share during this time:  in 1870-71, the assignment at issue was 16.1%, whereas by 1928-29, it was 56.1%.  That’s an undeniable large increase.  But there were legitimate regional and curb (high-tech) markets which existed to finance smaller firms (11), and smaller firms were still productive during this time—they were responsible for 13-22% of patents (15).

When you break things down regionally, you can see two completely different stories.  The mid-Atlantic and East North Central regions were each responsible for approximately 1/3 of patents during this time (16).  The East North Central region  (which includes Illinois, Indiana, Michigan, Ohio, and Wisconsin) was heavily small firm/individual, whereas the mid-Atlantic specialized in R&D and large firms (16-17).  But large firm patents were not more important or valuable, and the authors argue that they may even have been less valuable (19-20).  And some of these labs were mostly for vetting outside ideas (23-24) rather than coming up with new ideas.

So why did large R&D firms take over?  There were a couple of reasons which relate closely to one another.  The Great Depression hit the ENC region much harder than the mid-Atlantic (31).  Furthermore, government spending, especially during World War II, tended to focus on large firms with R&D departments.  SEC filing requirements also became tougher, which dried up those curb markets (33).  So once again, government policy had unintended(?) long-term consequences which led to corporatism.

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