THE “CONVEYOR” OF INNOVATIONS. PART 1.

500 YEARS OF PARTNERSHIP

The history does not know a more important partner for a technology entrepreneur than an inventor.

It is safe to consider that since the insightful way of thinking, generally developed by the 15th century, crystallized in engineering, economic development has been determined by the technological labour differentiation.

Adam Smith showed this process effects by the example of the operational specialization in a workshop producing ordinary pins (An Inquiry into the Nature and Causes of the Wealth of Nations, 1776). The labour productivity in the course of transition from the handcraft labour, characterized by the whole pin to be made by one artisan from start to finish, to the technology processing, when the work on creating a pin was divided into 18 operations each assigned to a separate person, increased 200–250 times.?It is the increase in the labour differentiation intensity that was proposed by Smith to be considered as the only source of wealth.

His idea seemed too revolutionary to his contemporaries and even later thinkers. However, today we understand he was right: the role of natural resources and their circulation in the world’s economy has long been incomparably insignificant in contrast to the engineering inventions contribution.

Over five hundred years, the partnership between the inventor and the entrepreneur has generated a range of engineer’s specialisations: from simple design to sophisticated research. Engineering as a type of occupation and profession, previously available only to individual geniuses, became a mass field of activity.

Inventors became owners of their intellectual product: the first legal guarantees for intellectual property protection appeared in the end of the 16th century, and the famous Statute on Monopolies, which registered the 14-year term of patent rights and restricted the king’s right to establish monopoly activities, was adopted in England in 1623.

The conveyor of inventions is assembled, components are delivered on time, the individual section performance is synchronised, followed by the output that is a serial product developing its quality standards.

Alongside with the labour differentiation in the field of inventions, the economic role of technology entrepreneurs was also increasing, compared to the contribution of those who made money on the redistribution of resources by virtue of wars, lobbying, trade, etc. For technology entrepreneurs, the flow of technology innovations became a source for business and profit, as it generated a field of opportunities that entrepreneurs learnt to use in order to create previously nonexistent activities.        

This idea was maximized by Joseph Schumpeter (Theory of Economic Development, 1912). According to him, an entrepreneur is exclusively a technology entrepreneur, the only one who produces innovations. Entrepreneur breaks down old market structures replacing them with the new ones, performing so-called creative destruction. In fact, Schumpeter not only introduced entrepreneurship as a leading position in the economic development process, but also put an equal sign between the innovation and the product of entrepreneurial activity, thus justifying engineering and entrepreneurial partnership from theoretical point.

CATCH UP AND SURPASS

A different view of the driving forces and internal structure of economic development will be found if we focus on the position of the so-called national state.

Since the industrial revolution was conducted by technology entrepreneurs and engineers in the late 16th century and the United Provinces (present-day Netherlands and Flanders) became the world’s economic center for more than a hundred years, dozens of countries have set themselves the tasks of catching-up industrialization many times.

On the one hand, any catch-up industrialization has an apparent advantage — the advantage of underdevelopment. It is always easier to copy someone’s already developed technological achievements than to create them over again.

The discussion of the whole variety of catching-up industrialization institutional matrices is beyond our subject matter. At the same time, it can be argued that as the gap in industrial development between the leaders and the applicants increased, the national state and its administration tried to play more and more significant role in compensating for backwardness.

Such projects were developed in different countries at different times: in France in the 18th century, in the USA, Germany, Japan, Argentina and Russia in the 19th century and in the USSR, Mexico and China in the 20th century.

On the one hand, most of the catching-up industrialization projects relied on the strong engineering schools development, and on the other hand, on the professional development of the state apparatus itself, aiming at replacing the technology entrepreneur functions with the good state machinery organization. On the other hand, institutional mechanisms establishment question arouse each time, regarding their intention to compensate and overcompensate for the unreadiness of the legal institutions and social professional organizations of the specific society for the industrial revolution. The efficiency of such projects is still an issue of concern for representatives of various social sciences, i.e. historians, sociologists, political analysts as well as for the field of practical politics.

It is important to emphasize that regardless of such substitution results in specific countries and historical circumstances, these processes always had one common consequence — they significantly, and sometimes irrevocably distorted the economic fundamental structure — first of all, the prices of those resources that were required for the business projects. Caused by this, the entrepreneurship was deprived of the right to establish exchange values of the products, hence the part of the property rights, thus, entrepreneurs were forced out to the regions less influenced by the state apparatus.        

Even in countries that did not come up with a question of superiority of the entrepreneurial innovation production method over the state at all, since it was obvious to representatives of the national elite, entrepreneurs were forced to form institutions that restrict the rights and possible influence of the state structures and officials. A striking example is the Bank of Amsterdam (1609) which was the first central bank institution in the history to regulate the exchange rate in accordance with the balance of business supply and demand, and the city authorities were forbidden to get loans there. Or later, it was Unity Creates Strength Trust (1774), a Dutch investment trust, created to diversify the national risks of entrepreneurs by investing in other jurisdiction.

Today, the work of state apparatuses in many countries, where the natural private business activity remains lower than in the leading countries in terms of the technological race, is intensified by further technology packages changing, which outlined its main features at the turn of the 21th century.

As in previous historical periods, this work is not limited to creating institutions that stimulate and support innovation, which means creating technology entrepreneurship and the inventor-entrepreneur interrelation, but is directly aimed at compensating for its functions.

20TH CENTURY INNOVATION OFFICER

The exposition will be incomplete if we forget to introduce another figure into the space of entrepreneurial orientation, that is the manager. Despite the fact that this is the youngest position among those mentioned above, as it is only a little more than a hundred years old, it is one of the most popular professions today. Notably, professional management owes the inventor-entrepreneur partnership its appearance and rapid growth in the 20th century.?

To clarify this point, let’s now think back to the last decades of the 19th — the early 20th century. Smells of oil and gasoline were in the air, reflecting the US industrial revolution growing in intensity, meanwhile the phenomena of the previous revolution were around represented by the English manufactories of the late 18th century, playing the key role in the industrial process organisation, but tragically not ready to accept a new package of technologies.

Contemporary management appeared as a result of the efforts to increase labour productivity in the factory (and to bring this point of the first industrial revolution in line with the tasks of economic globalization at a new stage). Frederick Taylor, a mechanical engineer by training and chief engineer of several American industrial enterprises, noticed a gap between the possibility for the multiple increase in production efficiency and the operational decisions made by the managing owners, so that he brought the organizational development experience from the field of invention and engineering to the management sphere. His scientific principles of labour organization imply a direct transfer of the differentiation and specialization method regarding variable engineering knowledge to the sphere of administration, organization and management. Taylor disintegrated the knowledge necessary to manage a technologically complexified production into eight different types of management activities, placing them literally on different floors of organizational and managerial activity.

Following Taylor, engineer Henry Gantt, his student and fellow, along with Karol Adametsky and Walter Polyakov, created the first professional management tools which were the base maps for manufacture planning, now known to a first-year management student as Gantt Diagrams.

Among the pioneers of the new era, those who managed to use the work results of Taylor and his followers to the full extent, was Henry Ford, who built the first technology transnational corporation from scratch. This is not surprising, after all, Taylor’s practical work was opposed vigorously by labour unions, capital investors and many engineers at that time, since it was focused primarily on restoring the lost functions of technology entrepreneurship in old companies. Describing the purpose of his diagrams, Gantt characterized them as requirements for the manufacturing entrepreneurial system to function and develop (Organizing for Work, 1919).

Trying to professionalize a part of the entrepreneurial work in order to increase factory productivity, Taylor set up an opportunity for a new industrial process organisational structure to emerge. It is exactly the pair of the transnational corporation and the hired management that held the position of the main producer of innovations for most of the 20th century.        

A significant part of innovations covered the sphere of so-called organizational innovations, i.e. methods and ways of operating activities seen as complicated ones concerning that time. At the same time, engineers and inventors were moving to corporate R&D centers in large numbers, reasonably counting on the large companies stability and their management competence.

The share of technological outsourcing, which reached almost 100% at the end of the 19th century (and at the end of the UK Industrial Revolution in almost all invention was carried outside the companies and factories — in private laboratories and universities), was reduced to a barely noticeable 3% in the 1960s, so only those studies which results were not industrially-oriented remained outside the transnational corporations.

It is not surprising that as far as the US industrial revolution in technologies and industries, such as the production of cars, fertilisers, fossil fuel, antibiotics and other large-tonnage products exhausted their potential for efficiency upgrading, the number of inventive organisations independent of transnational corporations, began to grow again, thus, the share of technological outsourcing reached 25% in the late 1990s and is inevitably increasing further.

COSTLY AFFAIR

At the same time, the price of management itself began to grow rapidly. Trying to understand and catch the idea of new technology trends, managers of large corporations began to invest in additional training, in even more specialized management, and, finally, directly in increasing their personnel quantity, significantly increasing the average costs for this. It’s been long time since inflation, mainly formed as a result of labour costs increase, couldn’t keep pace with the growth of managers’ incomes.

Every product used at the beginning of the 21st century, comprises 50—80% of direct and indirect management costs. If it is hard to be felt in terms of household items, then visit the manufacturing workshop of any vertically integrated company and ask about the amount of overhead costs — if it is honestly said, you will hear a figure up to hundreds of percentages.        

At the same time, the influence of this professional group on the labour productivity and the technology development is dramatically decreasing. The material technologies potential that formed the basis of the last industrial revolution is exhausted to the same extent as the life of intellectual, knowledge, technologies that performed well in the previous stage of development. Resulted from the collaboration of engineers and entrepreneurs to increase labour productivity, the management has become one of the key factors of its decline a hundred years later, leaving the part of functions within the implementation of the given entrepreneurial projects.

However, the social role of managers should not be underestimated, it is unlikely for anyone else in the field of innovation to have more restraining influence on the pace of technological development today.

Thus, in the field of innovation, in addition to the technology entrepreneur, we see the following. Firstly, a large group of inventors who divided labour among themselves, therefore staying extra-productive; who, due to their work results low appliance, try to deal with some of the entrepreneurial tasks themselves, which usually turns out to be failing. Secondly, the government officials who sincerely believe that they took into account the mistakes of their predecessors and came up with such new tools that they would definitely succeed in riding the technology development this time. Thirdly, a community of super-trained managers who are confident in the stable future of large corporations, whose number of specialisations exceeds the number of seats in a medium-sized football stadium.

Such method of navigation defining the development process parties and providing an understanding of their goals, is required by the entrepreneur only to proceed to the business projects development and implementation, given the distinguished position characteristics. So, how do technology entrepreneurs act today, in a situation of a new industrial revolution emerging?

To be continued…