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KNOWLEDGE CREATION, ENTREPRENEURSHIP, AND
ECONOMIC GROWTH: A HISTORICAL REVIEW
Bo Carlsson (corresponding author)
Department of Economics, Case Western Reserve University
111 19 Bellflower Road, Cleveland, Ohio 44106-7235
Tel. (216) 368-4112, fax (216) 368-5039, e-mail Bo.Carlsson@case.edu
Zoltan J. Acs
School of Public Policy, George Mason University
Fairfax, VA 22030-4444
Tel. (703) 993-1780, fax (703) 993-2284, e-mail zacs@gmu.edu
David B. Audretsch
Department Entrepreneurship, Growth and Public Policy, Max-Planck Institute for
Research into Economic Systems, Jena, Kahlaische Strasse 10, 07745 Jena, Germany
e-mail audretsch@mpiew-jena.mpg.de
Pontus Braunerhjelm
Department of Transport and Economics, Royal Institute of Technology
100 44 Stockholm, SWEDEN
Tel. +46 (8) 790 9114, e-mail pontusb@infra.kth.se
February 2009
This version of the paper was accepted for publication in Industrial and
Corporate Change, 18(6), 2009, pp. 1193-1229, DOI:10.1093/icc/dtp043
This paper explores the relationship between knowledge creation, entrepreneurship, and
economic growth in the United States over the last 150 years. Distinguishing between
general knowledge and economically useful knowledge, we examine the changes over
time in the locus and content of new knowledge creation: the role of universities,
particularly engineering schools and Land Grant universities, industrial laboratories, and
corporate R&D laboratories prior to World War II. The practical orientation of U.S.
academic R&D and the close research interaction between academia and industry are
noted. We study the unprecedented increase in R&D spending in the United States during
and after World War II and how it was converted into economic activity via incumbent
firms in the early postwar period and increasingly via new ventures in the last few
decades.
Keywords: knowledge, knowledge filter, economic growth, entrepreneurship, history
JEL codes: O14, O17, O30, N90
KNOWLEDGE CREATION, ENTREPRENEURSHIP, AND
ECONOMIC GROWTH: A HISTORICAL REVIEW*
INTRODUCTION
It is generally accepted that the creation of new knowledge is an important driver
of economic growth. But the mechanisms through which new knowledge gives rise to
economic growth are not well understood. For example, why is it that large investments
in R&D (such as in Japan and Sweden) have not resulted in high economic growth in the
last two decades? Why does entrepreneurial activity play a more important role in some
countries (e.g., the United States) than in others (Europe and Japan)? And how and why
do these relationships shift over time? The underlying question is: why doesn’t new
knowledge always result in (new) economic activity?
In a series of papers (Acs et al., 2004, 2005 and 2009) we have developed a
model that distinguishes between knowledge and economically useful knowledge
(following Arrow 1962) by introducing the notion of a knowledge filter that prevents
knowledge from becoming economically useful. We have also identified
entrepreneurship as a mechanism (in addition to incumbent firms) that converts economic
knowledge into economic growth.
The purpose of this paper is to explore the locus and content of knowledge
creation over time and to explain how it influences innovation and economic growth. We
focus primarily on the United States, occasionally comparing the U.S. experience with
that elsewhere.
* Extensive and constructive comments by two anonymous referees are gratefully acknowledged. We
would also like to thank Richard Baznik and the discussants at the DRUID conference in Copenhagen in
June, 2006, for helpful comments on earlier versions of this paper.
2
The paper is organized as follows. We begin with a conceptual overview of the
knowledge creation system and the role of filters or obstacles that prevent knowledge
from resulting in economic activity. We then present an historical overview of the
organization of academic and industrial research in the United States and the links
between knowledge creation and economic growth. We start with a discussion of how the
industrial revolution was based in part on turning knowledge into economically useful
knowledge and how university education and research in the United States became
practically and vocationally oriented (in comparison with European universities), partly
through the land-grant universities established in the mid- to late 19th century. In the early
part of the 20th century, corporate research and development labs began to emerge as
major vehicles of basic industrial research. Virtually all of the funded research prior to
World War II was conducted in corporate or federal labs. In conjunction with a rapidly
increasing share of the population with a college education, this made for high absorptive
capacity on the part of industry and, as a result, strong links between knowledge creation
and economic growth. In subsequent sections we discuss the emergence of the research
university, the dramatic increase in research and development spending, and the shift of
basic research toward the universities, especially during and following World War II.
During the 1960s and 1970s, knowledge creation became less focused on economically
useful knowledge, leading to an increasing need to “translate” basic (academic) research
into economic activity. New firms have increasingly become the vehicle to translate
research into growth; this can be seen in the greater role of small business and
entrepreneurship from the 1970s onward. Meanwhile, the R&D of large incumbent firms
has become more applied and oriented toward building absorptive capacity rather than
3
pushing out the knowledge frontier. We conclude with a discussion of the implications
for innovation, entrepreneurship, and economic growth.
THE KNOWLEDGE CREATION SYSTEM
A schematic picture of the knowledge creation system is presented in Figure 1.1
There are two main types of research: academic and industrial. The former is primarily
basic and is carried out in universities or research institutes, while industrial R&D
primarily involves applied research or development work and is carried out in industrial
firms or government laboratories.2 In the United States, basic R&D (about 60 % of which
is performed in universities) currently makes up slightly less than 20 percent of the total
R&D, while applied research makes up a little more than 20 percent. The remaining 60
percent is development R&D (NSF, 2006a). A large part of academic research and a
substantial part of industrial R&D has no direct commercial value (i.e., is not
economically useful).
The part of industrial R&D (in the lower part of Figure 1) that is judged to have
potential economic value (i.e., passes the economic value filter) can be turned into
intellectual property to be subsequently commercialized (if it turns out to have sufficient
commercial value), or it can be indirectly commercialized by increasing the absorptive
capacity or knowledge base of the company. Commercialization can be accomplished via
1 Even though the Figure may give the impression of a linear process from academic research to
commercialization, there are numerous cases of loops and feedbacks, as indicated later in the text.
2 The Frascati Manual defines basic research as “experimental or theoretical work undertaken primarily to
acquire new knowledge of the underlying foundation of phenomena and observable facts, without any
particular use in view. Applied research is also original investigation undertaken in order to acquire new
knowledge. It is, however, directed primarily towards a specific practical aim or objective. Experimental
development is systematic work, drawing on existing knowledge gained from research and/or practical
experience, which is directed to producing new materials, products, or devices, to installing new processes,
systems and services, or to improving substantially those already produced or installed” (OECD, 2002, p.
30).
4
expansion of the activities (new or improved goods and services) in existing firms – the
main vehicle – or via spin-off to new entities, or via licensing to other firms.
Most academic research (in the upper part of Figure 1) is basic and has no
immediate economic value. Basic sciences such as chemistry, physics, and mathematics
have no immediate economic value but are essential in more applied fields whose output
does have economic value.3 There are two types of research output that has potential
economic value. The most important is in the form of knowledge that graduating students
take with them into the labor market, i.e., educated labor (human capital, including
skilled researchers). Another important output is research that is judged to have potential
economic value, i.e., it passes the institutional filter. The first step in the
commercialization process is an invention disclosure. The researcher/inventor and/or the
technology transfer organization of the employer (university) decides whether or not to
apply for a patent. If this results in a patent application and if a patent is approved, the
invention passes the economic value filter and becomes intellectual property that can be
commercialized via licensing to an existing firm or via start-up of a new firm.4
The basic knowledge produced in academia may be in areas (such as the
humanities) that have little or no economic value (even though it may have significant
human value). The research may not be advanced enough to be on the knowledge
frontier, or it may not be sufficiently broad, deep, or systematic to be useful in applied
3 The relationship between the science of chemistry and the body of knowledge concerning certain
manufacturing processes referred to as chemical engineering is a case in point (Rosenberg, 2000, p. 84).
4 Only about half of the invention disclosures in U.S. universities result in patent applications; half of the
applications result in patents; only 1/3 of patents are licensed, and only 10-20 % of licenses yield
significant income (Carlsson and Fridh, 2002, p. 231). In other words, only 1 or 2 percent of the inventions
are successful in reaching the market and yielding income.
5
research or development that can lead to commercialization. In practical terms, the
allocation of funding of academic research in the United States may be viewed as
reflecting the perceived economic value of research in various disciplines. In 2004, the
life sciences received nearly 60 % of all R&D funding at U.S. universities and colleges,
all other sciences (including social sciences) about 25 %, and engineering the remaining
15 % (NSF, 2006a).
The barriers to converting research into commercialized knowledge may be
referred to as the “knowledge filter.” The first component of the knowledge filter as far as
academic research is concerned (besides the “roundaboutness” of converting basic
science into applied knowledge) may be referred to as the institutional filter. It consists of
organizational barriers, university policies, attitudes among faculty and university
administrators against commercialization of research, and lack of incentives to pursue
commercialization. The main output of academic research is often highly skilled labor.
The higher the barriers to commercialization of research, the greater is the share of
research dissemination via skilled labor.
The second and third components of the academic knowledge filter are the
economic and commercial value filters which reflect the capability to convert invention
disclosures into intellectual property (primarily in the form of patents) and then to
commercialize the intellectual property via licenses and start-ups.
There are similar filters for industrial R&D reflecting the difficulty in business
organizations to convert research into intellectual property and to commercialize new
6
products. The greater are the obstacles to commercialization of research, the thicker is the
knowledge filter.
The research efforts of academic institutions have increased enormously over
time, with varying economic impact. On the whole, U.S. universities have been much
more successful in commercializing research than their foreign counterparts. But external
funding of academic research is a relatively recent phenomenon; the research university
as we know it today did not emerge in the United States until around World War II. It is
only in the last few decades that basic academic research has begun to play an important
role in the economy. We turn now to a brief historical overview.
HISTORICAL OVERVIEW OF ACADEMIC AND INDUSTRIAL RESEARCH
AND THE KNOWLEDGE FILTER
Universities and Their Role in Knowledge Creation
Universities began to arise in Europe during the Middle Ages.5 They developed
out of monastery and cathedral schools, attended by adolescents and taught by monks and
priests. One of the first was in Bologna, established in 1088, followed by Paris (1160),
Modena (1175), and Oxford (1190). The curriculum consisted of the art of reading and
writing, focusing on the Bible and the Latin and Greek classics, rhetoric, and logic.
Knowledge meant logic, grammar, and rhetoric; it did not mean ability to do, or utility.
The role of the universities was to collect, codify, and teach general knowledge. Utility or
economic knowledge was not thought of as knowledge but rather as skill – the Greek
5 There were earlier precedents in China, India, and the Middle East.
7
word téchne. The only way to learn téchne or skill was through apprenticeship and
experience.
The establishment of the first engineering schools in the mid-18th century
represents the beginning of codification of economically useful knowledge. The French
École des Ponts et Chaussées was the first engineering school, founded in 1747. It was
followed around 1770 in Germany by the first school of agriculture and in 1776 by the
first school of mining. The first technical university, École Polytechnique in France, was
established in 1794. Meanwhile in Britain the application of patents shifted from
establishing monopolies to enrich royal favorites (first granted in the mid-15th century) to
patents being granted to encourage the application of knowledge to tools, products, and
processes, and to reward inventors, provided that they published their inventions.
(Drucker, 1998, pp. 18-21)
None of the technical schools of the eighteenth century aimed at
producing new knowledge… None even talked of the application of science to
tools, processes and products, that is, to technology. This idea had to wait for
another hundred years until 1849 or so, when a German chemist, Justus Liebig
(1803-1873), applied science to invent first, artificial fertilizers and then a way to
preserve animal protein, the meat extract. What the early technical schools… did
was, however, more important perhaps. They brought together, codified and
published the téchne, the craft mystery, as it had been developed over millennia.
They converted experience into knowledge, apprenticeship into textbook, secrecy
into methodology, doing into applied knowledge. These are the essentials of what
we have come to call the “Industrial Revolution,” i.e. the transformation by
technology of society and civilization worldwide. (Drucker, 1998, p. 21)
The first university in the United States was Harvard College, founded in 1636
and established in the tradition of European universities. Seven of the nine colleges
founded in the colonial era (all of which were private)6 were oriented to a classical
6 Two of these, the College of Willliam & Mary and Queen’s College (now Rutgers) were later converted
to public universities.
8
curriculum in preparation for civic leadership or ministry. After independence, private
and public universities were established in parallel. The University of Georgia (1785)
was the first state university. The U.S. Military Academy at West Point, founded in 1802,
was the first engineering school, followed by Rensselaer Polytechnic Institute in 1824
(Rosenberg & Nelson, 1994, p. 327).
After the Civil War, the Morrill Land-Grant College Act (1862) led to the
establishment of universities in every state. Unlike most private universities, these state
universities and colleges were charged with public service obligations in agricultural
experimentation and extension services,7 industrial training, teacher education, home
economics, public health, and veterinary medicine (Graham and Diamond, 1997, p. 18).
Some of the land-grant universities were private (e.g., M.I.T.). One of their main features
was a strong practical/vocational orientation in both education and research. While the
emphasis was on teaching branches of learning related to agriculture and the mechanical
arts in addition to the liberal arts, there was also research. The agricultural experiment
stations at the land-grant universities played a particularly important role not only in
advancing knowledge in fields of practical and economic relevance but also in making
the practical application of research acceptable if not required in U.S. academic
institutions. The Morrill Act also stimulated engineering education. The number of
engineering schools increased from six to 70 within a decade, and the number of
engineering graduates grew from 100 in 1870 to 4,300 in 1914 (Nelson & Wright, 1992,
p. 1942). Since the research agenda was driven primarily by the needs of the rapidly
7 After the Hatch Act of 1887 which allowed government support of the experiment station program
(Nelson & Wright, 1992, p. 1942).
9
expanding economy and largely involved applied research, this made for a thin
knowledge filter. The new knowledge was easily converted into economic activity.
Meanwhile in Europe, the tradition of higher education continued to focus on
teaching, but the advent of Humboldt University in Berlin in 1809 represented a new
approach, focused on research. This was the first research university; adherence to
scientific and scholarly discipline emerged as preeminent, not worldly application of
knowledge.
As a result of the different origins of U.S. colleges and universities with respect to
both ownership and mission, the American system of higher education has been
decentralized and pluralistic as well as competitive from the very beginning, in clear
contrast to Europe:
By the late nineteenth and early twentieth centuries, higher education systems in
Europe were typically centralized under a national ministry of education. As a
consequence, higher education policy was essentially government policy. Like
most public bureaucracies, Europe’s state-dominated systems of higher education
were organized hierarchically by function. Competition was minimized by
bureaucratic boundaries, much as it was in ministries of justice, war, or public
health. Teaching faculty were typically civil servants. The European university
was the training ground for the middle and professional classes, and for this
reason, attendance was confined to a small, closely screened cadre of
academically talented students who sought advanced professional and vocational
training rather than general education in the liberal arts, the goal of American
college students… Even though chair professors dominated their institutes, the
basic decisions about university budgets, student admissions, and academic
programs were made by central ministry officials, not by campus academic
officers. The centralized system of European higher education achieved
organizational rationality and bureaucratic efficiency at the expense of
competition and innovation (Graham and Diamond, 1997, pp. 12-13).
In European countries, ministries of education have typically paid the costs and
set the agenda for the university. As a result, European universities have had limited
authority to manage their own size and shape, their entry or exit requirements, and their
10
broad character and function. (ibid., p. 23) By contrast, American private universities are
typically governed by a board of non-resident, non-academic trustees, led by a powerful
president, and independent of control or support by the state.8
The decentralized and pluralistic American system allowed for much faster
expansion than that in Europe without requiring structural change. In 1910, about
330,000 students were studying at almost one thousand colleges and universities in the
United States (whose population was 92 million), while there were only 14,000 students
in sixteen universities in France (with a population of 39 million). This represented about
4 % of the college-age population in the U.S. vs. about 0.5 % in France.9 In most
European countries (including Britain), college enrollments did not exceed 5 percent of
the college-age group until after World War II (op. cit., p. 15). By 1940, the percentage of
college-age Americans attending institutions of higher education was three times higher
than the European average (roughly 12 % in the U.S. versus 4 % in Europe). (op. cit., p.
24)
8 “Almost without exception, American universities were built around a large, core college of arts
and sciences, organized into discipline-based departments in which faculty appointments and
tenure were based. This common organizational form traced its origin to the colonial colleges and,
by the nineteenth century, to the peculiar need for American undergraduate education to fill the
void left by a democratic system of public secondary schools that valued high graduation rates
over demanding standards. The raison d’être of “the college” was thus to provide baccalaureate
education in the liberal arts and sciences for residential undergraduates, while the graduate school
offered masters and doctoral degrees, and separate schools offered professional degrees…
When the German model of the research university was imported to the United States by
way of Johns Hopkins late in the nineteenth century, it was admired and emulated. But it was also
quickly Americanized. The research and graduate orientation of the German model took a
prominent and permanent place in the hierarchy of American academic prestige. But the American
graduate school was superimposed on the colleges of arts and sciences, with their undergraduate-
centered departmental organization. By the early twentieth century even Johns Hopkins looked
more like Yale, or like the University of North Carolina, than like von Humboldt’s model in
Berlin” (Graham and Diamond, 1997, p. 19).
9 The average years of formal higher educational experience of the population aged 15-64 in 1913 was 0.20
years in the U.S. versus 0.10 in France, 0.09 in Germany, 0.11 in the Netherlands, and 0.08 in the U.K.
(Rosenberg & Nelson, 1994, p. 325, citing Maddison (1987)).
11
The expansion of the U.S. system of higher education allowed it to cater not only
to a rapidly growing population but also to increasing percentages of each cohort
demanding higher education. This set the U.S. system apart from its European
competitors. It contributed importantly to the creation of a relatively highly educated
industrial labor force, i.e., a relatively high capacity to absorb new technology. And this
contributed significantly to the rising economic power and competitiveness of the United
States.
The rapid growth of the U.S. economy between the Civil War and World War I
was founded on rising productivity in agriculture and the emergence of new engineering-
based industries: mechanical, electrical, and chemical engineering, telecommunications,
and instrumentation. To a large extent this was the result of the ‘hands-on’ practical
problem-solving nature of academic research in the U.S. As early as 1830, Alexis de
Tocqueville commented on the practical orientation of science and attitudes toward
science in America, in contrast to the more theoretical and abstract orientation in Europe
(Rosenberg & Nelson, p. 324). “Whereas in Great Britain, France and Germany,
engineering subjects tended to be taught at separate institutions, in the United States such
subjects were introduced at an early date into the elite institutions. Yale introduced
courses in mechanical engineering in 1863, and Columbia University opened its School
of Mines in 1864” (ibid., p. 327). This interdependence between the needs of the growing
economy and the rise of university education is the reason Rosenberg has referred to
American universities as “endogenous institutions” (Rosenberg, 2000).
After the breakthroughs in electricity research around 1880, American universities
responded almost instantly to the need for electrical engineers. In the same year (1882) in
12
which Edison’s Pearl Street Station in New York City went into operation, MIT (founded
in 1865) introduced its first course in electrical engineering. Cornell followed in 1883 and
awarded the first doctorate in the subject in 1885. By the 1890s schools like MIT had
become the chief suppliers of electrical engineers. Throughout the entire twentieth
century, American schools of engineering have provided the leadership in engineering
and applied science research upon which the electrical industries have been based (ibid.,
pp. 327-328)
The story is similar in chemical engineering. Even though Britain was the
“workshop of the world” and had the largest chemical industry in 1850, this industry was
based on its role as supplier to the textile manufacturers of such essential inputs as
bleaches and detergents and of soda and sulfuric acid to the glass industry, not on
professional engineering competence. In fact, there were no departments of chemical
engineering in Britain or anywhere else outside the United States until the 1930s,10 and
the Institution of Chemical Engineers was not founded until 1922. By contrast, MIT
offered the first course in chemical engineering in 1888 and established the School of
Chemical Engineering Practice in 1915 (Rosenberg, 2000, p. 88). Several American
universities established chemical engineering departments in the first decade of the 20th
century, and the American Institute of Chemical Engineers was founded in 1908
(Rosenberg, 1998, pp. 193-200). The preeminence of the U.S. in chemical engineering
was based on the insight that industrial applications of chemistry involve not only a
scaling up of scientific discoveries but also integration with skills from a wide variety of
engineering fields. It was based also on close collaboration between academic scientists
10 In Germany, chemical engineering did not emerge as a distinct subject until after World War II
(Rosenberg, 2000, p. 103).
13
and industrial scientists in corporate R&D laboratories that were being established during
the same time period. The knowledge that was being transferred was practical and
informal rather than formalized as intellectual property. And the knowledge flows were
not necessarily vertical (from upstream to downstream); for example, fluidized bed
catalytic cracking was largely a joint achievement of MIT and the Esso laboratories.
Also, chemical engineering as an academic discipline became a vehicle (general-purpose
technology) for ‘horizontal’ diffusion of knowledge into the petrochemical industry
(Rosenberg, 2000, pp. 98-103).
But while the U.S. performance was strong in the practical application of
scientific discoveries, basic science itself was still relatively weak. Even as late as during
the first half of the 1920s Americans often traveled to Europe to learn, and when
European scientists traveled to the United States, they did so primarily to teach. An
aspiring student seeking the best available academic education in basic scientific
disciplines such as physics or chemistry would have been well advised to study in
Germany, Britain, or France (Nelson & Wright, 1992, p. 1941). But this situation was
changing by the end of the decade as American scientists began to reach the scientific
frontier. Leading U.S. scientists attained parity with the leading Europeans in some fields
before events in Europe forced the intellectual migration of the 1930s (Geiger, 1986, pp.
233-234). But by and large, basic science in the U.S. remained behind that in the leading
European countries, and external research funding was still quite small.
During the interwar period, U.S. academic research was funded primarily by
philanthropic foundations (such as the Rockefeller and Carnegie Foundations) and large
corporations (e.g., Du Pont, General Electric, Borden, and Lilly). The federal government
14
was not involved in funding academic research at this time. The total value of foundation
grants to academic institutions was only on the order of $50 million in 1931 and then fell
dramatically as the depression deepened. It rose again in the late 1930s but attained only
$40 million (about $450 million in 2006 dollars) in 1940.11 The externally funded
academic research was also concentrated in just a handful of institutions. Among sixteen
preeminent universities12 only six spent more than $2 million annually (from all sources,
including internal) in the late 1930s, and four spent less than $1 million. Eleven of these
were private institutions (Graham & Diamond, 1997, p. 28). Most research grants were
small and made to individuals rather than to institutes or schools; there were few if any
institutional grants.
But even though external funding of academic research was small, the issue of
commercialization of academic research arose. As early as in 1912, a new entity, the
Research Corporation, was set up to develop and strengthen the patents covering
electrostatic precipitation technologies developed by Professor Frederick Cottrell at the
University of California. In the 1930s, the Research Corporation began to manage the
patenting and licensing activities of other research universities who were reluctant to
handle these activities themselves (Mowery & Sampat, 2001a, pp. 318-319). Also, in
1924 the Wisconsin Alumni Research Foundation (WARF) was set up as a legally
independent organization to receive and license patents to University of Wisconsin
faculty (Shane, 2004). Several other state universities also set up similarly affiliated but
11 The fact that external research funding was so limited does not mean that no research was conducted,
only that it was focused on areas that did not require expensive equipment or large laboratories. “Big
science” projects in science, engineering, and medicine were new phenomena that did not come about until
during and after World War II.
12 These sixteen were UC Berkeley, Chicago, the California Institute of Technology (Caltech), Columbia,
Cornell, Harvard, Illinois, Johns Hopkins, MIT, Michigan, Minnesota, Pennsylvania, Princeton, Stanford,
Wisconsin, and Yale.
15
legally separate foundations to manage patenting and licensing. And in 1932, MIT
instituted a policy that asserted its rights to all faculty inventions. But rather than taking
on a direct role in managing patents and establishing its own affiliated foundation, MIT
signed a contract with the Research Corporation to manage its patent portfolio. Other
universities also signed similar agreements with the Research Corporation. However,
most U.S. universities did not have any patent policies prior to World War II, and several
leading universities (including Harvard, Penn, Chicago, and Johns Hopkins) had adopted
policies that discouraged patenting or prohibited faculty from patenting (Mowery &
Sampat, 2001b, pp. 788-789).
Thus, although both American universities and American industry had increased
their capacities for scientific research during the interwar period, the best among them
having reached parity with Europe’s best in some areas by the early 1930s, the total
research effort was still small compared to what was to come during and after World War
II. The contribution of university research to economic growth was quite modest. Most of
the limited basic research that was done was carried out in industrial and government
labs. Industrial expenditures for basic and applied research had reached $200 million in
1939, up from just over $100 million a decade earlier and $30 million at the start of the
1920s (Geiger, 1993, p. 4). Expenditures for research in government and industry,
overwhelmingly applied in character, were ten times university expenditures for basic
research in 1940 (op. cit., p. 14). As a result, a large part of the new knowledge created
(though limited in scope, particularly in the universities) was directly economically useful
and therefore relatively easily transformed into economic activity.
16
By 1945 there were 641 public institutions in 48 state systems and about 1,100
private institutions with a combined total enrollment of about 1.6 million students evenly
split between public and private institutions. Both the public and the private institutions
varied widely in purpose, size, and quality. Even though the number of public institutions
more than doubled between 1950 and 1988 (from 641 to 1,548), the private institutions
were still in a majority. The strongest growth was in public two-year community colleges
(Graham and Diamond, 1997, pp. 15-16; Snyder, 1993).
Early 20th century: the emergence of corporate R&D labs
As mentioned already, the research conducted in American and European
universities in the earlier part of the 20th century was quite limited. But as the number of
universities grew in the United States – particularly in the first decade after the Civil War
and in the 1890s when many land-grant universities were established – and with it the
number of graduates, the skills of the industrial labor force increased. New science-based
industries emerged that constituted the core of the “Second Industrial Revolution” – those
relying on chemical engineering, electricity, and the internal combustion engine. But
“relatively little of the American performance during this era was based in science, nor
even on advanced technical education. American technology was practical, shop-floor
oriented, built on experience. The level of advanced training in German industry was
substantially higher.” (Nelson & Wright, 1992, p. 1938) The new industries needed new
knowledge, but the universities did not possess the specialized knowledge, equipment,
and organization that was required. Instead, a new mechanism emerged in the form of
industrial laboratories.
17
During the latter half of the 19th century a number of industrial labs were
established in the United States. There were at least 139 by the turn of the century
(Mowery, 1981, cited in Rosenberg, 1985, p. 51). The earliest industrial labs did not
perform activities that could be regarded as research; they were set up to apply existing
knowledge, not to make new discoveries. They were organized to engage in a variety of
routine and elementary tasks such as testing and measuring in the production process,
assuring quality control, standardizing both product and process, and meeting the precise
specifications of customers (Chandler, 1985, p. 53). But as Rosenberg points out, this
development was linked to the expansion of higher education in the United States:
“The growing utilization of scientific knowledge and methodology in industry
was vastly accelerated by an expanding pool of technically trained personnel –
especially engineers. Associated with this expansion was the growth in the
number of engineering schools, engineering programs, and the engineering
subspecialties in the second half of the nineteenth century…. But it is essential…
to realize that it was the larger body of scientific knowledge, and not merely
frontier science, that was relevant to the needs of an expanding industrial
establishment.” (Rosenberg, 1985, p. 24)
Thus, the pioneering efforts by an increasing number of U.S. universities to
establish not only individual courses but also whole departments in chemical and
electrical engineering ahead of their European counterparts built a foundation for rapid
economic growth. They also established close collaboration between academia and
engineering-based industries. The links between science and industry - the emergence of
new bodies of scientific knowledge that were subsequently applied to industry - were
established somewhat later in a second stage of development in the form of corporate
R&D laboratories. The expansion of higher education coincided with the establishment of
such laboratories.
18
U.S. universities played an important role in the creation of corporate R&D
laboratories, especially in chemical engineering, via collaborative research and
consulting, and in developing expanded research capabilities over time, in addition to
serving as the launching pad for the careers of individuals who found employment in
private firm laboratories. There is also evidence of influence in the opposite direction,
from firms to universities. By providing both financial support for university research
laboratories and a market for future trained labor, firms supported the growth of scientific
capabilities at local universities (MacGarvie and Furman, 2005, pp. 4-5).13
Critical to this second stage [the corporate R&D labs] was a separation of the
testing, standardizing, and quality control functions from those of product and
process development. This separation involved, first, the creation of a laboratory
physically separate and usually geographically distant from the factory or
factories of the enterprise. Of even more importance, it called for the creation of a
separate, specialized organization to exploit the laboratory's activities. This
organization usually took the form of a department separate from those
responsible for production, distribution, and purchasing activities of the
enterprise. The new department's objective was to define programs for the
laboratory by monitoring both market and technological opportunities. Its most
critical task was to integrate the activities of the research personnel with those of
university professors working closer to the sources of scientific knowledge and
with those of managers in the company's design, manufacturing, and marketing
offices. (Chandler, 1985, p. 54)
The primary function of this new type of department – the corporate research
and development laboratory – was not basic research but rather the commercial
development of products and processes. Shortly after the turn of the century, a handful of
relatively new - but still big - businesses made a marriage between science and business
by creating such laboratories. The first corporate R&D lab was established by Du Pont in
13 The Du Pont company funded graduate fellowships at 25 universities during the 1920s and expanded its
program during the 1930s to include support for postdoctoral researchers. Other companies had similar
programs (Mowery & Rosenberg, 1988, p. 24).
19
1902. It was soon followed by the leaders in the electrical, chemical, photographic, and
telecommunications industries. These firms had one thing in common: They were based
on technologies that had emerged in one way or another from scientific discoveries or
developments and were particularly susceptible to significant, further improvement
through a scientific approach to problem solving. As a result, science became a part of
corporate strategy (Hounshell& Smith, 1988, p. 1). Another result was that a much larger
fraction of business-supported research was conducted within firms in the U.S. compared
with Europe where industry-wide associations or other arrangements played an important
role (Rosenberg, 1985, p. 24).
But the modern corporate research and development laboratory did not emerge
full blown from the minds of executives at such firms as Du Pont, General Electric,
Eastman Kodak, and American Telephone and Telegraph. The first organized industrial
laboratories had appeared in Germany in the 1870s, in firms that sought to commercialize
inventions based on new breakthroughs in organic chemistry (MacGarvie and Furman,
2005, p. 9).What distinguished these German corporate chemical laboratories and set
them apart from other approaches to innovation was that modern corporate chemical
research called for massive scientific teamwork rather than the efforts of individual
chemists. It also set the international pattern for the conduct of research in the chemical-
related industries: most of it has been in-house at the firms, although some has been
outsourced to universities. Also, once researchers had uncovered the mechanisms of
reactions, they could then pursue the invention of new dyes in a highly regular,
systematic way.
The number of routine experiments that had to be conducted to find a single
promising color was large. When such a color was discovered, it was sent to the
20
dye-testing division, where it was subjected to a battery of tests to indicate
whether and under what conditions it would tint anyone of the common fibers, or
such other items as wood, paper, leather, fur, or straw. Then each item
successfully tinted was subjected to several agents of destruction to determine
fastness. Of 2,378 colors produced and tested [by Bayer] in the year 1896, only 37
reached the market. This tedious, meticulous experimentation, in which a
thousand little facts were wrenched from nature through coordinated massed
assault, admirably illustrates the method and spirit introduced into scientific
inquiry by the rising industrial laboratory of the late nineteenth century. (John J.
Beer, quoted in Hounshell & Smith, 1988, p. 5)
As a result of these developments, while an increasing share of American
industrial production was based on new knowledge in the form of scientific discoveries,
the supporting research activity took place primarily in corporate R&D labs, not in
universities. The employment of scientists and engineers in corporate laboratories grew
about 10-fold, from less than 3,000 in 1921 to about 28,000 in 1940 (Mowery &
Rosenberg, 1998, pp. 20-23). Up until the 1920s and 30s, research at universities had
little to do with industrial innovation and economic growth, with the exception of organic
chemicals and to a limited extent electrical equipment. The main contribution of
universities was the education of highly skilled labor.
World War II and the Emergence of the Research University
The research university in the United States is largely a postwar phenomenon, although
as indicated above, its foundations were laid long before. It was patterned after the
German model (von Humboldt’s University of Berlin), but in contrast to its European
predecessor it emerged into a “decentralized, pluralistic, and intensely competitive
academic marketplace fueled by federal research dollars” (Graham & Diamond, 1997, p.
2). Competitive pressures forced the American research universities to change much
more quickly than did the sheltered public universities elsewhere.
21
The war effort led to an enormous scaling up of U.S. research to an unprecedented
level. Total federal R&D expenditures grew from $83 million in 1940 to $1,314 million
in 1945, in 1930 dollars (Mowery & Rosenberg, 1998, p. 28), while total industrial R&D
expenditures were on the order of $200 million annually just before World War II.
During the war, the Army Corps of Engineers alone spent $2 billion on the atomic bomb
and the Radiation Laboratory at MIT expended $1.5 billion for radar systems (Geiger,
1993, p. 9). The increased research was guided by military needs and involved both basic
research and its immediate application and development in the form of military goods
and services (which translated directly into economic activity as these goods had to be
paid for by the federal government).
During World War II the U.S. government harnessed the talent of the top
scientists and engineers at these [top] universities, not - as had been done in
World War I- by inducting them into uniformed service in war-related
bureaucracies but by developing a new contract and grant system under the
leadership of civilian scientific elites. The success story of the wartime Office of
Scientific Research and Development (OSRD) is well known. To lead the
mobilization of scientific manpower, President Roosevelt in 1940 summoned
Vannevar Bush, former dean of engineering at MIT and, since 1938, president of
the Carnegie Institution of Washington. Bush in turn brought in a powerful trio of
senior associates: Karl T. Compton, president of MIT; James B. Conant, president
of Harvard; and Frank B. Jewett, board chairman of Bell Telephone Laboratories
and president of the National Academy of Sciences. A formidable group, they
represented the major sectors of science and technology outside of government.
The OSRD developed an intense and intimate model of collaboration between
Washington and the nation's leading universities. The wartime development of
radar, the proximity fuse, penicillin, DDT, the computer, jet propulsion, and the
climactic trump card, the atomic bomb, brought enormous prestige to the
scientific community. From the development of radar at MIT, through the control
of nuclear fission at the University of Chicago, to the University of California's
secret operations at Los Alamos, scientific brilliance in the national interest was
associated with the great universities. (Graham & Diamond, 1997, p. 28)
Thus, the magnitude, nature, and locus of U.S. research and development changed
dramatically in conjunction with World War II, necessitated by the war effort and funded
22
by the federal government. Prior to the war, the federal government had almost no role in
funding academic research. Its research funding went to government (intramural) labs
and to defense contractors. Only government and industrial labs had the necessary
resources to carry out large-scale, systematic, programmatic research. The sheer scale of
the war-time research effort required the engagement of academic researchers as well.
This, in turn, required massive investments in building up the research infrastructure of
the universities.
Impressive as the federal effort was in mobilizing the nation’s scientific resources
to develop the means necessary to win the war, it is a story not only about research
funding, brilliant scientists, and organization at the federal level. It is also a story about
the internal culture and organization of the universities and about the relations between
the universities and their external environment, particularly industry.14 Granted that
academic research in the United States was highly concentrated to a few elite institutions
prior to World War II, had these elite universities not been ready to take up the challenge,
it is unlikely that their response would have been as rapid and strong as it was. As a result
of changes in its internal organization and incentive system during the 1930s, MIT was in
a leading position; it is no accident that Vannevar Bush was picked by President
Roosevelt to head up the wartime research effort.
As a private land-grant university, MIT had stood virtually alone as a university
that embraced rather than shunned industry.
14 During the interwar period the output of trained professionals was clearly more important than the
research carried out in academic institutions: “In 1919… MIT launched its Cooperative Course in electrical
engineering, a program that divided the students’ time between courses at the Institute and at General
Electric, which hired one-half of the students after graduation. The program was later joined by AT&T,
Bell Labs, Western Electric, and other firms.” (Nelson & Wright, p. 1949, quoting Noble, 1977, p. 192)
23
From its start MIT developed close ties with technology-based industrialists, like
Edison and Alexander Graham Bell, then later with its illustrious alumnus Alfred
P. Sloan, during his pioneering years at General Motors, also with close ties to the
growing petroleum industry. In the 1930s, MIT generated The Technology Plan,
to link industry with MIT in what became the first and is still the largest
university-industry collaborative, the MIT Industrial Liaison Program (Roberts,
1991, p. 33).
MIT’s involvement with industry was not confined to established companies,
however:
The traditions at MIT of involvement with industry had long since
legitimatized active consulting by faculty about one day per week, and more
impressive for its time had approved faculty part-time efforts in forming and
building their own companies, a practice still questioned at many universities.
Faculty entrepreneurship, carried out over the years with continuing and
occasionally heightened reservations about potential conflict of interest, was
generally extended to the research staff as well, who were thereby enabled to
‘moonlight’ while being ‘full-time’ employees of MIT labs and departments. The
result is that approximately half of all MIT spin-off enterprises, including
essentially all faculty-initiated companies and many staff-founded firms, are
started on a part-time basis, smoothing the way for many entrepreneurs to ‘test the
waters’ of high-technology entrepreneurship before making a full plunge
(Roberts, 1991, p. 34).
In his role as head of the OSRD, Bush not only spearheaded the mobilization of the
nation’s science research capabilities; he also revolutionized the relationship between
science and government by channeling the funding to universities rather than to
government labs, despite the fact that it involved military research (Roberts, 1991, pp.
13-14). In World War I, scientists had been recruited to government labs. The new way
of organizing the war effort made it possible to tap into existing research facilities and
capabilities and thus scale up the research much more quickly than would have been the
case otherwise. It also suddenly established the federal government as the major source of
funding for basic research – something that had not been the case until then.
24
Another important step was an institutional change in the organization of
academic research. In order to accommodate both the academic requirement of education
and research for the common good (i.e., via publication) on one hand and the need to
protect the confidentiality of military research on the other, it was necessary to find a new
way to organize the research. The solution was to set up independent laboratories such as
the Draper and Lincoln labs, both organized by MIT faculty who could then divide their
time between the normal academic activities and the defense-related research.
Yet another innovation associated with MIT was that in the immediate postwar
years MIT president Compton pioneered efforts toward commercialization of new
technology, including military developments. Among other things he helped to create the
first institutionalized venture capital fund, American Research and Development (ARD),
set up in 1946. It was largely Compton’s brainchild. He became a board member, along
with three MIT department heads. ARD’s first several investments were in MIT
developments, and some of the emerging companies were initially housed at MIT
(Roberts, 1991, pp. 33-34). Thus was established another crucial link connecting
knowledge creation and commercialization, keeping the knowledge filter as clean as
possible. Other universities eventually followed suit. However, in the early postwar years
it is clear that the vast majority of research funding continued to go to defense
contractors, not universities, and that the bulk of commercialization of new technology
took place via incumbent firms rather than via establishment of new firms.
25
Postwar Developments: 1945-1965
The impact of World War II on knowledge creation in the United States was four-
fold: (1) There was a tremendous increase in R&D spending. (2) The federal government
(particularly the Department of Defense) became by far the dominant provider of
research funding. (3) The primary thrust was toward systematic, programmatic research.
(4) The enrollment in higher education rose dramatically as a result of the so-called G.I.
Bill.
The aftermath of World War II involved a huge increase of the role of the federal
government not only in research but also in funding of higher education. The G.I. Bill,
signed into law by President Roosevelt in 1944, was designed to provide educational
opportunities to returning war veterans. The U.S. system of higher education expanded
rapidly and contributed significantly to increasing capacity in the society to absorb new
technology, thereby contributing indirectly to economic growth. The number of colleges
increased dramatically. Whereas there were 18 new colleges started annually between
1861 and 1943, the number rose to 25 in 1944-1959 and 50 between 1960 and 1979
(Adams, 2000). The total enrollment in higher education went from 1.5 million (9.1 % of
the 18-24-year old cohort) in 1939-40 to 2.4 million (15 %) in 1949 (Snyder, 1993), more
than a 50 % increase. By the early 1950s, approximately 8 million veterans had received
educational benefits. The GI Bill also brought to the university campuses a new kind of
student – older, more oriented to work than to traditional college-age pursuits, and
ultimately more entrepreneurial – different from the pre-war campus population.
The R&D initiated during the war was continued after the war. There was a huge
increase in total R&D spending from the early 1950s to the mid-1960s, mostly due to a
26
sharp increase in federal R&D spending. R&D expenditures as a share of GDP more than
doubled, rising from 1.4 % in the early 1950s to 2.9 % in 1964. See Figure 2. Nearly 80
% of federal R&D funding came from the Department of Defense and NASA. More than
half of this defense-related R&D spending was intramural (i.e., carried out within federal
agencies), and most of the rest was carried out by industry; less than 5 % was carried out
by academic and nonprofit institutions. While modest as a fraction of total U.S. R&D, the
funding for academic research still represented a major increase in R&D funding for
universities. It was the beginning of a long-term shift toward more academic research in
the national R&D system. In these early postwar years, less than 2 % of the DoD R&D
spending involved basic research, while about 1/3 of NASA’s R&D spending was for
basic research.15 By far the largest component of the overall R&D spending involved
applied work that was converted very rapidly into economic activity.
When demobilization after the war closed down the OSRD, national political
leaders agreed that the government-university collaboration should continue. The
question now became how to organize and institutionalize the nation’s research effort. A
deep split developed, however, over its structure and control.
The debate over the continuation of federal funding for scientific research started
immediately after the war. The main issues were whether a single central agency should
be set up to shape and coordinate scientific research, or whether research funding should
be handled through existing departments of the federal government. Another issue was on
what basis research contracts should be allocated. The result of the debate was a trade-
off: the creation of a new agency, the National Science Foundation (NSF), working in
15 The small fraction of DoD-funded research classified as “basic” may be due in part to the fact that much
of the funding went to research in engineering fields viewed as “applied” rather than “basic.”
27
parallel with the traditional agency structure and thus politically accountable to elected
officials, while the science establishment and the university community won a
commitment to peer-reviewed merit competition for basic science research funding.
The debate took five years: the National Science Foundation was finally
established in 1950, but with much smaller funding than originally envisioned by the
scientific community. In its first year of funding (1951), the NSF was allocated only
$150,000, and its funding did not exceed $10 million annually until 1955. (Source: NSF)
The NSF thus became much less dominant as a source of federal funding for academic
research than the academic community had originally expected. Meanwhile, the total
federal government R&D spending continued to increase and soon exceeded $1.5 billion
annually with $1.1 billion allocated to the Department of Defense alone. Also, at this
time several other agencies emerged. The navy was eager to crack the wartime monopoly
of the army and Army Air Corps on developing the atomic bomb; this led to the
establishment of the Office of Naval Research in 1946. At the same time, scientists who
opposed military control of atomic technology won support for the creation of the Atomic
Energy Commission (AEC). “Like the wartime OSRD, the AEC undertook much of its
research via contractual agreements with universities and industry, and it used the
contract model to shift from government to university management most of the
Manhattan Project's secret government-owned laboratories, including those at Los
Alamos, Lawrence, Argonne, Ames, and Brookhaven, and parts of Oak Ridge” (Graham
& Diamond, 1997, p.31).
In biomedical research, the demise of the OSRD left a vacuum that was filled by
28
the National Institute of Health (NIH), the research branch of the Public Health Service.16
The NIH, which had operated its own in-house or intramural research laboratories
since 1930, seized the moment of opportunity in 1945. Taking over fifty wartime
research grant projects from the expiring OSRD, the NIH became the chief
supporter of extramural research in the nation's expanding network of medical
schools. Congress… encouraged the NIH initiative and between 1945 and 1950
expanded its budget from $3 million to $52 million.
By 1950 the pluralistic nature of the federal research system was well
established, and the new NSF, despite its distinctive primary research mission,
was disadvantaged by its tardy entry. The NSF's research funds would modestly
enlarge the federal aid pot, but the foundation would not significantly reshape or
coordinate national science policy. During the 1950s, federal mission agencies
expanded their programs of R&D support under the broad rubric of "mission-
related basic research." Under this umbrella, agencies stretched their traditionally
applied R&D programs to include basic research, thereby offering universities a
growing cafeteria of funding opportunities. (Graham & Diamond, 1997, p. 31)
By 1954, federal agencies still accounted for as much as 69 percent of the funding
for the now vastly expanded total university research budgets, while the universities' own
funds contributed only 8.5 percent. Meanwhile, the share of private foundations was
reduced to only 11 percent and that of industry to 9 percent - both shares sharply reduced
from the peaks they had reached in the interwar years. (ibid., p. 32)
Thus, in conjunction with World War II, a comprehensive array of new federal
support programs provided both vastly increased research funding opportunities and
considerable competitive pressure. As a result, federal science policy was shaped not by a
new ministry of higher education or federal science agency but rather by a whole set of
new agencies and programs in already established departments of the federal government.
This led to overlapping and often duplicative sponsored research programs which on the
one hand invited individual researchers to shop for funding and on the other allowed a
broad, experimental research agenda (ibid., p. 26).
16 The NIH became plural - the National Institutes of Health – in 1948 when Congress added a separate
heart institute to the cancer institute it had created in 1937.
29
However, the new, federally subsidized research economy of the postwar years by
no means provided a blank check to subsidize the research agenda of university scientists
and scholars. It is important to note that federal R&D expenditures were allocated
primarily to development, not to research. In the early 1950s only 6-7 % of federal R&D
expenditures were for basic R&D (and less than 2 % of the R&D funding by the
Department of Defense, DoD). Further, most of the federal money (over 80 percent) was
spent either by intramural federal agencies or by industry, particularly defense
contractors, not universities. In fact, during the 1950s roughly 75 percent of all federal
R&D funding was provided by the DoD. In addition, most federal research funds were
provided to support applied, programmatic research, not basic, "pure," or "disinterested"
research. Even the federally funded basic research program was dominated by "big
science" projects with military applications. (ibid., p. 32) For example, in 1956 the
budget for basic science research was $78 million at the Department of Defense and $45
million at the AEC, while at the NIH, the major supporter of "little science" projects in
fundamental research, the basic research budget was only $26 million and that of the NSF
$15 million. Even by 1960, after a whole decade of rapid funding growth, the NSF still
provided only 12 percent of federal R&D funding for basic research. (Source: NSF)
It is noteworthy that while most research funding went to industry, not universities,
and was provided by the Department of Defense and other defense-related agencies, the
military was also the largest provider of research funding to universities. In 1963, the
DoD provided 26.4 % federal R&D funding to academic institutions, the AEC 8.4%, and
NASA 5.8%. Thus, together these three agencies were responsible for 40.6 %, while the
NIH provided 36.6%, USDA 5.0%, and other federal sources (including the NSF) 4.9%.
30
Altogether, the federal government funded 70 percent of the total funds for academic
research. Philanthropic organizations, state governments, and internal sources provided
the remaining 30 percent of funding (Graham & Diamond, 1997, pp. 34-35).
Under the terms of the federal research contracts, the funding agencies owned the
intellectual property rights to the research results and were responsible for their
application and implementation in their own domains – a form of commercialization.
However, as early as the late 1960s, federal funding agencies including the Department
of Defense, the NIH, and the NSF began requiring the universities to develop formal
patent policies. About 40 universities had done so during the war, and about 45
announced patent policies during the first decade after the war ended. But even though
most major universities had developed patent policies, many of them avoided direct
involvement in patent administration, preferring instead to let the Research Corporation
do that. Thus, the number of institutions that had invention administration agreements
with the Research Corporation grew from 6 in 1946 to 89 in 1956 and continued to rise
to 278 in 1979 (Mowery & Sampat, 2001b, pp. 790-792). Federal research sponsors
started to allow universities with approved patent policies to patent and license the results
of their federally funded research under the terms of Institutional Patent Agreements
(IPAs) negotiated by individual universities with each federal funding agency (Mowery
et al., 2001, p. 102).
The Sputnik crisis provided the leaders of academic science with a window of
opportunity during the Eisenhower and Kennedy presidencies. During the period 1958-63
two historic decisions were made: (1) the federal government assumed primary
responsibility for supporting basic research in the United States; and (2), the research was
31
to be carried out primarily by the universities as an integral component of graduate
education. (Graham & Diamond, 1997, p. 33-34)
As a result of the post-Sputnik surge in research expenditures, federal funding for
basic science raised the “pure science” component of university research expenditures on
American campuses from 52 percent in 1953 to 76 percent in 1963. The total federal
budget for R&D grew by 250 percent in constant dollars between 1953 and 1963, and
federal funding of university research grew by 455 percent (ibid., p. 34).
Military considerations clearly dominated the national research agenda during the
first two decades after the war. However, it took more than a decade before new research
started to generate significant start-up of new firms. The fact that the bulk of the R&D
continued to involve applied research or development work and was carried out either
intramurally or by large defense contractors meant that the research was commercialized
rapidly. Even though the ‘big science’ projects were targeted primarily for the military,
the postwar work was mainly applied, and much of it resulted in products that found
increasing civilian use (and largely via existing companies, not start-ups). Several of the
major technologies developed during the war originated in Britain and Germany and
came to the U.S. via Britain. For example, the Radiation Lab at MIT was initially set up
in 1940 as a joint Anglo-American project to further develop British radar technology
and produce radar equipment. Penicillin was mass produced in the U.S. during the war,
organized by the War Production Board on the basis of discoveries made in the U.K. and
Australia. The first American jet engine was built by General Electric in 1943 after a
British prototype, and the first American commercial jetliner was the Boeing 707, built in
1957 as an adaptation of a military tanker plane (KC-135), following the British de
32
Havilland Comet jetliner first in commercial jet service in 1952. The civilian
commercialization of these technologies was carried out primarily by existing companies.
While the conversion from military to civilian production was based in part on
imported technology and largely benefitted existing companies, the development of the
computer industry represents a different story, one in which the technology originated in
the United States and in which U.S. universities played a prominent role.
“The first digital electronic computer, the ENIAC, was brought to the full stage of
a working prototype at the Moore School of Electrical Engineering at the
University of Pennsylvania, in the fall of 1945… In the case of the computer,
moreover, American universities not only designed and assembled the initial
hardware of the computer industry; they created an entirely new discipline, of
huge economic importance, along with the research infrastructure that had to be
built in order to exploit the vast potential of the new hardware” (Rosenberg, 2000,
p. 49)
The first computer company was Eckert-Mauchly Computer Corporation, formed
in 1946. The company was sold in 1950 to Remington Rand (later Sperry Rand), which
was an established maker of office equipment and electric shavers. Many other
companies entered the emerging computer business during the early postwar years, most
of them responding to burgeoning government needs… Some companies were founded
de novo to pursue computer development opportunities, but in contrast to the history of
semiconductors, most start-ups sold out to become the nucleus of computer operations of
established companies (Scherer, 1996, p. 240).
The development of the computer and the computer industry is the most important
example of the increasingly prominent role of U.S. universities in research and in
creating new technologies for economic exploitation following World War II. In
conjunction with the war and its aftermath, U.S. universities closed the gap with leading
European universities in basic science but also, following in the paths established earlier,
33
pushed ahead in research in applied fields such as engineering and medicine. As a result,
American universities have played a much more prominent role than their European
counterparts in generating new technologies as a basis for economic growth. And the role
has often been one of collaboration and co-development with private partners than one of
unilateral transfer of technology.
Another example of such postwar high tech industries (beyond the computer) is
scientific instruments: new instrumentation has often been an unintended byproduct of
basic science research at universities and has subsequently been taken up, produced, and
sold by private firms. At the same time, new scientific instruments have played a major
role in shaping the research agenda at universities (Rosenberg, 1992). Yet another
example is the development of numerically controlled machine tools. Numerically
controlled machine tools represent the application of computers to solving machining
problems; the technology was first developed in collaboration between the Propeller Lab
at the Wright-Patterson Air Force base, MIT, IBM, and a small company in Michigan
(Carlsson, 1984, p. 103). Another example is semiconductors: the transistor was first
developed by William Shockley and colleagues at Bell Labs and then shared with some
thirty university professors (in part through a six-day course at Bell Labs). This was
clearly a case of knowledge transfer from industry to university (Rosenberg, 1992, p. 34).
Similarly, laser and optical fibers are examples of the result of interaction between
academic researchers and industry.
Several leading research universities, most prominently MIT, which had received
significant research funding during the war began to spin off new companies to
commercialize the new technologies in precision machinery, electronic components,
34
acoustics, and noise control, in addition to computer hardware and software and machine
tools (Shane, 2004, p. 46). As mentioned earlier, the American Research and
Development Corporation (ARD), the first modern venture capital company, was set up
at the end of the war to commercialize the military technologies invented at MIT. But
even though this spinoff activity represented a major increase in academic
entrepreneurship, its overall impact on new company formation was modest.
In terms of generating economic growth, the conversion of products and
production facilities from military to commercial applications clearly dominated.
Huge investments had been made during the war to produce tanks, trucks, jeeps,
airplanes, warships, and ammunition. These investments and technologies as well as the
knowledge about how to organize and manage mass production were converted to
civilian use. The effects lingered for several decades as mass production thinking became
dominant in U.S. manufacturing (Carlsson, 1984). The trade liberalization and economic
integration that began at the end of World War II (manifested in the establishment of the
United Nations, The World Bank, IMF, GATT, OECD, etc.) provided opportunities for
the industrial giants to expand as they converted from military to civilian production.
As a result, the economic growth in the early postwar years was largely
concentrated in large existing companies, not startups. The total number of concerns in
business was about 2.1 million in 1946 (about the same as in 1930) and rose to 2.7
million by 1949 and then stayed at that level until the end of the 1950s. Few new
companies were formed; the number of new business incorporations was around 100,000
per year in the latter half of the 1940s, rose gradually in the 1950s and 1960s but did not
really take off until the late 1970s. Nonagricultural self-employment stayed constant from
35
the late 1940s until the mid-1960s, even though the labor force grew (i.e., the self-
employment rate declined). There were few Initial Public Offerings (IPOs), and those that
did occur were quite modest in size (in terms of proceeds per IPO) and often involved
companies that had been started many years earlier (Ibbotson et al., 2001). The number
of organizations per person declined continuously from 1948 to about 1970 and then
leveled off. See Figure 3.
During the 1950s and early 1960s the knowledge filter was thin and easily
penetrated. While knowledge creation in traditional fields went on as before, with little
desire to commercialize the results, there was a large increase in knowledge creation in
science and engineering. Most of the new knowledge was applied and quickly converted
into new products, mostly military in the beginning but increasingly civilian. As owners
of the intellectual property, the federal agencies were responsible for commercialization,
and incumbent firms were the main vehicles to do that.
1965-1980: A Period of Transition
After the first two decades following World War II the economic landscape
shifted. Concerns were being raised about the rise of the military-industrial complex
against whose consequences President Eisenhower had warned. After the onset of the
Cold War, the Korean War, and the Sputnik challenge, military expenditures began to
decline, at least in relative terms. Although the Department of Defense was still the major
source of R&D funding, federal R&D expenditures grew more slowly than GDP. As a
result, R&D as a share of GDP fell from 2.9 % in 1964 to 2.1 % in 1979. See Figure 2.
Meanwhile, non-federal (mostly industrial) R&D spending stayed constant in relation to
36
GDP during the 1960s and 1970s and began to increase in the late 1970s, surpassing
federal R&D expenditures in 1978. By the end of the 1970s the federal government was
no longer the primary source of research funding.
While the share of military R&D declined, NIH funding increased.17 As a result, there
was a shift toward more basic R&D in the national research portfolio. R&D funding for
basic research as a share of total federal R&D funding increased from 7 % in 1959 to 13
% by 1972. This share then increased steadily from the end of the 1970s to reach 25 % in
the early 2000s.
In addition to this shift from applied to basic R&D there was also a change in the
locus of the R&D effort. The fact that the research funding was still highly concentrated
to only the top universities, most of them private, became a political issue. In 1963, out of
a total of 2,139 institutions of higher education, only 492 were awarded federal R&D
funds. Of the $830 million total, the top hundred recipients won 90 percent (Graham &
Diamond, 1997, p. 34).
Predictably, this allocation of resources was defended by the representatives of the
top universities. Former Harvard president Conant wrote: “In the advance of science and
its application to many practical problems, there is no substitute for first-class men. Ten
second-rate scientists or engineers cannot do the work of one who is in the first rank.”
(ibid., p. 36) Nevertheless, this concentration of taxpayer support to a few elite
universities was challenged in the 1960s.
As egalitarian, populist pressures grew in the 1960s, the Kennedy and Johnson
administrations responded by retaining the core formula of agency funding through peer-
review competition, but added new policies and programs in three areas. First, agencies
17 Defense funding of R&D went mostly to engineering schools and was classified as “applied,” while NIH
funding went to the life sciences and was classified as “basic.”
37
were directed to widen the geographic distribution of federal research support,
emphasizing physical facilities and attempting to double the number of strong research
universities. Second, federal research support was extended to include the social sciences,
the humanities, and the visual and performing arts. Third, federal support was
significantly expanded, extending beyond the roughly one hundred doctorate-granting
universities, to provide funding for construction and nonscientific programs, including
student financial aid, to more than three thousand institutions. These included community
colleges, private liberal arts colleges, state colleges and regional universities, historically
black institutions, and vocational and proprietary schools. Thus, in the Great Society
agenda, federal science policy expanded and blurred into higher education and social
policy. (ibid., p. 27)
As a result of these changes, the national R&D effort became less focused and
more dispersed. The rate of new knowledge creation declined, as indicated by the falling
share of R&D in GDP. Also, while the share of basic R&D increased sharply (as that of
applied R&D declined), the potential of commercialization diminished as the beneficial
economic effects would occur only with greater delay. The economic impact of the war-
related innovations were wearing off. In addition, a significant share of the basic R&D
funding went to educational purposes and building of research infrastructure rather than
into ‘pure’ research. As research projects were increasingly built around clusters of large-
scale equipment, often requiring special facilities and support staff, they became
enmeshed in the difficult process of institutional-level priority-setting, since accepting
these project assignments often meant making major capital investments. In this sense,
the knowledge that was created provided less stimulus to economic growth. The
institutional barriers to commercialization that had always existed were still there; the
research effort was less focused; and the federal agencies were becoming less successful
in converting research into economic activity.
At the same time, the industrial landscape was also shifting. Antitrust regulation
and its enforcement prevented both horizontal and vertical integration, leaving
38
conglomeration as the only option beyond organic growth. As time went on and
companies engaged in conglomeration in order to expand, they started to lose touch with
their knowledge base (their absorptive capacity was reduced). In this sense, too, the
knowledge filter started to clog up. The civilian spin-offs from military products began to
decline. Many large firms found it difficult to grow during this period. The share of small
firms in manufacturing began to grow, reversing the trend toward larger firm size during
the previous 100 years (Carlsson, 1992). Some indicators of entrepreneurial activity
began to change. The number of self-employed persons outside of agriculture plummeted
in 1966-68 and then recovered slowly, reaching its previous level only in 1978, rising
slowly until about 1990 and remaining roughly constant since then. The number of
organizations per 1000 people, which had declined steadily since 1948, leveled off
around 1970. New business incorporations started to increase in the late 1960s. The
number of IPOs was low in the 1960s but rose temporarily to a much higher level in the
early 1970s, only to fall to extreme lows in the latter half of the 1970s.18 These
developments are illustrated in Figure 3. With the arrival of the microprocessor and
recombinant DNA, as well as higher oil prices, in the early 1970s, additional forces were
set in motion. The industrial giants were no longer able to absorb the new technologies;
new mechanisms and new institutions were necessary.
1980-2006: New Patterns of Knowledge Creation and Economic Growth
It was against this background of diminished dynamism in the economy (but with
a few signs of a new era of entrepreneurial activity emerging) that a number of
18 The rise in IPOs was probably due mainly to institutional reforms that lowered taxes on capital gains and
allowed institutional investors such as pension funds to invest in venture capital firms. This made it
possible for old but privately held firms to go public.
39
institutional reforms were made in the early 1980s. There was a broad shift towards
stronger intellectual property rights. In 1980, the U.S. Supreme Court affirmed the
validity of patents on life forms. Protection was extended to cover new types of artifacts
such as research tools (Mowery et al., 2004, p. 5). The Court of Appeals for the Federal
Circuit was established in 1982 to serve as the court of final appeal for patent cases
throughout the federal judiciary, making it easier for people to protect their intellectual
property (Shane, 2004, p. 60).
The Bayh-Dole Act, passed by the U.S. Congress in 1980, was another important
reform. The purpose of the legislation was to facilitate commercialization of the results of
federally funded research by transferring the intellectual property rights from the funding
agencies to the universities in which the research was carried out. This provided
incentives for the universities to commercialize the results of their research. The Bayh-
Dole Act extended the Institutional Patent Agreements (IPAs) that federal funding
agencies had made with a number of universities to all performers of federally funded
research. In the subsequent period, from the early 1980s onward, the number of licenses
issued by universities and the number of startups began to increase, due in part to the
Bayh-Dole Act but also due to other reforms and structural changes.19 For example, there
19 Several authors have questioned the efficacy of the Bayh-Dole Act in bringing about increased
commercialization of academic research. For a discussion, see Mowery et al. (2004). Concerns have also
been raised about growing participation of universities in commercial relationships. But there is not much
evidence that the orientation and nature of academic research have shifted (see e.g., Thursby & Thursby,
2002) or that academic publishing has diminished (Mowery et al., 2004) as a result of Bayh-Dole. Nor has
industrial funding of academic R&D changed much as a percentage of total funding. It is difficult to isolate
the impact of the Bayh-Dole Act as it was only one part of a broad set of institutional changes that occurred
in the early 1980s.
As important as Bayh-Dole was, it was essentially an attempt to “reverse engineer” the technology
transfer process that had worked so effectively in prior years at a few very special institutions such as MIT
and CalTech. As mentioned earlier, the Research Corporation had been set up in 1912 and played an
important role in commercializing research results at several leading academic institutions. In the face of
the incentives offered by Bayh-Dole, a wide range of universities adapted to the new set of rules and began
promoting technology transfer, but the vast majority of them never developed the kind of permissive,
entrepreneurial culture that marked the early models.
40
was a shift in universities toward a policy of taking equity in licensees of university
technology. Also, the experience of university spin-offs in the early postwar years gave
increased momentum to academic entrepreneurship (Shane, 2004, pp. 61-63).
About this time, reforms were also made that permitted pension funds to invest in
venture capital partnerships, giving rise to institutionalized venture capital. This helped
unleash the growth of a new form of entrepreneurial finance. Between 1946 and 1977 the
creation of new venture funds amounted to less than a few hundred million dollars
annually. Starting in the late 1970s, and culminating in the late 1990s, fundraising in the
venture capital industry increased sharply (Kortum and Lerner, 2000). While most of this
money went to IPOs and new business startups, some of it was used to fund industrial
innovation. It is estimated that venture capital accounted for 8 % of industrial innovations
during 1983-1992 and 14 % by 1998. (Kortum & Lerner, 2000, p. 691)
Another step in unclogging the knowledge filter was the establishment in 1982 of
the Small Business Innovation Research (SBIR) program. The program requires a wide
range of federal agencies with extramural research budgets to set aside a portion (2.5 %)
of their research funding for small businesses (less than 500 employees). Over $10 billion
has been awarded by the SBIR program to various small businesses since 1982. Also,
deregulation, especially in telecommunications and transportation, gave rise to new
entrepreneurial opportunities. Further, the 1980s and 1990s witnessed a fundamental re-
organization of U.S. business. In the biggest merger and acquisition wave in U.S. history,
most conglomerates were broken up and business units were re-bundled. Companies
became more focused on their core competencies. One result of this restructuring was a
re-organization of corporate R&D. Many central R&D labs were closed, and others were
41
reduced in size while also focusing more narrowly on applied research with a clear
commercial objective; basic research (with no foreseeable commercial application) was
reduced in industrial firms and shifted instead to the universities which have picked up
the role as major performers of basic R&D.
Meanwhile, R&D spending as a share of GDP rose again, from 2.1 % in 1979 to
2.7 % in 1984 and has since remained at about that level. See Figure 2 above. The
increase was due to a modest increase in federal R&D spending and a sustained increase
in nonfederal (primarily industrial) R&D that continued until 2000. After 1987 there has
been a decline in federal R&D spending as a percentage of GDP, but the continued
growth in nonfederal R&D has kept R&D/GDP constant. Meanwhile, federal R&D
funding has continued to shift toward basic R&D which now represents about 25 % of
total R&D funding.20 Applied and development R&D is now funded overwhelmingly by
industrial firms. A larger share than ever before of the creation of applied knowledge is
now both funded and performed by the entities closest to commercialization, the
industrial firms themselves.21 This makes for a thin knowledge filter.
The structure of R&D at the national level has changed also in another way as the
life sciences have absorbed an increasing share of R&D expenditures. Particularly in the
biotech arena, this has meant a shift of basic research toward academic institutions. The
new discoveries have typically been made in universities, as the absorptive capacity of
existing companies (mostly pharmaceutical firms based on chemistry and chemical
engineering know-how) was quite limited in the new technology arena. The time lag
20 As noted earlier, the shift toward basic R&D is largely a consequence of increased funding by the NIH
both in absolute terms and as a share of total federal R&D funding.
21 It remains true, at least in fields other than biotechnology/biomedicine, that firms source most of their
technology from internal R&D. Joint ventures, alliances, and acquisitions of companies are the most
common external sources. Universities are seldom listed as primary sources of technology but serve rather
as places for recruiting employees (Carlsson et al., 2008).
42
between scientific discovery and commercial application has turned out to be much
longer than in the electronics field – clearly, part of this is due to the approval process
requirements of the U.S. Food and Drug Administration and other key agencies. And the
transfer mechanism has turned out to be not the large pharmaceutical firms but rather new
firms dedicated to biotechnology research who can translate the basic research into
commercial knowledge. But in most cases (Genentech being a notable exception), the
commercialization in the form of production, marketing, and distribution has been carried
out by established pharmaceutical firms, creating a new division of labor and symbiosis
between these two groups of firms.
New entrepreneurial opportunities have arisen through scientific and technical
advances and changes in government policies. Changes have occurred in the
entrepreneurial infrastructure, e.g., via greater availability of professional services and
stronger intellectual property protection. There have also been shifts in values,
preferences and attitudes toward entrepreneurship. For example, a study of MIT alumni
shows that the entrepreneurial activity of MIT alumni increased steadily (as measured by
first firm founding per 1000 alumni) during the 1950s, 60s, and 70s and has then stayed
at a high level (Hsu, Roberts and Eesley, 2006). The impact of universities on industry
occurs not only directly through transfer of technical knowledge but also through the
entrepreneurial activities of alumni.
As a result of all these institutional and structural changes, the last two decades
have witnessed a period of a new kind of dynamism in the form of growth of new
industries and renewal of old ones as the digital economy has penetrated into all parts of
society. Whereas in the early postwar period innovation tended to be carried out by large
43
firms in capital-intensive, concentrated industries characterized by highly differentiated
goods, the last two decades have been characterized by a different technological regime
in which innovation is carried out primarily by small firms in industries that are highly
innovative, skilled-labor intensive and have a large share of large firms (Winter, 1984;
Acs & Audretsch, 1987; Plummer & Acs, 2005). Jovanovic has shown that the
performance of small companies vs. large ones (as measured by the price of small
capitalization stocks relative to the S&P 500) was about equal from the end of World
War II to the late 1960s and then rose dramatically to a 4:1 ratio by the mid-1980s
(Jovanovic, 2001, p. 54). He attributes this rise in the relative performance of small firms
to the arrival of the microprocessor. He also notes that among the twenty largest U.S.
companies by market capitalization in 1999, ten were incorporated in or after 1967.
There are two main reasons why small firms have become more important in
recent decades. One is that small firms simply do certain things (such as certain types of
innovation) better than large firms. As a result, through division of labor between small
and large firms, the efficiency of the economy is increased. The other reason is that small
firms provide the entrepreneurship and variety required for macroeconomic growth and
stability (Carlsson, 1999).
Some of the results of the increased dynamism of the U.S. economy in the last
two decades are captured in Figure 3.22 As knowledge creation (as measured by the
R&D/GDP ratio) picked up after 1980, and as various institutional reforms were made,
there was a dramatic increase in entrepreneurial activity in the United States. The number
and gross proceeds of IPOs rose markedly in the early 1980s. New business
22 This is consistent with Phelps’s view that “dynamism requires that innovation be ample, aimed in good
directions and finding managers and consumers open to novelty” (Phelps, 2006).
44
incorporations started to rise in the late 1970s and continued to rise to the mid-1990s.
Non-agricultural self-employment also rose from the late 1970s to the mid-1990s.23
Nonfarm business tax returns have been on a steady rise since 1980 (the earliest year for
which data are available). The number of organizations per person made a dramatic jump
in 1984 and has continued to rise rapidly.
Thus, the early 1980s appears to have marked a turning point in U.S. economic growth,
representing a transition to a new technological regime in which new business formation
plays an increasing role in converting new knowledge into economic growth, thereby
reducing the knowledge filter.
SUMMARY AND CONCLUSIONS
This paper has examined the sources of knowledge creation in the United States
over the last century and a half and the mechanisms through which economic knowledge
has been converted into economic activity. Prior to the establishment of land-grant
universities after the Civil War, there was not much academic research that resulted
directly in economic growth. But the rapid growth of universities (particularly land-grant
universities and their agricultural extension programs) and enrollment in higher education
in the latter half of the 19th century created a much larger college-educated labor force in
the United States than in Europe. The resulting increased capacity to absorb new
technology was strengthened by the practical orientation of U.S. higher education.
Economically useful knowledge creation in the late 19th century was largely informal and
took place in industrial laboratories whose main tasks were testing, measuring, and
standardizing industrial products and processes.
23 Blau attributes the rise in self-employment to technological change in the form of personal computers,
“government safety and health regulations that favor the self-employed over businesses with employees,
and demand-induced changes in industrial structure favoring industries in which self-employment is
common.” (Blau, 1987, p. 464)
45
As science-based industries such as the chemical, electrical machinery, and
telecommunications industries began to grow in the late 19th century, new scientific
knowledge was needed. The creation of such knowledge required research facilities
utilizing specialized equipment and skills on a scale beyond the capabilities of the
universities. Industrial firms such as Du Pont and General Electric therefore built their
own corporate R&D labs. But in contrast to Europe, universities in the U.S. made
important contributions by establishing new disciplines such as electrical and chemical
engineering – thereby building up a significant and highly skilled labor force – and by
working closely with industrial scientists. Many leading scientists in the new disciplines
worked as consultants and had much of their research funded by industrial firms. It is in
such corporate laboratories, as well as in federal government laboratories, that most
economically useful R&D, including basic research, was conducted until after World
War II. The vast bulk of industrial R&D has always been commercially oriented,
resulting in new and improved products and processes. This is true even today.
Before World War II, basic research in the universities was quite small. Total
external funding of academic research did not exceed $50 million annually prior to World
War II, and all of this came from foundations and a few industrial companies. The federal
government played no role in funding academic research. But World War II led to
fundamental changes in the knowledge creation system. The military effort led to a
massive increase in R&D spending. Most of the funding came from the Department of
Defense and was conducted largely in government labs and by defense contractors. But
the war-related research was organized in such a way that it also involved universities.
For the first time, and quite suddenly, the federal government became the major source of
46
funding for academic research which now included “big science” projects (systematic,
programmatic research) on a scale never seen before. Basic research started to shift
toward the universities. As the war ended, the G.I. bill generated a large increase in
college enrollment. The war-related products (such as computers, jet engines, and radar)
that resulted from the R&D were commercialized almost immediately through the
military and soon after the war were converted into civilian products. The
commercialization took place mainly through incumbent firms. Even though leading
research universities such as MIT began spinning off new companies based on the
military technologies they had developed during the war, these new start-ups were too
few to affect the total number of firms materially. Overall, there were few new firms
created; entrepreneurial activity declined or stagnated between 1950 and 1965.
The federal funding of defense-related R&D continued to grow until total R&D
expenditures reached a peak in the mid-1960s. The total R&D spending then fell as the
federal expenditures declined. Also, the federal funding of academic research now
became less focused, dispersed to a much larger number of institutions of higher
education, and used for building research infrastructure. As a result, much less of the
knowledge created was economically useful; the knowledge filter was clogging up. The
civilian spin-offs from military products began to decline, and the economic growth rate
fell.
1980 represents something of a turning point. A number of institutional reforms
(including strengthening of intellectual property rights, the enactment of the Bayh-Dole
Act, changes in tax laws, and deregulation of financial institutions that created new
financial instruments) mark a transition to a new technological regime in which new
47
business formation plays an increasing role in converting new knowledge into economic
growth. The breakthrough in DNA research and the microprocessor revolution also
played a role. Entrepreneurial activity (as measured by non-farm business tax returns,
new business incorporations, the number of organizations per capita, the number of IPO
offerings, and non-agricultural self-employment) began to pick up as the dynamism of
the economy increased.
The ‘big picture’ that emerges is one which shows the economy becoming
increasingly dependent on economically useful knowledge and on the effectiveness with
which that knowledge is converted into economic activity. In the late 19th century the
knowledge creation was linked to a rise in the share of college-educated people in the
population and codification and standardization of economically useful knowledge in
industrial labs. At the turn of the 19th century, economic growth was driven primarily by
science and engineering-based industries such as chemicals, electrical equipment, and
telecommunications. The leading companies in these industries built their own corporate
R&D labs. These, as well as several federal laboratories, working closely with academic
scientists, were the main producers of economically useful knowledge, and they were
quick to reap the economic benefits.
World War II led to a massive scaling up of R&D in the United States. While
most of the funding went to federal and corporate laboratories, the federal government
now also began to fund academic research. At first the defense-related R&D was
immediately converted into economic activity via incumbent firms producing such
products as jet engines, radar, and computers. In the mid-1960s, the total R&D
expenditures started falling in relation to GDP, and the economic impact of the war-
48
related products was diminishing. The decline in R&D spending was reversed in the early
1980s, carried largely by biotechnology and the microprocessor.
The main conclusions of this paper are (1) that in order to explain economic
growth it is necessary to distinguish between general knowledge and economically useful
knowledge; (2) that the effectiveness with which such knowledge is converted into
economic activity varies over time and depends on institutional arrangements and on the
nature of the knowledge created; and (3) that the mechanism converting economically
useful knowledge into economic growth also varies over time. Until the late 1970s,
incumbent firms were the main vehicles. Subsequently, new ventures have been the main
mechanism, at least in the United States.
49
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