Innovation in a Context of Declining Returns to R&D: A Critical Review of Novel Theoretical Developments

Innovation in a Context of Declining Returns to R&D: A Critical Review of Novel Theoretical Developments

Chris William Callaghan (School of Business Sciences, University of the Witwatersrand, Johannesburg, South Africa)
Copyright: © 2019 |Pages: 18
DOI: 10.4018/IJSKD.2019100103

Abstract

Innovation theory has arguably driven the innovations that have contributed to human development over time. According to discussions related to the ‘Fourth Industrial Revolution,' interactions of novel technologies herald an age of unequalled productivity and human progress. Evidence however suggests that returns to innovation (narrowly defined here as investments in R&D), are in fact continuing to decline. Given this paradox, the objective of this conceptual paper is to present an argument drawn from theory that it is only a matter of time until declining returns to innovation reverse themselves and a new form of R&D problem solving becomes more widely utilised. If the propositions offered here are borne out by future research, then an important reconceptualization of the nature of the innovation process might be useful, one that questions Cohen and Levinthal's notion of absorptive capacity and path dependency as the primary mode of innovation problem solving.
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1. Introduction

According to Schwab (2017, p. 55), the impact of the fourth industrial revolution on business will take the form of “an inexorable shift from the simple digitisation that characterised the third industrial revolution to a much more complex form of innovation based on the combination of multiple technologies in novel ways.”

In terms of this notion of ‘combination,’ Brynjolfsson and McAfee (2014, p. 47) stress the importance of Weitzman’s (1998) ‘mode’ of recombinant innovation, whereby combinatorial possibilities develop “so quickly there is soon a virtually infinite number of potentially valuable recombinations of…existing knowledge pieces” and suggest that constraints to economic growth are primarily the ability to sift potential recombinations to find valuable ones. Weitzman’s (1998) theory is premised on the development of microfoundations for the knowledge production function. According to Weitzman’s approach, the production of new ideas is modelled as a function of newly reconfigured old ideas, akin to a process of cross-pollination. At the heart of these arguments is the notion that although resources might be scarce, ideas that allow for their combination and recombination, through the innovation process, can be the source of economic growth, and human development. This argument is a central tenet of Romer’s (1990) endogenous growth theory. At this nexus it is important to note that the discussions here delimit their focus to innovation as research and development (R&D) investments, and therefore to the portion of the innovation process that might be termed ‘invention,’ with a particular focus on problem solving in organisations.

“As a result of trial and error, experimentation, refinement, and scientific investigation, the instructions that we follow for combining raw materials have become vastly more sophisticated,” according to Romer (1990, p. 72), whereby such ideas, or recipes for the combination or recombination of resources can result in economics of scale in research and development (R&D) for the reason that once created and known they can be used by others, essentially at no additional cost. This concept, of knowledge as a nonrival good, implies that it cannot be ‘used up’ in the same way as other resources, but that an idea can be used in other contexts to increase productivity. This rationale places innovation at the heart of processes of economic growth. This perspective suggests certain implications, however, the most important of which is perhaps that investments in the development of new ideas (R&D) will demonstrate increasing returns over time, reflecting economies of scale in the R&D process. In other words, this body of theory predicts that R&D ‘will scale.’ Romer’s (1990, p. 84) endogenous growth model therefore predicts that “unbounded growth at a constant rate is feasible”

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