Technological Advances: Discovery, Invention, Innovation, Diffusion, Research and Development

Technology is the single greatest factor that distinguishes modern economies from primitive ones. Because technology lowers the cost of production and provides new products, it increases both productive and allocative efficiency for all firms. However, the advance of technology is unpredictable. No one knows what will be discovered, where, or when. Indeed, it is very difficult even to measure the pace of new technology.

For this reason, technology is often excluded from economic models to simplify their analysis. In economics, the short run is considered a period of time during which firms can change variable inputs, but not fixed costs. The long-run is considered a long enough duration so that firms can change even fixed costs. Some economists try to take a very long run view in which technology changes, but it is very difficult to form such an analysis, even using statistics. Although it is called a very long run view, the time period could actually be short, depending on how fast technology is changing within an industry.

There are 4 processes to technological advances in an economy: discovery, invention, innovation, and diffusion. Discovery involves the elucidation of the fundamental processes of nature through observations of nature, reasoning, and experimentation. Science is the branch of knowledge that seeks to understand the fundamental nature and processes of the universe. Advances in science depend on the scientific method. First, a hypothesis is formed to explain some observation, then an experiment is designed to test the hypothesis. When feasible, the experiment will consist of running 2 experiments side-by-side with all variables in common except for one. This isolates the variable to determine what effect it has on the overall process. Ultimately, the validity of the hypothesis is determined by the reproducibility of the experiment and how well it coheres with previous knowledge. When there is significant confidence in the correctness of a hypothesis, then it is called a theory. Of course, economics is one of the sciences where testing hypotheses is usually infeasible, so most advances in economics are made by assessing how well hypotheses explain or predict the economy. Most of these predictions are based on economic models, which incorporate the hypotheses as a basis for the predictions. Although discoveries are important for providing fundamental knowledge, most businesses do not invest money to make discoveries, because discoveries are often serendipitous and they rarely apply to a particular business, which is why a large part of science is financed by the government. Instead, businesses spend money on research and development (R&D), applying previous knowledge to either produce new products relevant to their business or to improve methods of doing their business, where results are more predictable, pertinent, and profitable.

Invention is the discovery or development of a product or process by applying previous knowledge in new ways. Inventions often begin as prototypes, in which the essential features are developed to see if they are workable. These prototypes, or basic working models, are then improved by adding, subtracting, or modifying the characteristics of the prototype until no other improvements can be made based on the prototype.

To motivate people to invent, governments grant patents, which gives the patent holder exclusive rights to sell the patented product or method for a specific duration, which, in the United States, is usually 20 years after the patent filing date.

Innovation is applying basic discoveries or inventions to produce a useful product or process for a specific application. Product innovation is the development of new and improved products or services; process innovation refers to new or improved methods of production or distribution. Innovations cannot be patented, even though the distinction between inventions and innovations is often indistinct. Innovations can, however, be protected by trade secrets, where, before any employees can learn of the innovation, they must sign a contract to not disclose the trade secret to anyone.

Discoveries and inventions are rarely profitable in themselves. Innovation is necessary to bring the product to market economically. For instance, the development of integrated circuits has been one the most important in history, enabling modern-day computers, tablets, and phones. In fact, integrated circuits are necessary for most electronic devices. However, there are 2 steps in developing new integrated circuits. The first step is that they must be designed so that they work in a specific way, channeling the flow of electricity so that the device can carry out its purpose. Once the integrated circuit chip is designed, then the company must also develop an economic way of manufacturing the chips, for without a low-cost method of manufacturing the chips, their prevalence, and therefore their influence, would be limited. Hence, their decreasing cost over time is almost as important as their actual design.

Diffusion is the spread of innovation to other firms so that they can remain competitive. This diffusion occurs by either emulating or copying others' products or processes, which is achieved in several ways. First, a company can look at any patents, which are available for inspection by anyone, to see the essential design, and develop new ways of working around that, developing ideas or methods to achieve the same functionality but without infringing the patent. Since patents are narrow in scope, a patent may reveal ways around it, enabling a competitor to develop a process or product functionally equivalent to the patented product or process. In other cases, competing firms can reverse engineer the product to see how it works and to see how it could be improved.

Website development is a good example of diffusion. For instance, Groupon developed a new way for firms to market their products and services by selling what is known as a group coupon over the Internet, which gives the consumers a steep discount if enough of them subscribe to the product or service. Now, many other companies have also started offering major deals, many of them offering variations of the group coupon.

Businesses engage in research and development to develop inventions, innovations, and to profit from diffusion. However, firms generally do not invest research efforts to find new discoveries, because they cannot be patented nor do they necessarily have an obvious business application, making it unlikely that a discovered process can be used to develop a new product or new process that would allow the firm to earn more profit. For this reason, governments generally subsidize basic research.