Inventors, Firms, and the Market for Technology in the Late Nineteenth and Early Twentieth Centuries

Recent scholarly literature explains the spread of in-house research labs during the early 20th century by pointing to the information problems involved in contracting for technology. We argue that these difficulties have been overemphasized and that in fact a substantial trade in patented inventions developed over the course of the 19th century, much of it the form of transactions conducted at arms-length through the market. This expansion of trade in technology made possible a growing division of labor, as inventors increasingly took advantage of their greater ability to sell of rights to patented technologies and focused their energy and resources on invention itself. Firms responded to the expansion of this trade by developing ways to to learn about and assess externally generated inventions. Although large firms were beginning to invest in their internal inventive capabilities, in doing so they faced many significant problems. They had to overcome resistance to contracts requiring employees to sign over patents to their employers, and they had to reduce the high turnover rates that made such requirements effectively unenforceable. The increased costs of inventive activity and the greater risks borne by independent inventors by the early 20th century helped firms make their case. But there was a lot of organizational learning to do. Hence where other scholars have emphasized the difficulties of contracting for technology in the market and the relative ease of integrating invention and production within the firm, we reverse the story. Economic actors at that time had a lot of experience contracting for new technological ideas in the market; what they had to spend a great deal of time and energy learning was managing creative individuals within the firm.