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You’re fascinated by technology. So am I, and I’m also fascinated by the sources that create and develop that technology. That’s why we’re kicking off a discussion on the institutions and structures that underlie U.S. corporate research.

Let’s start by looking at a major institution for creating technology during the last century: the central R&D laboratory.

Inventing Itself

As Albert North Whitehead once observed, “the greatest invention of the 19th century was the invention of the method of invention.” This “invention” got its start in the German chemicals industry (many scholars credit Bayer with having the first real company lab) then crossed over to the U.S. and took on an American flavor. George Eastman, Thomas Edison, George Westinghouse and others started as individual inventors but ended up as founders of company research labs.

At the beginning of the 20th century, most companies outsourced their research to these individual inventors or independent labs. But this trend reversed dramatically. AT&T, DuPont and General Electric, for example, increasingly turned inward for their future research initiatives. Internalizing research gave firms much greater control over their future technical direction; centralizing research let them exploit research opportunities beyond the immediate needs of individual businesses.

But this trend also had a downside. Austrian economist Joseph Schumpeter, who first called attention to the “creative destruction” that innovative entrepreneurs caused to entrenched monopolies, worried that these heroic entrepreneurs would be replaced by (rather less heroic) R&D bureaucrats.

Going Deep

The central R&D-laboratory model was part of the deep, vertical integration throughout the company, with internal discovery, patenting, development and production followed by distribution through the firm’s established sales channels. The strength of this model was reinforced by the federal government’s wartime mobilization of scientists from universities and corporations, coordinated through Vannevar Bush’s Office of Scientific Research and Development. This model resulted in tremendous technological breakthroughs from the atomic bomb to the semiconductor, nylon and the magnetic disk drive.

However, the model has also shown great weaknesses.

We now know that companies with strong market positions often have selfish reasons to slow down or even bury promising technologies. Many companies leave numerous patented technologies sitting on the shelf. The famous attitude of “Not Invented Here” emerged from the biases that even well-trained company scientists formed toward external research. These downsides fit uncomfortably well with Schumpeter’s view of innovation bureaucrats.

“The old approach to innovation was based on a social bargain with large companies,” Ethernet inventor Robert Metcalfe once told me. “Give us a monopoly in our markets, and we will invest in basic R&D. That’s a bad bargain.”

Let’s Take This Outside

While the central R&D laboratory system produced many outstanding innovations, often the companies who funded these initiatives did not profit sufficiently. Instead, other firms who invested little or nothing in the basic science stole a march on the inventing firm, got it to the market first and profited most from the research.

You know the history: While Bell Laboratories invented the semiconductor, the first company to ship a silicon-based transistor was an oilfield services company, Texas Instruments. While IBM pioneered the concepts behind the relational database, it has ceded market leadership to Oracle. While Xerox funded tremendously innovative work in user interface technologies, Apple and Microsoft scooped up the profits.

In these situations, startups diffused the key technology out into the market ahead of the company that funded the research. What startups lack in money and resources, they make up in focus and execution. In the process, Schumpeter’s heroic entrepreneurs are returning and bringing “creative destruction” to the central R&D laboratory.

Follow the Dollars

Companies that don’t capitalize on their innovations eventually stop funding them. Is that happening here? We can’t tell yet from the data. (This may be a weakness in our statistical measures, most of which group “R” with “D.”)

My contacts inside R&D labs, though, say that they are shifting their resources away from basic discovery-oriented research to applied mission-oriented work. At the same time, they tell me they’re outsourcing more of their basic research work to small startups, independent research houses and contract research organizations, while also partnering with universities and national laboratories.

Back to the Future?

This diffuse constellation of research inputs reminds me of the research structures we had at the beginning of the 20th century, before the advent of the central R&D laboratory.

To me, the central R&D laboratory model is obsolete. Its “Not Invented Here” syndrome and bureaucratic view always impeded development. But the costs of these downsides have escalated, since outsiders (fueled richly by venture capital) have grown so intensely competitive.

Are all the central R&D labs going to shut down tomorrow? No. However, the role that central R&D labs themselves play inside their firms must change.

I believe that they must help firms identify, access and absorb external research discoveries far more than they do today. They also must become more adept at using alternative paths to market the internal discoveries they create. Finally, they must learn how to conduct effective organizational experiments, in addition to technical experiments, to get the most out of their ideas.

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