Socio economic dynamics of innovation

SOCIO-ECONOMIC DYNAMICS OF INNOVATION
Ufuk Akcigit
University of Chicago
OECD - October 5, 2020.

Big Picture Question
Why do we care about innovation?
www.ufukakcigit.com www.artnotlari.com 2

Innovation and Growth
INNOVATION AND LONG-RUN ECONOMIC GROWTH
(U.S. STATES, 1900-2000)
AL
AZ
AR
CA
CO
CT
DE
FL
GA
ID
IL
IN
IA
KS
KY
LA
ME
MD
MA
MI
MN
MS
MO
MT
NE
NV
NH
NJ
NM
NYNC
ND
OHOK
OR
PA
RI
SC
SD
TN
TX
UT
VT
VA
WA
WV
WI
WY
−.4−.20.2.4
AnnualGDPp.c.GrowthRate1900−2000
−3 −2 −1 0 1 2
Log Patents (1900−2000)
Source: Akcigit, Grigsby, Nicholas (2017).
Fact 1: Inventive regions grew faster.

2. Innovation and Social Mobility
INNOVATION AND SOCIAL MOBILITYe 28: The Relationship between Inventiveness and Social Mobility
AL
AZ
AR
CA
CO CT
DE
FL
GA
ID
IL
IN
IA
KS
KY
LA
ME
MD
MA
MIMN
MS
MO
MTNE
NV
NH
NJ
NM
NY
NC
ND
OH
OK
OR
PA
RI
SC
SD
TN
TX
UT
VT
VA
WA
WV
WIWY
01234
Percentwithlowskillfather
whohavehighskilloccupation(1940)
0 2 4 6 8
Patents per 10,000: 1920−1940
Social Mobility = 1.301 + 0.339 * Patents per Capita
Slope coefficient statistically significant at 1% level
lots the relationship between average patents per 10,000 residents between 1920 and 1940, and
ility, measured by the share of those with a low-skill father who themselves have a high skill
rce: 1940 Historical Census Data, USPTO patent records.
Table 18: % of High-skill Child given Low-skill Father
(1) (2)
Av. Patents per Capita 1920-1940 0.746∗∗∗
0.484∗∗∗
(0.116) (0.149)
% Agricultural Occupation (1940) -0.031∗∗∗
Figure 3: See footnote 4 for explanations. Figure 4: See footnote 5 for explanations.
any causal link from growth to top income inequality, nor does he consider innovation or
social mobility.7
Third, a large literature on skill-biased technical change aims at explaining the increase
in labor income inequality since the 1970’s.8
While this literature focuses on the direction
of innovation and on broad measures of labor income inequality (such as the skill-premium),
Source: Akcigit, Grigsby, Nicholas (2017) and Aghion, Akcigit, Bergaud, Blundell, Hemous
(2017).
Fact 2: Inventive regions experienced more social mobility.

Innovation and Happiness
INNOVATION AND HAPPINESS
Figures and Tables
Figure 2: Raw scatter plot
Atlanta, GA
El Centro, CA
Honolulu, HI
Ithaca, NY
Longview, WA
Miami, FL
Niles, MI
Phoenix, AZ
Punta Gorda, FL
7.588.5
Anticipatedlifesatisfaction
15 20 25 30 35 40 45
Job turnover rate (in percent)
he anticipated life satisfaction measure comes from a question in Gallup Healthways Wellbeing Index about where peop
nticipate to stand in 5 years on a 0 to 10 Cantril ladder, where 0 represents the worst possible life for them and 10 the bes
nswers are averaged by MSA, using weights attached to each respondent in Gallup. The job turnover measure is the sum
Source: Aghion, Akcigit, Deaton, Roulet (2016).
Fact 3: People in innovative regions are happier.

However...

Innovation and Inequality
INNOVATION AND TOP INCOME INEQUALITY
11.11.21.3
NormalizedTop-1%IncomeShare(1stpercentile=1)
0 10 20 30 40 50 60 70 80 90 100
Innovation Percentiles
Source: Aghion, Akcigit, Bergaud, Blundell, Hemous (2017).
Fact 4: Innovative regions experience higher top income inequality.

Becoming an Inventor
Who becomes an inventor?

Education
01234
InventorsperTenThousand
No Education Less than High School High School At least some college

Education
01234
Parental Income
0.511.522.5
0 20 40 60 80 100
Parent Income Percentile

Education
01234
Parental Income
0.511.522.5
0 20 40 60 80 100
Parent Income Percentile
Financial frictions seem to be a major impediment to becoming an
inventor.

Returns to Innovation
Who gains from innovation?

-.4-.20.2.4
-5 0 5 10
year
inventor entrepreneur bluecollar worker whitecollar worker

7.9%
44.6%
21.8%
25.7%
inventor entrepreneur
whitecollar bluecollar

Within-ﬁrm Income Dynamics Upon Innovation I
Time of Innovation
-.050.05.1.15
-5 0 5 10
year
junior whitecollar junior manager senior manager senior whitecollar
Source: Author’s past work.

Within-ﬁrm Income Dynamics Upon Innovation I
Time of Innovation
-.050.05.1.15
-5 0 5 10
year
junior whitecollar junior manager senior manager senior whitecollar
Source: Author’s past work.
Senior white collars are hurt by innovation!

Within-ﬁrm Income Dynamics Upon Innovation II
‐0.15
‐0.1
‐0.05
0
0.05
0.1
1 2 3 4 5 6 7 8 9 10 11
IncomeDynamicsafterinnovation
year
Biological Age
Time since last diploma
Source: Aghion, Akcigit, Toivanen, Hyytinen (2017).

Within-ﬁrm Income Dynamics Upon Innovation II
‐0.15
‐0.1
‐0.05
0
0.05
0.1
1 2 3 4 5 6 7 8 9 10 11
IncomeDynamicsafterinnovation
year
Biological Age
Time since last diploma
Source: Aghion, Akcigit, Toivanen, Hyytinen (2017).
Negative impact comes from distance to frontier!
Retraining programs could be helpful to make growth more
”inclusive”!

0
5
10
15
20
1975 1980 1985 1990 1995 2000
grant year
in % terms
Fraction of Patents Sold
Average = 5.5 years
0
.02
.04
.06
.08
.1
.12
Frequency
0 4 8 12 16
duration
in number of years
Patent Sale Duration

Introduction
What processes make ﬁrms superstars of the economy?
What role does venture capital play in the making of these
superstar ﬁrms?
How much do the synergies between an entrepreneur and a
venture capitalist matter in this process?

VENTURE CAPITAL, FIRM DYNAMICS, AND ECONOMIC GROWTH Sina T. Ate¸s (UPenn)
“... We were cash positive. We didn’t have a year where we lost money... We
eventually ... sold 5% of the company for a million dollars ... just to get a venture capital
company to join our board and give us some adult advice... That money sat in the
bank.”
Bill Gates, ex-chairman and co-founder of Microsoft
1 Introduction
Investments by venture capital (VC) companies have a disproportionate impact on the US economy.
In 2010, the revenues of firms that had ever received VC support accounted for 21% of GDP, and
their employment share was 11% of total private sector employment, although VC investments to
their portfolio companies amount to less than 0.2% of GDP.1 VC financing is of particular relevance
for firm creation and innovation because VC firms strive to find young and innovative firms that
lack market experience. VC firms are unique in that they do not only provide financing: They also
actively engage in management by bringing their operational knowledge to bear in their investments.2

How Much do Venture Capitalists Matter?
AVERAGE EMPLOYMENT BEFORE AND AFTER 1st VC FUNDING
gure 5: The evolution of average employment before and after ﬁrst VC funding: VC-fund
Source: Akcigit, Dinlersoz, Greenwood, Penciakova (2018)

Conclusions
Innovation is good for growth, social mobility, and happiness.
Yet, inequality consequences should be taken into account!
Education policy is key for innovation and becoming an inventor!
This is also important to make the growth process more inclusive.
Tax policy should should not focus only on the incentives of
inventors. Financiers and managers are also affected by such
policies.
Existence of the VC sector is important both for the funds that
they provide, and also for the expertise that they bring.

Thank You...
For questions and comments, please e-mail:
uakcigit@uchicago.edu

References:

Socio economic dynamics of innovation

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