Abstract: This paper presents a simple R&D-driven endogenous growth model to shed light on some puzzling economic trends. The model can account for why patent statistics have been roughly constant even though R&D employment has risen sharply over the last 30 years. The model also illuminates why steadily increasing R&D effort has not lead to any upward trend in economic growth rates, as is predicted by earlier R&D-driven endogenous growth models with the “scale effect ” property.

This paper argues that macroeconomic models of endogenous growth driven by technological change could be much improved by drawing lessons from the microeconomic literature of intellectual property design. Growth models use overly simplistic and sometimes incorrect assumptions regarding the intellectual property regime. Microeconomic theory and empirical work are reviewed to demonstrate that determining optimal intellectual property design is complex and has important implications for firm behavior and performance. Considering the question of intellectual property design in a dynamic general equilibrium model should yield important insights about how intellectual property impacts growth and welfare.

The concept of dynamic capabilities is both extremely popular and poorly understood, because researchers approach it from the “outside in. ” This perspective obscures the social processes through which people enact the capability, and black boxes the dynamics through which they combine exploitation with exploration. We explore the dynamic capability for sustained product innovation from the “inside out. ” We find that innovative organizations structure everyday work around a conceptual, physical, and temporal space based on the overlap of manufacturing, marketing, and R&D knowledge systems. This structuring of everyday work is the capability, and it becomes dynamic because three sets of rules and resources animate it: 1) taking responsibility for the entire process, which provides people with the resource of time; 2) valuing knowledge and expertise, which provides the authority to act; and 3) searching for opportunities, which provides options to address the inevitable surprises of innovation work. These rules and resources invoke routines that enable people to map out innovation work in time, generalize specialized knowledge to make it accessible to others, and keep open a variety of options to solve design problems. We illustrate this new theory and discuss its implications for how managers can actually use their dynamic capabilities.