Human capital and incentives in the creation of inventions : a study of Finnish inventors

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School of Business | Doctoral thesis (monograph) | Defence date: 2010-07-28
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113 s.
Acta Universitatis oeconomicae Helsingiensis, A, 368
Innovation has long been acknowledged as a key factor influencing economic growth. Innovations, in turn, arise out of ideas produced by human capital. Thus, the study of inventors forms an important aspect of the economics of innovation that can offer new insights into the origins of innovative activity. Yet, economic research on inventors is scarce, and not much is known about factors that affect the inventiveness of individuals. To contribute to the study of innovation by studying inventors, we construct a detailed dataset covering almost all Finnish inventors of USPTO patents in the period 1988 to 1999, by linking the inventor information in the NBER patents and citations data file to the Finnish longitudinal employer-employee dataset. This linkage of inventor information to a dataset on the individuals and the companies they work for gives us a great opportunity to study various novel questions on inventors and the economics of innovation. Using this unique data on inventors, this thesis examines two key factors that play a role in determining individuals’ inventiveness: human capital and incentives. Human capital translates to ability, incentives imply effort. Both are needed for invention to take place. To understand these factors, in this thesis we a) examine the effect of tertiary engineering education on the propensity to patent, b) quantify the financial rewards that accrue to patent inventors, and c) investigate the life-cycle profile of the propensity to patent. The main way to accumulate human capital is through education. In Finland, educational policies in the 1960s and 1970s had a strong emphasis on engineering higher education. Thereafter, the Finnish economy has transformed into one of the most innovative economies in the world, and our data shows that a large share of the innovations (patents) is created by engineers. These facts motivate the first question in the study, which deals with the effect of tertiary engineering education on individuals’ patent productivity. Using instrumental variables based on the proximity of the universities that offer engineering education, the analysis indicates that education has a positive effect on the propensity to patent, and that educational policies can play a role in promoting a country’s innovative capacity. The establishment of three new universities that offer engineering education in different regions of Finland had the effect of inducing individuals to take up such education, which ultimately lead to increased patenting in the 1990s. The second question of the study focuses on incentives. Financial incentives play an important role in directing the time and effort of individuals, and the existence of monetary incentives for inventing is a vital factor in encouraging inventive activities. To study the role of incentives, we take the approach of examining whether financial incentives exist, i.e. do inventors earn a reward for their inventions. We analyze the returns to patent inventors by estimating the effect of granted patents on the inventors’ income. We find that inventors earn a small bonus reward in the year of the patent grant, about 3 % of their annual earnings, and 3-4 years later there is a more permanent wage increase. Inventors of highly cited patents earn the largest rewards, a wage premium of 20-30 % of annual earnings. The results indicate that the labor market provides high-powered financial rewards for employee-inventors in Finland. From the ex-ante perspective, this translates to incentives that direct individuals’ effort into inventions that lead to valuable patents. In the third part of the study, we investigate the life-cycle productivity of inventors. Our results indicate that the relationship between age and the propensity to patent has the shape of an inverse U, also suggested by the previous literature. Our data on Finnish inventors show a steeply increasing profile after the age of 25 and a peak around the early 30s with a stable period of high propensity to patent for about 10 years. From the beginning of the 40s, there appears to be a decline in the propensity to patent, although the fall is much flatter than the rise at the beginning of the career
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Terviö, Marko, professor
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