How a small change will reduce distortion in measuring innovation

October 31, 2018 by Tom Relihan, MIT Sloan School of Management
Credit: CC0 Public Domain

When your child is diabetic, a few minutes can make a big difference, and it pays to have real-time access to their blood sugar numbers. But what if no one sells a product that can do that? You build one, like the open-source community that developed the wireless blood sugar monitor Nightscout did.

The product serves a public good—keeping diabetics safe—and the community offers the plans to build it for free online. But until now, such clear examples of haven't been counted as such under the Organisation for Economic Co-operation and Development's . That changed on Oct. 24: The organization's new edition of the Oslo Manual, the guidebook for collecting and using data on industrial innovation used by most nations, now includes a revised definition of an innovation, removing the requirement that one must first be commercialized to be counted.

MIT Sloan economist Eric von Hippel, in his book Free Innovation, argues that household or "free" innovations—those developed by people on their own time and dollar—aren't receiving enough support. That's because they aren't being recognized for what they are by public policymakers, even though they're responsible for a significant proportion of new ideas and innovation.

Under the previous OECD definition, an innovation only qualifies as an innovation if it has been introduced to the market. That definition of "onto the market" means that innovators in the household sector—representing tens of millions of people spending tens of billions of dollars on product development and modification per year—don't get credit for innovations because 90 percent of them simply give their innovations away.

In mountain biking, for example, participants in the sport—who are now the consumers of the mountain bike industry—designed and built the first mountain bikes, but didn't receive any credit in the statistics, von Hippel said.

"Basically, the end result is a distorted system where businesses get a lot of credit for a lot of innovations they didn't do. This, in turn, biases public policy toward the needs of companies and their intellectual property rights," von Hippel said. "Now, finally, with a better OECD definition and better data we'll be in a position to allocate innovations to the people who actually develop them. That in turn will make household sector innovation visible to government policymakers, and induce people to make a more level playing field where both consumer innovators and producer innovators are acknowledged and supported."

The new OECD definition reads:

An innovation is a new or improved product or process, or combination thereof, that differs significantly from the unit's previous or processes and that has been made available to potential users (product) or brought into use by the unit (process). (This general definition uses the generic term "unit" to describe the actor responsible for innovations. It refers to any institutional unit in any sector, including households and their individual members.)

Tinkering leads to tech breakthroughs

Research by von Hippel and colleagues into consumer innovation across 10 nations found that the phenomenon was both very general and very important—generating a research and development capital stock of about $250 billion in the U.S. alone. These consumer hacks addressed all product areas of interest to consumers from new medical devices to sports and software hacks.

"If there is nothing out there, consumers will build it for themselves," he said. "Ninety percent of these people just give [innovations] away for free, and the other 10 percent is where a lot of entrepreneurship comes from. That means 90 percent of innovation occurring in the household sector hasn't been counted."

That means efforts to support household innovators, like building more maker spaces, aren't being carried out, von Hippel said. "If the household sector is developing many generally valuable innovations, this increases social welfare just as producer innovation does, and society ought to level the playing field and support both household sector innovation and producer innovation," he said.

Explore further: New statistics on business innovation released by NSF

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