French Labor Law Reduces Firm Innovation

I heard an intriguing paper at the January 2020 AEA meetings in San Diego. It shows that a French labor market regulation discourages firm innovation. The abstract of the working paper version of the paper appears below.

We study the impact of labor regulation on innovation. We exploit the threshold in labor market regulations in France which means that when a firm reaches 50 employees, costs increase substantially. We show theoretically and empirically that the prospect of these regulatory costs discourages firms just below the threshold from innovating (as measured by patent counts). This relationship emerges when looking nonparametrically at patent density around the regulatory threshold and also in a parametric exercise where we examine the heterogeneous response of firms to exogenous market size shocks (from export market growth). On average, firms innovate more when they experience a positive market size shock, but this relationship significantly weakens when a firm is just below the regulatory threshold. Using information on citations we also show suggestive evidence (consistent with our model) that regulation deters radical innovation much less than incremental innovation. This suggests that with size-dependent regulation, companies innovate less, but if they do try to innovate, they “swing for the fence.”

The source of the abstract quoted above, is:

Aghion, Philippe, Antonin Bergeaud, and John Van Reenen. “The Impact of Regulation on Innovation.” 2019.

Clayton Christensen Wrote Well on Innovation

Clayton Christensen’s The Innovator’s Solution (co-authored with Michael Raynor) was packed with insights and examples on how entrepreneurs and incumbent firms innovate. He wrote several other thought-provoking and useful books, starting with his now-famous The Innovator’s Dilemma. Just a few days ago, I told one of my students from Africa that he should read Christensen’s latest book, which gives wonderful examples of how entrepreneurial innovation in developing countries can help them prosper.

This evening (Thurs., Jan. 24, 2020) I was discouraged to receive an email alert from the Wall Street Journal saying that Christensen died today.

A year or so ago, I sent him a late draft of my Openness to Creative Destruction, which references his work several times. He never responded. Maybe he already was too ill to look at it, or maybe he didn’t like it. I’ll never know. But either way, I thank him for all that his books taught me about innovation.

Christensen’s best book is:

Christensen, Clayton M., and Michael E. Raynor. The Innovator’s Solution: Creating and Sustaining Successful Growth. Boston, MA: Harvard Business School Press, 2003.

Christensen’s best-known book is:

Christensen, Clayton M. The Innovator’s Dilemma: The Revolutionary Book That Will Change the Way You Do Business. New York: Harper Books, 2000.

Christensen’s most recent book is:

Christensen, Clayton M., Efosa Ojomo, and Karen Dillon. The Prosperity Paradox: How Innovation Can Lift Nations out of Poverty. New York: HarperBusiness Press, 2019.

Incumbent Italian Firms Invest in Cronyism, Not Innovation

I heard an intriguing paper at the January 2020 AEA meetings in San Diego. It shows that, at least in Italy, big incumbent firms protect their position more through investment in cronyism than through investment in innovation. The abstract of the NBER working paper version of the paper appears below.

Do political connections affect firm dynamics, innovation, and creative destruction? We study Italian firms and their workers to answer this question. Our analysis uses a brand-new dataset, spanning the period from 1993 to 2014, where we merge: (i) firm-level balance sheet data; (ii) social security data on the universe of workers; (iii) patent data from the European Patent Office; (iv) the national registry of local politicians; and (v) detailed data on local elections in Italy. We find that firm-level political connections are widespread, especially among large firms, and that industries with a larger share of politically connected firms feature worse firm dynamics. We identify a leadership paradox: When compared to their competitors, market leaders are much more likely to be politically connected, but much less likely to innovate. In addition, political connections relate to a higher rate of survival, as well as growth in employment and revenue, but not in productivity – a result that we also confirm using a regression discontinuity design. We build a firm dynamics model, where we allow firms to invest in innovation and/or political connection to advance their productivity and to overcome certain market frictions. Our model highlights a new interaction between static gains and dynamic losses from rent-seeking in aggregate productivity.

The abstract quoted above is from:

Akcigit, Ufuk, Salome Baslandze, and Francesca Lotti. “Connecting to Power: Political Connections, Innovation, and Firm Dynamics.” NBER Working Paper #25136, National Bureau of Economic Research, Inc., Oct. 2018.

Flying Cars Face “a Long Road to Regulatory Approval”

(p. B3) Curtiss Autoplane. Fulton Airphibian. Taylor Aerocar.

Businesses and entrepreneurs have been promising a mass-produced flying car for more than a century. None have succeeded, but that hasn’t stopped Hyundai and Uber from wanting in on the action.

. . .

. . . there is a long road to regulatory approval. According to Morgan Stanley, air taxis will probably be used first in package delivery, which has fewer technical and regulatory barriers.

For the full story, see:

Niraj Chokshi. “Hail a Flying Car? Soon, Hyundai and Uber Say.” The New York Times (Wednesday, January 8, 2020): B3.

(Note: ellipses added.)

(Note: the online version of the story has the date Jan. 7, 2020, and has the title “Where’s Your Flying Car? Hyundai and Uber Say They’re Working on It.”)

Facebook’s “Lord of the Rings” Defense of Free Speech

(p. B1) On Dec. 30, [2019] Andrew Bosworth, the head of Facebook’s virtual and augmented reality division, wrote on his internal Facebook page that, as a liberal, he found himself wanting to use the social network’s powerful platform against Mr. Trump. But citing the “Lord of the Rings” franchise and the philosopher John Rawls, Mr. Bosworth said that doing so would eventually backfire.

“I find myself desperately wanting to pull any lever at my disposal to avoid the same result,” he wrote. “So what stays my hand? I find myself thinking of the Lord of the Rings at this moment.

“Specifically when Frodo offers the ring to Galadrial and she imagines using the power righteously, at first, but knows it will eventually corrupt her,” he said, misspelling the name of the character Galadriel. “As tempting as it is to use the tools available to us to change the outcome, I am confident we must never do that or we will become that which we fear.”

For the full story, see:

Kevin Roose, Sheera Frenkel and Mike Isaac. “Agonizing at Facebook Over Trump.” The New York Times (Wednesday, January 8, 2020): B1 & B7.

(Note: bracketed year added.)

(Note: the online version of the story has the date Jan. 7, 2020, and has the title “Don’t Tilt Scales Against Trump, Facebook Executive Warns.”)

National Institutes of Health Rejected Funding for Moir’s Radical Theories

(p. B14) Robert D. Moir, a Harvard scientist whose radical theories of the brain plaques in Alzheimer’s defied conventional views of the disease, but whose research ultimately led to important proposals for how to treat it, died on Friday [December 20, 2019] at a hospice in Milton, Mass. He was 58.

His wife, Julie Alperen, said the cause was glioblastoma, a type of brain cancer.

Dr. Moir, who grew up on a farm in Donnybrook, a small town in Western Australia, had a track record for confounding expectations. He did not learn to read or write until he was nearly 12; Ms. Alperen said he had told her that the teacher at his one-room schoolhouse was “a demented nun.” Yet, she said, he also knew from age 7 that he wanted to be a scientist.

. . .

Conventional wisdom held that beta amyloid accumulation was a central part of the disease, and that clearing the brain of beta amyloid would be a good thing for patients.

Dr. Moir proposed instead that beta amyloid is there for a reason: It is the way the brain defends itself against infections. Beta amyloid, he said, forms a sticky web that can trap microbes. The problem is that sometimes the brain goes overboard producing it, and when that happens the brain is damaged.

The implication is that treatments designed to clear the brain of amyloid could be detrimental. The goal would be to remove some of the sticky substance, but not all of it.

The idea, which Dr. Moir first proposed 12 years ago, was met with skepticism. But he kept at it, producing a string of papers with findings that supported the hypothesis. Increasingly, some of the doubters have been won over, said Rudolph Tanzi, a close friend and fellow Alzheimer’s researcher at Harvard.

Dr. Moir’s unconventional ideas made it difficult for him to get federal grants. Nearly every time he submitted a grant proposal to the National Institutes of Health, Dr. Tanzi said in a phone interview, two out of three reviewers would be enthusiastic, while a third would simply not believe it. The proposal would not be funded.

For the full obituary, see:

Gina Kolata. “Robert Moir, 58, Researcher Who Rethought Alzheimer’s.” The New York Times (Saturday, December 21, 2019): B14.

(Note: ellipses, and bracketed date, added.)

(Note: the online version of the obituary was last updated December 23 [sic], 2019, and has the title “Robert Moir, 58, Dies; His Research Changed Views on Alzheimer’s.”)

Boudreaux Names “Openness” as One of Seven “Superb” Books Published in 2019

George Mason economics professor Donald Boudreaux, in his essay “Some Great Books for Stuffing Stockings” says “I offer here a list of seven superb books published in 2019 that your open-minded friends and family members are sure to love.”

I am honored that he included my Openness to Creative Destruction as one of the seven:

Arthur Diamond, Jr. Openness to Creative Destruction: Sustaining Innovative Dynamism. As does George Will, Diamond emphasizes the vital role played by individual entrepreneurs in helping to create modern mass prosperity. (The accounts of the challenges and efforts of flesh-and-blood entrepreneurs through the years is alone worth the price of this book.) And as does Deirdre McCloskey, Diamond recognizes also the importance of widespread respect for innovators and businesspeople. Making clear that modernity’s prosperity is the result of creative destruction, this book offers an unusually effective and powerful explanation of genuine market competition and a brilliant brief for its indispensability and for its goodness.