Who invents? Standard theories usually deal just with R&D-performing firms and individual inventors. But enormous amounts of invention come as a byproduct of everyday firm investment. This type of invention tends to be incremental, and tends to be neither patentable nor held secret by the inventor. Robert Allen, in this famous paper from the early 1980s, refers to such invention as “collective invention.”
Consider the British blast furnace industry in the mid 1800s. There was certainly no meaningful corporate R&D at the time, as the world’s first corporate R&D labs were only just appearing then (in the German chemical industry). Yet the blast furnace industry in Cleveland changed enormously over a couple decades, nearly doubling the height of blast furnaces, and more than doubling temperatures. Such changes were greatly beneficial for reducing fuel consumption.
No single firm made these drastic changes overnight. Rather, furnace heights were increased incrementally by some firms when they built a new factory. Benefits in terms of lower fuel use were then made publicly available through personal correspondence, industry gatherings, and journal publications. Two factors were critical in this shift. First, the industry was rapidly adding capital. If a new plant is being built, experimentation has low costs: the cost of adding a foot to the chimney is that efficiency might be harmed slightly, and the benefit is that efficiency may be helped slightly. When an industry is not accumulating capital, this sort of minor experimentation is much more costly, since the only experimentation involves building an entirely new, not-yet-necessary factory. The second critical factor is some reason to avoid secrecy. In the blast furnaces, secrecy was more or less impossible. Builders and workers were frequently moving from plant to plant, and could simply tell their new employer what they learned. Since information is leaking out anyway, it may be an equilibrium to share information in the hopes that others will have useful information to share with me: work by von Hippel, previously discussed here models this sort of sharing in more detail.
The reason we tend to ignore this type of public, incremental innovation is because of a bias, in popular culture and in policy, toward big technological advances. A paper of mine, which I hope to have ready to share here soon, argues that the patent bias toward technological achievement and away from incentivizing the nexus of inventions which lead to a commercially viable product can be seriously harmful. The importance of minor inventions is more than the importance of the famous ones, they shout from the rooftops!
An interesting update of Allen would be in the context of China. To the extent that industries accumulating capital quickly throw off, as a byproduct, incremental inventions, there can be rapidly increasing cost efficiency in even developed industries when some shock causes the industry to switch to a new region with little capital. Peter Hessler, National Geographic’s man in China and a great chronicler of that nation, tells a great story about technology transfer and incremental growth in his book Country Driving. I’m also curious to see how one would distinguish learning-by-doing in aggregate statistics from learning-by-sharing at the plant level.
https://docs.google.com….collinvent.pdf (Final JEBO copy. The only nongated version I can find is this Google cached article.)
A Fine Theorem 
Bad link
This link should work. Thanks.