Saturday, February 04, 2012

Technological improvement has been the best way to change the balances between rich and poor, big and small. In the beginning of last century, technological breakthrough often came from small companies that grew to behemoths today. That breakthroughs were mostly in the mechanical field and chemistry but they all started from small family businesses changed or created new markets.  One thing they had in common was the fact that the success often came from the brainchild project of some inventor.

Nowadays technological breakthrough comes from the fields of computer science. It is known that lots of small companies start up on this field now but they are almost always swallowed by bigger players, often state backed or field founders, like Microsoft or Apple. Even so it is possible to argue that the IT industry provides lots of opportunities for entrepreneurship.

Never in history had mankind access to so much knowledge in a wide range of areas, so it reasonable to ask why are there not any new big companies growing from small businesses, considering the unprecedented number of highly educated individuals active in our society

There are many talented people with brand new ideas that take advantage of completely new ways of solving problems. The problem of our time is just that entrepreneurship is borderline impossible in terms of necessary investment and competition. Initial investment is a problem because most people who create disruptive technologies are young, making them unlikely to have the economic assets to even take care of the legal part of a business. Competition because bigger companies have an established business which takes considerable effort to make it that way.
Taking the late 19th century success stories of the Diesel engine and its self made man, and the DuPont company which started from nothing, not many new companies rose to stardom without coming from strong business conglomerates. Globalization did in fact create many new challenges to the developed world, specially regarding how to create companies that have to abide by stricter laws (labor, environmental, legal) and that the same time be competitive. On the other hand a developed society has a bigger human capital, as in creative, which it needs to tap effectively to keep survive.

Established companies still need to compete and at some level innovate at the lowest pace possible as not to be obsoleted. With this in mind the concept of idea contests took place, offloading the research and development to the contest participants. The contest takes place, the company funds the prize, and not surprisingly absorbs the idea(s) and the inventor into its structure, actually removing the risks associated with R&D . This idea may look great in the sense that both parties benefit from the contest, altough that may not be true.
As the natural law states, a body will remain in rest until some force acts upon it. With this in mind we consider a stable market where there is no immediate force acting asking for the company to react, so there is no reason for the company to take the risk of using a novel idea/product when nothing compels it to. In consequence, the company will obviously not take the unnecessary risk and will shelve the idea. This loss is invisible to the whole system as this new market changer invention, never came to be, but the market and ultimatelly the people will suffer for it.
On the other hand if we actually tip the system into favoring this new inventor into creating their own business of which they have everything to gain, then there would be a bigger chance of seeing all the unprecedented education investment, returning in the form of growth, employment and taxes. Perhaps the contests would not be needed if there was a visible network that inventors/enterpeneurs could easily get assistance from.