The Development and Exploitation of Breakthrough Inventions

Abstract

I use a cognitive lens to examine how firms achieve and benefit from breakthrough inventions. I propose a life cycle where firms initially use knowledge creatively before routinely exploiting it, but mastery from use renews creativity. Firms are better able to exploit their breakthrough inventions with experience but are impeded by bureaucracy. Utilizing machine learning on 5.5 million USPTO patent abstracts, I identify and analyze 1,644 breakthrough inventions. I find that firms are most likely to produce breakthrough inventions when combining prior art that they are either intimately familiar or completely unfamiliar with. My findings therefore suggest coexisting but incompatible mechanisms for creating breakthrough inventions. Interestingly, firms that are old and small are best able to benefit from their breakthroughs. This finding suggests that the accumulated growth of old firms comes at a cost of a decreased ability to benefit from breakthrough inventions.