In the 20th century the majority of innovation started as evil nations wanted to destroy other nations.
As a result, the evil (and peaceful) nations devoted large chunks of their tax money to the defense budget.
The flow of research money was the following:
Public (taxes) -> Government -> Defense Agencies -> Universities -> Private Companies (implementation)
Research Budget Flow
Many of the most important contributions to technology and science were created or commercialized through this path: the internet, GPS, atomic energy , satellites and plenty more.
The innovation flowed from the government to enterprises and only then into consumers.
Space and Aviation -> Military -> Large Enterprises -> Civilian Government -> Small Enterprises -> Consumers
The early experiments or products were extremely expensive and sold in small quantities and required public financing.
In the 21st century the flow of innovation and new technology has reversed.
innovation Flow in a Consumer World
The recent launch of an iPhone into space with GPS tracking by civilians, is one amazing example.
The following stock chart provides more evidence. It plots the iShares Dow Jones U.S. Aerospace & Defense Index Fund compared to some major consumer oriented companies like Google, Sony, Amazon.
Chart of Defense Index Vs Consumer Companies 2006-2011
The new innovations are derived from consumer demand and consumer services or products : cellular phones, smart Phones, social networks,cloud computing, personal computers and online advertisement.
I believe this is the reason the Intel, Apple and Google are now the largest companies in the world, displacing companies like SUN, Nortel, Lucent, HP , IBM and similar companies more focused on enterprise and governmental markets. While IBM, Microsoft and Intel are still leading the patent table, one can claim it implies more on the inflation of patents , rather than true innovation.
Top 10 Companies Patents ROI from MSN
The reversal of innovation can be explained by multiple theories:
Moral – the global society has become more civilian and democratic. Individuals have more civil rights, more control of the public spend and therefore there are fewer wars, less dictators and less weapons. Unfortunately , I’m not sure all of the facts support this theory. I have found some evidence. For example, from 1988 to 2009 the global military spending share of GDP has dropped by 34% from 3.5% to 2.4% , global average. The number of conflicts decreased by 40% from 1992 to 2009.
Share of Military Expenditure as Percentage of Gross Domestic Product 1988 2099
Armed Conflicts by Region 1946-2009
Economics – In the end of the day we are all consumers and individuals. Economics are driven by numbers and since there are about 1 Billion consumers with a high standard of living, it is the largest market for almost any product. Selling a $300 product to every consumer translates to $300 billion market, this is equal to the global IT market spend. Selling $30 of advertisement to one Billion people …. you can do the math on your own. Compare that with the cost of design and manufacturing of a new stealth plane.
The R&D alone would cost Billions of dollars, and each airplane would cost $336M million dollars , if it the project is not aborted during the 20 years of development. Programming an amazing computer vision system for smart missiles would only be relevant to 20-40 customers. Delivering an amazing face recognition for facebook generates access to 750 Million customers. The OCR domain is one example I already bogged about.
Sociological – Open source software has allowed sharing of innovation and technology with zero cost of patents, licensing and removing many anti-competitive habits , either explicit or hidden that were common in past years. It also allows sharing of development costs across organizations. Younger generations are used to great user experience, and would not “go back” when entering Enterprise office. Cloud computing is also helping to build start-ups in 50 dollars.
The fact that Google and Amazon are hosting funding challenged public database of bioinformatics, that used to be funded by the government is rather provocative.
To summarize, while there are still huge budgets in defense and commercial enterprises, there is strong trend driving innovation from the individual. Do you believe the trend is real?