Unpacking Coasian ‘Red Boxes’ : Universities and Commercialization

In The Nature of the Firm, Ronald Coase explains how firms represent a suspension of the market mechanism. The allocation of activities depends on the relative costs of organizing activities within the firm versus direct reliance on the market. Despite Coase’s insight, economists often treat firms as black boxes with respect to innovation. Firms take in resources and produce innovations but why firms are successful at innovation is unspecified. As a result, the factors that enable wealth creation within the black boxes of firms, a key factor in economic progress, are little understood. Firms are not the only source of innovation, however. Economically valuable research also emerges from non-profit universities. They represent an alternative (which we term the “red box”) to research that occurs within firms’ black boxes, an alternative with specific advantages and disadvantages in producing innovations. Using a comprehensive set of patent data, we show that university patenting is largely the result of activity by a tiny subset of U.S. universities, contrary to the Bayh-Dole Act’s promise that it would produce a massive technology transfer from universities to the marketplace.In this Article, we argue that research in non-profit universities is distinct from research in a for-profit firm. As a result, the process of moving inventions from the university to the market usually occurs through licensing innovations to firms that have a comparative advantage in assessing possible market value of inventions and can risk capital to exploit innovations. Because successful commercialization of the product of research requires entrepreneurship, we use the insights into entrepreneurship of economists Joseph Schumpeter and Israel Kirzner to begin to unpack the red box of university commercialization efforts. This Article examines the practices that have emerged after the Bayh-Dole Act’s grant of intellectual property rights to universities for the results of federally funded research and the many constraints imposed by university structure. It also considers how the differences in the incentive structure with black and red boxes create a role of university research