Abstract: Financing Invention during the Second Industrial Revolution: Cleveland Ohio, 1870-1920

Naomi Lamoreaux, Margaret C. Levenstein, and Kenneth Sokoloff

Abstract

This paper draws on three distinct sources of information (patent assignments, lending records of local banks, and papers of individual businesses engaged in technological change) to examine the networks of inventors and investors who fostered technological change during Cleveland, Ohio's remarkable ascendance as a manufacturing center during the Second Industrial Revolution. It has been conventionally argued that there was a decline in the importance of independent inventors and an increase in the importance of research and development labs in large corporations. Our research shows that, while there was indeed a decline in independent inventing, the rest of the story is more complicated. In new industries associated with Second Industrial Revolution, inventors were disproportionately principals (owners or part-owners) in firms. Though in many cases these "entrepreneur-inventors" also had an employment relation with the firm, their incentives, and presumably their working environment, were quite different from individuals whose sole or primary compensation was salary, not dividends and capital gains. We document this argument with a detailed analysis of the growth of the electrical industry in Cleveland. As firms realized that success required staying on the technological cutting edge, some firms turned to the formalization of R&D, but that was mainly a later development with more complex consequences for the nature of technological change, its organization, and its finance.