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Innovation in finance 5
Another requirement of the knowledge economy is investments which must steadily
be made in research, development and education (R,D&E). In a market more com-
petitive than ever, these investments must represent a fast growing share of gross
domestic product (GDP). Innovation does not come free of cost; but throwing money
at the problem is the worse possible policy. R,D&E investments must be managed.
Business Week suggests the United States is investing $1.5 trillion per year in research,
development and education.
Measured by budgets allocated to these sectors by com-
panies, families and the government, this $1.5 trillion represents more than 12 per cent
of America’s GDP. Deliverables depend on high intellectual standards and a system
which encourages both individual and laboratory-based research results.
1.2 Laboratories for brilliant new ideas
The organized scientific research laboratory, as we know it today, is hardly 120 years
old. Its concept was implemented, for the first time, at the end of the 19th century
by Siemens, a major German company which was, and is, doing advanced work in
mechanical engineering, electrical engineering and physics (now also in electronics
and medical instruments):
Laboratories have grouped together resources unavailable to individual researches,
and also provided a planned basis of operations.
While the genius of individual researchers is all important, the institutionalization
of cooperative research has given a great stimulus to the advancement of science.
Laboratories provided a dynamic and activist approach to discoveries, with the-
oretical breakthroughs the theme of basic research while applied research and
development places emphasis on timely and practical results. Till the late 1940s,
deliverables by big and small laboratories were in physics, chemistry, engineering and
technology. This does not mean financial products don’t change over time. They do,
but until recently change developments largely rested on ideas of individual brilliant
An organized laboratory for financial instruments showed up for the first time in
the late 1980s, a century after the laboratory notion was born, and
As a centre for analysing and exploring in a sensible way the application of novel
ideas, it has been preceded by a lab for the knowledge society the US military has
The RAND Corporation, Santa Monica, California, is the earliest case of an entity
set up explicitly as a laboratory of ideas, a hallmark of the knowledge economy.
About a year before World War II ended, General Henry Harley Arnold, commander
of the US Army Air Forces, foresaw that:
With the end of the war, military research funding would lapse, and
Scientists working for the government would drift back to their niches in universi-
ties and private industry.

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