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In this chapter we provide evidence on the geographic distribution of inventive activity in software. Economists have long made a distinction between innovation and invention in the study of technological change. Schumpeter (1934) defined innovations as new, creative combinations that upset the equilibrium state of the economy. Mokyr (2002) defines invention as an increment in the set of technological knowledge in a society. Schumpeter pointed out that invention does not imply innovation, and that it is innovation that provides capitalism with its dynamic elements. Because it is more easily measured, in this chapter we will focus on the geographic dispersion of inventive activity. However, we adopt the position of Mokyr (2002), who argues that in the long run invention is a necessary precursor to innovation.

Unlike some of the other industries studied in this volume, one feature of software development is that it is frequently performed both by suppliers of software packages and services and by users. As a result, software development occurs throughout all industries in the economy, and so to understand the location of inventive activity in software it is insufficient to examine where one or two industries are located.

To understand this point further, it is helpful to gain a better understanding of the types of software development activity. The design, installation, implementation, and use of software consist of several phases. Messerschmitt and Szyperski (2002) identify two distinct value chains in software development. First, there is a supply value chain in which software creators develop software artifacts that provide value for the end user. This part of the software value chain consists primarily of design and development activities that can be thought of as software “production.” In the past this role had been played primarily by independent users, third-party programmers, or independent software vendors creating custom software, but over the past 20 years this role has passed increasingly to independent software vendors creating software products.

The output of this value chain contains all of what we would traditionally define as software products, such as word processors, operating systems, enterprise software such as enterprise resource planning (ERP) and business intelligence software, as well as middleware software, such as some transaction processing middleware and enterprise application integration. The total value of production in the software product industry was $61,376.9 million in 1997,1 and 195,200 persons were employed in this industry in the same year.2 Firms that operate in


Data from the U.S. Bureau of Economic Analysis input-output tables. This figure includes the total value of products made in NIPA industry 511200 (Software Publishers); 1997 is the latest benchmark year for the input-output tables. More recent years do not separate software producers from other information publishers.


Data from the Bureau of Labor Statistics (BLS) on the number of employees in the software publishing industry (NAICS 5112), available at

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