Two Carl Zeiss companies provide a natural experiment for analyzing the effects of socialist versus market systems on innovation. By analyzing patent records from 1950 to 1990, we trace the technological contributions of Zeiss Jena in the German Democratic Republic and Zeiss Oberkochen in the Federal Republic of Germany. We show that Zeiss Jena gradually developed considerable technological competence, but a deficiency of innovative potential within the socialist system led to political pressures on key firms to innovate “by plan.” These findings on Zeiss Jena imply that technologically viable firms can fail during the initial period of transition from socialism to capitalism. The diagnosis of a lack of innovation and faulty managerial incentives as the disease that is “cured” by market reforms should be balanced by an understanding of the actual capabilities of socialist firms and the difficulties of radical change mandated by brutal shocks to the macroeconomic system.
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