Download Macro-economics of Innovation 1

Macro-economics of
Innovation 1
Structural crises of adjustment,
business cycles and investment
behaviour (Freeman and Perez, 1988)
Business Cycles 1
• Kondratieve trade cycles (every 30 to 40
years) – revival-boom-recessiondepression
• Schumpeter (constellation of innovations
in recession and depression points)
• Traditional view: output is a function of
capital + labor
• Robert Solow (1956): role of technology in
output
Business Cycles 2
• One of the main reasons for cyclical fluctuations
in the economy is the instability of investments.
• Such instability is mainly related to the
investments in capital goods industries rather
than consumer goods industries.
• High capital-intensity and indivisibility of
investments tend to multiply investments during
boom and diminish during recession.
• Source: Freeman and Perez (1988)
Business Cycles 3
• Concept of Equilibrium in Economics
• Cobb-web theorem
• Excessive investments upset the
equilibrium
Investments 1
• Fluctuations in investments are caused by:
• External factors – 1) technological innovation, 2)
dynamic growth of population, 3) fluctuations in
business confidence and ‘animal spirits’.
• Internal factors – Any initial change in
investment gets multiplied as the employees in
capital goods industry spend their earnings on
consumption goods. This increases the optimism
of investors to invest more.
• Source: Freeman and Perez (1988)
Investments 2
• Inventions or scientific discoveries may occur
independently of the business cycle, but their
appreciable economic introduction will depend
on business conditions.
• The periods of stable growth depend more on a
general climate of confidence, including belief in
the future potential benefits from technical
change, rather than on assumptions of perfect
information, accurate calculations on the future
rate of return of a wide variety of investments.
• Source: Freeman and Perez (1988)
Technical Change 1
• The crucial importance of technical change for
investment behavior:
• At certain times technical change appears to
undermine confidence and stability, while at
others it has the opposite effect.
• At the level of individual innovative investment,
studies show that investment in new products
and processes has an element of true
uncertainty and the outcome cannot be known.
• Source: Freeman (1982)
Technical Change 2
• However, from a business cycle perspective, the
analysis cannot be restricted to individual innovation.
• Qualitative aspects and the systems of inter-relatedness
of innovations must be taken into account, which under
favorable conditions lead to an economic boom.
• Favorable conditions include, complementarities
between innovations and the emergence of appropriate
infrastructure and institutions that do not restrict diffusion
of new technologies.
• On the other hand, as technologies and industries
mature, diminishing returns and declining profits may
diminish investments.
• Source: Freeman and Perez (1988)
Taxonomy of Innovations 1
• Incremental innovations:
• Occur continuously, with varying rates in different
industries and countries, depending on a combination of
demand pressures, socio-cultural factors, technological
opportunities.
• They are not a result of deliberate R&D, but outcome of
inventions and improvements suggested by the
production people or proposals by users (‘learning-bydoing’ and ‘learning-by-using’).
• Although their combined effect is very important, no
single incremental innovation has dramatic effects.
• Source: Freeman and Perez (1988)
Taxonomy of Innovations 2
• Radical innovations:
• Discontinuous events usually as a result of
deliberate R&D in an enterprise or
university (e.g. color TVs, Electric
typewriters).
• They lead to growth of new markets and
investments, but relatively small in
aggregate economic impact.
• Source: Freeman and Perez (1988)
Taxonomy of Innovations 3
• Changes of ’technology system’:
• Far-reaching changes in technology, affecting
several branches of the economy, as well as
giving rise to entirely new sectors.
• A combination of radical and incremental
innovations, together with organizational and
incremental innovations affecting more than one
or few firms (e.g. synthetic materials, petrochemical innovations, machinery innovations in
injection moulding and extrusion)
• Source: Freeman and Perez (1988)
Taxonomy of Innovations 4
• Changes in ‘techno-economic paradigm’ (technological
revolutions)
• A major influence on the behavior of the entire economy
(pervasive effects). Creates new range of products,
services, systems and industries, as well as affects
almost all the other branches of the economy.
• Carries with it many clusters of radical and incremental
innovations.
• Changes involved go beyond engineering trajectories for
specific product or process technologies and affect the
input cost structure, and conditions of production and
distribution through out the system.
• Source: Freeman and Perez (1988).
Techno-Economic Paradigm 1
• A new techno-economic paradigm develops initially
within the old, showing its decisive advantages during
the ‘down-swing’ phase of the previous Kondratiev cycle.
• A combination of inter-related product and process,
technical, organizational and managerial innovations,
embodying a quantum jump in potential productivity for
all or most of the economy and opening up an unusually
wide range of investment and profit opportunities.
• The organizing principle of each successive paradigm is
to be found not only in a new range of products and
systems, but most of all in the dynamics of relative cost
structure of all possible inputs to production.
• Source: Freeman and Perez (1988)
Key Factor
• In each new techno-economic paradigm, a particular input or set of
inputs become the key factor of that paradigm and fulfills the
following conditions:
• 1) Clearly perceived low and rapidly falling relative cost – only major
and persistent changes have the power to transform the decision
rules and procedures for engineers and managers.
• 2) Apparently almost unlimited availability of supply over long
periods: temporary shortages may occur, but no major barriers to
long-term increase in supply. Essential for major investment
decisions.
• 3) Clear potential for the use or incorporation of the new key factor
in many products and processes throughout the economic system,
either directly or through related innovations, which reduce the cost,
change the quality of capital equipment, labor inputs and other
inputs to the system (e.g. oil, microelectronics).
• Source: Freeman and Perez (1988).
Kondratieve Cycles 1
• 1770s to 1830s (industrial revolution to hard
times).
• Main industries: textiles, Iron-working.
• Key factors: cotton and pig iron.
• Emerging sectors: steam engines, machinery
• Limitations: scale, process control and
mechanization, limitations of hand tools.
• Technological leaders: Britain, France, Belgium.
• Emerging countries: German States and the
Netherlands.
• Source: Freeman and Perez (1988)
Kondratieve Cycles 2
• 1830s to 1880s (Victorian prosperity to Great
depression).
• Main industries: steam power. shipping and railways.
• Key factors: coal and transport.
• Emerging sectors: steel, electricity, synthetic dye stuffs.
• Limitations: inflexibility of location in the case of water
power, scale, reliability and range of applications.
• Technological leaders: Britain, France, Belgium,
Germany, USA.
• Emerging countries: Italy, The Netherlands, Switzerland,
Austria-Hungary.
• Source: Freeman and Perez (1988)
Kondratieve Cycles 3
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1880s to 1930s (Belle epoque to Great depression).
Main industries: Electrical and heavy engineering.
Key factors: Steel
Emerging sectors: automobile, telecommunications, oil.
Limitations: steel as an engineering material in terms of
strength, durability and precision.
• Technological leaders: Germany, USA, Britain, France,
Belgium, Switzerland and the Netherlands.
• Emerging countries: Italy, Austria-Hungary, Canada,
Sweden, Denmark, Japan, Russia.
• Source: Freeman and Perez (1988)
Kondratieve Cycles 4
• 1930s to 1980s (Golden age of growth to crisis of
structural adjustment).
• Main industries: automobiles, aircraft, petro-chemicals.
• Key factors: Energy (particularly oil)
• Emerging sectors: computers, NC machines,
pharmaceuticals.
• Limitations: Fordist mass production, limitations of scale
of batch productions.
• Technological leaders: USA, Germany, Sweden,
Switzerland.
• Emerging countries: East Europe, Korea, Brazil, India,
China.
• Source: Freeman and Perez (1988)
Kondratieve Cycles 5
• 1980s to Present (Golden age of growth to crisis of
structural adjustment).
• Main industries: ICT, software.
• Key factors: electronic chips
• Emerging sectors: biotechnology, fine chemicals.
• Limitations: energy-intensity and material-intensity.
• Technological leaders: Japan, USA, Germany, Sweden,
Taiwan, Korea.
• Emerging countries: Brazil, Mexico, China, India.
• Source: Freeman and Perez (1988)
Features of New Techno-economic
Paradigm
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A new best-practice form of organization
New skill profile in the labor force
A product mix with intensive use of low-cost key factor
New radical and incremental innovations substituting the new key
factor
A new pattern in the location of investment
A wave of infrastructural investment
Emergence of new innovator-entrepreneur-type small firms
Concentration of the large firms in the branches producing the key
factor
anew pattern of consumption of goods and services and new types
of distribution and consumer behavior
Source: Freeman and Perez (1988)