Download The Economics of Technological Change

An Economic View on
Technological Change and
Innovation
B. Verspagen, 2005
The Economics of Technological
Change
Chapter 1
1
Invention, Innovation and Diffusion
• Major innovation
• Minor inventions (refinement and
development of the basic innovations)
• Radical breakthroughs followed by
incremental improvements
• Diffusion of innovation
2
Invention, Innovation and Diffusion
• Schumpeter
• Stages in the life time of an innovation
– Invention (technological domain)
– Innovation (invention put onto market)
– Diffusion (process that spreads the
innovation, adoption and imitation)
• Diffusion of a major innovation by incremental
innovations of basic design
3
Invention, Innovation and Diffusion
• Technological paradigms “Dosi”
– “a model and pattern of solution of selected
technological problems, based on selected principles
from the natural science and on selected material
technologies”
• Basic design of the innovation altered by
incremental innovations, but limited by the
choice of paradigm and the specific
circumstances in which the technology develops
• Technological trajectory “Dosi”
4
Invention, Innovation and Diffusion
• Success of innovation (hence of the paradigm)
depending on how well incremental innovation is
able to adapt the paradigm to local
circumstances
– Skills and capabilities of workforce
– Cultural aspects of the society
• Technological paradigm will ultimately most
likely to break down and a new paradigm might
emerge (better to adapt local circumstances)
5
Interaction of Technology and the Economy:
Demand Pull or Technology Push?
• Economic development and growth →
technological change → entrepreneurs
• Does technology determine economic
development or vice versa?
– Technology push hypothesis
– Demand pull hypothesis
6
Interaction of Technology and the Economy:
Demand Pull or Technology Push?
• The demand pull hypothesis
– Idea to innovate from the market
– Schmookler in 1950s and 60s
– Market information
– Critique: the difference between needs and
demand
7
Interaction of Technology and the Economy:
Demand Pull or Technology Push?
• The technology push hypothesis
– R&D first then marketing
• Basic (versus applied) science
– Basic science, applied R&D, knowledge
developed into product or process, diffusion
through the market
– Linear innovation process
8
Interaction of Technology and the Economy:
Demand Pull or Technology Push?
• Kline and Rosenberg “The Chain-Linked Model”
• Combination of two ideas
• The central chain of innovation: potential market,
invention, design & test, re-design & produce,
distribute & market → demand pull approach
• Also feedbacks → not a pure demand pull model
• Research → interacts with different stages in the
innovative process, improvements of the design
(incremental innovations)
9
Technology in Economic Models
• How to incorporate technology into economic
models?
• Exogenous production factor
• Endogenous production factors: labor and capital
• Until 1960s, technological knowledge as a shift
factor in the production function
Q  AK  L1
– Raising the level of technological knowledge implies
that more is produced with an equal amount of K
and L
10
Technology in Economic Models
• A determined by factors that are completely
outside the economy (exogenous)
• Technology → endogenous versus exogenous
factor?
• Product versus process innovation
• Why it is difficult to endogenize technological
change?
– Technology has certain characteristics of a public
good
– Technology is subject to great uncertainty
11
Technology as a Public Good
• The appropriability of technological knowledge
• Public good characteristics:
– Non-rivalry (if one person uses the good, this does
not prevent other people from using it again)
– Non-excludability (the party that puts the good on a
market has no way to control the use of this good by
other parties interested in it)
• Firms do not have power to charge consumers a
price for the public good to make profit
• Governments may take an active role in
supplying public goods
12
Technology as a Public Good
• Knowledge to be used as many times as
necessary → non-rivalry
• Not possible to exclude others from using the
knowledge
• Timing about putting invention on the market first
depending on development costs
• Competition in the production of new good is a
positive development for consumers (additional
value)
13
Technology as a Public Good
• Benefits to society versus firm
• The public interest in innovation is larger
than the private excess costs that are
faced by the company that considers to
invest in the project
• Market failure
– The public goods aspects of technological
knowledge give rise to an incentive problem in
a free market economy
14
Technology as a Public Good
• Is technological knowledge a pure public good?
• Skills and efforts on the side of the receiver of
this knowledge? → due to cumulative nature
• Tacit knowledge → transfer of it?
• Master and control technology leading to part of
technology being locked up
• The exploitation of knowledge in terms of
spillovers
– How about private knowledge versus spillovers?
15
Technology and Uncertainty
• The possibility of certain technical options
• The costs involved with a specific procedure for
producing a technical result
• Degree of uncertainty?
• An answer → Nelson and Winter “evolutionary
economics”
• Bounded rationality (Simon)
– Obtaining and processing information is a costly
process
– Real world is too complex to put into models
– Strong uncertainty limits the firm’s predictive
capabilities
16
Technology and Uncertainty
• An updated and altered model
• Trial-and-error process
• Decision making under bounded rationality
may take the form of routines or rules of
thumb
– Bounded rationality used as a description of
firm behavior in stylized evolutionary models
of the relationship between technology and
the economy
17
Technology and Uncertainty
• Uncertainty and risk
• R&D investment to undertake if expect a higher pay-off
than is associated with a similar investment in an activity
with lower risk
• How about from the point view of the aggregate
economy?
– “An stochastic process, if repeated often enough, will converge
to its mean”
• As risk is less of a negative factor for the economy at
large than for an individual firm, leaving risky R&D
investment to firms, will tend to lead to lower R&D
investment done than would be optimal from a
macroeconomic point of view→ K. Arrow
– The same conclusion with the notion of technology as a partly
public good
18
Evolution: Dawkin’s metaphor of
the blind watchmaker
• Evolutionary economics
• Dawkins → the process of random
mutation and natural selection
• Blind – uncertainty
• Mutation – process of incremental
innovations
• Natural selection – which one to be
successful?
19
Evolution: Dawkin’s metaphor of
the blind watchmaker
• Although the individual entrepreneur has to cope
with strong uncertainty and therefore can not
design in a top-down way the process (that we
have called technological paradigm), the
capitalist system, working by means of a
combination of the creation of novelty
(innovation) and economic selection (markets),
can create phenomena that seem as if they have
been carefully designed.
• Technological revolutions, steam power to ICT,
were created by the trial-and-error method of the
blind watchmaker
20
What is next?
• Need to endogenize technological change in
economic models
• Technological knowledge is a peculiar economic
factor that can not be treated like a normal
economic good
• Uncertainty and public goods aspects lead to
expect that a free market economy will produce
less technological knowledge than is socially
optimal
– Need the interaction between the economy and
technological change
21