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Lecture 1 - Knowledge, technological change and Innovation Studies

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  • 1. Lecture 1: Knowledge, technological change and Innovation Studies Plus • Outline of lectures • Assignments • Reflection on introductory readings • Determination of Course grade
  • 2. Schedule of lectures Lecture 1 (25/9): Knowledge, technological change and Innovation • Studies Lecture 2 (26/9): Sources of technological change • Lecture 3 (27/9): Innovation dynamics and the evolution of • industries Lecture 4( 28/9): Technological change and industrialisation • Lecture 5 (29/9): Technology diffusion and technology transfer • Lecture 6 (2/10): Incentives, firms and innovation • Lecture 7 (3/10): Sectoral characteristics of technological change • Lecture 8 (4/10): Innovation dynamics in the World Economy • Lecture 9 (11/10) A debate on the “new economy” • Lecture 10 (12/10) Innovation studies and technology policy •
  • 3. Assignments • Debate on the “new economy”, lecture 9 • Empirical paper on R&D and industrial innovation [deadline, 14/10] • DETERMINATION OF COURSE GRADE: (a) Homework assignments 50 %; (b) Final Exam 40 %; and (c) Class Participation 10 %.
  • 4. Knowledge, technological change and Innovation Studies
  • 5. OECD Countries: Ratio of tangibles/intangibles A ustria Italy A us tralia Norw ay Japan Belgium 1997 Germany 1995 Denmark 1990 Canada 1985 Netherlands Franc e UK Finland US Sw eden 0 2 4 6 8 10 12 14
  • 6. Value Chain in the Semiconductor Sector M a te ria ls IC M a s k IC F a b ric a tio n IC D e s ig n IC T e s tin g IC W a fer IC P a c k a g in g E q u ip m e n t V a lu e -a d d e d c h a in
  • 7. Technological Change: telecommunications
  • 8. DRAM Generations D R A M P r o d u c t C y c le 1 9 7 5 - 2 0 0 4 3000 2500 2000 Million Units 1500 1000 500 0 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 1K 4K 16K 64K 256K 1M 4M 16M 64M 128M 256M 512M 1G Source: IC Insights
  • 9. Changes in Market Leadership --Hard Disk Drives Product Generation: Leading Firm: 14-inch (1973) Control Data 8-inch (1978) Priam, Shugart 5.25-inch (1981) Seagate, Miniscribe 3.5-inch (1986) Conner, Quantum 2.5-inch (1990) Conner, Quantum 1.8-inch (1994) Integral
  • 10. Example – new drug • Basic research – microbiology, etc. • Applied research – screening compounds in test tubes; testing on animals • Invention – successful in laboratory • Development – Phase I and II clinical trials • Commercialization – packaging; marketing; dosage info • Diffusion – spread throughout the patient/doctor population
  • 11. Example – new software • Basic research – mathematics, queuing theory • Applied research – cryptography, sorting algorithms, data storage systems • Invention – idea of program, design, basic features • Development – programming, detailed specifications, alpha testing • Commercialization – beta testing, marketing, sale • Diffusion – adoption by consumers; large market share
  • 12. Knowledge as an Economic Resources The most fundamental resource in the modern economy is • knowledge and the most important process is learning. • Knowledge-based economy: increase of the relative importance of knowledge inputs in the production process. • Knowledge & firms: the creation of knowledge is the essence of building of competitive advantages in firms
  • 13. Economics of Information Information is an unusual economic good because: If I give or sell a piece of information to you, I still have it (non-rivalry). It is either very difficult or impossible for me to prevent you from passing on the information to someone else (non-excludability). These features of information complicate the economics of information: The fixed costs of producing information can be spread over all of the users that might be willing to pay for it without incurring significant additional costs (increasing returns) The willingness of individuals to pay for information is limited because a) its cost of reproduction are small and b) having it does not assure exclusive access (market failure and free rider problems) Intellectual property rights are a limited solution, but create the economic distortion of monopoly
  • 14. Distinction between Information and Knowledge The peculiar features of information do not fully apply to knowledge: 1. If I know something, I may not be able to transfer that knowledge to you. Information alone is not enough to reproduce knowledge. 2. In particular, my knowledge may consist of information that can be reduced to rules and procedures and tacit capabilities that I cannot effectively reduce to rules and procedures. (This leads to the division of knowledge into two types codifiable (or articulable) and tacit.) Whether I will ‘codify’ knowledge that can be codified depends on the incentives (economic or social) for doing so. 3. In addition, even if I can reduce something I know to rules and procedures you may not have the contextual knowledge or experience to understand my rules and procedures (absorptive capacity). 4. The existence of tacit or ‘unarticulable’ knowledge reduces the relevance of the problems with information as an economic good, but it raises additional problems in the transfer or exchange of knowledge.
  • 15. A Taxonomy of Knowledge-types • Know-what, knowledge about facts or principles • Know-who, knowledge supporting indirect access to knowledge • Know-how, knowledge linked to skills • Know-why, knowledge about principles and laws and the capacity to solve problems and extend the knowledge This taxonomy is an hierarchy with an increasing amount of tacit knowledge and difficulty in codification as you proceed down the list.
  • 16. Economic Considerations About the Boundary Between Codifiable and Tacit Knowledge The extent to which knowledge is codified is determined by incentives: the costs and benefits of doing so. To examine the costs and benefits of codification, the knowledge environment should be examined. In first approximation you can have stable or changing contexts. A stable context is characterised by the fact that codification can proceeds on the basis of pre-existing languages and models (a partial solution to the ‘absorptive capacity’ problem). In a changing context languages and models are fluid and codification is costly. In stable knowledge environments codification has lower costs and higher benefits than in unstable environments Whether information and communication technologies are making the codification process less costly and therefore more extensive is an issue of considerable economic and policy significance. Note that if the environment is changing more rapidly over time, information technology cost saving may be offset or eliminated.
  • 17. Classifications of innovation -1 Type; Impact; • product, • revolutionary (GPT), • process, • radical, • supply, • marginal/incremental (”reinvention”) • market, Level; • Organization • architectural • modular
  • 18. Classifications of innovation -2 Type of innovation Example Product Innovation New or improved product Process Innovation New or improved production process Organizational Innovation New organizational arrangement: a new venture division, a new internal communication system Management Innovation New managerial practice: TQM, BPR (business process re- engineering) Marketing Innovation New marketing practices: New financing arrangement, new sales approach Service Innovation New service concepts: online financial services
  • 19. Determinants of innovation • Economic factors (supply and demand) are important for an understanding of the rate and direction of technical change • Chance and unpredictability can be important in the process • There are forward and backward feedbacks throughout the process of innovation
  • 20. Innovation supply Supply of an innovation determined by – state of the relevant scientific and technological knowledge (technological opportunity) – cost and availability of inputs to innovation (trained technicians, knowledge workers, appropriate equipment) – ability to capture the increased profit from innovation (appropriability)
  • 21. Innovation demand Demand for a potential innovation depends on – Amount of cost reduction from that innovation (process innovation; new sources of supply; organizational change) – Consumer or producer benefit from something new (product innovation) – Consumer or producer benefit from improvement in an existing good (incremental product innovation)
  • 22. Direction of innovation - supply • Lack of technological opportunity – Science/technology not always available • Research on nanotechnology in 1910s, but lack of instrumentation – waited for electron microscope to make progress – Many wants unsatisfied for an extended period of time • cure for AIDS • Malaria vaccine • lightweight electric batteries
  • 23. Direction of innovation - supply – Treatment of diabetes held up by complexity of understanding insulin • Appropriability considerations – Lack of patents directs invention towards secrecy
  • 24. Direction of innovation - demand • “Inducement mechanisms and focusing devices” (Nathan Rosenberg) – Importance of bottlenecks in choice of innovative activity - “compulsive sequences,” where there is an imperative need for improvement – Manufacturing feeds back to innovation – Shocks to relative prices of inputs
  • 25. Relative factor prices Sharp changes in relative prices • Focuses attention on particular costs – firms cannot innovate in all directions at once – Oil price shocks and fuel-efficient cars • Threat or actual withdrawal of – labor • strikes in mid-19th C Britain lead to labor-saving machines – source of supply • Cotton to UK in U.S. Civil War (economizing on inputs) • US dye industry developed to replace German in WW I • Southeast Asian rubber during WW II – leads to creation of synthetic rubber
  • 26. The linear model of innovation A useful conceptualization, but not the whole story. The idea: science base basic research applied research invention prototype development commercialization diffusion technical progress economic growth Sometimes the entire process in red is referred to as innovation Which stages need funding, and how?
  • 27. Modifying the linear model • Importance of backward links (reverse the arrows) Commercialization and diffusion new innovation & development Invention/innovation science base/basic research
  • 28. Innovation and learning • During the R&D process – Knowledge concerning laws of nature (basic R) – Knowledge with useful applications (applied R) – Knowledge directed towards optimal design characteristics and satisfying consumer wants (development) • After the R&D process – During manufacturing – learning by doing – During the use of the product – learning by using
  • 29. A map of innovation inputs and outputs Market structure and industry; Appropriability environment Demand pull Firm size and (taste, market size) Market share, Tech. Opportunity R&D and other Diversification, (science base) Innovation investments And experience Knowledge Firm-level capital created By innovation investment Patents, Other IPR Innovative sales Innovation output Diffusion Outcomes: Productivity, Physical capital process Profitability, Worker skills And Economic Growth
  • 30. Beyond simple metaphors… Research Programmes on Technology and Innovation Points of Departure – From markets to incentives for rational and identical agents and then to innovation – From agents (firms with asymmetrical capabilities) to markets and innovation – From structural incentives (production system characteristics) to incentives and innovation dynamics – Additional Questions: – What is the driving force behind asymmetrical capabilities (codified knowledge, corporate structures, core competences, networking…) – Stylized facts and the level of theorizing [general trends and valid metaphors: product cycle, waves, critical technologies, paradigms etc.)
  • 31. The Innovation Studies Perspective • Firm level and sectoral studies • The systemic approach on technological change • Micro-foundations of innovation dynamics in a specific institutional setting • Towards a comparative/interdisciplinary perspective
  • 32. Some examples of interdisciplinary research with profound policy implications • Made in America project • Learning by doing: from aircraft engineering to Keneth Arrow and basic research funding • Innovation driven growth and EU framework programmes
  • 33. Our list of readings… • Innovation studies – Freeman • A theoretical perspective – Nelson • Innovation studies in the broader debate on innovation and technological change – Ruttan • The developing countries perspective - Bell