Lecture 1: Knowledge, technological
change and Innovation Studies
Plus
• Outline of lectures
• Assignments
• Reflection on introductory readings
• Determination of Course grade

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
•

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 %.

Knowledge, technological change and
Innovation Studies

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

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

Technological Change:
telecommunications

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

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

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

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

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

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

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.

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.

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.

Classifications of innovation -1
Type; Impact;
• product, • revolutionary (GPT),
• process, • radical,
• supply, • marginal/incremental
(”reinvention”)
• market,
Level;
• Organization
• architectural
• modular

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

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

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)

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)

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

Direction of innovation - supply
– Treatment of diabetes held up by complexity of
understanding insulin
• Appropriability considerations
– Lack of patents directs invention towards
secrecy

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

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

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?

Modifying the linear model
• Importance of backward links (reverse the
arrows)
Commercialization and diffusion new
innovation & development
Invention/innovation science base/basic
research

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

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

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.)

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

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

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