Lecture 3: Innovation dynamics
and the evolution of industries

From the production process to
technology
• There is a long tradition of research technological
change which starts with a simple assumption. The
characteristics of the production process have a major
impact on technological opportunities and innovation
dynamics in the long run.
• We can trace this back in Political Economy [division of
labour, size of markets, technology as an input to
production, learning by doing, different rates of
productivity growth at the sectoral level]–thus part of the
list of readings today is dedicated to these writings.
• A recent UNIDO report brings up to date these
arguments.

Innovation, Industrial Dynamics
and Industrial Evolution
• Industrial dynamics: market structure, entry-
growth-decline of firms
• Industrial evolution: knowledge,capabilities,
institutions and other actors facilitating industrial
change

Firms in 2-digit
classes are usually
not competing
directly, due to the
emergence of niche
markets

Factors in Industry and Product Life Cycles:
Areas to look for data
• Product/process innovation
• Rate and type of entrants
• Profile of the selection process
• Firm size and growth
• Market concentration
• Market niches
• Shake outs

Two basic insights from the
literature
• The relationship between innovation and industrial
change has many dimensions, involves several
actors, has periods of uncertainty (radical
innovation), periods of incremental change and
differs greatly across sectors (SPRU).
• A large number of industries follow a life cycle:
Radical Innovation..new products..demand
growth…shift of emphasis to process
innovation..selection process..concentrated
markets. These trajectories are different from
sector to sector.

Four areas of research findings-1
• Drawing on the increasing availability of
firm level data, researchers have pointed
out stylized facts and statistical
regularities.
– Sectoral diversity in firm size distribution
– Labour productivity differences across firms
– Persistence of profitability
– Heterogeneous firm-specific profiles within
industries

Heterogeneity and its persistence
• Firms differ even within very narrowly defined
business lines under most measures of structure
and performance:
– Size
– Growth
– Productivity
– innovativeness
• These differences tend to persist over long
periods of time: no convergence to an average
• The dynamics of an industry is significantly driven
by outliers

Four areas of research findings-2
• Heterogeneity of firms innovativeness.
– In most industries there are few firms which
are responsible for a large number of
innovations (different capabilities, different
routines).
– Heterogeneity is related to entry. We have
high rates of entry after technological
discontinuities (new firms have higher rates of
productivity also)

Four areas of research findings-3
• Inter-sectoral differences of the rate of
technical change, market structure and
organization of innovative activity.
– First pattern: few innovators, stability, new
innovators are rare
– Second pattern: wide population of
innovators, high turbulence in innovative
activity, large population of new innovators

Four areas of research findings-4
• The role of institutions in industrial
evolutions (universities, Venture Capital,
other supporting institutions)
– Firms are not the only actors in the innovation
process. Technological change is the result of
contribution of different actors.

A list of stylized facts
• Production increases in the initial phase of the
development of industry – then declines
• Numerous entries in the beginning
• Exceeded by exits over time
• Market shares are highly volatile in the first steps
– stabilize latter
• From product innovation to process innovation
• First movers generally enjoy long-term
leadership
• Dominant design ----process of standardization

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