Lecture 7 - Sectoral characteristics of technological change

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  • 1. Lecture 7: sectoral characteristics of technological change
  • 2. The role of technological change - three levels of analysis Economists who do examine science and technology use the same levels of analysis that are employed for analysing other economic behaviour Macro – How does the entire market system function? Does it have a shape or pattern that is difficult or impossible to discern by examining its components? Meso – Markets and industries are the meso level of analysis. Many economic outcomes are determined at this level. Micro – The company or other organisation (e.g. non-profit or government agency) as well as the individual is the micro level of analysis. This is where decisions are made including the decision to invest in innovation.
  • 3. Today, we will deal with the other side of a basic dichotomy in Innovation Dynamics thinking, i.e. our review is focusing on production-biased views
  • 4. Research on sectoral technological characteristics Why, then, the PLC model and the concept of the dominant design are not enough? • i) Because people started raising questions related to the transition from the meso to the macro-level of analysis, i.e. – What is the economic value of diversity of firm level technological assets. – What is the economic impact of different sets of industrial structures – What is the importance, at the aggregate level, of major, technology driven trends. • ii) Practical demand for well informed sectoral studies • iii) Critical assessment of the Porter model.
  • 5. Problems with the Porter model • Firm specific factors largely neglected in the Porter industry analysis perspective, • Only focus on product market imperfections, • All returns treated as profits from market power, and • The nature of entry barriers is not properly understood. [Exclusive focus on prices -Forms of competition most critical for transformation and sustainable growth over the long term are driven by innovation, imitation and appropriation]
  • 6. Innovation driven sectors are, to a large extent oligopolies. Thus, in order to deal with intra- and inter-sectoral diversity, we have to move beyond the analysis of basic market structures SBI: Science Based Industries
  • 7. Concepts on offer… • Increasing returns to scale • Path dependence • Self-reinforcing mechanisms • Variety • Technological/organizational trajectories • Creative destruction
  • 8. Lets take an example: the semiconductor industry. Recent research suggests that we have a clear causality trend there from From technological trends to market structures. • Product standards and learning by doing lead to market concentration and persistence of leadership in the semiconductor industry. • A large part of the PC industry is based on proprietary Intel- Microsoft software. • The innovative leader [Intel] adopts a first-mover strategy that aims at being first when prices are still high to recover R&D outlays. • This is translated into initially high and then decreasing world market shares for Intel for every new generation of products. • Competitors enter later, they are less innovative and they focus on volume production and marketing. • Their entry causes prices to fall and reduced profit margins are compensated by market expansion. • As prices fall behind a certain level, Intel moves up to the next generation. [Gruber, 1999).
  • 9. Similar insights from the Pharmaceutical industry : exploration and exploitation Cycles of discovery: • a combination of exploitation – [use of available assets needed to survive in the short term] and • exploration – [the development of novel capabilities for the long run]
  • 10. Pharmaceutical industry: a well documented case of the importance of sectoral trends • Recent studies on the pharmaceutical industry suggest that apart from firm-specific and country- specific characteristics, fundamental changes are taking place at the sectoral level.
  • 11. The intensity of R&D activity, increases the number of new innovators. Shares of top 5/10 decline.
  • 12. A taxonomy for firm trajectories (Pavitt, 1984, 2000) Supplier- Scale- Information- Science- Specialized dominated intensive intensive based suppliers Typical core - Agriculture - Bulk - Finance - Electronics - Machinery sectors services materials - Retailing - Chemicals - Instruments - Automobiles - Traditional - Publishing - Software Manufacture - Civil - Travel engineering Main sources - Suppliers - Production - Software and - R&D - Design of technology engineering systems - Production - Basic - Advanced departments learning research users - Production learning - Specialized suppliers - Design offices - Specialized suppliers Main tasks of - Use - Incremental - Design and - Exploit basic - Monitor science technology technology integration of operation of advanced user strategy needs from changes in complex - Development elsewhere to complex information of related - Integrate systems. strengthen processing products new systems other - Diffusion of technology - Obtain competitive incrementally best design - Development complementar advantages and production of related y assets practice products - Redraw divisional boundaries
  • 13. Sectoral technological trajectories: determinants, directions and measured characteristics Category of Typical core Determinants of technological trajectories Technological Measured characteristics firm sectors trajectories Sources of Type of userMeans of Source of Relative Relative size Intensity and process appropriation process balance of innovating direction of technology technologybetween firms technological product and diversification process 1 2 3 4 5 6 7 8 9 10 Supplier Agriculture Suppliers Price Non-technical Cost-cutting Suppliers Process Small Low vertical dominated Housing Research andsensitive (e.g. Private extension trademarks, services services marketing Traditional Large users advertising manufacture aesthetic design) Production- Scale Bulk Production Price Process Cost-cutting In-house Process Large High vertical intensive intensive materials engineering sensitive secrecy and (product (steel,glass) supplier: know-how design) Assembly R&D Technical (consumer lags durables and Patents autos) Dynamic learning economics Specialised Machinery: Design and PerformanceDesign know- Product In-house Product Small Low suppliers instruments development sensitive how design Customers concentric Users Knowledge of users Patents Science-based Electronics/ R&D Mixed R&D know- Mixed In-house Mixed Large Low vertical electrical Public how;patents Suppliers High Chemicals science Process concentric PE* secrecy and know-how Dynamic learning economics * Production Engineering
  • 14. Mapping Sectoral Regimes and Industrial Competition Science based Fundamental Complex systems Product Continuous processes engineering processes Size distribution High presence of: Low presence of: High presence of: Low presence of: High presence of: - self-employment - self-employment - self-employment - self-employment - self-employment Low presence of: - entrepreneur. firms Low presence of: - large firms - small firms High presence of: - small firms High presence of: - medium firms - entrepreneur. firms - large firms - small firms Average size Medium High High Low Medium Market High Medium High Low Low concentration Exit rate High Low High Entry (% self- High Low Low Low employ.) Exit (% self- High Low Low employ.) Survival rate Low High High Stability of Low High High Low Low continuing firms
  • 15. General Purpose Technologies:
  • 16. GPT's characterized by: 1. Pervasiveness, i.e. used as inputs by a wide range of downstream sectors 2. Technological dynamism 3. Innovational complementarities: the productivity of innovative activities in user sectors increases as a consequence of improvements in the GPT
  • 17. How does knowledge flow between industries? • embodied in intermediate products • via patents and licences • embodied in capital goods • via consultancy services • via joint ventures • via technological collaboration (informal or formal) • via complex non-R&D inputs (such as design) • via human capital flows • via extramural R&D • via imitation
  • 18. As a GPT advances it spreads throughout the economy, fostering innovation in an ever-expanding array of application sectors, and bringing about generalized productivity gains GPTs link micro, meso and macro: innovation in “single” tech has macro consequences!
  • 19. Inter-industry spillovers: General Purpose Technologies Technological convergence at the sectoral level: Different sectors come to share similar technological bases
  • 20. THE ‘CRITICAL TECHNOLOGIES’ GROWTH ARGUMENT • 1. Growth is based on specific new industries characterised by radical technological change. • 2. These radical technologies tend to be 'clustered' together. • 3. These industries displace existing activities, creating investment opportunities and 'virtuous circles' of growth; as opportunities decline, growth rates slow. • 4. ICT is a key activity of this type at the present time. It is rapidly growing as a major employer, with major employment growth prospects 'knowledge intensive‘ a driver of growth in other sectors
  • 21. Problems with waves and “paradigm shifts” • Do they actually exist? (Not much statistical evidence…) • Confusion between innovation and diffusion • Basic problems of chronology • Size of the new sectors (most of them were and are small…) • Measurement of inter-industry impact • Pervasiveness of innovation • Persistence of some key technologies • Arbitrary selection of the critical technologies • Exceptions: countries that develop without significant presence in the critical technologies/industries
  • 22. Empirical validation of the impact of Industrial structure on aggregate growth [Peneder] • Sectoral differences in income elasticity of demand • The structural bonus hypothesis [reallocation of labour in favour of industries with higher levels of productivity] • The structural burden hypothesis [increasing labour shares in stagnant industries] • Differential growth at the industry level • Industries differ in their generation of external effects.
  • 23. Sector specific competencies • Are technological competencies sector-specific or the trend is towards the convergence of technological competencies across sectors? • It possible to define some core technological areas for industrial sectors. These differences will be maintained over time. • Thus, we have a path-dependence view. • Most spillovers between firms would arise within specific sectors
  • 24. Technological Convergence • Corporate technological diversification takes place. • That comes in line with broader long-waves in cross- industry technological paradigms. • Take for example the car industry [Initially, car production relied on mechanical technologies (engine, gearing) and chemical technologies (fuel consumption, metals); Present day auto industry combines all that with digital and electronic systems (fuel control, braking systems). • Since the long wave approach suggests that in the long run all industries will be influenced by the new paradigm, we can label this process as technological convergence between industries.
  • 25. Technology driven catching up process
  • 26. Technology driven systemic failures [K. Smith] Failures in infrastructure provision and investment. When there is problematic under-investment in the two types of infrastructure with which firms interact, namely, physical infrastructure (like communications and transport), and science-technology infrastructure (like universities, regulatory agencies, publicly supported laboratories). Public action should be directed towards setting up incentives for and controls on private provision, subsidies for private provision or direct public provision. Transition failures. When firms are highly competent within their own technological area but not in other related areas. Public action generally aims to solve this problem implicitly, but public action should be more explicit and devise special measures for this type of failure. Lock-in failures. When firms are not able to switch away from their existing technologies and get 'locked-in' to a particular technological paradigm or trajectory. The rationale for public action is to generate incentives, develop technological alternatives and nurture emerging technological systems in order to make it easier for firms to move away from lock-ins. Institutional failures. When the institutional and regulatory context is having an unexpected and negative impact on innovation in the system. Public action here should concentrate on monitoring and assessing regulatory performance.
  • 27. Policy questions • Increase variety? • Extent of support of scientific research • Introduce horizontal or selective policies? • Invest in complementarities? • The scale of resources needed for technological catching up • The size of firms • New sectors/firms or restructuring • Real Business Cycles?
  • 28. Readings… • Dosi-for definitions • Rosenberg, Tunzelmann, Lee (will become available latter today) • A bridge to lecture 6: Carlsson • Peneder: An economist’s perspective on meso to macro-issues. • Background reading: sectoral profiles