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Industrial Economics Lecture 8.pptx

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Industrial Economics Lecture 8.pptx

  1. 1. Lecture Eight Technological Progress Invention, Innovation and Diffusion  Technological change is a term that is used to describe the overall process of invention, innovation and diffusion of technology or processes.  It is used in economics to describe a change in the set of feasible production possibilities.  The term is redundant with:  technological development  technological achievement, and  technological progress.
  2. 2.  In essence technological change is:  the invention of a technology (or a process)  the continuous process of improving a technology (in which it often becomes cheaper) and its diffusion throughout industry or society.  In its earlier days, technological change was illustrated with the 'Linear Model of Innovation', which has now been largely discarded to be replaced with a model of technological change that involves innovation at all stages of research, development, diffusion and use.
  3. 3.  The Schumpeterian trilogy divided the technological change process into three distinct phases: The technological change process including:  the conception of new ideas (invention)  the process that involves the development of new ideas into marketable products and processes (the doing of new things or the doing of things that are already being done in a new way) (innovation); and  the stage in which the new products and processes spread across the potential market (diffusion).  Three phases of the process of Technological Change innovation invention Diffusion
  4. 4. Invention  Is the creation of something new, or a "breakthrough" technology.  It is the initial creation or discovery of an idea or a product.  The invention of a personal computer can be a best example. There are numerous such examples in the world. Innovation  is a change in the thought process for doing something, or  it is the useful application of new inventions or discoveries.  it may refer to an incremental emergent or radical and revolutionary changes in thinking, products, processes, or organizations.  Following Schumpeter (1934), contributors to the scholarly literature on innovation typically distinguish between invention, an idea made manifest, and innovation, ideas applied successfully in practice.
  5. 5.  In many fields, such as the arts, economics and government policy, something new must be substantially different to be innovative.  In economics the change must increase value:  customer value, or  producer value.  The goal of innovation is positive change; to make someone or something better.  Innovation leading to increased productivity is the fundamental source of increasing wealth in an economy.
  6. 6.  The word "innovation" is often synonymous with the output of the process.  However, economists tend to focus on:  the process itself, from the origination of an idea to its transformation into something useful, to its implementation; and  the system within which the process of innovation unfolds.  Since innovation is also considered a major driver of the economy, especially when it leads to new product categories or increasing productivity, the factors that lead to innovation are also considered to be critical to policy makers.  In particular, followers of innovation economics stress using public policy to spur innovation and growth.
  7. 7.  Rogers proposes that there are five main attributes of innovative technologies which influence acceptance.  These are relative advantage, compatibility, complexity, trialability, and observability. i. Relative advantage: may be economic or non- economic, and is the degree to which an innovation is seen as superior to prior innovations fulfilling the same needs.  It is positively related to acceptance (i.e., the higher the relative advantage, the higher the adoption level, and vice versa).
  8. 8. ii. Compatibility is the degree to which an innovation appears consistent with existing values, past experiences, habits and needs to the potential adopter; a low level of compatibility will slow acceptance. iii. Complexity: is the degree to which an innovation appears difficult to understand and use; the more complex an innovation, the slower its acceptance. iv. Trialability: is the perceived degree to which an innovation may be tried on a limited basis, and is positively related to acceptance.  Trialability can accelerate acceptance because small- scale testing reduces risk. v. Observability: is the perceived degree to which results of innovating are visible to others and is positively related to acceptance.
  9. 9.  Joseph Schumpeter defined economic innovation as:  The introduction of a new:  good- that is one with which consumers are not yet familiar- or of a new quality of a good.  method of production, which need by no means be founded upon a discovery scientifically new, and can also exist in a new way of handling a commodity commercially.
  10. 10.  The opening of a new market; that is a market into which the particular branch of manufacture of the country in question has not previously entered, whether or not this market has existed before.  The conquest of a new source of supply of raw materials or half-manufactured goods, again irrespective of whether this source already exists or whether it has first to be created.  The carrying out of the new organization of any industry, like the creation of a monopoly position (for example through trustification) or the breaking up of a monopoly position.
  11. 11. Diffusion  It is the spread of a technology through a society or industry.  The diffusion of a technology generally follows an S- shaped curve as early versions of technology are rather unsuccessful, followed by a period of successful innovation with high levels of adoption, and finally a dropping off in adoption as the technology reaches its maximum potential in a market.  Ultimately, it is only the successful diffusion of innovations which leads to perceptible and widespread effects on the growth of productivity or trade competitiveness and on aggregate economic performance of countries.
  12. 12.  Models have frequently started from assumptions about the decision to invest in innovations.  They have thus attempted to take account of the availability of information about innovations and the degree of perceived risk.  When an innovation appears, adoption is slow because few potential users know of it and because its capabilities are relatively uncertain, its purchase represents a risk.  As time passes, more potential users come to hear of the process and the experience of the initial users becomes known through the industry, so reducing the risk to buyers.  In these conditions, diffusion proceeds more rapidly.
  13. 13.  As sales approaches saturation, the number of non-users falls with the effect that pace of diffusion slows once more.  Thus, when the share of output attributable to a new process is plotted against time on a graph, the diffusion path will not follow a simple straight line but rather an S-shaped (or sigmoid or logistic) curve.
  14. 14. Figure 7.1: The S-shaped logistic curve and Diffusion of innovation, the Sigmoid Curve
  15. 15. The Role and Sources of Technology  According to the Austrian economist, Joseph Schumpeter, technological change was a major determinant of industrial change.  Schumpeter believed that the economic cycles in capitalistic economies, are the result of rule changing innovations.  Innovation is a two headed beast: the introduction of revolutionary products and services by successful entrepreneurs is the fundamental force driving sustained long-term economic growth, but destroys the power of established institutions and organizations in the short term.  He named the process of industrial transformation through radical innovation as creative destruction.
  16. 16.  Robert Solow won the Nobel Prize in large part for showing how important technology is to economic growth.  Most economists in past had thought of growth as driven by the accumulation of capital, and by other changes besides technological improvements (e.g. increased division of labor).  But, Solow (1957) found that only 12.5% of measured growth in output per hour worked (in the US economy excluding farms during 1909-1949) could be attributed to increased use of capital equipment.  The rest of the productivity gain was attributed to improved production practices and equipment (technological advance in the strict sense) and to increased ability of the labor force (technological advance via the skills of workers).
  17. 17.  Even though available figures are very imperfect, Productivity growth stems in large part from spending on research and development (R&D) and other engineering improvements.  Figures show that many leading nations of the world have increased R&D spending over time, catching up with the US and the UK.  Differences between countries allowed industries to become efficient much more rapidly in some nations than in others.
  18. 18.  Adoption of new corporate structures is a social innovation, an organizational technological change that seemingly did yield both higher productivity and higher rates of other kinds of technological progress.  Education has been and remains to be fundamental for workers to have skills used in innovative progress, and university-industry linkages have been particularly important in launching some industries such as the early German chemical and dyestuffs industries.  Cartel-busting reduces price which yields short-term benefits, although cartels sometimes retarded innovation so getting rid of cartels might have yielded more invention or innovation.  Research: “University –industry linkage?????”
  19. 19.  Often, the term invention is used to mean:  the initial creation or discovery of an idea, while  innovation is used to mean:  the commercialization of the idea.  In practice, the innovation part of the work almost always requires:  far more money, and  far more work by scientists and engineers than the initial invention.  For example, the discovery of penicillin by an individual – Alexander Fleming in 1928 – did not lead to a commercial product until a massive development program during World War II, when thousands of scientists and engineers came up with viable, affordable production methods.
  20. 20.  Large firms, not small firms or independent inventors, made commercial production of penicillin a success.  Large firms seemingly dominate commercial innovation more than initial invention.  And the large firms, not the initial inventors, generally make most or all of the profit. • What are the ways to:  encourage the creation of new products?  improve the features and quality of existing products?, and  reduce costs of production?  As part of finding ways to spur technological improvement, it helps to know some of the determinants of invention and innovation
  21. 21. 1. Firm size  Do large or small firms innovate more? Why? 2. Individuals who create innovations  Do inventions and improvements come from people within a firm? Or  do they come from customers, suppliers, or outside inventors?  What types of inventions/improvements come from which people? 3. Regional agglomerations of firms  How does the local community around a firm affect that firm’s innovative success?
  22. 22. 1. Firm Size and Research and Development  Technological advance, broadly defined, has been the primary source of economic growth.  To stimulate economic growth, therefore, the most promising policies are any means that yield greater rates of technological progress.  There are many means to such innovation including: transfer of skills between nations, education, social attitudes that support innovation, and national R&D funds.  In the end, of course, what matters is the productivity improvements within the numerous companies (and government and non-profit organizations) that compose a productive economy.
  23. 23.  Studies of innovation by firms have checked to see whether small or large firms innovate more.  Joseph Schumpeter, in the 1940s, pointed to the importance of productivity growth and new products in driving economic advance, and argued that the traditional focus on reducing anti- competitive practices was misplaced.  In fact, he argued that large firms and monopolies (by which he also meant oligopolies) are the primary source of rapid economic progress!
  24. 24.  By trying to stop anticompetitive practices, Schumpeter argued, economists and governments were irreparably damaging the economy!  Economic growth and the creation of new products were supposedly being harmed by governments limiting the power of monopolists.  If Schumpeter was right, we could have been living today in a world with much cheaper prices, and far more new and useful technologies than exist, if past governments had been supportive of large corporations and monopolies.
  25. 25. • Why might bigger or smaller firms tend to do more R&D? To begin answering the question, consider some of the factors that affect how much R&D a firm does: Technological opportunity: In different industries or product markets, there are different amounts of opportunity to create important new technologies. For example, there seems to be more technological opportunity today in the biotechnology or software industries than in the cloth manufacturing industries. Technological opportunity is sometimes known as a “technology push” factor.
  26. 26.  Demand for technology: Regardless of technological opportunity, progress may slow when there is little economic demand for a technology.  For example, with the switch from horse and carriage travel to automobile travel, the development of new patents related to horseshoes plummeted.  (A horseshoe is a U-shaped metal bar nailed to the bottom of horses’ hooves, so that the hooves don’t wear out).  People’s willingness to pay for a new technology is sometimes known as a “demand pull” factor.
  27. 27. Appropriability: Can firms “appropriate” the monetary returns to R&D? One of the Webster’s dictionary definitions for appropriate is: “To set apart for, or assign to, a particular person or use, in exclusion of all others…” If patent rights are strong, both small and large firms should be able to appropriate the returns to R&D, i.e. capture the profits that could come from the inventions and innovations created during the R&D.
  28. 28. If patent rights are weak, either (1) other firms copy the invention or innovation; (2) other firms develop minor variations of the new technology and patent the variations instead, thus “patenting around” another firm’s patent and continuing down the path of development; or (3) large firms with strong investments in the technology can maintain dominance by having large numbers of patents and copyrights, and by defending them legally, so that new firms are kept out of the market and find it impractical to develop new technologies. Availability of financing: Do firms have enough money to fund R&D?
  29. 29.  Absorptive capacity: Do firms have the capacity to “absorb” information about new technologies developed in other firms or by academic researchers?  The extent to which a firm has the relevant R&D personnel and other resources needed to absorb new technologies from outside the firm is called its “absorptive capacity.”  Incentives from cost-spreading: Consider two firms, producing 100 and 10,000 automobiles per year respectively.  Suppose a project to design a new production machine, thus cutting production cost per car by Birr 1, costs Birr 10,000.
  30. 30. For the smaller firm, the project would not be worthwhile, because it would take 100 years of producing 100 cars per year to pay back the development cost of Birr 10,000.  But for the large firm, the project pays for itself in one year, and in future years saves Birr 10,000 per year.  Thus, the fixed cost of R&D may be spread over the number of units sold, giving an advantage to larger firms.
  31. 31.  In addition to which firms do more R&D, with empirical data it helps to ask why some firms may seem to do more R&D.  In particular, a firm’s:  “propensity to patent”, or  relatedly its potential to publish the results of R&D, influences how much it seems to do R&D.  In some industries, firms need to patent a lot, whereas in other industries it makes more sense to keep R&D results secret.
  32. 32.  Also, different firms may have managers who are more or less keen on patenting or restrictive about publishing.  Larger firms tend to have more incentives than smaller firms to improve and streamline existing technologies.  Hence, large firms often pursue large numbers of minor improvements to products and manufacturing processes.  If an invention comes from smaller firms, commercialization (or “innovation”) still takes a lot of effort, which may be carried out with help from larger firms.
  33. 33.  But, what does the empirical evidence on firm size, industry concentration, and R&D look like?  Some of Schumpeter’s notions were labeled “the Schumpeterian hypothesis” by other economists.  In particular, the Schumpeterian hypothesis is that larger firms are better at producing innovations than small firms.
  34. 34.  The notion is that, if the hypothesis is right, the values of [(R&D spending or output) / (firm size)] should be bigger for larger firms.  The name “R&D intensity” is used to mean (R&D spending) / (firm size), since firms with higher values are in a sense doing research and development more intensively.  Different studies found that bigger firms tend to have bigger R&D budgets and more R&D results (such as patents).
  35. 35.  The real question they posed was, however, whether R&D intensity increases with firm size.  It turns out that R&D intensity varies a lot from company to company for reasons that seem to have little relation with size.  Specifically, most of the variance in companies’ R&D/size measures can be attributed to variables other than size.  Characteristics of particular industries, such as the nature of the technology and its appropriability, explain much of the variance.
  36. 36. • specifically, above a low threshold in size, R&D intensity seems to be roughly constant regardless of firm size. • Similarly, in more concentrated industries (which typically have bigger firms), there tend to be higher R&D budgets, but there is little relationship between industry concentration and R&D intensity, and R&D intensity seems roughly unrelated with industry concentration
  37. 37.  Finally, it was found that the R&D output of firms per unit of size actually seems to decline with firm size!  For example, the number of patents produced each year per employee in a company or per Birr spent on research actually seems to be smaller in the bigger companies!  Thus, it seemed, perhaps the bigger companies are actually less efficient than the smaller companies!  With this sort of empirical evidence, many researchers took the view that Schumpeter’s notions were wrong, and small companies are better sources of R&D.  Even people who had originally been champions of the Schumpeterian view (such as Mike Scherer) seemed to adopt this view.
  38. 38. • While larger firms may do more research than smaller firms, this may not apply to case like where firms can appropriate returns to innovation, or where firms can rapidly expand to any amount of output. • Is such cases, small firms would be expected to have the same incentive as large firms to do R&D.
  39. 39. Other Determinants of R&D • Lots of issues are more important than size in determining which firms innovate more. 1. The industry in which firms participate: Suppose you compare the aerospace industry versus the soft drinks industry.  It’s no surprise that aerospace firms have bigger R&D budgets, in absolute terms or as a percent of sales or profits, than soft drink firms. 2. The culture of the firm, how it’s organized, and the skills of people in the firm: Some firms have a belief in being technology leaders, while others pay more attention to costs or marketing.
  40. 40.  Some firms involve factory workers in coming up with ideas to improve the production line, while others separate the jobs of their engineering staff and line workers.  Some firms have executives, scientists, and engineers with the necessary skills to succeed with a technology; others don’t.  Consider firms in the same industry with similar culture, organization, and employee skills. Among these firms, large size seems beneficial for some types of innovation:
  41. 41. a. Firms with large market shares seemingly have the advantage for the many incremental changes that improve a product and reduce its manufacturing cost. b. Small firms, however, are relatively free of bureaucratic problems and incentive problems that may get in the way of major inventions.  The managers of large firms are often charged with blocking important inventions that have little to do with a firm’s existing products or markets, or especially those that would replace the firm’s existing products, because they want to focus on what the firm already does.
  42. 42. • Economists have discussed some of the issues that help to determine which firms and individuals are the sources of invention.  The conclusion from various case studies is that major inventions come from many sources – large firms, small firms, and individuals. Thus, it would be wrong to think that large firms are necessary for invention to occur. 2. Individuals who Create Innovations: • The ideas for an invention or innovation often come from outside the firm that puts the innovation into practice.
  43. 43.  Thus, a firm’s contacts with customers and suppliers, and its openness to ideas from those sources, may influence its rate of innovation.  Also, of course, the specific individuals involved in companies help determine how successful a company can be at innovation.  Some of the economists who analyzed the sources of innovation (and invention) found that often the ideas for innovations came not from the company that put the innovations into products, but from customers or suppliers of the company.
  44. 44.  An important concept in theories of industry concentration is that of heterogeneity between firms. • The term heterogeneity simply means differences, which could involve differences in size, research skills, managerial capabilities, etc. • Some theories assume that heterogeneity in terms of the capabilities of managers and of engineers/researchers remains fixed over time, that is, a rating could be assigned to each firm when it starts up, telling how good that firm is in terms of the capability of its personnel, and the rating remains over time. • Such fixed heterogeneity of personnel can explain some interesting facts about industrial competition.
  45. 45. 3. Regional Agglomerations of Firms:  A regional agglomeration occurs when firms locate near each other.  Agglomerations might have many advantages for the success of companies at R&D and at competition more generally.  Nearness by itself, however, may not guarantee an advantage.
  46. 46.  Some of the characteristics that seem to be necessary for regional agglomeration to give an advantage include: – Openness and ease in interchange of ideas among engineers and managers; – Readily available start-up money, especially from previously successful entrepreneurs; Close involvement and assistance from investors; – Close links between university research and educational programs; – Firms working closely with local government and volunteering executives’ time to try to resolve regional problems; – Cooperation among firms particularly when special needs arise; etc.
  47. 47.  There are agglomeration economies related to innovation.  For instance, cities with diverse economies may tend to grow, whereas cities focused primarily on a single industry may stagnate if the single industry ceases to grow or collapses.  Diverse economies have more ability to spin off new kinds of business when profit opportunities exist.
  48. 48.  Cities with diverse economies may be an especially likely and supportive environment for spin-off of new businesses, because the diversity of businesses makes available many different skills, ideas, interests, and resources needed to start many different types of new businesses.  Diversity of knowledge and assets allows people to come up with new business approaches.  In contrast, if almost all firms in a city were specialized in, say, cotton spinning and weaving, then it may be very hard to create new kinds of non-cotton business when the cotton industry becomes unable to compete with producers in other nations.
  49. 49. Patents and Patent Protection  A patent is a set of exclusive rights granted by a state (national government) to an inventor or their assignee for a limited period of time in exchange for a public disclosure of an invention.  It usually refers to a right granted to anyone who invents or discovers any new and useful process, machine, article of manufacture, or composition of matter, or any new and useful improvement thereof.
  50. 50.  A patent is not a right to practice or use the invention.  Rather, it provides the right to exclude others from making, using, selling, offering for sale, or importing the patented invention for the term of the patent subject to the payment of maintenance fees.  A patent is, in effect, a limited property right that the government offers to inventors in exchange for their agreement to share the details of their inventions with the public. • Like any other property right, it may be sold, licensed, mortgaged, assigned or transferred, given away, or simply abandoned.
  51. 51.  The procedure for granting patents, the requirements placed on the patentee, and the extent of the exclusive rights vary widely between countries according to national laws and international agreements. • Typically, however, a patent application must include one or more claims defining the invention which must be new, non-obvious, and useful or industrially applicable. • The exclusive right granted to a patentee in most countries is the right to prevent others from making, using, selling, or distributing the patented invention without permission.
  52. 52. • Patents are legal instruments intended to encourage invention by providing a limited "monopoly" to the inventor (or their assignee) in return for the disclosure of the invention. • The underlying assumption being invention is encouraged because an inventor can secure exclusive rights, and therefore a higher probability of financial rewards in the market place.
  53. 53.  The publication of the invention is mandatory to get a patent. • Keeping the same invention as a trade secret, rather than disclose by publication, could prove valuable well beyond the time of any limited patent term, but at the risk of congenial invention through third party. • Some research suggests rather than encouraging invention, patents can hinder development, lower R&D investments, and decrease overall economic output. • In these models, collaboration and information sharing has a strong impact on new product development and innovation.
  54. 54. • In most modern nations, there is an established system for protecting intellectual property, the product of a person or company's originality and creativity. • The broadest protection of this sort is the copyright. • Copyrights are intended to protect "original works of authorship" that are in a tangible form. • This includes paintings, books, movies, choreographed dances (if the steps are written down), music, architecture and all other sorts of art. • For a set length of time, these works cannot be copied or reproduced without the copyright-holder's permission.
  55. 55. • Copyrights do not protect the ideas put forth by a particular piece of art; they only protect the way in which those ideas are presented. • In the United States and many other countries, any original work of authorship is automatically copyrighted as soon as it is created. • Other sorts of intellectual-property protection are much narrower in scope. • Trademarks protect designs and phrases that businesses use to distinguish their product from other companies' products, and trade secrets protect proprietary information that must be kept secret in order for a business to profit (the recipe for Coca-cola, for example).
  56. 56. • Of all of the forms of intellectual-property protection, patents are the most complex and tightly regulated. • Patents are basically copyrights for inventions. Unlike copyrights, patents protect the idea or design of the invention, rather than the tangible form of the invention itself. • Consequently, patenting something is a much trickier procedure than copyrighting something.
  57. 57. • Thank you for your attention @ being an economist in all your journey!!!

Editor's Notes

  • Retard – delay ; bust- make useless