Lecture 2

Sources of Technological Change

The Cumulative Synthesis Approach [Abbot Usher]

Four steps to innovation processes:• 1. Perception of the problem

– May be induced by economic forces • 2. Setting the stage

– Elements necessary for the solution brought together through a configuration of events. One necessary element is a person with the necessary skill in manipulating the other elements.

• 3. The act of insight – The essential solution to the problem is found.

This is an uncertain process. Prediction is impossible.

• 4. Critical revision

The Microprocessoro The transistor (or chip) was the seminal invention in the development of the

semiconductor industry. Its invention was followed by the integrated circuit, a more complex chip with more than one active device. The microprocessor followed.

o Perception of the problemo A Japanese company (Busicom) requested a chip for hand-held calculators

from Intel. o Setting the stageo Intel had much prior experience with memory devices for computers. o Act of insighto Ted Hoff realized that general purpose computer architecture could be used

to meet Busicom’s needs less expensively. That eliminated the need for several chips.

o Critical revision• Speed increased rapidly (Moore’s law)

The ideal innovation funnel

Phase I Phase II Phase III Launch

An Innovation Funnel Example

Initial marketing and technical

concepts

Idea

Generation

CharterContract

Launch Proposal

Post Launch Review

GatekeeperGatekeeper

Gatekeeper

Gatekeeper

Feasibility

Concept refinement and

prototype creation

Product optimization

Commercialization Production & Distribution

Capability Launch & Rollout

One page description of proposed project including objective, rationale and development routes. Early Commercial Assessment

Cross-functional development plan including project plan as contract between team and Gatekeeper.

Launch Plan including CEP approval request.

Tracks success of and key learningsfrom launched products

KEY

= GATE

= DOCUMENT

Example: The Key Questions Answered By Each Phase

PhaseReview 1 Phase

Review 2 PhaseReview 3

PortfolioReview

Phase 1:Concept

Investigation

Phase 2:Feasibility

Phase 3:Development

Phase 4:Post

Release

CurrentProductSupport

ENTER

EXIT

•Does the product make sense from marketing, technical & financial perspectives?

If yes, thenconcept

approved& full teamallocated

•What is the product spec?

•Can we develop it within budget and schedule?

•Can we produce it at the required cost & volume?

If yes, thenprototypeapproved

& full teamallocated

•Has the product been fully verified and validated?

•Have production objectives been met?

If yes, thenfull manufacturing

approved& sub-teamallocated

•Does the idea fit roughly with our strategy and resource availability?

If yes, thenconcept documentapproved

& sub-team allocated

•Is the product meeting safety, efficacy and business targets in the market?

If yes, thencloseoutapproved

& handoff toproduct support

PhaseReview 4

Phase progression indicates increasing investment and decreasing risk.

IdeaGeneration

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Basic concepts and vocabulary

Leaders in technological effort(R&D financed by productive enterprises as % of GDP)

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The sources of technological change

• R&D [activities, actors, different technologies and/or scientific fields]

• Learning by doing [production process, research activities

• Spillovers [direct –indirect (exploitative activities needed); international; intra-industry; rent spillovers, knowledge spillovers]

Who Does Research?

• In this section, we consider who is involved in the research process, and discuss the incentives that they face.

• Note that different actors face different incentives, and will thus react to policies differently.

Categorizing research

• 1. Source of funds: who provides the funding? • In US (and most developed countries), industry is the largest source of R&D

funding: 81.4% in 2002. • 2. Performance: who does the research? • Not all R&D performed by the institution than funds it. • 2002: 25% of federally-funded R&D done in industry Much of this is defense

research. • Similarly, less than 20% of university performed R&D is funded by universities. • 64% of funding comes from federal government. • 3. R&D by character of use • Corresponds to linear model of R&D developed by Vannevar Bush (in 1945

report to FDR: Science – the Endless Frontier) – Basic research– Applied research– Development

The determinants of Technological Change

1. Industry Conditions2. Availability of Technical Skills3. Expected gross Profitability from Invention4. State of Scientific Knowledge5. Expected Costs of Inventions6. Expected Net Profitability from Invention7. Research Findings (curiosity driven)8. Inventive Activity9. Inventions and Innovations

•Patented Ideas•Commercialization

Demand-Pull Theories of Innovation - Induced Innovation

• Induced innovation is an example of a “demand-pull” influence. • Induced innovation looks at the influence of factor prices on

technological change. o E.g.: labor prices up => R&D to save labor

– Model o Begins with an innovation possibility curve (IPC). o The innovation possibility curve tells all the possible techniques

that could be used at a given time. o Before any one technique is chosen, R&D must be performed. o The actual technology chosen depends on the relative prices.

– One critique of the induced innovation model is that it assumes the IPC is given.

Demand-Pull Theories of Innovation -Evolutionary Theory• Evolutionary theory derives from work by Richard Nelson and Sidney Winter in

the 1970s. Arose from dissatisfaction of standard neoclassical economics to explain many empirical facts about long-run economic development and technological change.

• Key features of evolutionary theory: o Replaces profit-maximizing behavior of firms with decision rules applied

routinely over a period of time. o Decision rules include routines for production, for managing workers,

ordering inventory, advertising, or changing R&D. o R&D in evolutionary theory has two fundamental mechanisms

• 1. Search for better techniques • 2. Selection of firms by the market

The term “evolutionary theory” is borrowed from biology. The idea is that the strongest firms survive. Thus, profits matter, even though profit maximization isn’t the explicit goal.

Induced innovation vs. evolutionary theory

• Their findings are similar. However, evolutionary theory has one important difference -- it is dynamic. In the evolutionary model, invention is cumulative. A successful search not only provides a new product, but also a new starting point for research. After B technology is adopted, the next search will occur around the neighborhood of B. Relating this to the induced innovation literature, this would suggest that the exact nature of next year's invention possibilities curve depends on the outcome of this year's research.

• The evolutionary theory builds on different hypotheses: asymmetrical capabilities of firms, limited access to knowledge and routines (vs. profit maximization). This approach offers useful hypotheses for further research.

Demand-Pull Theories of Innovation - Path Dependence

• Path dependence depends on technology “lock-in.”o Once certain technologies are adopted, switching to a new technology might not

be feasible, even if the new technology is marginally better. • QWERTY typewriters are the classic example. • Three features leading to QWERTY’s lock-in • 1. Technical interrelatedness – the need for system compatibility

– In this case, the links are between the keyboard and the typist’s memory. • 2. Economics of scale – user costs fall as a system gains acceptance. • 3. Quasi irreversibility –the result of the acquisition of specific skills

– In this case, touch typing skills.

• Often the result of network externalities. • Network externalities are when an individual's demand depends on the

consumption levels of other people. Windows vs. Mac software is a good example of a network externality.

• This model applies to industries where network technologies lead to increasing returns to scale. For example, it explains why a transition to hydrogen-powered vehicles will be difficult. However, it does not apply more generally.

The supply side• The models discussed above focus on demand for new

innovations. They neglect the role that the supply side, or the state of scientific knowledge, plays in influencing research.

• The idea is that the basic knowledge on which other inventors can build is important. The supply of new ideas increases technological opportunity. This increases the likelihood of research success, and thus the marginal rate of return.

• We have two sets of supply side models: Dynamic-Long waves of technologies (and General Purpose Technologies), Static-explaining level of activity and efficiency.

Size and Structural Dimensions of the Firm

• Size: Is Bigger Better?– In 1940s, Schumpeter argued that large firms

would be more effective innovators• Better able to obtain financing• Better able to spread costs of R&D over large

volume

– Large size may also enable…• Greater economies of scale and learning effects• Taking on large scale or risky projects

Size and Structural Dimensions of the Firm

– However, large firms might also be disadvantaged at innovation because…

• R&D efficiency might decrease due to loss of managerial control

• Large firms have more bureaucratic inertia• More strategic commitments tie firm to current technologies

– Small firms often considered more flexible and entrepreneurial

– Many big firms have found ways of “feeling small”• Break overall firm into several subunits• Can utilize different culture and controls in different units

Technological Learning Systems___________________________________

•• Late industrialization is usually deprived of the Late industrialization is usually deprived of the innovation element.innovation element.

•• Late Industrialization and catching up are basically a Late Industrialization and catching up are basically a process of process of ““learninglearning””, and not of innovation., and not of innovation.

•• The use of the concept of innovation as a kind of The use of the concept of innovation as a kind of synonym of technical change hinders the ability to synonym of technical change hinders the ability to understand the differences in the processes of understand the differences in the processes of technical change typical of developed and developing technical change typical of developed and developing economies.economies.

•• The limited nature of the latecomerThe limited nature of the latecomer’’s process of s process of technical change (learning) is the main reason why technical change (learning) is the main reason why developing economies have low productivities and developing economies have low productivities and per capita incomes, and high inequity.per capita incomes, and high inequity.

A Key Transition in the Structure of Industrial Technology

Technology Use,Operation andMaintenance

TechnologyDevelopmentand Creation R&D

DESIGN AND ENGINEERING

TECHNICIAN AND CRAFT SKILLS AND CAPABILITIES

BASIC OPERATORSSKILLS AND CAPABILITIES

1. Continuous incremental, engineering-based improvement: processtechnology, methods of organising production, diversification and upgrading in productspecifications and designs, etc.

2. Continuous improvement in technologies linking stages in valuechains: hardware (e.g. transport and computer-based systems) and organisation/management

3. Technology search (and research and training) for acquiring andabsorbing technology

4. Acquisition of technology: machinery and equipment, and in the designs andspecifications of materials, products and components

5. Design, (reverse) engineering and project management: for new productionfacilities, to diversify/upgrade products, or to source components, materials and equipmentfrom local suppliers

6. Research and development, plus design and engineering: to introducetechnologies that cannot be acquired (competitively) from foreign sources, and for introducingnew products and processes that permit competitive entry to domestic or foreign marketsindependently of foreign technology sources.

Different Types of ‘Innovation’/Technical Change

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Readings…

• Dosi –only relevant sections• -Manasfield [definition, findings]• Acs [findings, for further discussion

tomorrow]• Clarke his view on the three sources of

technological change• Archibugi –relevant to your second

assignment.