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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