Lecture 1: Knowledge, technological change and Innovation Studies

Plus• Outline of lectures• Assignments• Reflection on introductory readings• Determination of Course grade

Schedule of lectures• Lecture 1 (25/9): Knowledge, technological change and Innovation

Studies• Lecture 2 (26/9): Sources of technological change• Lecture 3 (27/9): Innovation dynamics and the evolution of

industries• Lecture 4( 28/9): Technological change and industrialisation• Lecture 5 (29/9): Technology diffusion and technology transfer• Lecture 6 (2/10): Incentives, firms and innovation • Lecture 7 (3/10): Sectoral characteristics of technological change• Lecture 8 (4/10): Innovation dynamics in the World Economy• Lecture 9 (11/10) A debate on the “new economy”• Lecture 10 (12/10) Innovation studies and technology policy

Assignments• Debate on the “new economy”, lecture 9

• Empirical paper on R&D and industrial innovation [deadline, 14/10]

• DETERMINATION OF COURSE GRADE: (a) Homework assignments 50 %; (b) Final Exam 40 %; and (c) Class Participation 10 %.

Knowledge, technological change and Innovation Studies

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Sw eden

US

Finland

UK

France

Netherlands

Canada

Denmark

Germany

Belgium

Japan

Norw ay

Australia

Italy

Austria

1997199519901985

OECD Countries: Ratio of tangibles/intangibles

Value Chain in the Semiconductor Sector

I C W a f e r

M a t e r i a l s

I C F a b r i c a t i o n

E q u i p m e n t

I C M a s k

I C D e s i g n I C T e s t i n g

V a l u e - a d d e d c h a i n

I C P a c k a g i n g

Technological Change: telecommunications

DRAM GenerationsD R A M P r o d u c t C y c le 1 9 7 5 - 2 0 0 4

0

5 0 0

1 0 0 0

1 5 0 0

2 0 0 0

2 5 0 0

3 0 0 019

75

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Mill

ion

Uni

ts

1 K 4 K 1 6 K 6 4 K 2 5 6 K 1 M 4 M1 6 M 6 4 M 1 2 8 M 2 5 6 M 5 1 2 M 1 G

Source: IC Insights

Changes in Market Leadership --Hard Disk Drives

Product Generation:

14-inch (1973)

8-inch (1978)

5.25-inch (1981)

3.5-inch (1986)

2.5-inch (1990)

1.8-inch (1994)

Leading Firm:

Control Data

Priam, Shugart

Seagate, Miniscribe

Conner, Quantum

Conner, Quantum

Integral

Example – new drug

• Basic research – microbiology, etc.• Applied research – screening compounds in test

tubes; testing on animals• Invention – successful in laboratory• Development – Phase I and II clinical trials• Commercialization – packaging; marketing;

dosage info• Diffusion – spread throughout the patient/doctor

population

Example – new software

• Basic research – mathematics, queuing theory• Applied research – cryptography, sorting

algorithms, data storage systems• Invention – idea of program, design, basic features• Development – programming, detailed

specifications, alpha testing• Commercialization – beta testing, marketing, sale• Diffusion – adoption by consumers; large market

share

• The most fundamental resource in the modern economy is knowledge and the most important process is learning.

• Knowledge-based economy: increase of the relative importance of knowledge inputs in the production process.

• Knowledge & firms: the creation of knowledge is the essence of building of competitive advantages in firms

Knowledge as an Economic Resources

Economics of Information

Information is an unusual economic good because:

If I give or sell a piece of information to you, I still have it (non-rivalry).

It is either very difficult or impossible for me to prevent you from passing onthe information to someone else (non-excludability).

These features of information complicate the economics of information:

The fixed costs of producing information can be spread over all of the users thatmight be willing to pay for it without incurring significant additional costs(increasing returns)

The willingness of individuals to pay for information is limited because a) itscost of reproduction are small and b) having it does not assure exclusive access(market failure and free rider problems)

Intellectual property rights are a limited solution, but create the economic distortionof monopoly

Distinction between Information and Knowledge

The peculiar features of information do not fully apply to knowledge:

1. If I know something, I may not be able to transfer that knowledge to you.Information alone is not enough to reproduce knowledge.

2. In particular, my knowledge may consist of information that can be reducedto rules and procedures and tacit capabilities that I cannot effectively reduceto rules and procedures. (This leads to the division of knowledge into two types

codifiable (or articulable) and tacit.) Whether I will ‘codify’ knowledge that can be codified depends on the incentives (economic or social) for doing so.

3. In addition, even if I can reduce something I know to rules and proceduresyou may not have the contextual knowledge or experience to understand my rules

and procedures (absorptive capacity).

4. The existence of tacit or ‘unarticulable’ knowledge reduces the relevance of the problems with information as an economic good, but it raises additionalproblems in the transfer or exchange of knowledge.

• Know-what, knowledge about facts or principles

• Know-who, knowledge supporting indirect access to knowledge

• Know-how, knowledge linked to skills

• Know-why, knowledge about principles and laws andthe capacity to solve problems and extend the knowledge

This taxonomy is an hierarchy with an increasing amount of tacitknowledge and difficulty in codification as you proceed down the list.

A Taxonomy of Knowledge-types

Economic Considerations About the Boundary Between Codifiable and Tacit Knowledge

The extent to which knowledge is codified is determined by incentives: the costs and benefits of doing so.

To examine the costs and benefits of codification, the knowledge environment should be examined. In first approximation you can have stable or changing contexts.

A stable context is characterised by the fact that codification can proceeds on the basis of pre-existing languages and models (a partial solution to the ‘absorptive capacity’ problem).

� In a changing context languages and models are fluid and codification is costly.

� In stable knowledge environments codification has lower costs and higher benefits than in unstable environments

Whether information and communication technologies are making the codification process less costly and therefore more extensive is an issue of considerable economic and policy significance.

Note that if the environment is changing more rapidly over time, information technology cost saving may be offset or eliminated.

Classifications of innovation -1

Type; • product, • process, • supply, • market,• Organization

Impact;• revolutionary (GPT),• radical,• marginal/incremental

(”reinvention”)

Level;• architectural• modular

Classifications of innovation -2

New service concepts: online financial services

Service Innovation

New marketing practices: New financing arrangement, new sales approach

Marketing Innovation

New managerial practice: TQM, BPR (business process re-engineering)

Management Innovation

New organizational arrangement: a new venture division, a new internal communication system

Organizational Innovation

New or improved production process

Process Innovation

New or improved productProduct Innovation

ExampleType of innovation

Determinants of innovation

• Economic factors (supply and demand) are important for an understanding of the rate and direction of technical change

• Chance and unpredictability can be important in the process

• There are forward and backward feedbacks throughout the process of innovation

Innovation supply

Supply of an innovation determined by– state of the relevant scientific and technological

knowledge (technological opportunity) – cost and availability of inputs to innovation

(trained technicians, knowledge workers, appropriate equipment)

– ability to capture the increased profit from innovation (appropriability)

Innovation demand

Demand for a potential innovation depends on – Amount of cost reduction from that innovation

(process innovation; new sources of supply; organizational change)

– Consumer or producer benefit from something new (product innovation)

– Consumer or producer benefit from improvement in an existing good (incremental product innovation)

Direction of innovation - supply

• Lack of technological opportunity– Science/technology not always available

• Research on nanotechnology in 1910s, but lack of instrumentation – waited for electron microscope to make progress

– Many wants unsatisfied for an extended period of time• cure for AIDS • Malaria vaccine• lightweight electric batteries

Direction of innovation - supply

– Treatment of diabetes held up by complexity of understanding insulin

• Appropriability considerations– Lack of patents directs invention towards

secrecy

Direction of innovation - demand

• “Inducement mechanisms and focusing devices” (Nathan Rosenberg)– Importance of bottlenecks in choice of

innovative activity - “compulsive sequences,” where there is an imperative need for improvement

– Manufacturing feeds back to innovation– Shocks to relative prices of inputs

Relative factor prices

Sharp changes in relative prices• Focuses attention on particular costs

– firms cannot innovate in all directions at once– Oil price shocks and fuel-efficient cars

• Threat or actual withdrawal of – labor

• strikes in mid-19th C Britain lead to labor-saving machines

– source of supply• Cotton to UK in U.S. Civil War (economizing on inputs)• US dye industry developed to replace German in WW I• Southeast Asian rubber during WW II – leads to creation of synthetic

rubber

The linear model of innovation

A useful conceptualization, but not the whole story. The idea:science base � basic research � applied

research � invention � prototype � development � commercialization � diffusion� technical progress � economic growth

Sometimes the entire process in red is referred to as innovation

Which stages need funding, and how?

Modifying the linear model• Importance of backward links (reverse the

arrows)Commercialization and diffusion � new

innovation & developmentInvention/innovation � science base/basic

research

Innovation and learning

• During the R&D process– Knowledge concerning laws of nature (basic R)– Knowledge with useful applications (applied R)– Knowledge directed towards optimal design

characteristics and satisfying consumer wants (development)

• After the R&D process– During manufacturing – learning by doing– During the use of the product – learning by using

A map of innovation inputs and outputs

Market structure and industry;Appropriability environment

Demand pull(taste, market size)Tech. Opportunity

(science base)R&D and other

Innovation investments

Firm size and Market share, Diversification,And experience

KnowledgeFirm-level capital createdBy innovation investment

Innovation output

Patents,Other IPR

Diffusion process

Outcomes: Productivity, Profitability,

And Economic Growth

Innovative sales

Physical capital Worker skills

Beyond simple metaphors…Research Programmes on Technology and Innovation

Points of Departure

– From markets to incentives for rational and identical agents and then to innovation

– From agents (firms with asymmetrical capabilities) to markets and innovation

– From structural incentives (production system characteristics) to incentives and innovation dynamics

– Additional Questions:– What is the driving force behind asymmetrical capabilities (codified

knowledge, corporate structures, core competences, networking…)– Stylized facts and the level of theorizing [general trends and valid

metaphors: product cycle, waves, critical technologies, paradigms etc.)

The Innovation Studies Perspective

• Firm level and sectoral studies

• The systemic approach on technological change

• Micro-foundations of innovation dynamics in a specific institutional setting

• Towards a comparative/interdisciplinary perspective

Some examples of interdisciplinary research with profound policy

implications• Made in America project

• Learning by doing: from aircraft engineering to Keneth Arrow and basic research funding

• Innovation driven growth and EU framework programmes

Our list of readings…

• Innovation studies – Freeman• A theoretical perspective – Nelson• Innovation studies in the broader debate on

innovation and technological change –Ruttan

• The developing countries perspective - Bell