P3 (Basic concepts 2)_19092013124019595

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3.3. Technology creation and

diffusion

Schumpeterian Market Dynamics

Circular state 1 Circular state 2

Bound vision

Normal profit

Perfect

competitionMarginal

analysis

Bound vision

Normal profit

Perfect

competitionMarginal

analysis

New Combination Swarming

New vision

Supernormal profit

Quasi-rent

Band wagon

Investment boom

Dissipation of rent

Imperfect competition, Non-marginal analysis

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Why do firms and nations invest in

innovation?

• First-mover advantages

(1) patent

(2) head start in investment

- early learning and early reduction of costs ‘learning curve’

- pre-emption of scarce assets

(3) pre-emption of buyers: switchingcosts

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(4) setting technical standards- more important in fast-moving &complex technologies

cf. IT vs. automobile

• Constraint

- have to keep innovating

- always face bigger uncertainties inbeing at the forefront of technologies

Follower’s advantages

(1) Technology transfer

- imitation cost less than creation cost

e.g. Mansfield et al. (1981)

“imitators could duplicate patentedinnovations for about 65% of innovators’ cost; imitation was fairly

rapid, with 60 percent of the patentedinnovations [imitated] within 4 years.”(quoted in Lieberman & Montgomery1988: 43)

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(2) No technological lock-in

- sub-optimal choice was often rational

when heavy investments were already

made

eg. the leadership change in the steel

industry

(3) Bug-freeeg 1. commercial jet aeroplanes

- Britain: introduced Comet 2 years before Americans began developing and 4 year beforethey introduced their jets to the market. But ..

“Their delay allowed them to offer airplanes thatcould carry up to 180 passengers when the CometIV carries up to 100, and a cruising speed of 550mph instead of 480 mph ... because they were

designing for later and more powerful engines. Butthey were also aided by the delay of four years inmaking the Comet safe after its accident from metalfatigue.” (Rosenberg 1982: 110)

eg 2. Sony vs. Matsushita

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3.4. Learning

• Technology = knowledge

: Knowledge should be learnt.

• Learning-by-doing (Arrow 1962)

eg. Horndal effect

• Learning-by-using (Rosenberg 1982)learning accrued from utilisation of

products by final users

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Characteristics of

learning process(1) gradual process of accumulation of

knowledge

"Innovation is, economically speaking,

not a single well-defined act but a series

of acts closely linked to the inventive

process. An innovation acquires

economic significance only through an

extensive process of redesign,

modification, and a thousand small

improvements which suit it for a massmarket ..." (Rosenberg 1976: 76).

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“So technological progress may well be

described as an incremental and a

continuous process. Even major

innovations which appear to be

discontinuous, may be the result of the

cumulative impact of small

improvements. (Shin 1992:55)

(2) purposive goal-seeking activity

- technological progress in attained

through intentional efforts.

- learning should be motivated andfocused

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(3) importance of information flow

‘learning-by-interaction’ (Lundvall

1988)

3.5. Institutional dependence

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Basic functions of institutions

: shaping social behaviour by providing

incentives and some regularities

(1) mark off the boundary of uncertainty

eg1. patent system

eg2. public R&D support

- important esp. when no market

potential is seen by the private sector

Basic functions of institutions

(2) Determining the intensity and direction

of learning

eg. incentive structure, codes of

information

→ Development to the studies of nationalinnovation system (NIS)

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3.6. Understanding

R&D investment

What is R&D?

• Firm’s activities involved in technologyacquisition and creation

- “collection of not-very-well-definedactivities” (Rosenberg 1976: 77)

“It may involve solutions to problemswhich, from a technological point of view, may be neither difficult nor interesting, but economically veryimportant.” (Rosenberg 1976:76)

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Uncertainty andcomponents of R&D

• The importance of ‘development’ component

- less than 15%: basic research

- over 20%: applied research

- over 2/3: development (Rosenberg 1976: 76)

“Only a few firms perform any basic research

and this accounts for less than 5 per cent of all industrial R&D expenditure in most OECD

countries.” (Freeman & Soete 1993: 255)

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“... if we examine R&D expendituresamong OECD member countries in theearly 1960s, we find that the U.S. had ahigher proportion of expenditures on thedevelopment component than any other country.” (Rosenberg 1976: 77)

high degree of uncertaintiessurrounding R&D activities

high failure rate

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Is R&D basically defensive?

“... the nature of the uncertaintyassociated with innovation is such thatmost firms have a powerful incentivemost of the time not to undertake themost radical type of product innovationand to concentrate their industrial R&Don defensive, imitative innovations,product differentiation and processinnovation.” (Freeman &Soete 1993:244-245)

Why do firms do basic R&D?

• Characteristics of basic R&D

(1) the most uncertain part of R&D

component

- ‘long-term investment’

(2) output: ‘intermediate goods’

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“... most firms that have engaged in it [basic

research] have had fairly strong and well-entrenched positions of market power.Precisely because the potential pay-off tobasic research is so long term, only firms thatwere reasonably confident of being around inthe long term would be likely to consider thepossibility of making such commitments.”(Rosenberg 1990: 167)

: it’s all right if “the firm capture enough of these benefits…” although the results of R&D

investment become easily non-appropriable.

“... the output is some form of new

knowledge that has no clear

dimensionality. The output is a peculiar

kind of intermediate good that may be

used ... to play some further role in the

invention of a new final good.” (168-

169)

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(1) expecting ‘unexpected and unplanned

benefit’

- “the distinction between basic research

and applied research is highly artificial

and arbitrary”


(2) ‘A ticket of admission to an information

network’

- high degree of interactivity between

basic and applied research

- basic knowledge about basic research

is necessary in communication in the

research community

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(3) Providing basic knowledge for applied

research

“to understand better how and where to

conduct research of a more applied

nature.”


(4) evaluation of the outcome of applied

research

(5) monitoring technological trend

(6) incentives by the government

“... to improve their visibility and their

eligibility for government militaryprocurement contract.” (172)

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Is R&D an insurance or a

speculation?

• The insurance view

“... the firm is in effect using its R&D

budget as a form of insurance against

the risks of technical change” (Freeman

& Soete 1993: 259)

applicable to large established firms

Is R&D an insurance or aspeculation?

• The speculative game view

- venture business

cf. high investment in ‘basic research’ in

biotechnology firms

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* “[They] are engaged in basic researchthat is believed to be close to the

commercialization stage. ... What

appears to be driving the small firms

that perform basic research in

biotechnology is the first-mover

advantages – or at least an expectation

that first-mover advantages may be

critical.” (Rosenberg 1990: 168)

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Management of R&D investment

• Portfolio investment

“What management is looking for is a

portfolio of projects rather than a series

of separate projects. By thinking in

terms of a portfolio rather than a project

it is possible to select a blend of safe

and high risk projects ...” (Freeman &

Soete 1993: 255)


• Total volume

“... most large firms allocate annual fundsto the R&D function on a rule-of-thumbbasis such as percentage of sales. Theactual budget rule often evolves throughdecision-makers learning what is the

‘appropriate’ budget for their firm.” (Kay1988: 285)

• Distribution within R&D activities

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• Diversity across firms

- according to capability, industry,

willingness to take risks ...

• Diversity across countries

- according to capability, government

policies towards R&D …

Changing uncertainties and thedegree of internalisation of R&D

• Initial trend towards internalisation of R&D

- starting from the situation where there was

no close interaction between science and

technology and demand for R&D investment

was low

- some reasons favouring internalisation: close interaction between R&D and

production, secrecy, willingness to take risks

involved in R&D …

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Changing uncertainties and the

degree of internalisation of R&D

• Increasing externalisation of R&D

- still, large chunk of basic research done

by universities or public institutes

(1)increasing market size for R&D→

increasing specialisation

(2) standardisation of technologies

Changing uncertainties and thedegree of internalisation of R&D

(3) Increasing fusion across technologies

increasing cross-fertilisation of

technologies

need to maintain broader portfolio of

technological competencies

→ technology alliances

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Changing uncertainties and the

degree of internalisation of R&D

(4) increasing financial risk involved in

new technology development

eg. Fuel cell research, semiconductor

research alliances

again, extremely diverse strategies

towards the combination of internal &

external R&D

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Big questions to answer

(1) Global trend

- How and to where the world is

moving?

(2) Strategy of firms & countries

- How do they utilise the global trend for

their own benefits with their given(and/or creatable) resources?

P3 (Basic concepts 2)_19092013124019595

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