SPRU Friday (Freeman) Seminar Series31 October 2014

Blade Runner Economics

Will Innovation lead the

Economic Recovery?

Professor Daniele ArchibugiItalian National Research Council, RomeBirkbeck College, University of London

Information and communication technologies

CommunicationsVideo telephones

Audiovisual systems Photo ScannersVoice command systems Visual analysis

Diffusion of electronic equipment

Kiosks with electronic cashiersElectronic money

Space technologies

Air travelFlying vehicles

Space travel and colonization ColoniesSpace exploration

Biotechnology

Replicants Nexus 6 Constructed memories

Artificial human components

Eyes

Toys J.F. Sebastian’s constructed friends

Artificial animals Real animal almost exiting

Artificial pitons and owels

Blade Runner Economics

• In the case of biotechnology, none of what was described has happened (although many things are possible)

• In the case of ICTs, Blade Runner has under-estimated the pace of technological change (no Internet, no email)

• One core message: technological opportunities integral component of societal development

• Integration among different technologies (Schumpeterian clusters) is crucial to shape techo-economic paradigms

Is the Information Intensive Techo-economic paradigm over?

• ICTs have changed the economic profile of our economies and guaranteed two decades of development

• Some argue that ICTs have exhausted thier potential. Or, more precisely, that are not any longer the driving force of growth

• End of the speculative bubble or of technological opportunities?

• And, above all, what next?

History is dominated by changes in techno-economic paradigms

• Dominant technologies extensively used in society• Associated to skills and employment distribution• Based on social acceptance and institutions able to

foster them• Interactions among different technical components

guarantee the success, or the failure, of the technical system

Stone Age, Bronze Age, Iron Age

Period Successive Techno-Economic Paradigms

Industrial organisation Typical industries Pavitt's category of firms

1770-1830

Early Mechanisation

Growing importance of small manufacturing firms

Textiles, Potteries, Machinery

Supplier dominated

1840-1880

Steam power and railway

Separation been producers of capital and consumption goods

Mechanical engineering, Steel and Coal

Specialized suppliers

1890-1930

Opportunities associated to scientific discoveries

Emergence of large firms

Chemicals, Electrical machinery, Engineering

Science based

1940-1980

Fordist and Taylorist revolutions

Oligopolistic competition for mass consumption

Automobiles, Synthetic products, Consumer durables

Scale intensive

1980-2020

Information and communication

Networks of firms, strong user-produces interactions

Microelectronics, Telecoms, Software

Information intensive

Is economic growth historically contingent?

• Christopher Freeman (1984): The potential for economic growth is associated to generation and diffusion of knowledge to economic and society through innovation

• Robert Gordon (2012): “the rapid progress made over the past 250 years could well turn out to be a unique episode in human history”

• Carlota Perez (2013): «There is the possibility of unleashing a golden age bu tilting the playing in field in favour of green growth»

Winners and losers in economic crisis

• When there is a decline in the business cycle, all companies, industries and countries tend to be affected

• But some companies, industries and countries are more affected than others

• Marx: capitalism need crisis• Schumpeter: gale of creative destruction

Back to the classics

Add successively as many mail coaches as you please, you will never get a railway thereby

Who does what? Company typologies

Business as usualLet wait until it stops raining

Reduce costs Including investments

Search for new opportunitiesNew markets and new products which could generate sales and profits

Looking for the Next Techno-Economic Paradigm

• What will be the new industries and business opportunities to generate jobs and profits?

• If the technological opportunities are already there, who is going to invest in order to develop and deliver them to the market?

Innovation and Economic Downturn

• Structural characteristics of National Systems of Innovation, demand (Filippetti & Archibugi, 2011)

• The effect of the financial crisis on the convergence in innovation in the European Union (Archibugi & Filippetti, 2011)

• Archibugi & Filippetti, Innovation and Economic Crisis, Routledge, 2011

• The impact of the economic crisis on innovation: Evidence from Europe (Archibugi, Filippetti & Frenz)

• Economic crisis and innovation: is destruction prevailing over accumulation? (Archibugi, Filippetti & Frenz)

Are creative destruction and technological accumulation sensitive to the business cycle?

• During economic expansion, innovative firms lead technological change also by increasing their investment in innovation (supporting technological accumulation)

• Economic crises generate turbulence and some new entrants are willing to spend more to innovate, also in blue sky explorations (creative destruction)

Characteristics of Innovating Firms

Technological Accumulation Creative DestructionLarge and dominant firms explore new opportunities through R&D labs and design to preserve their market shares. These firms exploit their financial resources and the already existing organizational structure

Small firms anticipate and deliver to the market significant innovations. Through only a very few of these firms will be successful, the winners may create the impetus for entire new industries.Economic turbulence may also help to contest market shares to incumbent firms

Schumpeter, 1942; Pavitt et al., 1989 Schumpeter, 1911; Freeman et al., 1982; Dosi, 1982; Perez, 2002

Sources of Knowledge

Technological Accumulation Creative Destruction

Since “firms know more than they do” (Pavitt), they can try to explore their competences also in other product lines

The early identification of new markets and new technological opportunities is crucial.Collaboration among different subjects can be very important to identify and explore knowledge.Serendipity plays also an important role

Schumpeter, 1942; Pavitt et al., 1989; Granstrand et al., 1997; Antonelli, 1997

Freeman et al., 1982; Christensen & Rosenbloom, 1995

Innovation Typology

Technological Accumulation Creative Destruction

Most innovations are generating a continuous flow of incremental product and process innovations.

Organizational routines dominate the generation of innovations

A few radical innovations generating new industries, often in integration with knowledge already explored for different purposes.New forms of economic organizations also help to reinforce the generation of innovations

Schumpeter, 1942; Pavitt et al., 1989; Methé et al., 1996; Cefis & Orsenigo, 2001

Schumpeter, 1911; Freeman et al., 1982; Dosi, 1982; Perez, 2002

Market Structure

Technological Accumulation Creative Destruction

High entry barriers also because imitation costs are high and intellectual property rights are well protected. Oligopolistic competition dominates

Low entry barriers in new industries. High turbulence, which in turn leads to increase competitionTechnological discontinuities help to create new markets and new opportunities

Schumpeter, 1942; Galbraith, 1952; Chandler, 1977

Schumpeter, 1911; Freeman et al., 1982; Dosi, 1984; Perez, 2002

Forms of Capitalism

Technological Accumulation Creative Destruction

More likely to occur in coordinated market economies (such as Japan and Germany), where the various public and private institutions are more likely to work together continuously

More likely to occur in liberal market economies (such as the United States and the United Kingdom) for their capacity to shift resources from industries with low opportunities to industries with higher opportunities

Hall and Soskice (2001) Hall and Soskice (2001)

The Innobarometer Survey

Innobarometer 2009 (European Commission) – firm level survey on more than 5000 firms across Europe – April 2009

Question no. 1: “Compared to 2006, has the amount spent by your firm on all innovation activities in 2008 increased, decreased, or stayed approximately the same?”

Question no. 2: “In the last six months [November 2008 to April 2009] has your company taken one of the following actions [increased, decreased or maintain the innovation spending] as a direct result of the economic downturn?”

Question no. 3: “Compared to 2008, do you expect your company to increase, decrease or maintain the total amount of its innovation expenditure in 2009?”

The effect of the crisis on the innovationinvestment across the European countries

2006 compared to 2009

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Increassed%

Decreased%

Stayed thesame %

Perc

enta

ges o

f firm

s w

hic

h a

re r

eport

ed t

o h

ave incre

ased,

decre

ased o

r m

ain

tain

ed t

heir innovation e

xpenditure

s

Firms' innovation expenditures 2006-2008 Firms' innovation expenditures 2009

The balances of firms investing and disinvesting in innovation before and after the crisis

The catching-up of the New Member States before the crisis

AustriaBelgium

Czech rep.

Estonia

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Latvia

Lithuania

Luxemburg

Norway

Poland Slovakia

Slovenia

Spain

United Kingdom

Bulgaria

Denmark

Netherlands

Portugal

Romania

Sweden

Switzerland

0.2

0.3

0.3

0.4

0.4

0.5

0.5

0.6

0.6

0.7

0.7

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

InnoInv 06-08 performance

InnoStruct

perf

orm

ance

Parvenu

AristocracyDeclining Nobility

Third State

Innovation investment during and following on from the crisis

Cross-Tabulations of dep. variables

     Following on from the crisis

(T3)  

  Increase Decreas

eMaintai

n Total

During the crisis (T2)

Increase Frequencies 192 73 159 424Column percentages 32 5 7 10

Decrease Frequencies 61 812 256 1,129Column percentages 10 57 11 26

Maintain Frequencies 350 544 1,832 2,726

 Column percentages 58 38 82 64

  Total Frequencies 603 1,429 2,247 4,279

  

Column percentages 100 100 100 100

Innovation expenditure of great innovators and other firms, 2006 and 2008, UK

 

n. of firms

% Share of innovation exp.

2006

Share of innovation exp.

2008

Average innovation exp. 2006 in

£000s

Average

innovation exp. 2008 in

£000s

Change in

average innovatio

n exp. 2006-2008

All other firms 2,161 87 0.79 0.63 563 413 -0.27

Great innovators 324 13 0.21 0.37 981 1,599 0.63

Total 2,485 100 1.00 1.00 618 568 -0.08

Who is winning?Who is increasing innovation investment

in spite of the crisis?

Firms that compete with innovation (before, during and after the crisis). If these firms do not innovate they are out of the market.

New firms (created after 2001) after, but not during the crisis

Firms with internal R&D Departments (before, but also after the crisis)

Technological opportunities are coupled by market opportunities (which innovations will we have in the future?)

The crisis is making the global landscape more important

The Next Wave?A comparison of ICT and Molecular

ages

A contrasting view:Disruptive Technologies

McKinsey Global Institute

Four criteria:

• Technology is rapidly advancing or experiencing breakthroughs

• The potential scope of impact is broad• Significant economic value could be affected• Economic impact is potentially disruptive

Criteria to assess societal impact of innovation (based on Freeman)

• Large variety of connected products and services with substantial cost reduction

• Create a new industry, but also change the operations of most other industries

• Social and Political acceptability• Environmental sustainability

McKinsey Global Institute TOP SIX to 2025

• Mobile Internet• Automation of Knowledge work• Internet of things• Cloud technology• Advanced robotics• Autonomous vehiclesCombined, they account for about 90% of future

business opportunities

McKinsey Global Institute Seventh to Twelfth 2025

• Next generation genomics• Energy storage• 3D printing• Advanced materials• Advanced oil and gas exploration• Renewable energy

What will be the dominant innovations of the XXI Century?

Transcendence