Towards an evolutionary theory of new path creation: radical innovation and introduction of clean energy

technologies.

James SimmieProfessor of Innovation Studies: Oxford Brookes University

Globalisation, Climate Change and GovernanceMay 18 2010

Four main approaches to analysing economic

change and innovation

• Darwinian inspired biological analogy and the notion of the co-evolution of institutions with economic change

• Complex adaptive systems theory

• Panarchy

• Path dependence theory.

Definition of path dependence

“a probabilistic and contingent process: at each moment in time the suite of possible future evolutionary trajectories (paths) of a technology, firm or industry is conditioned by (contingent on) both the past and the current states of the system in question. The past thus sets the possibilities while the present controls what possibility is to be explored” (Martin and Sunley 2006, p. 402).

Research questions

• How are new technological and industrial pathways created?

• Why are they created in some places rather than others?

• What can the introduction of clean energy technologies tell us about these questions?

Neo-Schumpeterians

• Dosi (1982) and Perez (1983)• Processes of structural change and increasing

productivity can be understood as driven by identifiable technical change and its subsequent diffusion in successive technological revolutions.

• Introduction and diffusion of technical change is not a random phenomenon but is a path dependent process in which individual innovations are interdependent with others and grouped in to what Schumpeter had described as “clusters” of innovations.

Definition of innovation

“The implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations” (OECD 2005, p. 46).

Technological lock-in

• David 1985 and Arthur 1988• There is an inherent tendency towards

technological “lock-in”. • David’s work on the economic history of

technology established the argument that the economy is built on the legacy of its own past. In this view economic history is seen as an irreversible process in which future outcomes are strongly dependent on past events. As a result the state of an economy at any point in time depends on the historical pathways taken up until then (Martin and Sunley 2006).

Technological paradigms

• Dosi (1982), building on the Kuhnian concept of scientific paradigms (Kuhn 1962), argued that technologies develop and diffuse along trajectories that are path dependent because of the influence of the technological paradigms within which they are developed.

• Such paradigms are the prevailing models for the solution of techno-economic problems (Markard and Truffer 2006).

Technological paradigms definition

“a collectively shared logic at the convergence of technological potential, relative costs, market acceptance and functional coherence” (Perez 2010, p. 186).

Path dependence and gales of creative destruction

These studies have not explained satisfactorily how radical change and gales of creative destruction are instigated given these powerful forces driving the existing directions of travel along particular trajectories.

New path creation

• Important for this branch of evolutionary theory to have some explanation of how such changes are instigated and why and how new pathways are created in the first instance in order to lead into explanations of how their subsequent growth and development becomes path dependent.

• “To be truly evolutionary, path dependent systems also need mechanisms that generate novelty and hence new pathways of development” (Martin and Sunley 2006, p.407).

Main arguments

• Economic and spatial niches where the dominant networked technological paradigm of the time is weak or not present are required for the initial incubation of radical innovations.

• Human agency and decision making are required to generate radical innovations. Such agents are pioneers in their fields. They may be individual entrepreneurs, large corporations, public policy makers or users.

• A new economic pathway is created as the diffusion of radical innovation reaches a critical mass where a tipping point is reached between continuation with previous forms of production under existing technological paradigms and the adoption of new ones. This requires agency.

• Significant diffusion agents can include those concerned with the marketing of a new product or service. They could also be public policy makers creating niches through regulation and public policy or driving through the co-ordinated adoption of a new technology.

Definition of radical innovation

• “An entirely new class of products or technological devices based on a novel set of engineering and scientific principles” (Markard and Truffer 2006).

Technological paradigms and radical innovation

• First major problem confronting the introduction of radical innovations and the creation of new economic pathways is how to overcome the prevailing techno-economic paradigm and its established network externalities, technologies, products and services (Markard and Truffer 2006).

• Some scholars of the sociology of technology and evolutionary economics argue that “niches” are required within or outside of existing knowledge structures and networks as the location of radical innovations (Geels 2004).

Definition of niche

• A niche may be defined as an application context in which the new product or technology is temporarily protected from the standards and selection rules of the prevailing paradigm (Kemp et al 1998, Hoogma et al 2002, Markard and Truffer 2006).

• A niche may be:• A distinctive set of economic circumstances in which

innovations do not have to compete initially on equal terms with the dominant technological paradigm.

• A geographic place where the barriers to innovation are less than elsewhere.

Functions of niches

• Niches provide space for radical novelties to incubate without being subjected to prevailing competitive market pressures or the normal selection criteria that accompany the dominant technological paradigm.

• The informal rules of niche environments are less articulated and subject to higher degrees of uncertainty than those of the established paradigms (Geels 2004).

• In niche conditions it is also possible to draw on new local or international knowledge in order to develop new business networks, value chains and user-producer relationships.

Radical innovations and historical niches

• The domestic putting out system, that was the prevailing production paradigm when the first factory was built in Derby, England, was concentrated elsewhere in the West Country, the West Riding of Yorkshire and East Anglia.

• The railways first developed in small unconnected coalfield niches in the North East and West of England and so did not compete immediately with the predominant networked canal based system of heavy transport.

• Steel was originally produced, particularly in Sheffield, England, by adding carbon to carbon free wrought iron. The first commercially successful Bessemer steel rolling mill was established in a new area, Wyandotte, Michigan in the United States.

• Flow line production was introduced in a new factory in Detroit which, until that point, had not been a significant node in the emerging automobile industry in the United States.

• The commercial production of transistors commenced in California while the predominant valve based electronics paradigm was still dominant on the East coast.

Technological revolution

Radical innovation Associated city/region Hard network landscape

Industrial revolution Factory driven by water powerJohn Lombe

Derby1717

Canals & waterwaysTurnpike roads

Age of steam & railways Steam engine George Stephenson

Stockton to Darlington1825

RailwaysUniversal postal serviceTelegraph (mainly national)PortsSailing ships

Age of steel, electricity & heavy engineering

Bessemer converterHenry Bessemer

Wyandotte, Michigan1855

Steel shipsTranscontinental railwaysWorldwide telegraphTelephone (mainly national)Electricity networks

Age of oil, automobile& mass production

Flow line production systemHenry Ford

Detroit, Michigan1908-1915

Networks of roads, highways, ports & airportsNetworks of oil ductsUniversal electricity Worldwide telecommunications

Age of information & telecommunications

Transistor productionWilliam Shockley

Mountain View, California1955

World digital telecommunicationsInternet& electronic mailMultiple source, flexible use electricity networksHigh-speed multi-modal physical transport links

Economic and spatial niches

In all these cases the economic niches that gave birth to iconic radical innovations that sparked technological revolutions were also spatial niches where the existing technological paradigms were either weak or not represented.

Agency and mindful deviation in niches

• Niche environments provide opportunities for radical innovations to be introduced. They do not themselves create innovations. Those are introduced as a result of interactions between economic actors, policy makers and the users of innovations or their results.

• It is therefore necessary to have theory of agency that explains how specific actors create and introduce radical innovations in niche environments.

Human agency in new path creation

• Garud and Karnøe (2001) Argue that any theory of new path creation should attach a significant role to the importance of strategic agency and the considered “mindful deviation” of entrepreneurs from established paths.

• Puffert (2000) goes further in arguing that the very existence of established pathways may make actors more eager and motivated to attempt to make their new technologies and ways of doing things the basis of new pathways.

Entrepreneurs and mindful deviation

• Entrepreneurs of various kinds create new pathways as they navigate the current flow of events in “real time” and seek to set new processes in motion by “mindful deviation”

• The two ideas “real time influence” and “mindful deviation” distinguish the explanation of new path creation from those of subsequent path dependency (Garud and Karnøe 2001)

Agency and structure

• The idea of real time influence locates the agents of new path creation in the ongoing structural conditions along with the contextual influences, such as technological paradigms (Dosi 1982), institutional settings and macro-economic conditions of the past, in which they find themselves.

• A key characteristic of (at least some) entrepreneurs is that they are not just passive observers of these streams of events but knowledgeable agents with capacities to understand them and to act in ways that are not prescribed by the existing social rules and technological paradigms and trajectories (Garud and Karnøe 2001, p. 2).

Agents and mindful deviation

• The first water powered factory was constructed by John Lombe in an area that was not subject to the domestic putting out production paradigm.

• The first public railway was built by George Stephenson but did not challenge initially the prevailing canal based heavy transport network .

• Henry Bessemer invented the steel converter named after him but then licensed the IPR to steel makers outside the traditional iron smelting paradigm.

• Henry Ford introduced flow line production to the manufacture of automobiles in order to establish a new type of mass market for the product in an area that was not originally at the heart of US car manufacturing.

• William Shockley started the commercial production of solid state transistors in market conditions and in a locality increasingly driven by military requirements where cost was not a key issue.

Critical mass and diffusion

• One innovation, however radical, does not make a new economic pathway. Changes occur slowly at first while producers, designers, distributors and consumers engage in feedback and learning processes (Perez 2010). This is usually a cumulative process and critical mass builds up over time as clusters of innovations emerge in new economic sectors.

• This process is preceded by sometimes quite lengthy periods of individual inventions. After the accumulation of relevant inventions entrepreneurs begin to take up these new ideas and commercialise them as innovations

Definition of critical mass

• Critical mass is a well known phenomenon in non-linear dynamic systems (Lorenz 1993).

• It may be defined as a point of discontinuity that induces a dramatic turnaway from an existing system (Witt 1997).

Significance of critical mass

Existing technological paradigms and network externalities always favour the existing and widely used product variants. For this reason success in the creation of new economic pathways comes down to the prerequisite to pass a critical mass (Witt 1997).

Logistic curve for invention and innovation in computing

Basic inventions & innovations in computing 1850-1960

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1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970

Years

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Inventions

Innovations

Innovation diffusion and new path creation

The diffusion of radical innovations is the key process that spreads their use from the original niche environments to the point at which critical mass is achieved and a new economic pathway is created that represents a significant discontinuity with the existing paradigm or system. In contemporary economies, as with the introduction of an innovation, diffusion also requires agents.

Diffusion agents

At the level of individual companies diffusion agents need to overcome existing network externalities in order to instigate a widening adoption of their companies’ new product or service. One way of achieving this is to try to co-ordinate the adoption decisions of potential users in order to overcome the network diseconomies that early adopters would otherwise have to bear. Such co-ordination is one way of reaching the critical mass point of economic transition to a new economic pathway.

Transition and collective action

• The transition from one economic pathway to another may well need to be organised by collective action. This is because setting the diffusion process in motion is like providing a public good.

• Without collective action, the early adopters would have to bear the initial network diseconomies while later adopters would profit from the investments of the early adopters (Witt 1997).

• A current example of this problem is the barriers to the diffusion of renewable energy technologies in the face of the prevailing carbon based and networked paradigm.