Econ 124 & PP 190-5/290-5 Innovation and Technical Change

1. Econ 124 & PP 190-5/290-5 Innovation and Technical Change Science, invention, and innovation Prof. Bronwyn H. Hall UC Berkeley

2. Part 2 of the course • Innovation fundamentals • Science, invention, and innovation (Fagerberg 2004 for an overview) • Diffusion, standards, and network externalities (after the quiz - Hall 2004) • IP system in practice • The varieties of IP protection (Ch. 3) • Some contemporary IP policy problems Econ 124/PP 190-5/290-5

3. Further reading • Nathan Rosenberg (Cambridge University Press paperbacks) • Perspectives on Technology • Inside the Black Box • Joel Mokyr (Oxford University Press paperback) • The Lever of Riches • Fagerberg, Mowery, and Nelson (eds, Oxford University Press, forthcoming) • Handbook of Innovation Econ 124/PP 190-5/290-5

4. This week (21 and 23 Sept) • Innovation fundamentals • Definitions • Determinants • Level • Direction • The process • The linear model • What the linear model leaves out Econ 124/PP 190-5/290-5

5. Define three key concepts • Invention • Innovation • Diffusion ……..But recognize that the boundaries between these concepts are fuzzy Econ 124/PP 190-5/290-5

6. Invention • creation of an idea of how to do or make something (usually by an individual) • “a prescription for a producible product or operable process so new as not to have been obvious to one skilled in the art at the time the idea was put forward" (Schmookler 1960) • "an increment in the set of total technical knowledge of a given society" (Mokyr 1990) • “the first occurrence of an idea for a new product or process” (Fagerberg 2004) Econ 124/PP 190-5/290-5

7. Innovation • making an idea for a new product or process real, putting it into practice • usually performed by a team or company (requires financial resources as well as a range of skills) • “the act of being the first to produce a new good or service or the first to use a new method or input” (Schmookler 1966) • “the first commercialization of an idea” (Fagerberg 2004) • “A new idea, method, or device. The act of creating a new product or process. Includes invention as well as the work required to bring an idea or concept into final form” (McNealy, Sun website, 2004) Econ 124/PP 190-5/290-5

8. Diffusion • the spread of a new product or process throughout society or at least throughout the relevant part of society • the process that enables an innovation to contribute to economic growth and welfare NB: Some researchers refer to any adopter of a new technology as an “innovator.” In this course we will not use this wording. Econ 124/PP 190-5/290-5

9. Determinants of innovation • Economic factors (supply and demand) are important for an understanding of the rate and direction of technical change • As in the case of ordinary goods like milk or shoes • Understanding these helps in designing policy levers • Chance and unpredictability can be important in the process • There are forward and backward feedbacks throughout the process of innovation Econ 124/PP 190-5/290-5

10. 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) Econ 124/PP 190-5/290-5

11. 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) Econ 124/PP 190-5/290-5

12. Direction of innovation - supply • Lack of technological opportunity • Science/technology not always available • Leonardo da Vinci’s airplane • 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 Econ 124/PP 190-5/290-5

13. Direction of innovation - supply • Treatment of diabetes held up by complexity of understanding insulin • needed crystallography to understand complex organic molecules • Historically, mechanics & metals progressed faster because inorganic chemistry simpler • Appropriability considerations • Lack of patents directs invention towards secrecy (Moser) Econ 124/PP 190-5/290-5

14. Direction of innovation - demand • “Inducement mechanisms and focusing devices” (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 Econ 124/PP 190-5/290-5

15. Examples of imbalance • Oil tube drill • for the inside of bicycle hubs because outside forming tool too fast for conventional drill, so manufacturing sequence out of step • Development of laptop computer • Focus on cheaper, lighter color screens • Lighter, longer-lived rechargeable batteries Econ 124/PP 190-5/290-5

16. 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 Econ 124/PP 190-5/290-5