Innovativeness and patterns of innovation. Explaining structural change.

1. Innovativeness and patterns of innovation. Explaining structural change. ESST Module 4: Unit 3 Andreas Reinstaller

2. Innovativeness: Creative Destruction J.A. Schumpeter on Creative Destruction “The fundamental impulse, that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets...[This process] incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism”, Schumpeter (C.S.D. (1942), p.83)

3. Phases of the innovation process • Identification of economic opportunity an technological search/invention • Perception of opportunity (?) • Incremental innovation: exploitation of unexplored (new) technological sub-solutions on existing designs (identification of potential linkages and complementarities between existing sub-components) • Radical innovation: cognitive re-framing of the problem and establishment of a new search trajectory, i.e. artefacts leading to new design and structure of linkages between (new and old) sub-components. • Interaction between science, research and existing meta-heuristics high • The adoption decision of innovators and early diffusion: • the era of ferment: the identification and emergence of different possible design trajectories. Firm as mediator between science, development and customer needs, low appropriability. • The diffusion: • establishment of one or several dominant designs through co-evolutionary learning, between producers and adopters. Gradually internalizing research and development and increasing appropriability.

4. Creative Destruction: Patterns of innovative activity • Innovation is a nested phenomenon: it occurs at very different levels (Freeman-Perez (1988)): • Incremental innovations • Radical innovations • Changes of the technology system • Changes in the techno-economic paradigm • Radical and incremental innovations can take different forms again (Abernathy-Clark (1985)) • Architectural • Niche markets • Regular • Revolutionary • OR • competence enhancing or competence destroying (Tushman - Anderson (1986)) • OR ....

5. Diffusion: The S-shaped diffusion curve and learning, a fundamental concept

6. Diffusion: Phases of entry

7. Diffusion and substiution(i): Long term effects of pervasive technologies (infrastructures) Changes in Transportation Systems Changing Energy Efficiency of Electricity Generation Source: Ausubel et al. (1998), European Review, Vol. 6, No. 2, 137-156

8. Diffusion and substitution (iib): a localised substitution effect & demand/regulation effects Fitted Logistic (ECF time series): USA: t0=1995,7, t10%-90%=8,12, b=0,541 r2=0,994 CAN: t0=1993,8, t10%-90%=7,12, b=0,617 r2=0,989

9. Diffusion and substitution (iic): a localised substitution effect & demand/regulation effects SCAN (ECF): t0=1990,92, t10%-90%=4, b=1,099 r2=0,969 SCAN (TCF): t0=1993,211, t10%-90%=4,002, b=1,098 r2=0,987 AUT (TCF): t0=1990,3, t10%-90%=3,001, b=1,46 r2=0,839

10. Creative Destruction and Technological Regimes • Schumpeter MK I is a good candidate for shake outs, but may happen also in MK II • Causes for shake outs: • Innovation builds on knowledge external to the industry or it is competence destroying; (Nelson/Winter (1982), Tushman/Anderson (1986, 1990) • Innovation requires a minimum scale of production which smaller incumbents do not match (Jovanovic/McDonald (1994) • Innovation is appropriated and internal to the firms (competence enhancing), but their market focus is too narrow Christensen (1997)

11. Creative Destruction and industry shake outs Source: Swaminathan et al. (2000), mimeo.

12. But what causes “entry” or new industries to rise: the perception of opportunity. Bottlenecks and incoherences in the production system “... most productive processes throw off signals of a sort which are both compelling and fairly obvious; indeed, these processes when sufficiently complex and interdependent, involve an almost compulsive formulation of problems. (...) In a sense the capital good sector is always bombarded with messages of the sort that say: ‘I expect to be able to earn a profit if I can produce a new device which will conform to certain specifications. But no machinery now exists which can produce such a device. Therefore you can earn a profit by devising and selling machines which will produce according to these specifications.’N.Rosenberg (1976), in: Perspectives on Technology

13. The perception of opportunity: Consumption as social learning and the opening of new market niches • It reflects social processes: commodities are carriers of social meanings • Functionings (Sen 1985): „what she manages to be ... part of the state of that person“ in a certain social environment • Evaluation of products takes place in such a context • Interpersonal ranking is hence important • An embedding in a certain social structure (which is mainly due to the division of labour) gives rise to lifestyles and related consumption patterns • Consumption reflects social structures and social learning: it is to some extent a carrier of „social history“

14. How are niches generated: Consumption Dynamics Critical income levels Distinction: Lifestyle niches Dissent, Revaluation: Value niches Aspiration: main markets Variety of goods

15. Role of production constraints: Cognitive focusing devices of technological search Triggers of “information crises” Role of social learning of consumers: Search of and testing of new product characteristics (feedback mechanism to production) The creation of new technological path as response to information crises: Information crisis: “rules and routines of an existing regime do not match any longer problem pattern and thus lead to decrease of fitness” Leading to cognitive reframing of the new problem through interaction with other knowledge suppliers Opportunity and the creation of new technological paths: a short summary

16. Definition by P.David: “Processes that are unable to shake freeof their history, are said to yield path dependent outcomes.” They depend on: On the sequence of choice Small historical accidents affecting this sequence Positive feedbacks related to such a choice Sources: positive feedbacks generated by Demand side externalities Network effects Installed base effects i.e. through costs reductions attributable to experience based learning, or through the attainment of system scale economies Pathdependence: definition and sources

17. Sources of path-dependence within an amongst firms System of horizontally/ vertically integrated enterprises enterprise • machinery and equipment • sunk costs • embodied knowledge • knowledge base • learning by using/doing • learning by interacting with • staff/customers • complementarity between goods • organization • rule base • reciprocity/institutional inertia market Economies of scale and scope network effects, technological interrelatedness Socio-economic/institutional framework

18. Path-dependence and initial conditions: diffusion of two competing technologies Superior technology and inferior technology have equal initial probability of choice 0.5:0.5 Inferior technology has slightly higher initial probability of choice 0.55:0.45 Superior tech Superior tech

19. Implications of path dependence • Technological development depends on the past history of choices made by individuals or groups of individuals • This development may be irreversible in some cases, or reversible only at very high cost • Technological development is unlikely to give always rise to “optimal” solutions, as postulated by Neoclassical theory

20. The consequences of localised search and learning: technological lock-in; the Arthur-Model Criteria of choice Technologies with feedback New adopters R has a natural preference for A, aR>bR r ++ A A B R-agent nA(n)++ rn=bR+rn-1nB rn=aR+rn-1nA r0 = s0 sn=aS+sn-1nA sn=bS+sn-1nB S-agent B s ++ nB(n)++ payoffs S has a natural preference for B, aS<bS • The choice of a technology depends only on its payoff • The payoff depends on natural preferences and the number • of adoptions