The Dynamics of localized technological change

1. The Dynamics of localized technological change Innovation and Technology Transfer -José Mangueira -Rui Martins -Pedro Nazareth Antonelli, C. and Calderini, M. (1999) , “The dynamics of Localized Technological Change”, in The Organization of Economic Innovation in Europe, eds. A. Gaambardella, and F. Malerba, pp. 158-176, Cambridge Univ Press 8th of March 2002

2. Presentation Framework • Introduction • Skill-intensive Industries • The dynamics of localized knowledge • Role of demand-pull forces in the dynamics of localized technological change • The author’s approach: Basic Hypotheses Empirical Analysis • Conclusion

3. Introduction The notion of localized technological change is appropriate for understanding the dynamics of innovation in most of European industries Starting Point: R&D intensity and patent-counting fail to appreciate the innovative capability of most traditional industries Technological change is mainly based upon learning-by-doing and tacit knowledge To appreciate the dynamics of technological change based upon localized technological knowledge: Skill-intensive industries play a role mainly for the European industrial scenario Continuous introduction of technological and organizational innovations are (for skill-intensive industries) mainly based upon bottom-up approaches

4. Skill-intensive Industries • Characteristics: • The specific nature of the technological change • The high rate of the total factor productivity (TFP) • Small sizes of firms • The high level of regional concentration and wages, and the low level of capital intensity • The tight web of cooperative agreements among firms • Sourcesof technological knowledge and consequently technological change: • The internal organization: relationship between production departments and marketing activities • Internal labor markets and wages structures • The creative and timely adoption of new capital goods and intermediary inputs. • The implementations of technological by means of parallel changes in the organization of the companies • The close interactions between changes in theprocess and products in terms of design

5. The dynamics of localized change Information differs from Knowledge: Information (treated data) is an input in the production of knowledge Technological knowledge is localized in tacit learning processes (largely excludable) Constraints in its transference and adaptation Technological Change is inherently localized Localized technological change Tacit knowledge Generic knowledge Scientific structured information, available to everybody at low costs of acquisition and replication (Public Good) Highly idiosyncratic, specific to the business environment and expensive

6. The dynamics of localized change Standard microeconomics suggests that technological information should be considered a public good, in that its use is non-excludable and non-rival. Intellectual property rightscan increase appropriability, but reduce the scope for the socialization of inovation benefits. The localized character of the technical knowledge increases its appropriability but reduces its spontaneous circulation in the economic system. Technological change is inherently localized (firm background). Firms rely upon varying mixes of tacit and generic knowledge in order to generate localized technological innovations.

7. The dynamics of localized change The study of the determinants of the innovation capability of firms, must take into account the innovation system into which firm is embedded, more specifically three classes of factors: • Amount of resources devoted to implementing the accumulation of tacit • knowledge by each agent in the system • Receptivity to technological knowledge generated by third parties • Properties of the system in terms of connectivity and distribution of receptive agents New technological knowledge emerges also from the daily interactions of learning firms among themselves and with other scientific institutions. Communication and trading of information play a major role.

8. Role of demand-pull forces in the dynamics of localized tech. change Localized technological change is the endogenous outcome of the interplay between substitution costs and learning processes. Changes in demand input costs and relative competitivity for each firm imply substitution costs of switching sizes and production techniques. Firms tend to capitalize on their experience acquired bymeans of learning-by-doing and learning-by-using, plus R&D. Changes in demand imply that firms are induced to make efforts to cope with the in(de)creased levels of their output by in(de)creasing the levels of their inputs; This however push firms to mobilize all their learningcapabilities so as to capitalize on the experience acquired and hence introduce innovations that make it possible to adjust output to the desired levels without changing their input levels.

9. Role of demand-pull forces in the dynamics of localized tech. change The literature on demand-pull assumes that firms are pushed to introduce technological innovations by the pressure of demand. In fast-growing markets the rates of return to innovation are larger so as to trigger accrued innovative efforts of firms and independent inventors that eventually lead to the generation of faster rates of innovation. Recent developments in evolutionary theory show that cumulative causation and path dependency of economic processes not only apply to firms or industries, but they are also at the core of selection mechanisms between competitive firms and technologies. Dynamic economies accumulate knowledge and experience the firm has acquired over the years.

10. Role of demand-pull forces in the dynamics of localized tech. change In the Shumpeterian literature the basic incentive to innovate is provided by marketentropy. The larger the time variance in the market shares, the larger the efforts of firms to introduce innovations.This is due to two contrasting and yet complementary reasons: Fast-growing firms that have increasing market share, larger levels of output, mark-ups and cash flows, retain larger shares of them to fund internally risky projects,so invest moreonR&D. Declining firms, that see both their market shares, profits and output shrinking, are now induced by the emerging failure to fund R&D activities aggressively in order to survive and meet the adversity of introduction of both product and process innovations. Because of the attention paid to the variance in market shares the Schumpeterian literature stresses also the role of demand at the firm level in assessing the amount of incentives for firms to introduce technological innovation.

11. Basic Hypotheses New levels of demand (aggregate changes or increased share of a given market Firms have to accomodate their size to the new levels of their demand Increasing size: Extensive growth (increase in the level of input) or Intensive growth (increase in the levels of efficiency) Demand-pulled localized technological change will be larger the larger is the increase in the demand levels, the larger the dimensional switching costs, and the larger the opportunities to generate innovations based upon experience and local knowledge acquired by means of learning-by-doing and learning-by-using and R&D activities

12. Empirical Analysis Based upon evidence about the mechanical engineering industry, with a data set of 136 firms in a time span of six years (1988-1994) Technological change is characterized by the relevance of the learning process (internal and external) Computer Integrated Manufacturing: Implementing such a system is a largely empirical and trial-and-error process, where firms are forced to rely on their own knowledge, resources and experience The non-availability of formalized knowledge discourages imitative behaviours and patterns of inovation Shifts in the demand curves of mechanical engineering firms have triggered innovation processes characterized by localized knowledge, learning by doing, learning by using, and tacit knowledge

13. Conclusion Technological knowledge is considered as a high impure public good, which relies upon a continuum of specifications of different forms of knowledge: at one extreme generic and scientific knowledge and at another, tacit knowledge In the generation of localized technological change firms rely on both tacit and generic knowledge: “The generation of localized technological knowledge can therefore be viewed as the product of a systemic bottom-up process of induction from actual experience, which integrates a top-down process of deduction from general scientific principles on which generic knowledge is built” Importance of the communication channels: Connectivity and Receptivity

14. Conclusion Too much importance has been paid by European innovation economics and policies to R&D activities as if they were the unique source of knowledge for firms: Many small firms rely almost exclusively on tacit localized knowledge and yet are able to generate important innovations Suggestions: An innovation policy should push the innovative capability of skill-intensive firms by paying attention to feeding all the processes of learning and implementing technological cooperation Creation of industrial technological centers specifically designed to sustain the localized processes of technological change so as to socialise the technological know-how