Community Economics:

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Community Economics Technology and Innovation

Shapero (1981, p. 26) argues development means
the area or people in that area . . .achieve a
state denoted by resilience -- the ability to
respond to changes in the environment
effectively creativity and innovativeness--the
ability and willingness to experiment and
innovate initiative taking--the ability, desire
and power to begin and carry through useful
projects. In conjunction with this is the need
for diversity, which offers an area some measure
of invulnerability, to the effects of many
unforeseen events and decisions. With diversity
there is always part of a local economy
relatively unaffected by the changes in a single
industry or market place or by legal constraints
on a given product. Diversity provides a
favorable environment for creativity and
innovativeness.
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Community Economics Technology and Innovation

Technology is how land, labor and capital are
combined to produce output. Technology can be
industry sector and/or business specific and is
generally regulated by management or community
processes. It can involve the latest innovation
or something that has been around for sometime.
Technology can be product specific, such as how
we produce a good or service by combining inputs,
or it can be process specific such as new ways of
dealing with workers or decision-making.
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Community Economics Technology and Innovation
The current wave of thinking acknowledges that
firms benefit from internal and external
economies of scale, or what regional economists
have called agglomeration economies. If a firm
can make an economic profit on new products,
technologies or innovations then the firm has a
short-run profit incentive to invest in research
and development. The key is the institutional
role of patents. Because firms, or an
entrepreneur, can obtain patent protection
ensuring monopoly profits over the life of the
patent there is an incentive to invest in
developing new technologies. We have also seen
that this new way of thinking about the economic
growth process, endogenous growth theory, can
work against smaller communities who may not
possess agglomeration characteristics.

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Community Economics Technology and Innovation
Endogenous Growth Models Revisited

The work of Romer and Lucas radically changed how
economist thought about the growth process and
the underlying factors causing growth. Following
a trend in economic theory they lifted the
assumption of perfect competition which had
already occurred in the industrial organization
and international trade literatures, Romer asked
what would happen if we abandoned the
neoclassical model and started with a clean slate
in which the economy is not held to perfect
competition.
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Community Economics Technology and Innovation
Endogenous Growth Models Revisited

Remember that in Romers view of the world
earning monopoly rents on discoveries cannot
occur in a perfectly competitive economy, but it
is the striving to capture these rents that spur
economic growth. How does this process play out?
(Technological advances do not fall from heaven
as in the neoclassical model. Many individuals
and firms have market powers and earn monopoly
rents on discoveries.)
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Community Economics Technology and Innovation
Endogenous Growth Models Revisited

Grossman Helpman point to the key idea that
profit seeking investments in knowledge play a
critical role in long-term growth. Investment in
knowledge has two components. The first is
investment in human capital through education.
The second is investment in research and
development of new products and technologies in
an attempt to capture monopoly rents on those
discoveries. The latter leads us to endogenous
technological progress or endogenous growth.
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Community Economics Technology and Innovation
Endogenous Growth Models Revisited


Put another way, if research and development
of new products and technologies are fundamental
to the growth process, why would firms or people
invest in research and development? The key is
short-term monopoly rents that can be gained on
the new technology.
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Community Economics Technology and Innovation
Endogenous Growth Models Revisited


There is an important distinction here to be
made between ideas and products or technologies.
An idea or way of thinking about a problem
generally cannot be patented. If a business
reorganizes itself to gain internal synergies
that firm cannot prevent a competitor for
following its lead. Ideas and knowledge are
embodied in people who are mobile and can move
from one firm to another taking their knowledge
with them. Trade secrets or the way a
particular firm goes about its business, cannot
be patented and is at times fiercely protected by
firms.
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Community Economics Technology and Innovation
Endogenous Growth Models Revisited


Innovations, or new ways to do old things, are
almost immediately part of the public domain.
Products and technologies, on the other hand, are
tangible things that can be patented and
protected from competitors
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Community Economics Technology and Innovation

At hand we have three notions of technology and
innovation that must be clearly defined. The
first hinges on the notion of the creation of new
technologies or ways of doing business. These
are patentable and can earn the creator profits
in the short-run. The second centers on the
creation of new ideas which are non-rival in
their nature. This could be a new business
practice such as just- in- time inventory. While
certain business methods like implementing just-
in- time inventory might be patentable, the
overall concept can not. The third notion
centers on adoption rates of the new technology
or innovation. Early adopters can gain from
increased efficiencies above later adopters. As
more firms adopt the technology then the gains
from early adoption fades away.

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Community Economics Technology and Innovation

the neo-classical model suggests that sources of
output or income growth for communities arise
from any of the following economic actions (1)
an increased supply of land (2) an increased
supply of labor or population growth (3) an
increased supply of capital or capital
accumulation (4) some form of technological
change (5) some form of increased economic
efficiency by shifting resources from lower- to
higher-productivity uses. The neo-classical
model suggests innovation creates higher profits
for adopters by reducing their average costs.
These excess profits create an incentive for
technological adoption and lead to diffusion.

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Community Economics Technology and Innovation
The community can become vulnerable to forces
beyond its control. The spatial diffusion of
technology or innovation significantly affects
the rate of development among communities.
Technological change does not occur at a
constant pace, nor is it uniformly adopted
everywhere. The hindrances to the instantaneous
spread of technology contribute to a market
imperfection preventing every community from
equal or instantaneous access to the same
technology. The end result is communities develop
at different rates because they use different
technology. Technological change can shift the
relative production advantages among communities,
for example less of a local resource being needed
or other local resources becoming more
productive.


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Community Economics Technology and Innovation

The community can become vulnerable to forces
beyond its control. Technological change can
shift the relative production advantages among
communities, for example less of a local resource
being needed or other local resources becoming
more productive. The development of new cotton
varieties, fertilizers, and irrigation methods,
for example, lead to a shift of cotton production
from southeastern to southwestern U.S.
Furthermore, over time substitute resources may
replace a key resource such as artificial
replacing natural rubber. This gives us an idea
about how technology generically fits into the
picture, but what specifically is technology.

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Community Economics Technology and Innovation

Technology and innovation are a little bit like
the genie and Pandoras Box. Once you have let
it out, it is very difficult to put it back in.
Technology and innovation are very critical in a
dynamic economy. In a dynamic economy, however
you invariably create winners and losers when new
technology or innovation is applied. This is
directly related to Schumpeters idea of creative
destruction. As new technologies and products are
developed they replace, or destroy, older ones
and the losers are those that held the patents on
the now old technologies. In addition, if the
new technology is radical enough early adopters
can exert strong monopoly powers and force later
adopters from the market.

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Community Economics Technology and Innovation

It is important to remember what we are talking
about with regards to community technology.
First, the technology in the community is the sum
of the technology of individual firms, the
sectors they belong to, and the technology
employed by the local public sector (e.g.,
municipal government, schools, water and waster
treatment and fire protection among others).
Second, much of the communitys technology is
process technology (i.e., how we deal with each
other). This involves interaction between
constitutes and governing bodies, how teachers
teach or how local businesses network to build
synergies. Process technology emphasizes
management technology or management information
technology and within the business world focuses
on operation research.

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Community Economics Technology and Innovation

Technology also ranges from basic to applied
technology. Basic research is conducted with
little appreciation for what its commercial
possibilities may be. This generally is
conducted at universities, think tanks or
research labs. Applied research on the other
hand is research conducted with either a
practical question or a commercial application
already in mind. The recent grow in the number
of patents flowing from basic research, such as
gene splicing methods, has seen a significant
acceleration of private firms investing in basic
research. Indeed, the much more rapid
application of patents to what was once viewed as
basic research has significantly blurred the
distinction between basic and applied research.

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Community Economics Technology and Innovation

Innovation is the successful introduction of
ideas perceived as new into a community or as the
first commercial or genuine application of some
new advancement outside of experimentation. From
a community economic development perspective
innovations may be based on ideas that are
inventive, borrowed, or imitated. Again, from
the communitys perspective what is already
established in one place may, by borrowing or
intimation, become an innovation in another.

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Community Economics Technology and Innovation

The technological change can be divided into two
parts things and ideas. Things, it is argued,
are rival in that things, such as a new robot
technology, can be patented. Ideas broadly
defined, on the other hand, are non-rival and
easily transferable (Mathur 1999). But because
non-rival ideas can be copied and communicated,
their value increases in proportion to the size
of the market in which they can be used. A
non-rival good is that good whose use by a firm
does not preclude or diminish its use by others
(Mathur 1999). It is non-excludable when a firm
or an economic agent cannot prevent its use by
others without incurring substantial cost
relative to the value of the good. Its use with
other inputs like land, capital and labor
overcomes the limitations imposed by diminishing
returns to these inputs in production.

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Community Economics Technology and Innovation

Product technology relates to things. Innovation
relates to Schumpeters notion of
entrepreneurship. Process technology relates to
ideas or the way of during things. It takes all
three to sustain economic growth and development.
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Community Economics Technology and Innovation

Creativity
Knowledge
Information
Data
Figure 8.2 Creativity Pyramid
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Community Economics Technology and Innovation

In terms of understanding the conditions of
research, development, and creativity, however,
the importance of structural instability can not
be minimized. Uncertainty is fundamental to
creativity. Uncertainty of this kind is not an
obstacle but rather a precondition for a creative
state. Communication is key in understanding the
creativity process. The idea of both horizontal
or internal and vertical or hierarchical
communications is very fundamental to the
creativity process. This critical role of
communication tends to occur in metropolitan
areas and favors them in the creative process.
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Community Economics Technology and Innovation

Costs, but more importantly profits, represent an
important consideration in adopting any new
technology. First there is the cost of acquiring
information about the new technology and then
there is the investment cost of acquiring the
technology. But an important cost, often not
considered ex ante, is adjustment cost.
Adjustment costs are the time and resources to
acquire a set of necessary skills and know-how
(basic and advanced understanding of the
technology) in order to fully utilize the new
technology and realize its maximum potential
productivity gain (Ahn 1999). Furthermore, it
includes lost production and declines in
productivity as the new technology is
incorporated into the production process.
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Community Economics Technology and Innovation
Product Life Cycle

Firm Location Flexibility
Innovation is critical in the early phase of the
cycle in which the product is initially developed
and adapted for commercial use. In the growth
phase, production technology is pivotal as firms
move the product to the mass market.
Product Maturity
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Community Economics Technology and Innovation
Growth Center /Propulsive Industries Theory
Growth center theory stresses the role of
propulsive sectors in shaping the economic growth
fortunes of communities. These propulsive
industries are comprised of technological
innovators (or lead firms) with growth
stimulating effects on both backward and forward
linked sectors through which positive growth
(spread) effects or negative (backwash) effects
are propagated. In short, growth center theory
suggests that there is a dynamic disequilibrium
where cost reducing and growth inducing actions
feed on themselves and pull other areas along.
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Community Economics Technology and Innovation
Growth Center /Propulsive Industries Theory
Spread and backwash effects can occur through
several broad economic forces. These include
investment, spending for goods and services,
migration, knowledge and technology and political
influence and government spending. Each of these
can be shown to have both spread and backwash
dimensions. For example, urban funds are
invested in rural areas to take advantage of low
labor and land costs, resulting in a spread
effect. Simultaneously, rural funds are invested
in urban areas to take advantage of relatively
rapid growing goods and services markets.
Another example focusing on knowledge and
technology flows. Urban centers are the
generators and diffusers of information and
innovation for the surrounding hinterland,
resulting in spread effects. Rural to urban
migration is selective of the better educated and
more highly skilled rural residents. Here the
urban center will draw in the human capital of
the surrounding hinterland.
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Community Economics Technology and Innovation
Growth Center /Propulsive Industries Theory
Backward regions are unlikely to spawn
entrepreneurs who are needed to bring new
technologies to market. It appears that only in
rather densely populated regions, in the vicinity
of large urban centers, will produce sufficient
entrepreneurship. In the context of small
peripheral regions, innovative development is not
likely. The human capital of small regions is
too limited and too mobile many of the talented
people will simply leave.
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Community Economics Technology and Innovation
Disequilibrium Theories
Another group of theories includes
entrepreneurship, seedbed, and regional
creativity theories in which environmental
factors and non-spatial synergies contribute to
an areas overall receptivity to technology and
innovation. Entrepreneurship, seedbed or
creativity theorists ask - why have some
locations been economically more dynamic than
others and what role can public policy play in
creating and fostering these conditions?
Creativity is a social phenomenon primarily
developed in communities characterized by high
levels of competence, many fields of academic and
cultural activity, excellent possibilities for
internal and external communications, widely
shared perceptions of unsatisfied needs, and
synergies among local actors.
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Community Economics Technology and Innovation
Disequilibrium Theories
The important point is the idea that new
technology and innovation induces people to start
or spin-off new firms. This causes a dynamic
sense of disequilibrium in that many things, in
both input and product markets, and production
processes are changing. As we saw in the
neoclassical model shifts in technology and the
introduction of innovations cause the growth path
of the economy to shift resulting in short-term
disequilibrium
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Community Economics Technology and Innovation
Policy Space
Technological change often alters traditional
comparative advantages creating new locations for
economic production. The end result is that
governments frequently intervene in the
transmission of technology because of their
concern about relative comparative advantage.
The end result is communities lagging in
technological development are likely to see their
economic base eroded by external competitive
forces leading to more decline in output,
incomes, and employment. If these communities
continue to find themselves disadvantaged by
technological change they will seek to have some
offsetting governmental intervention.
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Community Economics Technology and Innovation
Policy Time
It takes time to incorporate new technology into
the capital stock. In some cases, new technology
requires a completely new production process that
retards adoption of the technology until the
present capital stock is fully depreciated. New
technology requiring only minor changes is
adapted more quickly. Since communities are
composed of different industrial sectors, the
rate of technological progress among sectors
varies. Communities with sectors experiencing
rapid technological change also experience more
rapid technological change than other
communities. Patent agreements and secrecy in the
use of the technology hampers the instantaneous
transmission of technology among communities.
Thus, some of the reasons for different adoption
rates of technology include the risk attitude of
management ignorance about the new technology
time to implement and restrictive agreements.
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Community Economics Technology and Innovation
Policy Limited

• Community and regional policies can only do so
  much. For as Malecki and Nijkamp (1988) note
• Regional policies cannot create entrepreneurs.
• Policies are unable to substitute for a critical
  mass.
• Regional policies can have indirect effects.
• Policies cannot drastically alter the position of
  lagging regions.
• Regional policies may have a limited impact on
  spatial mobility.

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Community Economics Technology and Innovation
Policy
Government policies designed to address
technology transfer must work or be aimed at the
organization level. Successful technology
transfer requires transfer of knowledge across
disciplines, professions, industry sectors,
regions, and communities. Thus, it is an
organizational and cultural process as well as a
knowledge transfer process.
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Community Economics Technology and Innovation
Policy
At higher levels of government, the spectrum of
policy options broadens. The government has a
role in supporting basic research and this has
historically been done by supporting research
universities and research labs that cater to the
Department of Defense and NASA related programs.
Another key element as technology becomes more
important to the economy is the ability of the
labor force to take advantage of and used
technologies and innovations. This translates
into the increasing role of educational
opportunities beginning primarily K-12 education,
institutions of higher education, and continuous
retraining opportunities.
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Community Economics Technology and Innovation

Product technology relates to things. Innovation
relates to Schumpeters notion of
entrepreneurship. Process technology relates to
ideas or the way of during things. It takes all
three to sustain economic growth and development.