Innovativeness and patterns of innovation. Explaining structural change.

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

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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.

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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 ....

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Diffusion The S-shaped diffusion curve and
learning, a fundamental concept
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Diffusion Phases of entry
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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
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Diffusion and substitution (iib) a localised
substitution effect demand/regulation effects
Fitted Logistic (ECF time series)
USA t01995,7, t10-908,12, b0,541 r20,994
CAN t01993,8, t10-907,12, b0,617
r20,989
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Diffusion and substitution (iic) a localised
substitution effect demand/regulation effects
SCAN (ECF) t01990,92, t10-904,
b1,099 r20,969 SCAN (TCF) t01993,211,
t10-904,002, b1,098 r20,987
AUT (TCF) t01990,3, t10-903,001,
b1,46 r20,839
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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)

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

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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

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How are niches generated Consumption Dynamics
Critical income levels
Distinction Lifestyle niches
Dissent, Revaluation Value niches
Aspiration main markets
Variety of goods
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Opportunity and the creation of new technological
paths a short summary

• 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

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Pathdependence definition and sources

• Definition by P.David
• Processes that are unable to shake free of 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

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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
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Path-dependence and initial conditions diffusion
of two competing technologies
Superior technology and inferior technology have
equal initial probability of choice 0.50.5
Inferior technology has slightly higher initial
probability of choice 0.550.45
Superior tech
Superior tech
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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

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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, aRgtbR
r
A
A
B
R-agent
nA(n)
rnbRrn-1nB
rnaRrn-1nA
r0 s0
snaSsn-1nA
snbSsn-1nB
S-agent
B
s
nB(n)
payoffs
S has a natural preference for B, aSltbS

• The choice of a technology depends only on its
  payoff
• The payoff depends on natural preferences and
  the number
• of adoptions