Innovativeness and patterns of innovation. Explaining structural change.

ESST Module 4: Unit 3Andreas Reinstaller

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)

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.

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 ....

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

Diffusion: Phases of entry

Changes in Transportation Systems

Changing Energy Efficiency of Electricity Generation

Source: Ausubel et al. (1998), European Review, Vol. 6, No. 2, 137-156

Diffusion and substiution(i): Long term effects of pervasive technologies (infrastructures)

Diffusion and substitution (iib): a localised substitution effect & demand/regulation effects

Fitted Logistic (ECF time series): )( 01 ttbe

Ky

USA:t0=1995,7, t10%-90%=8,12, b=0,541r2=0,994

CAN:t0=1993,8, t10%-90%=7,12, b=0,617 r2=0,989

Diffusion and substitution (iic): a localised substitution effect & demand/regulation effects

SCAN (ECF):t0=1990,92, t10%-90%=4, b=1,099r2=0,969SCAN (TCF):t0=1993,211, t10%-90%=4,002, b=1,098r2=0,987

AUT (TCF):t0=1990,3, t10%-90%=3,001, b=1,46r2=0,839

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)

Creative Destruction and industry shake outs

Source: Swaminathan et al. (2000), mimeo.

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

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“

How are niches generated: Consumption Dynamics

Critical income levels

Distinction: Lifestyle niches

Aspiration: main markets

Dissent, Revaluation: Value niches

Variety of goods

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

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

machinery and equipment•sunk costs

•embodied knowledge

knowledge base •learning by using/doing

•learning by interacting withstaff/customers

•complementarity between goods

organization•rule base

•reciprocity/institutional inertia

enterprise System of horizontally/ vertically integrated enterprises

marketEconomies of scale

and scope

network effects,

technological interrelatedness

Socio-economic/institutional framework

Sources of path-dependence within an amongst firms

0.5 1 1.5 2

0.2

0.4

0.6

0.8

1

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 slightlyhigher initial probability of choice0.55:0.45

Superior tech

0.5 1 1.5 2

0.2

0.4

0.6

0.8

1

Superior tech

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

R-agent

S-agent

New adopters

nA(n)++

Criteria ofchoice

Technologies with feedback

A

B

S has a natural preference for B, aS<bS

R has a natural preference for A, aR>bR

nB(n)++

r0 = s0

A B

payoffs

rn=aR+rn-1nArn=bR+rn-1nB

sn=aS+sn-1nA sn=bS+sn-1nB

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

r ++

s ++

The consequences of localised search and learning: technological lock-in; the Arthur-Model