The Economics of Innovation - UZH00000000-707f-70cd-ffff-ffffa9f6c38d/... · The Economics of Innovation Prof. Dr. Ulrich Kaiser Institute for Strategy and Business Economics University

The Economics of Innovation

Prof. Dr. Ulrich Kaiser

Institute for Strategy and Business Economics

University of Zurich

Spring semester 2009

University of ZurichISU – Institute for Strategy and Business Economics

Ulrich Kaiser

The Economics of InnovationSpring semester 2008

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0. Introduction and motivationAdopted, amended and adapted from Manuel Trajtenberg, The Eitan

Berglass School of Economics, Tel Aviv University; h // il/ l/ & /http://www.tau.ac.il/~manuel/R&D_course/


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Note:These slides are extra material and not relevant for the exam.


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0. Introduction and motivation httIs innovation important?

p://www..roche.com

/home.htm

l; March 19, 20008


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0. Introduction and motivationhttp://March

Is innovation important? /w

ww.nov

h 19, 2008 vartis.com8

m/researchh/index.shhtm

l;


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0. Introduction and motivationhttp://March

Is innovation important? /w

ww.syng

19, 2008 genta.comm/;


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0. Introduction and motivationIs innovation important?


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Source: Kaiser (2006)


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0. Introduction and motivationIs innovation important? Does it pay?



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0. Introduction and motivationIs innovation important? Does it pay? Also for the inventor?



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0. Introduction and motivationInnovation input

Source: http://www.bfs.admin.ch/bfs/portal/de/index/themen/21/02/ind7.indicator.71402.html


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Source: TLF


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Source: TLF


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0. Introduction and motivationInnovation output

Source: TLF


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Source: TLF


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Source: TLF


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Source: TLF


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Source: TLF


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0. Introduction and motivationInterfaces with other disciplines in Economics

There is a core, and a great deal of interface with other, central fields in Economics:

With IO: market structure & innovation (main theme), incentives to i i i & i d d i i i & i d dinnovate, innovation & industry dynamics, innovation & antitrust, demand

for new products, etc.

WithMacro: productivity growth business cycles institutions etcWith Macro: productivity growth, business cycles, institutions, etc.

With Labor: rising inequality & skill‐biased tech change, innovation & unemployment (deskilling), etc.p y ( g)


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0. Introduction and motivation

With International: technology and comparative advantage, outsourcing, North‐South, globalization; international aspects of

Interfaces with other disciplines in Economics

outsourcing, North South, globalization; international aspects of intellectual property (IP).

With Law and Economics: IP.

With Finance: how to finance R&D, venture capital.

With Health Economics: new drugs, new medical devices and healthWith Health Economics: new drugs, new medical devices and health care costs.

With Economic History: very central, Industrial revolutions, secular growth, tetc.

With Defense Economics – defense R&D


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0. Introduction and motivationInterest in technology/economics interface

Internet – pervasiveness, brings about changes in lots of aspects of life, social, economic, personal; e‐commerce, eBay, the last bubble.

New, exciting tech frontiers, e.g. Nanotechnology; Tech and Health Care ‐bi h l h G jbiotechnology, the Genome project

Feeling of acceleration of changes, but that was true also in the pastpast…

But above all: because recognition that innovation key to long term growthBut above all: because recognition that innovation key to long‐term growth, key to raise in standards of living.


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0. Introduction and motivationTop innovations

CNN enlisted with the aid of the Lemelson‐MIT Program in preparing the list of the Top 25 non‐medical innovations that,

have become widely used since 1980,

are readily recognizable by most Americans,

have had a direct and perceptible impact on everyday life, and

could dramatically affect the future.


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Is innovation important? 1. The Internet2 Cell phone

13. Air bags 14. ATM 15 Ad d b i2. Cell phone

3. Personal computers 4. Fiber optics 5 E il

15. Advanced batteries 16. Hybrid car 17. OLEDs

5. E-mail 6. Commercialized GPS 7. Portable computers

18. Display panels 19. HDTV 20. Space shuttle

8. Memory storage discs 9. Consumer level digital camera

p21. Nanotechnology 22. Flash memory 23. Voice mail

10. Radio frequency ID tags 11. MEMS 12. DNA fingerprinting

23. Voice mail 24. Modern hearing aids 25. Short Range, High Frequency Radio12. DNA fingerprinting Radio


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0. Introduction and motivationTechnology and happiness“Technology and Happiness” by James Surowiecki

“Does Economic Growth Improve the Human Lot? Some empirical evidence”, by Richard Easterlin

In: Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz, edited by Paul David and Melvin Reder, Academic Press, 1974


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0. Introduction and motivationTechnology and happinessPeople adapt very quickly to good news (like lottery winners) – “hedonic adaptation”adaptation .

So with technology, no matter how dramatic a new innovation is, it is very easy to take it for granted. Things that once seemed miraculous soon become y g gmundane, and even frustrating when they don’t work properly.

Bad externalities: congestion, invasion of privacy, can’t get away from it all, too much choice (but Internet helps)

On the other hand: much better health care.


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0. Introduction and motivationReminder: sources of growth

ααλt C)1( ααλtt

tt CLeY )1( −=

CLY ggg ⋅+⋅−+= ααλ )1(

gi : Growth rate of variable “i”

λ : Rate of productivity growth ‐“the residual”λ : Rate of productivity growth the residual

growth of income (product) per capita:growth of income (product) per capita:

(gY – gL )= λ + α (gC – gL)


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0. Introduction and motivationSources of growth

(gY – gL )= λ + α (gC – gL)

Two sources:

(1) Factor accumulation (traditional…): Increase in capital per worker (gC – gL): more machines, equipment, structures per worker

(2) Increases in productivity, λ: technological advance/innovation, fueled by R&D


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0. Introduction and motivationRobert Solow

Findings of landmark research by Robert Solow: increases in productivityFindings of landmark research by Robert Solow: increases in productivity (due to tech change) main determinant of growth! (one of the key empirical findings ever in economics)

(confirmed commonly held perceptions – bewilderment from technology, international exhibitions, Edison and Ford, etc.)

F d t l ti i ti k t th b t th k tFundamental question: innovation key to growth, but can the market economy “deliver”?


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0. Introduction and motivationRobert SolowThe large residual: “manna from heave”? “a measure of our ignorance”? Embarrassing for economists: the most important determinant of economicEmbarrassing for economists: the most important determinant of economic well‐being – out of reach?!

This finding largely determined the research agenda: g g y g

• Measurement issues: quality of products, of capital, human capital, economies of scale.

• Understand the mechanisms: incentives, diffusion, GPTs, case studies, etc.

• The new growth literature – endogenous growth.


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Institutional Structure

( )(Government, Universities, Military)

Legal Structure

(Property rights protection, Patents)

Markets Structure

(competition, other incentives) ( p y g p , )( p , )

R&DR&D

Basic ScienceSpilloversScientific

bli i Innovation &

publications, patents,

citations etc Technological Change

citations, etc.


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Innovation &Technological Change

Economic effectsOther effects

• Health, Life expectancy• Uncertainty & Risk

Micro Macroreduction

• Military balance• Rise and fall of world

Micro Macro

• Entirely new products• Qualitative improvements

•Productivity•Growth

powers• Cultural influences

• Qualitative improvementsin existing products

• Better production processes• Industry dynamics – entry &

•Growth•Standard of living•InequalityIndustry dynamics entry &

exitInequality•Unemployment


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0. Introduction and motivationThe Historical Stage: 10,000 years of crawling pace, then the tide of modern growth

The 3 big enablers of the 1770s:

•1769:Watt’s steam engine (patent on separate condenser, etc.)

•1776: The American Revolution: emergence of political regime that would support the advent of the market economy; built‐in mechanisms to

accommodate & foster change (based on England lead of 150 years )accommodate & foster change (based on England, lead of 150 years…)

• 1776: Adam Smith – The Wealth of Nations: the intellectual basis of the market economy.


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0. Introduction and motivationThe Globalization of S&T• Advanced S&T spreading around the world, also in developing countries

(e g India ppp $2 900 China $5 000 versus US $37 800)(e.g. India, ppp $2,900, China, $5,000 versus US $37,800).

• Increased mobility of scientists and inventors (geographic, institutional)

• Larger more diverse teams of inventors and scientists• Larger, more diverse teams of inventors and scientists

• More international cooperation

• Decentralization of “big science”: e g the Genome project• Decentralization of big science : e.g. the Genome project


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0. Introduction and motivationWhy globalization of S&T?Some of the reasons:

Globalization in trade, finance, IP, WTO, etc. bound to impact also S&T.

Increased complexity, cross‐disciplinary nature of frontier S&T (e.g. G ) i d i li i f hGenome, nano), increased specialization of researchers.

Advances in ICT, ease of communication and transportation, lowering of barrierslowering of barriers.


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0. Introduction and motivationBut also persistent agglomeration effects…

Geographic localization of research and innovation, by fields:Silicon Valley (around Stanford)Boston area (around MIT, Harvard)Cambridge UK (e.g. biotech)g ( g )Israel “Waddi”

Contradicts globalization? not quite: creativity/ innovation requires close interaction, highly specialized inputs, personal contacts etccontacts, etc.


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0. Introduction and motivationAdam Smith

Work is divided into 18 different tasks, each worker perform 2 – 3 tasks.

They manage to produce 4,800 pins per worker/day

If each worker would work in isolation (i.e. do all the tasks himself), ( ),then would produce just 1 – 20 pins per day!

Productivity gains: at least 280 times higher!!!


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0. Introduction and motivationAdam Smith

Productivity gains from specialization due to (notice different from y g p ( ff ftrade):

Increased dexterity

Time savings (from one task to the next)

(but increased boredom, alienation, lack of concentration?)

Invention of new machines, due in turn to specialization – the “philosophers” (now R&D)

[think of it as “learning by doing”]

“The division of labor is limited by theThe division of labor is limited by the extent of the market”


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0. Introduction and motivationJoseph SchumpeterRecall context: ideological debate socialism vs. capitalism; the great depression, th i f th S i t U i (“ it li i ?”) S h t t ll d

Th t lit f t h i l h d i i ( d h

the rise of the Soviet Union (“can capitalism survive?”). Schumpeter extolled virtues of capitalism, but NOT as perfect competition.

• The centrality of technical change, driving progress (and hencemaking capitalism viable?)

• The typical “roles” needed: the entrepreneur the inventor theThe typical roles needed: the entrepreneur, the inventor, thecapitalist (finance, risk taking). Emphasis on the entrepreneur, lure

of “extraordinary profits”. See Edison, Gillette, Ford, Steve Jobs, Gates,DellDell .

• Business cycles


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0. Introduction and motivationJoseph Schumpeter

• Monopoly power and innovation – the “Schumpeterian hypothesis…”

• “Evolutionary dynamics”, the “Process of Creative Destruction“

• History of Economic Analysis – monumental work .

• On balance, a great deal of inspiration, not of precise modeling.


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When assessing capitalism as a system, look at its actual performance –stunning! Brings “statistics”, forecast…

That’s only part of the story: increased leisure, new and betterprod cts not reflected in the GDP!products, not reflected in the GDP!

The improvement particularly marked for the lower classes, not for“kings”…Mass production, that’s the big thing!kings …Mass production, that s the big thing!

The success of capitalism allows for social legislation, to take care of the illsits causes, e.g. unemployment, poverty; predicts that growth will allowprotection to the elderly and the sick, education, etc.


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To what extent does monopoly/oligopoly power hinder growth? Arguesthat it does not:

Lots of growth at a time of increasing concentration of monopoly power( d 1900 ) (b d h ld h h d h(around 1900s) (but not good argument, perhaps could have had muchmore growth…);

Lots of technical change precisely in concentrated sectors (well needsLots of technical change precisely in concentrated sectors (well, needscross‐sectional evidence, lots of work on that since).


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0. Introduction and motivationJoseph SchumpeterKey: capitalism is primarily a dynamic system, cannot be judged by static

ti ( h l ff t t ti ffi i )notions (such as monopoly power, affects static efficiency).

Capitalism as a mechanism for endogenous change: basic impulse not fromexogenous shocks population growth or capital accumulation but fromexogenous shocks, population growth or capital accumulation, but from

New consumer goods

New methods of production & transportationNew methods of production & transportation

New markets

f f h lNew forms of organizations…that capitalism creates.


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0. Introduction and motivationJoseph SchumpeterThese innovations bring about the process of “creative destruction”: new

products rendering old ones obsolete new knowledge replacing old one etcproducts rendering old ones obsolete, new knowledge replacing old one, etc.

Considers the possibility of trade‐offs between static and dynamicefficiency.efficiency.

“The problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and

destroys them.”


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0. Introduction and motivationJoel Mokyr

More change in the past 200 years than in the previous 7,000…

The first industrial revolution: GPD/per capita grew slowly, but large increase in population! Fundamental changes in:

Power technology (increases in fuel efficiency from 1% Newcomen, to 7.5% with compounding, to 17% with the Corliss)

MetallurgyMetallurgy

Textiles

Others: Machine tools gaslight ballooning etcOthers: Machine tools, gaslight, ballooning, etc.

[Landes: also in organizational forms, the factory system]


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0. Introduction and motivationJoel MokyrKey inventions from 1750 on: the throttle, the spinning jenny, the mule.

Allowed widespread use of cotton, led to factory system.

How long it took to spin 100 lb. of cotton?

hand spinner would have taken 50,000 (!) hours

The mule: 300 hours (1790)

The self actor: 135 hours (1830)

Cotton was the key in the 1st Industrial Revolution: the price of cotton clothCotton was the key in the 1st Industrial Revolution: the price of cotton cloth declined by 85% in 1780‐1850!


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0. Introduction and motivationJoel MokyrFirms invest in R&D whenever profits fall short of a certain threshold

No notion of rationality that drives investment decisions


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0. Introduction and motivationReferencesBFS: Bundesamt für Statistik der Schweiz, Indikatoren zu Forschung, Entwicklung und Technologie;Technologie;

http://www.bfs.admin.ch/bfs/portal/de/index/themen/21/02/ind7.set.714.html.

Kaiser, U. (2006), The Value of Danish Patents ‐ Evidence From a Survey of Inventors, Centre for Business and Economic Research Discussion Paper 2006‐

02; http://www.cebr.dk/upload/dp2006‐02.pdf

Lemelson‐MIT Program; http://web.mit.edu/invent/Lemelson MIT Program; http://web.mit.edu/invent/

Mokyr, J. (1990), The Lever of Riches: Technological Creativity and Economic Progress. New York and London: Oxford University Press, 1990.

Mokyr, J. (1993), The British Industrial Revolution: an Economic Perspective. Boulder, Westview Press. 1993.

Schumpeter J A (1942) Capitalism Socialism and DemocracySchumpeter, J.A. (1942), Capitalism, Socialism and Democracy.

Schumpeter, J.A. (1954), History of Economic Analysis.


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0. Introduction and motivationReferencesSmith, A. (1776), An Inquiry into the Nature and Causes of the Wealth of

NationsNations.Solow, R.M. (1956), A Contribution to the Theory of Economic Growth,

Quarterly Journal of Economics 70, 65‐94.

Solow, R.M. (1956), A Contribution to the Theory of Economic Growth, Quarterly Journal of Economics 70, 65‐94.

Solow, R.M. (1957), Technical Change and the Aggregate Production Function,Solow, R.M. (1957), Technical Change and the Aggregate Production Function, Review of Economics and Statistics 39, 312‐20.

TLF: Bundesministerium für Bildung und Forschung, 2007 Report On the T h l i l P f f G htt // t h l i hTechnological Performance of Germany; http://www.technologische‐leistungsfaehigkeit.de.


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The Economics of Innovation - UZH00000000-707f-70cd-ffff-ffffa9f6c38d/... · The Economics of Innovation Prof. Dr. Ulrich Kaiser Institute for Strategy and Business Economics University