Lecture 7: sectoral characteristics of technological change

The role of technological change - three levels of analysis

Economists who do examine science and technology use the same levels of analysis that are employed for analysing other economic behaviour

Macro – How does the entire market system function? Does it have a shape or pattern that is difficult or impossible to discern by examining its components?

Meso – Markets and industries are the meso level of analysis. Many economic outcomes are determined at this level.

Micro – The company or other organisation (e.g. non-profit or government agency) as well as the individual is the micro level of analysis. This is where decisions are made including the decision to invest in innovation.

Today, we will deal with the other side of a basic dichotomy in Innovation Dynamics thinking, i.e.

our review is focusing on production-biased views

Research on sectoral technological characteristics

Why, then, the PLC model and the concept of the dominant design are not enough?

• i) Because people started raising questions related to the transition from the meso to the macro-level of analysis, i.e.– What is the economic value of diversity of firm level

technological assets.– What is the economic impact of different sets of industrial

structures– What is the importance, at the aggregate level, of major,

technology driven trends.

• ii) Practical demand for well informed sectoral studies

• iii) Critical assessment of the Porter model.

Problems with the Porter model• Firm specific factors largely neglected in the Porter

industry analysis perspective,

• Only focus on product market imperfections,

• All returns treated as profits from market power, and

• The nature of entry barriers is not properly understood. [Exclusive focus on prices -Forms of competition most critical for transformation and sustainable growth over the long term are driven by innovation, imitation and appropriation]

SBI: Science Based Industries

Innovation driven sectors are, to a large extent oligopolies. Thus, in order to deal with intra- and inter-sectoral diversity, we have to move beyond the analysis of basic market structures

Concepts on offer…

• Increasing returns to scale• Path dependence• Self-reinforcing mechanisms• Variety• Technological/organizational trajectories• Creative destruction

Lets take an example: the semiconductor industry. Recent research suggests that we have a clear causality trend there from From technological trends to market structures.• Product standards and learning by doing lead to market

concentration and persistence of leadership in the semiconductor industry.

• A large part of the PC industry is based on proprietary Intel-Microsoft software.

• The innovative leader [Intel] adopts a first-mover strategy that aims at being first when prices are still high to recover R&D outlays.

• This is translated into initially high and then decreasing worldmarket shares for Intel for every new generation of products.

• Competitors enter later, they are less innovative and they focus on volume production and marketing.

• Their entry causes prices to fall and reduced profit margins are compensated by market expansion.

• As prices fall behind a certain level, Intel moves up to the next generation. [Gruber, 1999).

Similar insights from the Pharmaceutical industry : exploration and exploitation

Cycles of discovery: • a combination of

exploitation – [use of available

assets needed to survive in the short term] and

• exploration – [the development of

novel capabilities for the long run]

Pharmaceutical industry: a well documented case of the importance of

sectoral trends• Recent studies on the

pharmaceutical industry suggest that apart from firm-specific and country-specific characteristics, fundamental changes are taking place at the sectoral level.

The intensity of R&D activity, increases the number of new innovators. Shares of top 5/10 decline.

Supplier-dominated

Scale-intensive

Information-intensive

Science-based

Specialized suppliers

Typical core sectors

- Agriculture services - Traditional Manufacture

- Bulk materials - Automobiles - Civil engineering

- Finance - Retailing - Publishing - Travel

- Electronics - Chemicals

- Machinery - Instruments - Software

Main sources of technology

- Suppliers - Production learning

- Production engineering - Production learning - Design offices - Specialized suppliers

- Software and systems departments - Specialized suppliers

- R&D - Basic research

- Design - Advanced users

Main tasks of technology strategy

- Use technology from elsewhere to strengthen other competitive advantages

- Incremental integration of changes in complex systems. - Diffusion of best design and production practice

- Design and operation of complex information processing systems - Development of related products

- Exploit basic science - Development of related products - Obtain complementary assets - Redraw divisional boundaries

- Monitor advanced user needs - Integrate new technology incrementally

A taxonomy for firm trajectories (Pavitt, 1984, 2000)

Sectoral technological trajectories: determinants, directions and measured characteristicsCategory of Typical core Determinants of technological trajectories Technological Measured characteristicsfirm sectors trajectories

Sources of Type of userMeans of Source of Relative Relative size Intensity andprocess appropriation process balance of innovating direction of technology technologybetween firms technological

product and diversificationprocess

1 2 3 4 5 6 7 8 9 10Supplier Agriculture Suppliers Price Non-technical Cost-cutting Suppliers Process Small Low verticaldominated Housing Research andsensitive (e.g.

Private extension trademarks,services services marketingTraditional Large users advertisingmanufacture aesthetic

design)Production-Scale Bulk Production Price Process Cost-cutting In-house Process Large High verticalintensive intensive materials engineering sensitive secrecy and (product

(steel,glass) supplier: know-how design)Assembly R&D Technical(consumer lagsdurables and Patentsautos) Dynamic

learningeconomics

Specialised Machinery: Design and PerformanceDesign know- Product In-house Product Small Low suppliers instruments development sensitive how design Customers concentric

Users Knowledge ofusers Patents

Science-based Electronics/ R&D Mixed R&D know- Mixed In-house Mixed Large Low verticalelectrical Public how;patents Suppliers HighChemicals science Process concentric

PE* secrecy and

know-howDynamiclearningeconomics

* Production Engineering

Mapping Sectoral Regimes and Industrial Competition

LowLowHighHighLowStability of continuing firms

HighHighLowSurvival rate

LowLowHighExit (% self-employ.)

LowLowLowHighEntry (% self-employ.)

HighLowHighExit rate

Low Low High Medium High Market concentration

MediumLowHighHighMedium Average size

High presence of:- self-employment

Low presence of:- self-employment- large firmsHigh presence of:- entrepreneur. firms- small firms

High presence of:- self-employmentLow presence of:- small firms

Low presence of:- self-employment- entrepreneur. firmsHigh presence of:- medium firms- large firms

High presence of:- self-employmentLow presence of:- small firms

Size distribution

Continuous processes

Product engineering

Complex systemsFundamental processes

Science based

General Purpose Technologies:

GPT's characterized by:

1. Pervasiveness, i.e. used as inputs by a wide range of downstream sectors

2. Technological dynamism3. Innovational complementarities: the

productivity of innovative activities in user sectors increases as a consequence of improvements in the GPT

How does knowledge flow between industries?

• embodied in intermediate products• via patents and licences• embodied in capital goods• via consultancy services• via joint ventures• via technological collaboration (informal or formal)• via complex non-R&D inputs (such as design)• via human capital flows• via extramural R&D• via imitation

As a GPT advances it spreads throughout the economy, fostering innovation in an ever-expanding array of application sectors, and bringing about generalized productivity gains

GPTs link micro, meso and macro: innovation in “single” tech has macro consequences!

Inter-industry spillovers: General Purpose Technologies

Technological convergence at the sectoral level: Different sectors come to share similar technological bases

THE ‘CRITICAL TECHNOLOGIES’ GROWTH ARGUMENT

• 1. Growth is based on specific new industries characterised by radical technological change.

• 2. These radical technologies tend to be 'clustered' together.

• 3. These industries displace existing activities, creating investment opportunities and 'virtuous circles' of growth; as opportunitiesdecline, growth rates slow.

• 4. ICT is a key activity of this type at the present time. It is rapidly growing as a major employer, with major employment growth prospects 'knowledge intensive‘ a driver of growth in other sectors

Problems with waves and “paradigm shifts”

• Do they actually exist? (Not much statistical evidence…)• Confusion between innovation and diffusion • Basic problems of chronology • Size of the new sectors (most of them were and are

small…)• Measurement of inter-industry impact• Pervasiveness of innovation• Persistence of some key technologies• Arbitrary selection of the critical technologies• Exceptions: countries that develop without significant

presence in the critical technologies/industries

Empirical validation of the impact of Industrial structure on aggregate growth [Peneder]

• Sectoral differences in income elasticity of demand

• The structural bonus hypothesis [reallocation of labour in favour of industries with higher levels of productivity]

• The structural burden hypothesis [increasing labour shares in stagnant industries]

• Differential growth at the industry level• Industries differ in their generation of external

effects.

Sector specific competencies

• Are technological competencies sector-specific or the trend is towards the convergence of technological competencies across sectors?

• It possible to define some core technological areas for industrial sectors. These differences will be maintained over time.

• Thus, we have a path-dependence view.• Most spillovers between firms would arise within

specific sectors

Technological Convergence• Corporate technological diversification takes place.• That comes in line with broader long-waves in cross-

industry technological paradigms.• Take for example the car industry [Initially, car

production relied on mechanical technologies (engine, gearing) and chemical technologies (fuel consumption, metals); Present day auto industry combines all that with digital and electronic systems (fuel control, braking systems).

• Since the long wave approach suggests that in the long run all industries will be influenced by the new paradigm, we can label this process as technological convergence between industries.

Technology driven catching up process

Technology driven systemic failures [K. Smith] � Failures in infrastructure provision and investment. When there is problematic

under-investment in the two types of infrastructure with which firms interact, namely, physical infrastructure (like communications and transport), and science-technology infrastructure (like universities, regulatory agencies, publicly supported laboratories).

� Public action should be directed towards setting up incentives for and controls on private provision, subsidies for private provision or direct public provision.

� Transition failures. When firms are highly competent within their own technological area but not in other related areas. Public action generally aims to solve this problem implicitly, but public action should be more explicit and devise special measures for this type of failure.

� Lock-in failures. When firms are not able to switch away from their existing technologies and get 'locked-in' to a particular technological paradigm or trajectory.

� The rationale for public action is to generate incentives, develop technological alternatives and nurture emerging technological systems in order to make it easier for firms to move away from lock-ins.

� Institutional failures. When the institutional and regulatory context is having an unexpected and negative impact on innovation in the system.

� Public action here should concentrate on monitoring and assessing regulatory performance.

Policy questions

• Increase variety?• Extent of support of scientific research• Introduce horizontal or selective policies?• Invest in complementarities?• The scale of resources needed for technological

catching up• The size of firms• New sectors/firms or restructuring• Real Business Cycles?

Readings…• Dosi-for definitions

• Rosenberg, Tunzelmann, Lee (will become available latter today)

• A bridge to lecture 6: Carlsson

• Peneder: An economist’s perspective on meso to macro-issues.

• Background reading: sectoral profiles