Schumpeter, Innovation and Growth

Long-Cycle Dynamics in the Post-WWII American Manufacturing Industries

Mümtaz Keklik

• Publisher: Routledge
• Year: 2018
• Print ISBN:
  9781138725096
• eBook ISBN:
  9781351753920
• Topic: Business
• Subtopic: Business General
• Index: Business

This title was first published in 2003. Bringing together contemporary innovation pattern theories inspired by the two original patterns developed by Joseph A. Schumpeter, this book develops an innovative new model of long wave aggregate level economic activity. This model is rigorously tested with post-war US manufacturing data, revealing an intriguing correlation between the data and the model. The book examines different theories of technological change, and provides a detailed account of the long wave which makes use of the relevant aspects of these theories, without betraying their main features and messages. These theories are synthesized and shown to be consistent with the development of post-war US manufacturing. Shedding light on the dynamics of the technological advances that have taken place in the last 20 years, economists and students alike will find this volume an invaluable read.

1

Schumpeterian Innovation Patterns and the Long Wave

Introduction

In his The Theory of Economic Development (1934) and Capitalism, Socialism and Democracy (1942), Schumpeter describes two different patterns of industrial innovation. In the former (Schumpeter Mark I), the major source of innovative activity is small firms operating in highly competitive industries, whereas in the latter (Schumpeter Mark II) this role is played by large firms operating in oligopolistic industries. The visionary entrepreneur as the driving force behind innovative activity in the former innovation pattern is replaced by the large R&D laboratories in the latter.

Schumpeter’s analysis of innovation has been the source of inspiration for many economists who have since studied technological innovations. Among these economists three different strands can be identified. The first one bases its theoretical and empirical analysis on the relationship between market structure variables, i.e., firm size, industry concentration, entry, and the level of innovation activity (firm size-based theories). The second one analyzes patterns of innovative activity over the life cycle of industries (industry life cycle theories), and the last strand places more emphasis on technological regime conditions specific to each industry with regard to innovation activities (new evolutionary theories).

All of these theories have tried to empirically verify the Schumpeterian innovation patterns. The first and the third approaches use cross-sectional or short-term time series data in their empirical analyses. In the second approach, by contrast, empirical research is based on long-term time series data, since these theories examine the evolution of industries over their life cycles. All three approaches, however, look at the issue on either the firm or industry aggregation level and then make generalizations regarding either all industries (first two approaches) or industries in certain technological classes with common technological regime conditions (the third approach). One overall conclusion that can be drawn from empirical findings of these approaches is that the Schumpeter Mark I and Mark II patterns of innovation can coexist in the economy in different industries. In other words, one can find the first pattern in some industries, and the second pattern in some others during the same time period.

In this chapter it is argued that one or the other of these two patterns tends to predominate during the different phases of the long wave. On the basis of this premise the chapter sets out to synthesize the three different theories mentioned above so as to develop a stylized account of long waves in the aggregate level of economic activity. The overall picture that emerges out of this exercise lends support to Mensch’s (1975) reformulation of the Schumpeterian theory of the long wave.

Following Schumpeter, Mensch argues that the beginning phase of a long wave is characterized by the emergence of a cluster of radical innovations and important improvement innovations. Unlike Schumpeter, however, Mensch provides an endogenous explanation for the emergence of these innovations by arguing that the technological stalemate which characterizes the stagnation phase of the long wave paves the way for radical transformations in market structure, innovation patterns and technological regime. The radical innovations that emerge as a result create new leading industries and new markets. During this early phase of the long wave Schumpeter Mark I predominates in the whole economy because of its prevalence in the leading industries. However, Schumpeter Mark II tends to predominate as the leading industries begin to mature. Though the level of innovative activity initially remains high in this second phase, markets eventually saturate and pseudo innovations become the norm as technological stalemate gradually sets in.

Here, the objective is to incorporate this Menschian approach to long waves by drawing on the insights of the three different theories of innovation outlined above. In this book, these arguments are extended in three ways: first, they are reformulated to apply to manufacturing industries as a whole over the long cycle; second, in order to explain the overall behavior of the system, specific technological regime conditions associated with dominant innovation patterns in a given time period are incorporated; and, finally, some common behavioral characteristics of industries over their life cycles are also incorporated into the argument.

The current chapter is divided into three sections: in the first section Schumpeter’s ideas and the different theories of innovation inspired by Schumpeter are briefly summarized. In the second section, the stylized account of the long wave that emerges from a synthesis of these ideas is discussed. The third and the last section includes a restatement of the main argument and some concluding remarks.

Schumpeterian Innovation Patterns

Schumpeter places technical change at the center of his approach. He indicates in his Capitalism, Socialism and Democracy (1942):

The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process…. Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary. And this evolutionary character of the capitalist process is not merely due to the fact that economic life goes on in a social and natural environment which changes and by its change alters the data of economic action; this fact is important and these changes (wars, revolutions, and so on) often condition industrial change, but they are not its prime movers. Nor is this evolutionary character due to quasi-automatic increase in population and capital or to the vagaries of monetary systems of which exactly the same thing holds true. The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, new methods of production or transportation, new markets, the new forms of organization that capitalist enterprise creates. (Schumpeter 1942, 82–83)

This constant transformation embodies a process of industrial mutation that “…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 1942, 82–83).

Schumpeter explains the details of this process of creative destruction in The Theory of Economic Development in which he outlines the role of innovations and that of the entrepreneur. In his vision of competition markets are perceived not as the signaling device for allocation of scarce resources but as a sphere of change that forces firms to innovate (variety creation in its modem version). This process of incessant change pushes the structure of the system to a qualitatively different point. In the period of transformation some firms (or agents) survive and grow, whereas others that cannot adapt to change are weeded out. This is a continuous process which creates the foundation for further change.¹ The process can be identified, therefore, as an open-ended process of change and transformation (Magnusson 1993, 3).

This cumulative and sequential transformation is brought about in a relatively long period during which some pioneering innovations lead to a basic transformation of the system of economic routines (Andersen 1994, 26). These pioneering innovations in certain industries generated by entrepreneurial activity come in clusters and create opportunities for other new innovations and imitations of newly produced technologies. As the system gets more and more mature, investment opportunities which create new economic spaces that lead to swarming of new innovations and imitations vanish. In the mean time, entrepreneurial activity becomes obsolete.

Although the importance Schumpeter attached to technical change as the integral part of economic activity did not change, his ideas about the economic and social environment within which innovations are carried out have moving from his The Theory of Economic Development (1934) to Capitalism, Socialism and Democracy (1942). In the former, Schumpeter describes an industrial structure which is characterized by many small firms. Major innovations alter old economic routines. In this more competitive environment, new and small firms have an advantage of technological ease of entry into an industry. Entrepreneurs who have new ideas, products, and processes establish new enterprises that challenge old ones, continuously disrupting established routines in production, organization, and distribution. In the meantime they weaken the monopoly power of old establishments and cause an erosion in their quasi-rents associated with this monopoly power (Malerba and Orsenigo 1995; Schumpeter 1934; Loury 1979, among others). In short, they are the forerunners of progress through a process of creative destruction.

The picture drawn in The Theory of Capitalist Development (1934) reflects the late nineteenth century European industry structure (Malerba and Orsenigo 1995). As Schumpeter moves his analysis to the modem American industrial structure of the early twentieth century, he finds that the economic environment is imperfectly competitive, where large firms have some ability to protect themselves from the gales of creative destruction created by the challenge of small innovative firms. In Capitalism, Socialism and Democracy (1942) he examines the innovative patterns in less competitive markets in which large established firms prevail and entry barriers exist. He stresses that the possibility of acquiring and holding onto the monopoly power and associated quasi-rents is indeed a function of innovative activity. He observes that, in order to keep their oligopolistic advantages, large firms pursue a strategy of innovation based on R&D research laboratories. Accumulated knowledge in specific technologies, great comparative advantage in establishing and operating large scale R&D laboratories, and finally ease to access financial resources give large firms a competitive edge in creating entry barriers for potential rivals (Schumpeter 1942, 87–106).

Some authors call these two different patterns of innovation described by Schumpeter as Schumpeter Mark I and Schumpeter Mark II respectively (Nelson and Winter 1982a, b; Kamien and Schwartz 1975, 1982), whereas others like Malerba and Orsenigo (1995) call them widening and deepening patterns of innovation. Malerba and Orsenigo (1995) define a widening pattern of innovative activity as the enlargement of an innovative base through the continuous entry of new innovators, who erode the competitive and technological advantages of the established firms. By contrast, one finds a deepening pattern of innovative activity in oligopolisitic industries in which a few firms capitalize on the advantages of accumulated knowledge in certain technological areas. Whereas the widening pattern is characterized by the continuous destruction of old economic routines by a group of new small firms, the deepening pattern is characterized by large firms’ R&D-based innovative activity which enables them to hold on to their oligopolistic advantages.

In the literature on innovation patterns one finds arguments that are consistent both with the widening as well as the deepening pattern (Malerba and Orsenigo 1995, 48). It is possible to identify three different interpretations of these innovation patterns.

Firm Size-based Theories of Innovation Patterns

The traditional approach to patterns of innovation relates innovative activity to firm size and the degree of industry concentration. Earlier proponents of this approach argue that innovative activity in more concentrated industries is rather weak (Kamien and Schwartz 1975) and that small firms in atomistic industries are more innovative.

Relatively older empirical studies have shown that, although there may be certain advantages to firm size in efficiently using R&D output, technical change is more efficiently carried out by small-to-medium size firms (Kamien and Schwartz 1975, 9). This implies that research intensity (innovative effort) does not linearly increase with firm size. A common conclusion reached by the older empirical (either cross-sectional or short-term time series/panel data) studies is that innovational effort (measured by R&D employment or R&D expenditures relative to sales) increases more than proportionately with firm size (measured by sales volume, assets, or number of employees) up to a point, but later as the size continues to increase, innovational intensity tends either to stay constant or decline (Kamien and Schwartz 1975; Scherer 1965; Mansfield 1968; Smith and Creamer 1968; Phillips 1971; Markham 1965, among others).

Studies that measure research intensity by R&D per patent have also shown that beyond a certain level efficiency of inventive activity varies inversely with firm size (Schmookler 1972; Kamien and Schwartz 1975, 9). Schmookler also found that smaller firms employ a greater proportion of their patents commercially than do larger firms. Likewise, Scherer (1965) found that patent intensity varied inversely with firm size and increased with R&D intensity, though showing diminishing returns. The number of significant inventions per dollar of R&D in certain industries is found to be lower in the largest firms than in small- and medium-size firms (Mansfield 1968). Furthermore, a ranking on the basis of overall quality and effectiveness per research dollar expended varied directly with the firm’s total R&D budget and inversely with its sales (Mansfield et al. 1971). This implies that large firms with high market share tend to contribute to major innovations relatively less.

Compared to larger firms smaller firms appear to be more efficient in utilizing their knowledge base because of their organizational advantages. Cooper (1964) argued that in the organizational structure of larger firms one finds a more complex bureaucracy resulting in an atmosphere less conducive for the creative contributions of the operating personnel, which might explain why larger firms are not so efficient in reaping the fruits of their R&D activities.² Also superior technical personnel tend to be attracted to smaller firms in which greater latitude can be afforded to them. Furthermore, as a firm gets larger, it becomes more difficult to locate and solve problems. Finally, it is argued that small firms are more cost conscious.

There is also the possibility that some large firms may be suppressing some opportunities of invention and development, whereas smaller firms are not (Blair 1972). Pavitt and Wald (1971) argue that smaller firms have often made very major innovations when large firms let the opportunity slip by (Kamien and Schwartz 1975, 10). Similarly Jewkes et al. (1969) found that the sources of innovations varied and that large research labs of major corporations did not come up with major innovations. They argue that small firms developed over half of 36 nongovernment sponsored innovations in 1954 (Jewkes et al. 1969).

However, earlier literature on the relationship between industrial concentration (four firm concentration ratio) and innovative effort and innovative output is rather inconclusive (Kamien and Schwartz 1975, 33). Horowitz (1962) and Hamberg’s (1966) findings weakly suggest that there is a correlation between industrial concentration and research intensity (Kamien and Schwartz 1975, 20). Scherer (1967) had research effort as the dependent and industrial concentration as the independent variable along with some qualitative factors such as the technological opportunity class and the type of good (for 1960). His findings suggest that there is a positive relationship between research intensity and industrial concentration if those qualitative factors are dropped out of the equation. When they are added in, the industrial concentration coefficient stays positive and significant but has a small explanatory power. This...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of Tables
• List of Figures
• Preface
• List of Symbols
• List of Abbreviations
• Introduction
• 1 Schumpeterian Innovation Patterns and the Long Wave
• 2 Innovation Theories of Long Waves
• 3 Escalating Logistic Functions For Modeling Historical Processes
• 4 An Empirical Analysis of Growth in the Leading U.S. Manufacturing Industries Between 1947 and 1995
• Conclusion
• Bibliography
• Index