The Economics of Industrial Innovation

Luc Soete, Chris Freeman

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781136600654
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

First published in 1997. Massive technological development has changed the face of industry drammatically. This text provides an analysis of the trends and dynamics of innovation in industry. It has been updated with recent statistical information and examples. A new section explores the debate surrounding macroeconomics in an analysis of the impact of globalization on industrial change. This book covers such topics as: the rise of science-related technology; innovations and the firms; macroeconomics of innovation; and innovation and public policies.

CHAPTER 1

INTRODUCTION

All the improvements in machinery, however, have by no means been the inventions of those who had occasion to use the machines. Many improvements have been made by the ingenuity of the makers of the machines, when to make them became the business of a peculiar trade; and some by that of those who are called philosophers or men of speculation, whose trade is not to do anything but to observe everything; and who, upon that account, are often capable of combining together the powers of the most distant and dissimilar objects. In the progress of society, philosophy or speculation becomes like every other employment, the principal or sole trade and occupation of a particular class of citizens. Like every other employment too, it is subdivided into a great number of different branches, each of which affords occupation to a peculiar tribe or class of philosophers; and this subdivision of employment in philosophy, as well as in every other business, improves dexterity and saves time. Each individual becomes more expert in his own peculiar branch, more work is done upon the whole, and the quantity of science is considerably increased by it.

(Smith, 1776, p. 8)

It is a scientifically based analysis, together with the application of mechanical and chemical laws, that enables the machine to carry out the work formerly done by the worker himself. The development of machinery, however, only follows this path once heavy industry has reached an advanced stage, and the various sciences have been pressed into the service of capital. … Invention then becomes a branch of business, and the application of science to immediate production aims at determining the inventions at the same time as it solicits them.

(Marx, 1858, p. 592)

When you adopt a new systematic model of economic principles you comprehend reality in a new and different way.

(Samuelson, 1967, p. 10)

1.1 INTRODUCTION

In the world of microelectronics and genetic engineering, it is unnecessary to belabour the importance of science and technology for the economy. Whether like the sociologist, Marcuse, or the novelist, Simone de Beauvoir, we see technology primarily as a means of human enslavement and destruction, or whether, like Adam Smith and Marx, we see it primarily as a liberating force, we are all involved in its advance. However much we might wish to, we cannot escape its impact on our daily lives, nor the moral, social and economic dilemmas with which it confronts us. We may curse it or bless it, but we cannot ignore it.

Least of all can economists afford to ignore innovation, an essential condition of economic progress and a critical element in the competitive struggle of enterprises and of nation-states. In rejecting modern technology, Simone de Beauvoir was consistent in her deliberate preference for poverty. But most economists have tended to accept with Marshall that poverty is one of the principal causes of the degradation of a large part of mankind. Their preoccupation with problems of economic growth arose from the belief that the mass poverty of Asia, Africa and Latin America and the less severe poverty remaining in Europe and North America, was a preventable evil which could and should be diminished, and perhaps eventually eliminated.

Recently both the desirability and the feasibility of such an objective have been increasingly questioned. However, innovation is of importance not only for increasing the wealth of nations in the narrow sense of increased prosperity, but also in the more fundamental sense of enabling people to do things which have never been done before. It enables the whole quality of life to be changed for better or for worse. It can mean not merely more of the same goods but a pattern of goods and services which has not previously existed, except in the imagination.

Innovation is critical, therefore, not only for those who wish to accelerate or sustain the rate of economic growth in their own and other countries, but also for those who are appalled by narrow preoccupation with the quantity of goods and wish to change the direction of economic advance, or concentrate on improving the quality of life. It is critical for the long-term conservation of resources and improvement of the environment. The prevention of most forms of pollution and the economic recycling of waste products are alike dependent on technological advance, as well as on social innovations.

In the most general sense economists have always recognized the central importance of technological innovation for economic progress. The famous first chapter of Adam Smith’s Wealth of Nations plunges immediately into discussion of ‘improvements in machinery’ and the way in which division of labour promotes specialized inventions. Marx’s model of the capitalist economy ascribes a central role to technical innovation in capital goods – ‘the bourgeoisie cannot exist without constantly revolutionizing the means of production’. Marshall had no hesitation in describing ‘knowledge’ as the chief engine of progress in the economy. A standard pre-war textbook states in the chapter on economic progress that ‘Our brief survey of economic expansion during the last 150 years or so seems to show that the main force was the progress of technique’ (Benham, 1938, p. 319). The standard post-war textbook by Samuelson (1967) comes to much the same conclusion.

Yet although most economists have made a deferential nod in the direction of technological change, until recently few have stopped to examine it. Jewkes and his colleagues explained this paradox in terms of three factors: ignorance of natural science and technology on the part of economists; their preoccupation with trade cycle and employment problems; and the lack of usable statistics (Jewkes et al., 1958).

These factors may partly explain the relative neglect of innovation but they cannot be held to justify it, as all of them can be overcome at least to some extent. Jewkes and his colleagues demonstrated this in their study of The Sources of Invention, and it has been confirmed by other empirical studies before and since. Indeed, whereas earlier literature reviews (e.g. Kennedy and Thirlwall, 1971) complained of the dearth of studies of innovations and their diffusion, more recent reviews (e.g. Dosi, 1988; Freeman, 1994) pointed to the explosion of interest in the 1980s and 1990s.

The earlier neglect of invention and innovation was not only due to other preoccupations of economists nor to their ignorance of technology; they were also the victims of their own assumptions and commitment to accepted systems of thought. These tended to treat the flow of new knowledge, of inventions and innovations as outside the framework of economic models, or more strictly, as ‘exogenous variables’. A large body of economic theory was concerned with short-term analysis of fluctuations in supply and demand for goods and services. Although very useful for many purposes, these models usually excluded changes in the technological and social framework from consideration, under the traditional ceteris paribus assumption (other things being equal). Even when, in the 1950s, economists increasingly turned their attention to problems of economic growth, the screening off of ‘other things’ was largely maintained, and attention was concentrated on the traditional factor inputs of labour and capital, with ‘technical change’ as a residual factor embracing all other contributions to growth, such as education, management and technological innovation.

It was, of course, always recognized in principle that ‘other things’ were extremely important, but it was only recently that they began to be the subject of systematic economic analysis. For what they are worth, most of the early econometric studies of growth in industrialized countries attributed the greater part of measured growth to technical progress, rather than to increases in the volume of the traditional inputs of capital and labour. However, technical change remained on the fringe and not at the centre of economic analysis. Yet it would not be unreasonable to regard education, research and experimental development as the basic factors in the process of growth, relegating capital investment to the role of an intermediate factor. This is indeed the tendency of the so-called new growth theory (Romer, 1986; Verspagen, 1992b). It is of course new only in the sense of the belated recognition by modellers of some of the long-held ideas of economic historians and of those economists, such as Schumpeter, who always gave a central place to technical and institutional change. The World Bank (1991) review of development theory also reflected this major shift in thinking about growth mainly in terms of ‘intangible investment’ (see Chapter 13).

Looked at in this way, the investment process is as much one of the production and distribution of knowledge as the production and use of capital goods, which embody the advance of science and technology.¹ ‘Intangible’ investment in new knowledge and its dissemination are the critical elements, rather than ‘tangible’ investment in bricks and machines. Yet our whole apparatus of economic thought, as well as our whole system of statistical indicators, are still largely geared to the ‘tangible’ goods and services approach.

This will surely change in the coming decades, if only for the reason that the specialized industries concerned with generating and distributing knowledge will employ a large part of the working population. Bernal’s model (1958) of the probable patterns of future employment (Figure 1.1) was speculative. It probably exaggerates the future share of science and engineering and underestimates the future share of ‘teaching’ but it illustrates the kind of fundamental change which is occurring. Agriculture, which once occupied almost the whole population, now employs less than 10 per cent in the most advanced economies (although still more than 50 per cent in many less developed countries). Not only is the share of manufacturing declining, as services expand their share, but within manufacturing and services an increasing number of people are concerned primarily with generating and disseminating information rather than goods.

Fig. 1.1 Changes in occupation in the past and future

Source: Bernal (1958).

Indeed, if a very wide definition of knowledge industries is adopted, then Machlup demonstrated that they already employed a quarter of the United States labour force in 1959. In his book, The Production and Distribution of Knowledge (1962), he estimated that over 30 per cent of the US labour force were engaged in occupations essentially concerned with producing and handling information rather than goods. In his definitions he included not only research, development, design and education of all kinds, but also the larger numbers of people employed in printing, publishing, scientific libraries, testing laboratories, design and drawing offices, general statistical services, resource survey organizations, radio, television and other communication industries, as well as computers and information machines of all types, and professional services concerned with analysing and displaying information. All of these activities are important in generating, disseminating and applying advances in technology, although some of them are more important in a broader sense as entertainment. More recently, Porat (1977) estimated that the share of ‘information occupations’ in the United States economy was already half the total, hence the increasing use of the expression ‘information society’. As we shall see in Chapter 7, when we come to discuss Information and Communication Technology (ICT), the distinction between information and knowledge is an important one. Raw data have to be converted into useful knowledge. The information society can be regarded as the culmination of a long process of the growth of intangible investment in information-based activities.

1.2 THE RESEARCH AND DEVELOPMENT SYSTEM

Research and inventive activities are only a small proportion of this very wide complex of ‘information’ industries. The professional labour force engaged in research and experimental development is less than 2 per cent of the total working population in the United States, and less than 1 per cent in most other countries. But this Research and Development system is at the heart of the whole complex, for in contemporary society it originates a large proportion of the new and improved materials, products, processes and systems, which are the ultimate source of economic advance. This is not to underestimate the importance of dissemination of knowledge through the education system, industrial training, the mass media, information services and other means. Nor is it to deny the obvious fact that in the short run rapid progress may be made simply by the application of the existing stock of knowledge. Nor yet is it to deny the importance of feedback from production and from markets to R&D and other technical and scientific activities. It is only to assert the fundamental point that for any given technique of production, transport or distribution, there are long-run limitations on the growth of productivity, which are technologically determined. In the most fundamental sense the winning of new knowledge is the basis of human civilization.

Consequently there is ample justification for concentrating attention on the flow of new scientific ideas, inventions and innovations. Efforts to generate discoveries and inventions have been increasingly centred in specialized institutions – the Research and Experimental Development network. This professionalized system is generally known by the abbreviated initials R&D. Its growth was perhaps the most important social and economic change in twentieth-century industry. This book is primarily concerned with the innovations arising from the professional R&D system, and with the allocation of resources to this system. Its interaction with other knowledge industries and with industrial production and marketing are of critical importance for any economy, but it is only recently that it has become the subject of systematic study. The policy adopted for R&D in any country, whether it is implicit in the sense of ‘laissez-faire, laissez-innover’, or explicit in the sense of national goals and strategies, constitutes the main element of policy for science and technology, or, more briefly, national science policy. A wider spectrum of scientific and technological services (STS) link the R&D system with production and routine technical activities. STS includes such activities as design, quality control, information services, survey and feasibility studies. They are also essential for efficient innovation, and may predominate in the diffusion of technical change in many branches of industry.

Although government and university laboratories had existed earlier, it was only in the 1870s that the first specialized R&D laboratories were established in industry. The professional R&D system was barely recognized at all by economists in the nineteenth century and even in the early part of t...