The Economics of Innovation, New Technologies and Structural Change

Cristiano Antonelli

• Publisher: Routledge
• Year: 2014
• Print ISBN: 9780415406437
• eBook ISBN: 9781134435159
• Topic: Economics
• Subtopic: Business General
• Index: Economics

The ongoing process of revising and rethinking the foundations of economic theory leads to great complexities and contradictions at the heart of economics. 'Economics of innovation' provides a fertile challenge to standard economics, and one that can help it overcome its many criticisms.

This authoritative book from Cristiano Antonelli provides a systematic account of recent advances in the economics of innovation. By integrating this account with the economics of technological change, this exceptional book elaborates an understanding of the effects of the introduction of new technologies.

This excellent, comprehensive account from respected expert Antonelli will be much appreciated within the innovation economics community, yet it is also a book that should be read by all those with either a private or professional interest in economic theory.

1 Introduction

Economics of innovation has grown rapidly in the last part of the twentieth century around a problematic core: the puzzle of total factor productivity growth. The continual growth of output and efficiency experienced in most countries since industrialization cannot be explained only in terms of an increase of inputs used in the production process. The introduction of innovations and new technologies plays a major role in changing the efficiency of use of inputs and hence output levels per unit of input.

After much progress, economics of innovation seems more and more to concentrate on the effort to elaborate a theory of economic creativity with a strong impact on the theory of the firm and the theory of organization and decision making.

In parallel, mainstream economics has been able to appropriate many results of the economics of innovation with the successful development of the so-called “new growth theory”. New growth theory has been able to assimilate many achievements of the economics of innovation such as the distinctions between tacit and codified knowledge, the analysis of appropriability regimes, the understanding of the role of technological externalities, spillovers and systems of innovations. New growth theory however rejects all the complementary implications of the economics of innovation in terms of the disequilibrium conditions that are the necessary conditions to understand the dynamics of introduction of technological change and its effects. An equilibrium theory of growth, based upon the joint production of appropriable knowledge and relevant technological externalities, now provides an important achievement of mainstream economics. Firms innovate relying on the appropriability of specific knowledge and in so doing generate generic knowledge which spills over and is freely available. The introduction of innovations takes place smoothly in a monopolistic competition context with an increasing variety of products (Aghion and Howitt 1998).

Such a result seems to be based upon a highly selective and indeed highly partial recombination of equilibrium analysis with some key findings of the economics of innovation. The growing exclusive concern of economics of innovation with the nanoeconomics of creativity and knowledge seems to leave more and more room for such attempts.

An effort to build a more general framework of analysis in which the real achievements of economics of innovation can be valued seems necessary. Innovation and disequilibrium cannot be decoupled, nor can the introduction of novelty and the continual and endogenous interplay between technological and structural change be reduced to a smooth process of introduction of an ever increasing variety of products.

A better understanding of the determinants and effects of technological change is possible only when the full set of structural elements of the economic system into which each new technology is being introduced is properly taken into account. The full array of direct and indirect dynamic interactions which characterize the introduction of a new technology into an economic system can be properly appreciated only when the structure of underlying relations among each component of the system is considered.

An approach is needed by which where the variety of innovations and the heterogeneity of markets and actors, both on the supply and the demand side, is recognized and yet their interdependence is emphasized. To do so the merging of the Schumpeterian and the Marshallian traditions of analysis is most useful. The latter focuses the heuristic power of partial equilibrium analysis but in a systemic context. The former calls attention to the role of the dynamic forces, brought about by innovation, in the perpetual unfolding of new perspectives and evolving forms of coherence among each element and subset of elements which are part of the system.

Although economic change keeps the system away from a stable equilibrium, a systemic analysis is necessary to understand the full set of laws of motion, including feedbacks and reactions, which characterize the sequence of events which lead to and parallel the generation, introduction, adoption and diffusion of new technologies. From this viewpoint the important progress made by the economics of innovation needs to be better integrated into the broader and more complex framework of analysis provided by the economics of technical change.

Such an effort seems all the more relevant and useful in the context of the new global economy, as it emerged and consolidated in the last decades of the twentieth century. The distinctive feature of the global economy in fact is the great variety of factors markets and yet single products markets where competitors based in different countries face each other with different technologies and different absolute and relative factors costs. In this context a basic tenet of economic analysis finds a new and problematic application. Not only do relative prices guide the choice of techniques, but also, and surprisingly, the choice of technologies.

Economics of innovation must cope with such a context and possibly find, in so doing, a much broader scope of analysis. The traditional borders between technical choice and technological change become in fact more and more blurred so that the divide between the economics of technical change and the economics of new technologies cannot longer hold.

A better integration of the economics of innovation with the economics of technical progress can yield important results so as to pave the way to a broader scope of analysis, one which is able to provide a systemic analysis of technological change where the microeconomic and the aggregate analysis integrate.

At any point in time the levels of output and total factor productivity are sensitive to the relative scale of the production factors. All changes in the composition of production factors has a direct effect on output and total factor productivity. The composition of inputs changes either when technology or the relative price of inputs change. Input composition affects output levels and average costs: hence standard procedures to assess total factor productivity growth both synchronically and diachronically.

Two new dimensions of technological change emerge, respectively general new technologies and contingent technological change. A general new technology can be identified when it consists of a neutral shift effect, such that all the map of isoquants slides towards the origin. The shift effect, moreover, is so consistent that even perspective users active in different factors markets will find the new technology superior to the previous one. The total factor productivity increase in this case is absolute. A contingent technological change is defined by the sheer change in the direction of new technologies, that is in the shape of the isoquants, without any actual increase in the absolute efficiency. A contingent technological change has a limited scope of application because it makes it possible total factor productivity increases only for specific combinations of factors costs.

This distinction between the notions of general and contingent technological change makes it possible to better appreciate our understanding of innovation at the firm level as well as the assessment of the interplay between technological and structural change at the system level. The levels and the dynamics of relative prices of both basic and intermediary inputs, as determined by the original endowments and the industrial structure of the system and their changes, are the primary factors in the inducement mechanism which provides both incentives for and constraints on the rates and the direction of technological change. The rate and the direction of technological change are induced by the specific characteristics of the industrial and economic structure of the system at each point in time and by their changes. Specifically the levels of the relative prices induce the direction of the new technologies while their changes induce the rates of introduction of innovations.

Schumpeterian growth cycles associated with the introduction of new biased technologies can be explained in terms of the market dynamics in upstream markets for production factors. Regional integration of economic systems and internal competition are affected by the interplay of relative prices and technological change. The intentional reshaping of relative prices can become the basic guideline of a growth-oriented industrial policy to take advantage of the composition effects.

In turn, however, the rate and the direction of technological change introduced and adopted at each point in time has a direct bearing on the structure of relative prices, with a strong and recursive path-dependent process of localized causation where technological change and structural change affect each other.

The understanding of the interactions between the structure of the economic system, especially in terms of relative prices and hence the characteristics of the markets for intermediary and basic inputs, and the characteristics of a new technology in terms of both the advance of general efficiency and the changes in the intensity of usage of production factors, provides a fertile and rich context into which the analysis of the determinants and effects of the generation, introduction, adoption and diffusion of new technologies can be developed.

In this context technological variety can be found with significant effects both at the macroeconomic and system levels and with respect to our actual understanding at the microeconomic levels of the behavior of firms. It is interesting to note that the notion of technological substitution finds some preliminary elements in the debate about reswitching. The debate about reswitching has been very sharp and absorbed much attention. Its focus, however, was more about the implications of the overlapping of two set of techniques with respect to the theoretical definition of the equilibrium levels of profits and wages in a general equilibrium analysis and growth theory (Pasinetti 1962). The acquisitions of the debate on reswitching found little application in the economics of technological change. As a matter of fact, however, the debate on reswitching anticipated the analysis of techniques and technologies which cannot be defined in absolute terms as either progressive or regressive (Heertje 1973).

The actual ranking of new technologies, in terms of both price and output efficiency, becomes much less clear when a variety of factors markets is considered. For each technology, traditionally defined as an envelope of equivalent techniques, output and average costs are sensitive to the relative prices of production factors and to their scale of usage.

As Vernon Ruttan remarks: “if technical change is nonneutral between t₀ and t₁ the measure of technical change is no longer independent of the relative prices that prevail” (Ruttan 2001: 56).

In this context the hypothesis of a variety of agents and behaviors in economic analysis has many major implications. At a time of increasing globalization, the hypotheses of a substantial heterogeneity of local factors markets in each country seem more and more compelling and realistic. Such hypotheses are all the more plausible at a time of rapid and biased technological change, characterized by strong factor-saving and factor-using effects brought by the introduction of a new general purpose technology such as the recent waves of innovation in new information and communication technologies. Because of the sensitivity of output and average costs to the relative prices of production factors, a variety of “efficient” technologies can be found across global markets. In this context the issues of technological variety and contingent technological advance become relevant.

When factors markets heterogeneity in terms of prices is admitted, comparative analysis of the performances of a given technology in different regions becomes a very difficult task. By the same token the assessment of the actual performance of a new technology changes along with any change in the relative cost of production factors. The actual effects the technology are contingent upon the systems of relative factor prices in each local market. The levels of total factor productivity associated with a single technology may vary across regions, according to the relative prices of production factors. This adds to the consequences of the sensitivity of production costs, and hence in a global competitive market, of output levels to the ratio of factors costs. Such effects are all the more relevant as they reinforce each other. They apply synchronically to differences in the relative costs of inputs across industries and regions, in assessing the actual levels of increase of total factor productivity when a single new technology is introduced in different regions and diachronically when changes take place along historic time, in factors markets in assessing, with a given technology, the levels of production costs.

Technological changes can no longer be ordered just in terms of total factor productivity levels: relative prices of production factors matter in assessing the actual bottom line average costs, according to the relative productivity and price of each factor. Standard procedures to assess total factor productivity growth can appreciate to some extent the effects of all synchronic and diachronic changes in factor costs.

These issues seem extremely relevant at the microeconomic level of analysis and have important effects on our actual understanding of both the behavior of firms and the aggregate dynamics of the economic system. The differences in the production functions at work and in the factors markets, among industries and regions, are much sharper than at the aggregate levels. The actual assessment of the real evolution of technological change at a microeconomic, industrial and regional level is much more complex than at the aggregate levels and important dynamic implications need to be taken into account.

The understanding of the reciprocal feedbacks between the structure of each economic system, integrated in the global economy, and the rate and the direction of technological change makes it possible to grasp the basic path-dependent character of growth and change. The understanding of the path-dependent interaction between structural change and technological change seems a major contribution made possible by the integration of the economics of innovation tradition of analysis and the economics of technical change.

The rest of the book is structured in three parts as follows. Part I recalls the building blocks on which the analysis of the recursive interactions between innovation, new technologies and structural change is conducted. In this part Chapter 2 provides a general review of the main achievements of economics of innovation. The key role of out-of-equilibrium analysis in solving the puzzle of total factor productivity growth is elaborated and the complementarity between disequilibrium and the very notion of innovation is articulated.

Chapter 3 retrieves the important achievements of the economics of technical change as it emerged from the 1930 through the 1960s and lays down the background analysis of the opportunities for merging the traditions of analysis of the economics of innovation and of the economics of technical change respectively. The strength of this latter tradition of analysis, with respect to the role of prices and especially relative prices in assessing productivity levels and the circular relation between production and distribution theory, is stressed.

Part II starts with Chapter 4 which elaborates the dynamic implications of the sensitivity of total factor productivity and average costs levels to equilibrium input composition in an economics of innovation perspective of analysis. Chapter 5 shows the important opportunities created by the merging of the results of economics of innovation with the tradition of the economics of technical progress in a disequilibrium context. The distinction between the inducement of innovation activated by all changes in the levels of absolute factors prices, of relative factors prices and of demand, and the inducement of the direction of technological change is introduced and elaborated. Chapter 6 explores the interaction between industrial dynamics and the introduction of new general and contingent technologies. The vertical effects in the relations among industries are analyzed as well as the horizontal effects within industries. The role of industrial dynamics in the evolution of the relative prices of intermediary inputs is stressed as a key element in technological choice, consisting of both the induced introduction of new technologies and the adoption of existing ones. Chapter 7 highlights the interactions between the markets for basic inputs with special attention to labor markets and the technological choices of firms. The discontinuity brought about by the composition effects are analyzed as well as the consequences of the regional integration of economic systems characterized by significant differences in factors endowments. Chapter 8 generalizes the analysis of the interdependence between the dynamics of economics structures and technological change in the global economy. Chapter 9 provides a simple analysis of the effects of the heterogeneity of consumers on the oligopolistic rivalry among producers that are able to introduce product innovations and to retain a direct control of a fraction of the general demand for a class of goods that are only partly substitutes. Niche prices can help firms to survive in single products markets and make profits even if they are less cost-effective than competitors. Such cost asymmetries in fact depend upon the adverse relative endowments of most productive production factors which induce a mismatch between the local factors markets and the bias of the new production functions, brought about by highly productive general purpose technologies. Chapter 10 emphasizes the recursive and path-dependent relationship between structural change and technological change in terms of the incentives and constraints it engenders for the generation, introduction, adoption and diffusion of innovations at the firm and the system level.

The analytical tools introduced in Chapters 4-10 are applied in Part III where the policy implications are also developed. Chapter 11 applies the framework so far elaborated to the understanding of the economics of new information and communication technology in Chapter 10. The policy implications are analyzed in Chapter 12. The understanding of the key role of relative prices provides a new scope for a growth-oriented economic policy. The coevolution between the structure of relative prices and the direction of technological change makes it possible to stress the notion of potential productivity growth, defined as the scope for measured productivity growth which can be obtained by appropriate changes in the system of relative prices. The conclusions summarize the main results of the analysis.

Part I

The building blocks

2 Shifting heuristics in the economics of innovation

Introduction

Economics of innovation is a recent fruitful area of specialization in microeconomic theory. During the last forty years, economics of innovation has emerged as a distinct area of enquiry at the crossing of industrial organization, regional economics and the theory of the firm, and as a well-identified area of specialization in the microeconomics of growth. In this context the interacti...

Table of contents

• Cover Page
• Half Title page
• Title Page
• Copyright Page
• Contents
• Figures
• Foreword
• Acknowledgments
• 1 Introduction
• Part I The building blocks
• Part II Innovation and structural change
• Part III Applications and implications
• Notes
• Bibliography
• Index