The Source of Capital Goods Innovation

Kong Rae-Lee

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781317938606
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The results of the empirical investigation of Japan and Korea show that the user firms in both countries, represented by car makers, have involved themselves in the technical and entrepreneurial entry into machine tools along with making active investments. As a consequence, they made a considerable contribution to the innovation of machine tools, increasing their competitive advantage as well as the competence of their specialized suppliers.

1.
Introduction

Capital goods have long fascinated classical economists and scholars of innovation studies in connection with technological innovation and productivity growth. They have laid the capital goods sector at the centre of the generation and the diffusion of technological innovation. At the same time, the innovation of capital goods has been featured as an important source of the viability and flexibility of industrial economies, because a large number of industrial sectors invariably require improved and innovated capital goods for their productivity growth. The existence of a well-developed capital goods sector possessing the technical knowledge, skills and facilities to innovate machinery has been frequently regarded as one of the critical factors determining the borderline between developed countries and developing countries.

Developed countries have accumulated a technological capacity to undertake innovation almost as a matter of course and routine through their highly developed capital goods sector. The efficient and innovative capital goods sector of developed countries was the major source of the productivity growth of their economy as a whole. Whereas, developing countries have satisfied much of the demand for the capital goods necessary for their productive activity with imports from developed countries. The availability of capital goods in international markets has made it possible for developing countries to continue their economic growth without themselves going through the difficult and costly process of developing the capital goods sector. Developing countries, being late-comers, have benefited from the manifold development of capital goods in developed countries, despite there being some undesirable consequences of the resultant technological dependence.

The newly industrialized countries such as Korea, Taiwan, Hong Kong and Singapore are the developing countries which benefited as late-comers from the innovations of capital goods in developed countries, without a well-developed capital goods sector. Yet, they have relied almost entirely on imports for capital goods such as semiconductor process equipment; high precision, special-purpose, machine tools; and many other kinds of production equipment.

At a certain development stage, developing economies tend to have a limitation for continuous development. The manufacturing activities of user sectors in the developing countries are by and large specific to the production of standard products and their skills typically are attached to the exploitation of relatively low-quality products. Many user sectors of capital goods in the economy become highly vulnerable to a change in the external business environment. Eventually, their competitiveness will begin to erode rapidly and their export growth will start to stagnate, since firms may no longer be the cheapest producers with an advantage based on a low labour cost.

The solutions to the problems of the developing countries might lie in building up a technological capability to develop capital goods, as many scholars have noted.¹ Building an indigenous technical capability to design and manufacture complex capital goods not only deepens the local production of capital goods, but also revives the productivity growth of the economy. This may enable a large area of the capital goods using sectors as well as the capital goods sector itself to increase their productivity and maintain their competitive advantage in international markets.

Without indigenous technological capabilities to develop capital goods, the developing economies are not likely to move easily out of the current difficulty. To develop the technological capability of the capital goods sector is, however, not easy nor is it the same task as that of developing its user sectors. It requires an explicit and costly learning process and a qualitative shift in technology towards a distinctly novel type of product technology. It also involves a wider range of actors and factors which may differ from those in the development of user sectors.

In this connection, the objective of this study is to explore the policy question: ‘How and by what paths does a developing economy build an innovative and competitive capital goods sector?’ This study attempts to grapple with the role of users in the innovation process of capital goods. To understand the role played by the user firms/sectors of capital goods seems to be of crucial importance for unveiling the nature of technological change in capital goods and obtaining resultant policy implications. It is due to the fact that capital goods embody to a great extent user-specific, idiosyncratic, technological know-how, and are generally process innovations developed by user firms. The appropriate skills and knowledge to manufacture capital goods were historically acquired through an intimate association between the user and the producer.

Unfortunately, there has been, until quite recently, little attention devoted to the user-side factors in relation to the rate and direction of capital goods innovation. Many of the past innovation studies have had a basic assumption that the innovator is always the supplier or manufacturer. Also, relatively little contribution has been made to the understanding of the user participation in the innovation process of capital goods. Both economists and those pragmatically concerned with technology policy are preoccupied with the assumption that the manufacturer is the primary innovator of various capital goods. So government policies to stimulate innovation have naturally been almost entirely oriented towards manufacturers. In this respect, this study holds a special focus on the role of the user that yield additional insights into policy recommendations.

This study shows how international suppliers of capital goods may construct a competitive advantage through an interaction with strong user firms in their home countries. Their firm-specific competitive advantage may then be exploited in the rest of the world through exports and international production, especially in other important centres in which innovation linkages with large user firms can be replicated locally. Thus, the success in global competition of large scale user firms, e.g. vehicle assemblers, translates into the subsequent success of their specialised suppliers at home.

To understand more fully the role of user firms/sectors, this study moves from the broad concept of ‘capital goods’ to the concrete case of machine tools. The reason why machine tools are chosen for the study is that they are the basic components of the capital goods sector and are a leading transmitter of technological innovation throughout the economy. The machine tool industry actually constitutes a very small part of the capital goods sector in most countries. It is nonetheless a critical industry as it produces the machinery which produces all other capital goods as well as consumer goods. The industry is often regarded as a ‘node’ for supplying both hardware and software to all metal working industries. These characteristics imply that the innovations in the machine tool sector will have repercussions throughout a large area of the user sectors of capital goods in terms of technological diffusion, productivity growth and international competitiveness.

The research is carried out through both theoretical and empirical exploration at three levels: the firm, the industry and the country depending on the dimension of the discussions. The theoretical enquiry is first made from the viewpoint of an individual firm’s activity in relation to the development of machine tools with a dynamic aspect, and then extended to the point of sectoral and international dimensions. The methods of empirical investigation are twofold: cross-country analysis and country-specific analysis. The former deals with relevant variables for 20 countries and the latter with Japan and Korea.

Empirical findings from the Japanese and the Korean case reaffirm the significance of vertical user-producer interaction in promoting geographically located innovation, as documented historically by Rosenberg, and in more recent times by scholars such as Lundvall. The findings are also consistent with Porter’s account of the significance of home country background for the establishment of competitiveness in international markets. The results of these theoretical discussions and empirical analyses are presented in seven chapters including this introduction and the conclusions. The main content of each chapter is summarised as follows.

In Chapter 2, we begin with discussions about the nature of the innovation process and the source of technological innovation in general terms. This chapter is a review of the past innovation theories concerning the nature and source of technological innovation. It surveys and summarises the main streams of two theoretical dichotomies: technology-push and demand-pull innovation theories, and supplier-active and user-active innovation perspectives.

In Chapter 3, the theoretical framework to identify the role of user firms in the dynamics of innovation is presented. The essence of our argument in this chapter is that the user firms, on the one hand, create a basis for the specialised producers to embark on a dynamic path to innovation through investment activities, and on the other hand, they become involved directly in the development and commercialisation of machine tools, and that such user activities have a positive impact on competitive advantage not only for users themselves but also for specialised producers.

In Chapters 4 and 5, country-specific investigations are carried out in Japan and Korea to assess evidence for the arguments addressed in the theoretical part. The country-specific study adapts two separate but complementary methods of analysis. It analyses quantitative data at the industry level with some firm-specific information for the Japanese case, while it analyses the results of a field survey for the Korean case. The results of the analyses for the Japanese case are presented in Chapter 4 and that for the Korean case in Chapter 5.

The results reveal that the users in both countries, represented by car makers, appear to have involved themselves in the technological and entrepreneurial entry into machine tools along with active investments. They have also established innovative linkages with specialised suppliers, and made a considerable contribution to machine tools innovation so as to construct a competitive advantage in their advantage in their home markets. As a consequence, their firm-specific competitive advantage may then be exploited in overseas markets.

In Chapter 6, the conceptual framework put forward previously is applied to an international level analysis. By way of the application, we develop the notion that the international differences in the investment of local user sectors account for the international asymmetries of machine tools innovation. The consequences of the international differences in the competitiveness of the machine tool sector as well as its user sectors is analysed. A panel data for 20 countries and 19 years were used in order to examine the notion. The results show that the inter-country variations in machine tools innovation are closely associated with the international variations of the export competitiveness in both the machine tool sector and its user sectors.

In Chapter 7, the author concludes that the user firms play a critical role in shaping the dynamics of capital goods and this role is closely associated with their competence as well as the competitiveness of the specialised suppliers. Based on those findings, it recommends some policy implications for developing the capital goods sector of developing countries, with some suggestions for future research.

Note

1 For example, Rosenberg (1976), Fransman (1986), Singh (1986), Erber (1986), Kim Linsu (1990) and Porter (1990).

2.
The Source of Technological Innovation

Introduction

Private firms in market economies may attempt the exploration and development of new products and processes, if they know of the existence of some unexploited scientific and technical opportunities. They may also allocate resources to technological activities for innovating their products and processes, if they know of the existence of a market and some economic benefits from the innovations. In turn, innovations of private firms may, if successful, change their production costs, quality of products, sales and eventually market position. The accumulation of innovations may increase their market competitiveness and, ultimately, lead to the evolution of the industry involved.

Innovations are basically the outcome of innovative capability within each firm and within industries. The innovative capability pertains to the activities of conceiving and implementing changes in technology that include all the activities spanning invention to innovation and ranging from radical (major) new departures to incremental (minor) improvements of existing technology (Westphal, 1984). A firm’s innovative capability is accumulated over a long time through a learning process and the complex interactions between such functions as technical and scientific knowledge, organization, management and marketing.

A firm’s innovative capability is also, to a great extent, affected by a number of factors external to each firm and industry, such as the availability of public technical and scientific knowledge, technical opportunities of the industry, and skilled manpower and engineers on the supply side; stringency of user requirements, user participation and the market size on the demand side; and the cooperation culture of users-suppliers and parents-subcontractors, market structure and conditions, particularly inter-firm competition, public finance, and public policies on the environmental side. The extent to which these external factors influence the innovations varies widely among different industries and countries.

The purpose of this chapter is to understand the nature and determinants of innovation through a review of related literature. It is, however, impossible to review the whole body of literature that relates to all of the above mentioned factors affecting innovations. Rather our discussion here is limited to a selected group of contributions associated with the following issues: (a) the nature of the innovation process, (b) demand-pull and technology-push explanations and (c) supplier-active and customer-active explanations.

In the following section, we intend to briefly discuss the nature of the innovative process that has been put forward in past economic and innovation theories. The review of the literature related to the interpretations of demand-pull and technology-push innovation begins in the following section. In the next section, explanations for supplier-active and user-active models will be dealt with the source and locus of technological innovation. Finally, some implications for making the framework of this study will be drawn.

The Nature of the Innovation Process

Technology has been defined as knowledge, expertise, skills, know-how and techniques involving everything related to problem-solving activity and transforming inputs into outputs. Technological change thereby refers to changes in the ways in which problems are sorted out and inputs are transformed into outputs. When a firm produces a good or service or uses a new method or input, it makes technical change or technological change. The first firm or individual to make a technical change is an innovator, and its action is innovation. Innovation is broadly defined here as the creation and use of new products and processes and the modification of existing products and processes.¹

The nature of innovation and its process has been differently featured by each of the economic schools. In neo-classical economics, technology is an exogenous factor to production systems as well as given and available to all companies. Technical change is simply defined as the shifts from one known technique to another known technique as the optimal combination of factor inputs is altered in response to changing conditions of supply and price.

This standpoint implies that technological change is a by-product of changes in factor prices and supply so that no effort would be required to gain, possess, utilize, and innovate technology. The treatment of technology by neo-classical economics does not provide many useful insights into the nature of the innovation process. Although some neo-classical economists have undertaken a considerable amount of research aimed at pinning down what technical change actually is, their explanations are also considered as inadequate for understanding the nature of the innovation process.²

While most neo-classical economists continued to ignore the technology factor in formulating their economic theories, Schumpeter made a break with neo-classical thinking about technology. In his book The Theory of Economic Development’ (1961, pp. 65–6), Schumpeter defined innovation as ‘the carrying out of new combinations of productive means’, which covers the introduction of new products, processes, markets, material supplies, and organisations. He argued that entrepreneurs with initiative, foresight, creativity, and strong motivation to do new things differently play the key role in the carrying out of new combinations (ibid., pp. 77–80). Because of the discontinuous emergence of entrepreneurs, innovation too appears discontinuously and acts as the main disturbance of equilibrium, hence playing a fundamental role in the business cycle (ibid., pp. 212–55).³

Schumpeter had come round, in his later writing in ‘Capitalism, Socialism and Democracy’, to the view that innovation itself becomes a routine work under the control of the bureaucratized giant industrial units. He stated that ‘it is much easier now than it has been in the past to do things that lie outside familiar routine … technological progress is increasingly becoming the business of teams of trained specialists who turn out what is required and make it work in predictable ways’ (Schumpeter, 1976, p. 132). This statement is based on the evolutionary process of capitalism. That is, as economic activity becomes depersonalised, large bureaucratic firms not only oust individual entr...