Economics of Innovation: What is Innovation?

Economics of Innovation

• The presenter is Michele Pezzoni
• The course consists of ten classes, each lasting two hours, with a fifteen-minute break
• The teacher's email is [email protected]
• Student evaluation is based on « contrôle continu »
• There will be a QCM plus three open questions in the 5th class lasting 20 minutes
• There will be a QCM plus three open questions in the 10th class lasting 20 minutes
• The final grade is based on exam grades and participation in classes
• Slides and scientific papers provided during classes are the reference material
• Course materials will be available on Moodle, under IPEEIN - ECUE Economics of innovation

What is Innovation?

• The course will cover the concept of innovation and related topics
• Classes 1 and 2 discuss Joseph Schumpeter's contributions
• Classes 1 & 2 will also discuss the main concepts and terminology used during the course, Schumpeter MARK1 and Schumpeter MARK2
• Classes 3 and 4 focus on the role of science in promoting technological change, examining the ways science interacts with innovation
• Classes 3 & 4 will also describe the debate regarding the Linear and Chain-Linked innovation models
• Classes 5 and 6 examine the relationship between the type of innovation and the industry life cycle
• Classes 5 & 6 will also examine the role of new innovative companies entering industries and challenging incumbents
• Classes 7, 8, and 9 discuss patents and intellectual property rights and propose technical material on patenting procedures
• Class 10 is an exam

Innovation as a Subject of Study

• Innovation plays an important role in GDP growth, productivity growth, and a country's competitiveness
• There is a cross-sectional correlation between a country's development and innovation level
• Strong complementarities exist between different types of innovation, such as the electric car and efficient batteries
• A large portion of innovations are evolutionary
• Few innovations are radical; examples are the first mobile phone and the iPhone
• Many innovations result from new combinations of existing elements
• Uncertainty remains high during the innovation process
• Uncertainty includes technical difficulties and market commercialization

Project LOON

• Project LOON, supported by Google, utilized balloons in the stratosphere to provide internet access
• Project LOON was technologically feasible, with the first experiment in Kenya
• Project LOON was economically uninteresting and too costly, ultimately being substituted by satellite constellations
• Innovation results from a relational process involving interaction and collaboration between various actors
• These actors include individuals, universities, firms, and public and private institutions
• Regional and national policies, presence of universities and research centers, and an adequate labor market affect innovation
• Types of innovation systems include national, regional, and sectoral

Microeconomic Innovation

• In microeconomics, innovation equates to technological change

Invention vs Innovation

• Invention is a new idea, whether scientific, technological, or organizational
• Innovation involves a new product ready for commercial exploitation
• The role of the innovator (entrepreneur for Schumpeter) differs from that of the inventor
• There are often delays between invention and innovation
• In pharmaceuticals, invention often coincides with innovation

Invention and Innovation History

• Walter Brattain, John Bardeen, and William Shockley developed the first transistor prototype at Bell Labs in 1941
• They received the Nobel Prize in physics in 1956
• The transistor became commercialized and included in billions of electronic devices
• Douglas H Ring, an engineer at Bell Labs, invented the system that is the basis of the operation of mobile phones in 1947
• The first mobile phone was produced by Motorola in 1973

Innovation as a Process

• Innovation can be seen as either an unpredictable event or a process
• Schumpeter views innovation as a process
• Examples of this process are the modern car, steam engines, and planes
• These are the result of incorporating several innovations

Types of Innovations

• Radical innovation involves a completely new machine (e.g. steam engine) and can represent a technological revolution (e.g. Valve VS transistor)
• Incremental innovation introduces marginal improvements, such as GPS in cars and smartphone evolution
• The distinction between radical and incremental innovation is often a continuum

Types of Innovation: Product vs Process

• Product innovation involves introducing new products
• Process innovation involves improvements to the production process to decrease production costs

Types of Innovation: Organizational vs Technological

• Technological innovation focuses on advancements in technology itself
• Organizational innovation focuses on changes to the structure and management of an organization
• The multi-divisional structure is an example of organizational innovation

Technological Innovation

• Technical application is the materialization of science and technology into projects, machines, and products
• Technology is the finalization of scientific knowledge to specific requirements

Science and Technology

• Science produces abstract and not finalized knowledge
• Science is a public good while technology is a private good
• Characteristics of a public good: non-exclusive and non-rivalry consumption
• There is the common opinion that science is exogenous and produces the advancement of technology, e.g. lasers

Relationship Between Science and Technology

• The reverse is also possible, from technology to science
• Computer - computer science (and a contribution to all scientific domains)
• Transistor -> The physics of the solid state
• Technical applications are sometimes the basis for developing scientific disciplines
• Microscope -> Medicine
• Telescope -> Astronomy

Sources of Innovation

• Three basic sources of innovations include R&D, learning by doing and learning by using

Research & Developments

• R&D has 3 phases including basic research, applied research and experimental development
• The importance of R&D can be seen in countries such as
• Fin / Swe=3.5%
• US=2.8%
• IT=1.3%
• CHINA=1.9%
• This can be seen as the separation of production and research within firms known as Specialization within firms
• Through R&D departments in large companies
• The specialisation of the field known as research professionalization (PhD students) is seen as important for creating the new R&D through specialists

R&D: Definition

• R&D is defined in the FRASCATI Manual, 2002, p.30
• R&D: Research and development (R&D) comprise creative work undertaken on a systematic basis in order to increase the stock of knowledge (including knowledge of man, culture and society) and the use of this knowledge to devise new applications

Learning by Doing

• Learning by Doing is an informal learning process that relies on crucial roles of experience
• Learning is on the job experience that occurs more and more as a firm produces something
• Holding a firms output rate constant means average cost declines with cumulative output increasing
• In summary, the more firms do the cheaper it gets

Learning by Using

• Workers' experience with capital goods and customers' experience with consumer goods suggests better ways to use such goods and possible improvements
• It generates a flow of incremental innovations

Learning by Using Software

• 0 alpha status. Software not stable, internal development, defining characteristics
• 1 Beta status. Software available outside for testing by users (beta release)
• 2 release candidates. This is a beta version with a potential final product
• 3 final release

Leaning by Using JT3D Engines

• Jet Users = air companies
• To be more precise air companies are known to improve jet engines over time through feedback to provide improvements for jet engines
• Initial is earlier maintenance experience referred only to propeller engines with the under estimating of the reliability of JET engines (imposed by producers to users for insurance reasons)
  • Very frequent services
  • The service = disassembling + tests and checks
  • Service data gathering revealed not so much wearing on the components
  • Service lags grow longer and no more compulsory disassembling
  • Development of diagnostic tools and practices is overcoming of initial excess of caution imposed by producers

Schumpeter's Work

• Innovaton is not stationary
• Innovaton is a process
• It must be analysed from a historical perspective, analysing only a theoretical model is not enough

Schumpeter

• Schumpeter lived from 1883-1950
• Focused upon innovation, enterprise and capitalism
• He focused a broader definition of innovation using creative destruction to fuel innovation, that is the essential fact in capitalism
• capitalism consists of what every capitilist concern has got to live in
• This formed part of his work on Capitlaism, Socialism and Democracy, 1942: 82

Other Schumpter Work

• Schumpeters Book was the THEORY OF ECONOMIC DEVELOPMENT 1911
• He looked at
  • Invention VS innovation
  • Innovation as new products, new products' quality, new production methods, opening of new markets, new sources of materials or goods, new firms' organization
  • New firms and their entrepreneurs can be sources of innovation
  • The process of creative destruction revolutionizes the economic structure within the industry
  • The process of creative destruction is essential for capitalism

Schumpter Models

There are two models MARK I and MARK II MARK I focused upon

• The fact that Science entrepreneur profits fuel innovation
• The basic model of Garage firms apple, microsoft, Science is exogenous - invention
• The entrepreneur is the innovator, but not necessarily the inventor

MARK II

• The latest SCHUMPETER CAPITLAISM, SOCIALISM AND DEMOCRACY was published in 1942
• This model can be useful in induries such as biotechnology and the biotech market
• The R&D leads to firms innovation and Oligopoly profts
• It is the result of large R&D, which large companies do
• The model is valid in industries such as the automotive and the aeronautic industry

Bells LABS Success From Innovation

• AT&T saw great success through Bell Labs and its innovative approach
• Through firms R&D, Oligopoly profits drove Innvation
• Key discoveries include
  • Radio astronomy
  • Transistor
  • Laser -Information theory -UNIX operating system, -C programming language -C++ programming language

Characteristics of Model Outcomes

• Schumpeter Mark I
  • Small new entrant innovators -Turbulence in the market
• Low concentration of innovators
• Schumpeter Mark II*
  • Large incumbent innovators
  • Stability of the hierarchy of innovators
  • High concentration of innovators

Questions Regarding Debate After Schumpter

• As per the Schumpeterian legacy there were questions regarding
• Are small firms more innovative than large firms?
• Are monopolistic markets more innovative than competitive markets??
• Endogeneity is between innovation and market structure in most cases

Key Similarities Regarding Innovation

• There are some similarites that were highlighted regarding innovation
• Innovation is influenced by scientific and technological opportunities in a sector
• The appropriability of innovations influence the economic incentives associated with the R&D investment -> e.g., drug patents
• There is a relationship between market structure and innovation

Key differences Regarding Innovation

• Main differences between two models can be seen where
  • Neoclassical = Equilibrium
  • Evolutionary = No equilibrium -Neoclassical = Static and dynamic
  • Evolutionary = Dynamic-Neoclassical = Technology as information -Evolutionary = Technology as knowledge (learning, cognitive aspects, ...) -Neoclassical = Firm strategy
  • Evolutionary = Firm competence and vanity -> heterogeneity and selection-Neoclassical = The history of the firm is not so important
• Evolutionary = History of the firm is important -Neoclassical = Rationality and maximization
• Evolutionary = Bounded rationality-Neoclassical = Learning as an accumulation of information -Evolutionary = Learning as an accumulation of knowledges)

Measurement of Innovation

These can include; Detailed description of innovation through case studies or industry studies

• This is Very detailed but without any generality
• Counting innovations by asking industry experts
• Firm survey- It's a detailed analysis, but subjective answers at country level
• Using the firms' accounting data to measure R&D expenses -> Data availability for large and medium-sized firms, but small firms do not report the R&D consts
• Using patents and patent citations (class) -> Detailed analysis of technology, firms and countries observed over long periods of time
• The drawback is that firms don't always use patents to protect their inventions

How measurement Can be Used

• OECD calculations based on data from the US Patent and Trademark Office
• Top ten corporations in terms of number of US patents are useful for rankings