1. Lecture 2
Sources of Technological Change

2. The Cumulative Synthesis Approach
[Abbot Usher]
Four steps to innovation processes:
• 1. Perception of the problem
– May be induced by economic forces
• 2. Setting the stage
– Elements necessary for the solution brought
together through a configuration of events. One
necessary element is a person with the necessary
skill in manipulating the other elements.
• 3. The act of insight
– The essential solution to the problem is found.
This is an uncertain process. Prediction is
impossible.
• 4. Critical revision

3. The Microprocessor
o The transistor (or chip) was the seminal invention in the development of the
semiconductor industry. Its invention was followed by the integrated circuit,
a more complex chip with more than one active device. The microprocessor
followed.
o Perception of the problem
o A Japanese company (Busicom) requested a chip for hand-held calculators
from Intel.
o Setting the stage
o Intel had much prior experience with memory devices for computers.
o Act of insight
o Ted Hoff realized that general purpose computer architecture could be used
to meet Busicom’s needs less expensively. That eliminated the need for
several chips.
o Critical revision
• Speed increased rapidly (Moore’s law)

4. The ideal innovation funnel
Phase I Phase II Phase III Launch

5. An Innovation Funnel Example
Gatekeeper
Gatekeeper
Gatekeeper
Gatekeeper
Idea Launch &
Feasibility Capability
Rollout
Generation
Concept Product Commercialization
Initial marketing refinement and optimization Production &
and technical prototype Distribution
concepts creation
Post
Launch
Launch Review
Proposal
Contract Tracks success of
and key learnings
Charter from launched
Launch Plan including
products
CEP approval request.
Cross-functional
KEY
development plan
One page description of
including project plan as
proposed project including = GATE
contract between team
objective, rationale and
and Gatekeeper.
development routes. Early
= DOCUMENT
Commercial Assessment

6. Example: The Key Questions Answered By
Each Phase
Phase progression indicates increasing
investment and decreasing risk.
Portfolio
Review Phase
Phase
Review 1 Phase Phase
Review 2
Review 3 Review 4
E E
Phase 1: Phase 4:
N X Current
Phase 3:
Idea Phase 2:
T Concept Post I Product
Development
Generation Feasibility
E T Support
Investigation Release
R
•Does the idea fit •Does the •Is the product
•What is the •Has the product
roughly with our product make meeting safety,
product spec? been fully verified
strategy and sense from efficacy and
•Can we develop and validated?
resource marketing, business targets
it within budget •Have production
availability? technical & in the market?
and schedule? objectives been
financial •Can we produce met?
If yes, then perspectives? If yes, then
it at the required
concept closeout
cost & volume? If yes, then
document approved
full manufacturing
approved If yes, then & handoff to
If yes, then approved
& sub-team concept product support
prototype & sub-team
allocated approved approved allocated
& full team & full team
allocated allocated

7. Basic concepts and vocabulary
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11. 0.0
0.5
1.0
1.5
2.0
2.5
3.0
Sweden
Korea
Japan
Switzerland
Finland
USA
Germany
France
Netherlands
Ireland
Taiwan
UK
Israel
Singapore
Italy
South Africa
Brazil
Leaders in technological effort
Costa Rica
Malaysia
Turkey
(R&D financed by productive enterprises as % of GDP)
China
India

12. The sources of technological change
• R&D [activities, actors, different technologies
and/or scientific fields]
• Learning by doing [production process, research
activities
• Spillovers [direct –indirect (exploitative activities
needed); international; intra-industry; rent
spillovers, knowledge spillovers]

13. Who Does Research?
• In this section, we consider who is
involved in the research process, and
discuss the incentives that they face.
• Note that different actors face different
incentives, and will thus react to policies
differently.

14. Categorizing research
• 1. Source of funds: who provides the funding?
• In US (and most developed countries), industry is the largest source of R&D
funding: 81.4% in 2002.
• 2. Performance: who does the research?
• Not all R&D performed by the institution than funds it.
• 2002: 25% of federally-funded R&D done in industry Much of this is defense
research.
• Similarly, less than 20% of university performed R&D is funded by universities.
• 64% of funding comes from federal government.
• 3. R&D by character of use
• Corresponds to linear model of R&D developed by Vannevar Bush (in 1945
report to FDR: Science – the Endless Frontier)
– Basic research
– Applied research
– Development

15. The determinants of Technological Change
1. Industry Conditions
2. Availability of Technical Skills
3. Expected gross Profitability from Invention
4. State of Scientific Knowledge
5. Expected Costs of Inventions
6. Expected Net Profitability from Invention
7. Research Findings (curiosity driven)
8. Inventive Activity
9. Inventions and Innovations
•Patented Ideas
•Commercialization

16. Demand-Pull Theories of Innovation - Induced Innovation
• Induced innovation is an example of a “demand-pull” influence.
• Induced innovation looks at the influence of factor prices on
technological change.
o E.g.: labor prices up => R&D to save labor
– Model
o Begins with an innovation possibility curve (IPC).
o The innovation possibility curve tells all the possible techniques
that could be used at a given time.
o Before any one technique is chosen, R&D must be performed.
o The actual technology chosen depends on the relative prices.
– One critique of the induced innovation model is that it assumes the
IPC is given.

17. Demand-Pull Theories of Innovation -Evolutionary Theory
• Evolutionary theory derives from work by Richard Nelson and Sidney Winter in
the 1970s. Arose from dissatisfaction of standard neoclassical economics to
explain many empirical facts about long-run economic development and
technological change.
• Key features of evolutionary theory:
o Replaces profit-maximizing behavior of firms with decision rules applied
routinely over a period of time.
o Decision rules include routines for production, for managing workers,
ordering inventory, advertising, or changing R&D.
o R&D in evolutionary theory has two fundamental mechanisms
• 1. Search for better techniques
• 2. Selection of firms by the market
The term “evolutionary theory” is borrowed from biology. The idea is that the
strongest firms survive. Thus, profits matter, even though profit maximization
isn’t the explicit goal.

18. Induced innovation vs. evolutionary
theory
• Their findings are similar. However, evolutionary theory has one
important difference -- it is dynamic. In the evolutionary model,
invention is cumulative. A successful search not only provides a new
product, but also a new starting point for research. After B
technology is adopted, the next search will occur around the
neighborhood of B. Relating this to the induced innovation literature,
this would suggest that the exact nature of next year's invention
possibilities curve depends on the outcome of this year' research.
s
• The evolutionary theory builds on different hypotheses:
asymmetrical capabilities of firms, limited access to knowledge and
routines (vs. profit maximization). This approach offers useful
hypotheses for further research.

20. Demand-Pull Theories of Innovation - Path Dependence
• Path dependence depends on technology “lock-in.”
o Once certain technologies are adopted, switching to a new technology might not
be feasible, even if the new technology is marginally better.
• QWERTY typewriters are the classic example.
• Three features leading to QWERTY’s lock-in
• 1. Technical interrelatedness – the need for system compatibility
– In this case, the links are between the keyboard and the typist’s memory.
• 2. Economics of scale – user costs fall as a system gains acceptance.
• 3. Quasi irreversibility –the result of the acquisition of specific skills
– In this case, touch typing skills.
• Often the result of network externalities.
• Network externalities are when an individual' demand depends on the
s
consumption levels of other people. Windows vs. Mac software is a good
example of a network externality.
• This model applies to industries where network technologies lead to
increasing returns to scale. For example, it explains why a transition to
hydrogen-powered vehicles will be difficult. However, it does not apply more
generally.

21. The supply side
• The models discussed above focus on demand for new
innovations. They neglect the role that the supply side,
or the state of scientific knowledge, plays in influencing
research.
• The idea is that the basic knowledge on which other
inventors can build is important. The supply of new ideas
increases technological opportunity. This increases the
likelihood of research success, and thus the marginal
rate of return.
• We have two sets of supply side models: Dynamic-Long
waves of technologies (and General Purpose
Technologies), Static-explaining level of activity and
efficiency.

22. Size and Structural Dimensions of the
Firm
• Size: Is Bigger Better?
– In 1940s, Schumpeter argued that large firms
would be more effective innovators
• Better able to obtain financing
• Better able to spread costs of R&D over large
volume
– Large size may also enable…
• Greater economies of scale and learning effects
• Taking on large scale or risky projects

23. Size and Structural Dimensions of
the Firm
– However, large firms might also be disadvantaged at innovation
because…
• R&D efficiency might decrease due to loss of managerial
control
• Large firms have more bureaucratic inertia
• More strategic commitments tie firm to current technologies
– Small firms often considered more flexible and entrepreneurial
– Many big firms have found ways of “feeling small”
• Break overall firm into several subunits
• Can utilize different culture and controls in different units

24. Technological Learning Systems
___________________________________
• Late industrialization is usually deprived of the
innovation element.
• Late Industrialization and catching up are basically a
process of “learning”, and not of innovation.
• The use of the concept of innovation as a kind of
synonym of technical change hinders the ability to
understand the differences in the processes of
technical change typical of developed and developing
economies.
• The limited nature of the latecomer’s process of
technical change (learning) is the main reason why
developing economies have low productivities and
per capita incomes, and high inequity.

25. A Key Transition in the Structure of Industrial Technology
Technology
Development
R&D
and Creation
DESIGN AND
ENGINEERING
TECHNICIAN AND CRAFT
SKILLS AND CAPABILITIES
BASIC OPERATORS
Technology Use, SKILLS AND CAPABILITIES
Operation and
Maintenance

26. Different Types of ‘Innovation’/Technical Change
1. Continuous incremental, engineering-based improvement: process
technology, methods of organising production, diversification and upgrading in product
specifications and designs, etc.
2. Continuous improvement in technologies linking stages in value
chains: hardware (e.g. transport and computer-based systems) and organisation/management
3. Technology search (and research and training) for acquiring and
absorbing technology
4. Acquisition of technology: machinery and equipment, and in the designs and
specifications of materials, products and components
5. Design, (reverse) engineering and project management: for new production
facilities, to diversify/upgrade products, or to source components, materials and equipment
from local suppliers
6. Research and development, plus design and engineering: to introduce
technologies that cannot be acquired (competitively) from foreign sources, and for introducing
new products and processes that permit competitive entry to domestic or foreign markets
independently of foreign technology sources.

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28. Readings…
• Dosi –only relevant sections
• -Manasfield [definition, findings]
• Acs [findings, for further discussion
tomorrow]
• Clarke his view on the three sources of
technological change
• Archibugi –relevant to your second
assignment.