Chapter 11, Firms
SCIENCE AND TECHNOLOGY POLICY IN A
COMPETITIVE ECONOMY
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SCIENCE AND TECHNOLOGY POLICY IN A
COMPETITIVE ECONOMY
Introduction:
The link between science and innovation is crucial to industrial
success.
•Policy makers try to improve the innovative record of their countries
with appropriate policies to support science and technology.
•Fundamental changes; grants for specific innovations and
technology development projects have been phased out in a shift
from the support of close-to-market artifact development to the
support of collaborative far-from-market knowledge generation.
This chapter will compare the neoclassical approach to science and
technology policy with the evolutionary view which sees innovation as
the product of a system of institutions.
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2. The distinctiveness of technology
• Justification of the public support for science:
• The first sees scientific output as a cultural consumer good which
enlightens and entertains the public at large. (new symphony).
• A second view, sees science as an investment that generates a
more than compensatory return, in terms of wealth creation or
improved living standards via medical advances or better control
of the environment.
• What are the main limitations of the production process
(technology push) linear model?
• The first, the linear model covers only a small fraction of the
activities involved in the innovation process. (economic factors,
such as demand)
• The second flaw in the production line model concerns the status
of science and technology, Research has established clearly that
science and technology are largely independent, but mutually
beneficial, bodies of knowledge.
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3. The economics of technology policy: the traditional
approach:
Technology may identify as; knowledge, skills, artifacts
• Technology policy can focus on a combination of these
elements; (programmes of engineering research, training or
the construction of a specific device).
• Market traditional failure. Why may a decentralized market
economy fail to allocate resources optimally to innovation?
Kinds of market failure in innovation:
• Public good aspect of technological knowledge; it is used, it
is not consumed.
• Divergences between private and social costs and benefits
add a second source of difficulty.
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• The third source of market inefficiency in technology creation
lies in the difficulty of estimating the technical or commercial
returns to an innovation.
• The consequence of these various market failures is the
absence of markets which promote the efficient creation and
exchange of technological knowledge.
• A second broad class of market failures, those that relate
market power and innovation. the fact that the average cost
of producing an item of knowledge falls as it is more widely
used. Since one cannot innovate on the basis of a fraction of
a technology, there will always be an indivisible cost incurred
in creating the knowledge behind an innovation and this
conditions will make a loss.
• These considerations demonstrate the inadequacy of the
perfectly competitive model (which requires prices to be
equal to marginal costs) in providing guiding principles in a
world where firms are
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3.2 Limitations of the market failure perspective:
• There is a divergence between private incentives and social incentives
which, in principle, governments can correct.
• The logical underpinning that market failure provides tells us
nothing about the design of policy instruments, nor their
appropriate method of implementation, and The answers to
these questions generate very different policy initiatives, in
part because the incidence of market failure varies
considerably across the wide spectrum of science and
technology.
• A more serious difficulty is the fact that the traditional
approach is based on the vision of a Pareto-efficient
economy in which competition is conceived in terms of
equilibrium market structures that are compared with the
Pareto-efficient yardstick of perfect competition.
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4. An Evolutionary Perspective
• The significance of (public good dimension of knowledge and the
imperfections of intellectual property rights) is not to be judged by a world
of equilibrium competition but by a world of change, in which competition
is a process and that means evolutionary approach. Explain the main
features of the evolutionary view of competition?
• Innovation - the generation of variety - and market selection are essential
parts of the competitive process.
• Thus competition can be seen as a process of introducing and diffusing
diverse discoveries, the utility of which cannot readily be predicted in
advance
• The natural tendency of the evolutionary process, however, is to
concentrate production around the more effective activities, to destroy the
diversity which drives competition and to tend towards monopoly
• Firms compete to gain monopoly positions, not to allocate resources in a
Pareto-efficient.
• Historically, economic competition encompasses two kinds of events:
qualitative ones - the introduction of new activities - and quantitative ones
- the changing relative importance of existing activities.
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4.1 Innovation opportunities and firm capabilities
• Technology policy is intended to change the innovation behavior of firms
so that it should take account of the relationships between expenditure
on technology creation and the resulting outputs. This relationship is
what we call it the innovation process or the 'innovation opportunities
function‘.
• This function relates inputs to the innovation process (time and effort) to
output and tells us how inputs might be used efficiently.
Cumulative innovation efforts
Figure 11.1 Innovation opportunities
at a given level of technical capability
(Isoquant map)
INN 2
INN 1
E0
0
t0
Time to Innovation
The important point to
recognize
is
that
the
innovation curves are drawn
for a given level of
technological capabilities of
the firm, that is for the firm's
state of knowledge relevant
to that technological area.
Any improvement in this
state of knowledge shifts the
function - the map of
innovation curves - towards
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the origin.
5. Technology foresight:
• A route to building infrastructure has been to create new
'bridging institutions' between industry and academia to
facilitate the effective transfer of knowledge and to shape the
research agenda. (UK the Technology Foresight Program)
• Foresight activities have been defined as: 'a systematic
means of assessing those scientific and technological
developments which could have a strong impact on industrial
competitiveness, wealth creation and the quality of life.
• The principle elements in identifying exploitable science
could be summarized at three levels:
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• The principle elements in identifying exploitable science could be
summarized at three levels:
• Identifying the link between areas of technology and the
underpinning
scientific knowledge base
• Identifying the product classes which would be significantly
affected by
technological developments over a 20 year horizon
• Identifying the relevant markets and the related pressures for
change
insofar as they influence commercial incentives.
• The process involved creating fifteen sectoral panels of 'experts'
which consulted on a wide basis with the relevant communities in
industry, academia and government. Each panel produced a
report indicating the main forces for change, …etc.
• May be one of the outcomes of the Foresight Programme will be a
reallocation of resources within publicly-funded science and
technology in the UK.
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Chapter 12
THE FOUNDATIONS OF NATIONAL
COMPETITIVENESS
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Chapter 12: THE FOUNDATIONS OF ATIONAL
COMPETITIVENESS
Introduction:
• The core argument developed in what follows is that, for
firms as for countries, success is based not on doing what
others already do well, but on doing what others will never do
as well. Hence the focus of industrial policy should not be on
improving the things we do worse than others, but on
improving what we do better.
• Two widely held views of active industrial policy:
- Many believe that there is no what it calls national
competitiveness, only the competitiveness or competitive
advantage of individual firms.
- There is also a view, frequently reiterated in the 1980s, that
governments cannot and should not try to 'pick winners'.
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The competitive advantage of Firms:
• The concept of competitive advantage sums up the idea of relative
market success. Firms with a competitive advantage in a market
have a cost or quality advantage and can therefore earn
supernormal returns as a result of owning some characteristic of its
operations that others cannot emulate.
• Firms considering their corporate strategy - and economists advising
them - are very interested in the sources of competitive advantage.
• Furthermore firms can create over time the capabilities and
organizational characteristics that give them a durable edge over
rivals even where entry barriers arc low. Three resources for that:
• One is what I call 'architecture': the network of relational contracts
within and around the firm, involving employees, suppliers and
related firms.
• The second source is reputation, that sustains a price premium for
quality products of a firm selling experience goods.
• The third source is innovation. Innovation is a key source of
competitive advantage, but one whose benefits can be hard to
appropriate and sustain.
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3. The sources of national competitive advantage
3.1 Does national competitive advantage exist?
• Yes, there is evidence indicate that there is such a thing
as national competitive advantage. Most cameras are
made in Japan, If you use software, it is far more likely to
have been created in the United States than in any other
country.
• Do you think the existence of so many multinational firms
contradicts this argument? Do multinationals make
geographical boundaries irrelevant?
• No, because all of these reasons: a small number of
companies which have genuine dual nationality. Perhaps
more enuinely multi-national companies will be created. But
it will be a slow process. Most companies still have a very
obvious national identity.
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3.2 The sources of geographical concentration:
• creates national competitive advantage?
• national competitive advantage could be derived from a scarce
factor of production of the country.
• There are some resources of economic importance which are
aligned with national borders. Language, Legal systems, fiscal
rules and regulatory regimes also coincide with national
boundaries.
• The relationship between physical resources and industrial
location used to be much closer than now. But, what explains
these clusters in the present?
• Economies of scale, transport cost advantages once transport
systems are built, and local demand for products can all play a
role in sustaining industrial clustering. Yet many of the reasons for
the persistence of clusters of related firms in a particular area
seem to be social rather than narrowly technical: more concerned
with trust and working relations than with cost economies.
• It is in success in creating networks which facilitate these
exchanges that many competitive advantages in today's world
depend
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3.3 Culture, trust and industrial success:
• A certain level of trust cuts transactions costs and smoothes
the process of even straightforward economic exchange.
• Elaborated forms of institutional trust and even personal are
required for complex relational contracting, and can be
sustained by features of the legal environment, such as the
legal concept of 'good faith' in German and Italian legal
doctrine.
• Shared experiences and values are a central element in
developing trust.
• Marshall recognized that 'mutual knowledge and trust'
reinforce a tendency to trade with those we know, and are
essential to efficient verbal contracts.
• Social institutions which support trust relationships and the
development of tacit knowledge are a major advantages for
industrial success.
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