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Development Through Technology Transfer

Creating New Organisational and Cultural Understanding

Intellect Ltd

Innovation Process and Influential Factors

This chapter explores and analyses the ways innovation has been approached and defined. A first section is devoted to the historical evolution of technology. The objective of this section is to examine the major attempts used to explain technological changes as an evolutionary process. The second section explores the nature of innovative activity and highlights its complexity and its multidisciplinary approach. The third section focuses on the intricate aspect of this activity by examining the whole innovation process. The fourth section scrutinises the continuous debate over the causes of innovation and finally the fifth section outlines the determinants for a successful implementation of innovation. In conclusion, this chapter examines the relevance of these theories in the context of developing countries.

1. Historical Evolution of Technological Changes

Classical economists, from Adam Smith to Milton Friedman, have presented the history of technology as a continuous process of advance. In general, economists have always recognised the importance of technological change in the promotion of economic growth. For Adam Smith in 1776, the division of labour and improvements in machinery led to the promotion of invention. Marx in 1848 stated the necessity for the bourgeoisie to revolutionise constantly the means of production. It was, however, Schumpeter and Schmookler who identified technological change as an important component of economic development.

In a paper published in 1952, Schmookler stated the belief that the growth in the national product of the USA in the 70-year period leading up to 1938 was due not only to the growth in the stock of capital and labour but also to the growth of efficiency in the use of these resources. Kuznets (1965) supported this view, which found its greatest advocates in Solow (1957) and Kendrick (1984). According to them, from about 1900 to 1920 'technical progress' as Solow called it or 'productivity advance' as Kendrick termed it, contributed 1% a year to the rise in the national output of the USA, and between 1920 and 1950 this contribution increased to 2% per year. Solow added that no more than 1/8 of the growth of output per head could be attributed to increased capital input, and the remaining 7/8 should be credited to technical progress. Thus, the major breakthrough was that the growth in output was the result of factors believed to be entirely due to technological progress.

The history of technology appears as one of steady progress from the time of the Industrial Revolution. The primary Industrial Revolution, concerned with the development of steam energy, was followed by a series of secondary revolutions (railway, electricity and electronics). One of the first and major contributions to this theory of long-term economic development and structural change in capitalist societies came from Joseph Schumpeter.

1.1. Schumpeter's Contribution

Schumpeter' s theory of economic development contained an important evolutionary trait which according to Coombs et al. (1987) represented a radical departure from neoclassical economics. The primary concern of the neoclassical school was to explain and predict changes in the relationships between static economic variables such as prices, output and profit in the general equilibrium model based on the assumption of maximisation and perfect competition. For Schumpeter, innovation was the main driving force of change giving rise to the growth and decline of economies. In his concern about the ways economic systems respond to perturbations, Schumpeter adopted an evolutionary model in which technological change and the efficacy of the entrepreneur as an innovative agent played the most significant role.

Indeed, in his study of capitalism, in which innovation is defined as 'the main engine of capitalist growth and the source of entrepreneurial profit' Schumpeter suggested that 'the essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process'. He also added that 'capitalism can never be stationary'. Thus, Schumpeter was a strong defender of the theory that the supply of innovation is more important than the adaptation to existing patterns of demand. Schumpeter viewed the entrepreneur as being the key character in capitalist societies, often discovering new ideas and introducing them into economic life. However, after having identified in his early work in 1912 the individual entrepreneur as the source of innovation, Schumpeter argued in his later works in 1928 and 1939 that it is the entrepreneurial function which generated innovation rather that the individual entrepreneur.

In his study of business cycles (1934, 1939, 1942), Schumpeter came to recognise that 'every concrete process of development finally rests upon preceding development' and 'every process of development creates the pre-requisites for the following'. These notions of cumulative and pre-requisite development show Schumpeter's acknowledgement of cycles in economic development. In this context, Schumpeter took up Kondratiev's work and introduced the idea of technological revolution as the basis of the 'Kondratiev cycles'.

In the 1920s, Kondratiev of the Institute of Applied Economic Research in Moscow was among the first to attempt to collect data to clarify the turning point of the long cycles. Kondratiev saw these cycles being related to the durability of certain types of investment such as buildings and transport. In his study of business cycles, Schumpeter added that innovations causing economic fluctuations are evenly distributed through time and appear discontinuously in groups or 'swarms'. From Kondratiev's work, Schumpeter identified the following waves.

i. The first 'Kondratiev wave' from 1785 to 1845 and which corresponds to steampower.

ii. The railways as the second 'Kondratiev wave' from 1845 to 1900.

iii. The third 'Kondratiev wave' from 1900 to 1950 corresponding to electric power and the automobile.

In spite of the significant evolutionary feature carried in his theory of economics, Schumpeter was also influenced by the Walrasian theory of 'equilibrium'. This explains why Schumpeter started his analysis from a state of equilibrium which gets thrown into disequilibrium. He therefore held the view that innovation generates disequilibrium. Indeed, Schumpeter classified economic cycles in the following ways: prosperity, recession, depression and revival.

In the prosperity period innovation is successful and risk is cut down. As a consequence a shift from equilibrium occurs. In the recession, the innovative impetus ends and the stage returns to a new equilibrium. The depression appears when former innovation has no effect. Finally, the revival emerges when new innovations are introduced into the market.

However, in his study of business cycles, Schumpeter emphasised further his evolutionary approach and defined economic evolution as being about 'changes in the process brought about by innovation, together with all their effects and the responses to them by the economic system'. As Juma (1986) points out, this view of evolutionary theory 'transcends the notion of circular economic flows and the tendency towards general equilibrium'. Indeed the disequilibrium caused by innovation opens up new opportunities for adaptation which leads to new innovation. Schumpeter viewed this as 'the setting up of a new production function'. For Freeman (1974), Schumpeter held the view that innovations generate disequilibrium first because innovations are unevenly distributed since they tend to concentrate in certain specific sectors and second innovations 'cluster' come about in 'bunches' as a result of the diffusion process which is also uneven. While Schumpeter's contribution to the understanding of the role of innovation in the process of economic change is widely acknowledged, it is, however, argued that he ignored the process of innovation itself. Usher (1954) and Strassman (1959) point out that Schumpeter's work was merely a description of the consequences of innovation and did not explain the process. For Ruttan (1959) and Freeman (1996) there was nothing in Schumpeter's work that could be identified as a theory of innovation. He had very little to say about the origin of innovations or about the management of innovation at the micro-level. Kuznets (1965) and Perez (1984) asserted that Schumpeter provided no explanation of the mechanisms of causation which underlay the activity of innovation. Kuznets argued that both Schumpeter and Kondratiev had failed to substantiate their theories by reference to statistics on production, trade and employment.

In line with Schumpeter, the neo-Schumpeterian school has explained the role of innovation in the process of economic development, but has also attempted to explain the process of innovation itself.

1.2. Major Neo-Schumpeterian Contributions

In this section, the neo-Schumpeterian work is divided into three groups. The first includes works from Mensch (1979), Freeman (1974) and Freeman and Perez (1988) where emphasis is placed upon long economic cycles. The second group comprises the work of Nelson and Winter (1977,1978,1982) which deals with search and selection mechanisms. The last group is devoted to the 'Organic' approach to innovation proposed by Clark and Juma (1987), Rothwell (1992), Kanter (1996), Morgan (1997) and Tidd et al. (1997).

For all three groups, technology is the major factor generating economic change, and technological change is an evolutionary process which is interactive, cumulative, institutional and disequilibrating.

Long Cycles Theory

Mensch (1979) proposed a theory of 'bunching' of basic innovation to explain how Kondratiev waves start. He claims that historically such a pattern can be observed to occur in the depression periods of the 1830s, 1880s, 1930s and he predicted a new cluster of basic innovation in the 1980s. The cycles according to Mensch (1979) are associated with a cluster of basic innovations which establish new branches of industry. The resulting economic expansion reaches a limit and consequently a technological stalemate is reached. Mensch argues that the stalemate creates an 'accelerator mechanism' and hence induces innovations which come again in clusters and boost the economy. Thus, during the technological stalemate of the recession phase, the basic or radical innovations are crowded out, providing the opportunity for subsequent recovery.

This theory was challenged by Freeman and his colleagues (1982). They argue that 'once swarming does start it has powerful multiplier effects in generating additional demand in the economy for capital goods, for materials, components, distribution facilities and of course labour'. This induces a further wave of process and applications innovations, and gives rise to expansionary effects in the economy as a whole. It is, according to Freeman et al. (1982) the effect of swarming that leads to economic expansion, and not depression inducement as suggested by Mensch. However, Freeman and his colleagues acknowledge that depression may bring about institutional, political and social changes which can facilitate the adoption of new systems of technology.

Freeman and Perez (1988) introduced the notion of a 'techno-economic paradigm' which is much wider than clusters of innovations or even of technology systems. These two authors use the concept of a paradigm as Kuhn (1962) does to describe a way of seeing a dominant pattern which influences thinking across a very broad front. Kuhn introduced new ways of looking at the development of knowledge in general, and scientific knowledge in particular. He argued that scientific knowledge did not develop in a linear progression but in a series of historical stages of stability and disruption leading to periodic paradigm shifts in which the whole structure of how scientists see the world is altered. However, Kuhn did not examine the socio-economic context which shapes the emergence of particular paradigms.

This concept of a techno-economic paradigm, as defined by Freeman and Perez (1988), refers to 'a combination of interrelated products embodying a quantum jump in potential productivity for all or most of the economy and opening up an usually wide range of investment and profit opportunities'. This quantum jump in productivity is seen by Perez (1984) as 'a technological revolution, which is made possible by the appearance in the general cost structure of a particular input or key factor'. Thus, each mode of development would be influenced by a specific technological style or paradigm for the most efficient organisation of production (Freeman, 1996). By technological style we mean an ideal type of productive organisation or a best practice pattern which develops as a response to what are perceived as the stable dynamics of the relative cost structure for a given period of capitalist development. This assumes a strong feedback interaction between the economic, social and institutional spheres which generate a dynamic complementarity centred around a technological style. Thus the structural crisis which affects the economic as well as the socio-institutional spheres requires the adaptation of the socio-institutional context to innovations leading to a new technological style. This is why Freeman and Perez (1988) suggest that the favourable conditions for their paradigm should include 'complementarities between innovations and the emergence of an appropriate infrastructure as well as some degree of political stability and institutions which do not hinder too much the diffusion of new technologies'.

Such a paradigm has a major influence on the behaviour of the entire economy. For Freeman and Perez, 'it not only leads to the emergence of a new range of products, services, systems and industries ... it also affects directly or indirectly almost every other branch of the economy'.

The techno-economic paradigm consists of a combination of radical and incremental, innovations and its emergence is basically justified by the scope of changes brought about by technology. Radical innovations are the result of deliberate Research and Development (R&D) activity and are discontinuous events. Conversely, incremental innovations occur more or less continuously depending upon a combination of demand pressures, socio-cultural factors, technological opportunities and trajectories. The incremental innovations occur essentially as the outcome of simple improvements suggested by users as the result of their 'learning-by-doing'. These incremental innovations which do not require a high level of in-house skill, are viewed by Bell (1982, 1984) and others as being the most appropriate to firms from developing countries.

Freeman and Perez's (1988) techno-economic paradigm is also based on organisational and managerial innovations since the changes involved affect not only engineering activities but also various facets of management activities such as production, distribution and organisation. Thus each wave is not only concerned with technological clusters but has also dominant organisational forms associated with it. This explains Bessant's (1990) suggestion of a fifth wave in which emphasis is put on the following features.

i. non-price factors;

ii. flexibility in technology;

iii. flexibility in organisational structure;

iv. changing relationships within and between organisations;

This techno-economic paradigm acknowledges the necessity to surmount the incompatibility between the emergence of new technology and the older forms of organisation based on division of labour and rigid bureaucratic style which characterise the fourth wave known as mass-production or the Fordist-Paradigm.

Freeman and Perez explained technological changes as an evolutionary process in which emphasis was put on long economic cycles. Their study was, however, limited to the macro-level and was hardly brought to the level of the organisation nor to the context of developing countries.

Search and Selection Theories

The works of Nelson and Winter (1977, 1978, 1982), which contributed to a better understanding of innovation at the organisational level, are acknowledged as being of notable value in the search and selection approach. They define innovation as 'a change of decision rules' and argue that such 'a change in decision rules is more likely to be stimulated by threats and adversities than by a situation characterised by favourable outcomes'. Thus according to Nelson and Winter, organisations that are sufficiently profitable do not search for alternative techniques. The search for innovation may only happen when there is a pressure of threats, such as adversity. These 'decision rules' are known as technological trajectories, that organisations embrace them and may change them depending on the characteristics of their products and processes, and on the environment in which the organisation operates.

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Excerpted from Development Through Technology Transfer by Mohammed Saad. Copyright © 2000 Intellect Ltd. Excerpted by permission of Intellect Ltd.
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