Innovation Cost and the Nature and Direction of Learning:...
Transcript of Innovation Cost and the Nature and Direction of Learning:...
Innovation Cost and the Nature and Direction of Learning: Lessons in Manufacturing Change and Automation
(Previous title: Incremental Process Innovation and Competitive Cost Reduction)
March 29, 2019
Kenneth L. Simons
Department of Economics Rensselaer Polytechnic Institute
110 8th Street Troy, NY 12180-3590
USA Tel: (518) 276-3296 Fax: (518) 276-2235
Email: [email protected] Acknowledgments: Omar ALShaye assisted in data collection by independently coding innovation characteristics from in-depth reading of articles, then discussing and agreeing appropriate treatment compared to the author’s coding. Helpful comments were provided by Michael Klein, Yu-li Ko, and seminar participants at the 2016 International Schumpeter Society Conference, the 2016 Industry Studies Conference, Colgate University, Rensselaer Polytechnic Institute, and the University at Albany.
Innovation Cost and the Nature and Direction of Learning:
Lessons in Manufacturing Change and Automation
Abstract
Manufacturing cost “learning curves” are argued to result primarily from process
innovation, affecting not only the rate of learning, but also the nature and direction of learning.
A model of firm incentives for innovation opportunities implies that, in devising future
production cost reductions, larger firms innovate disproportionately, and larger firms
disproportionately pursue higher-cost-reduction innovations, expensive technologies,
mechanization, and new technological trajectories. The most detailed single-product process
innovations database apparently ever analyzed, with novel data on 303 television process
innovations, is assembled to test the model. Process innovations’ rate, nature, and direction
match the predictions. Sustained incremental process innovation, often in duplicate across firms
without appropriation of rights, occurred in diverse production steps. Process innovation
“learning” was associated with enhanced future business survival and market share. Moreover,
most innovations carried an innovation scope advantage for potential future electronics mass
manufacture.
Keywords:
learning curve, process innovation, R&D cost spreading, incremental technological change,
innovation incentives, manufacturing competitiveness, television receivers, electronics
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Innovation Cost and the Nature and Direction of Learning:
Lessons in Manufacturing Change and Automation
Causes underlying “learning by doing” have been important unknowns, investigated for
manufacturing firms in a small but growing number of industry and firm studies (Thompson
2012). While the term learning by doing is used as a synonym for cost reduction, most cost
reduction in manufacturing apparently results not “by doing” the making of goods, but by
deliberate cost-reducing efforts and activities. Capital investments (Thompson 2001) and a
search for lower-cost inputs (Sinclair, Klepper, and Cohen 2000) sometimes explain part of the
improvement. Innovation, however, explains improvement most frequently, through R&D,
engineering, and process management (Hatch and Mowery 1998, Sinclair, Klepper, and Cohen
2000, Levitt, List, and Syverson 2013, Hendel and Spiegel 2014). Engineers and other plant
employees deliberately investigate methods to lower manufacturing cost. 1 Despite the
preponderance of deliberate engineering and R&D as the identified cause of firms’ cost
reduction, these and other studies have not systematically identified and studied the underlying
innovative improvements.
I examine an industry, television manufacture, with substantial learning-by-doing
(Boston Consulting Group 1972). Could innovations have caused the industry’s learning curve
by making unit costs lower, especially for manufacturers with greater cumulative output? If so,
larger producers must have carried out substantially more process innovation. In addition to the
rate of innovation, the nature and direction of innovation should have differed predictably for
larger producers. I assess the character (minor or major), locus (within the manufacturing
process), direction (mechanical versus labor intensive), trajectory (related changes introducing a
new manufacturing approach), and scope (applicability to other products) of innovations, and
how they may be driven by firm size.
To understand the rate and direction of cost reduction, I develop a theoretical model. The
model extends the idea of R&D cost-spreading beyond implications for the rate of innovation
1 These insights arise from studies of, in order of first citation, World War II Liberty shipyards, a
Fortune 500 batch chemical production firm, semiconductor manufacturers, an automobile
manufacturing plant, and a steel mini mill.
2
and product-process innovation differences, to consider correlates of high innovation cost. A
rate of innovation incentivized by expected sales motivated Schmookler (1966, 112-115) to
model R&D as driven by current output which predicts future sales. In his model, financial
returns make an invention worth commercialization if current sales predict that profit from future
sales will exceed the cost of invention. Competitive models in this spirit were developed by
Dasgupta and Stiglitz (1980) and Levin and Reiss (1988). The way firm size drives innovation,
Cohen and Klepper (1996b) showed, is fundamental to interpreting, and avoiding
misinterpretations of, the meaning of size-R&D relationships. However, this modeling approach
has almost never been taken beyond its ramifications for the rate of aggregate innovation. An
exception is that process innovation’s rate should be incentivized by current firm size, but not the
rate of novel product innovation that creates new markets (Cohen and Klepper 1996a).2 Yet, an
effect of R&D cost-spreading has been missed in theoretical analyses. Correlates of high
innovation cost must coincide with firm size in R&D cost-spreading models, since larger firms
pursue a greater proportion of higher-cost innovations than do smaller firms. This implies that
R&D incentives drive R&D in a way that propels not just the rate but also the nature and
direction of the learning curve.
The model depends on assumptions that are realistic for typical industries, but that differ
from common characterizations in economic models. Researchers’ attention on innovation has
gone mainly to product innovations that are major, winner-takes-all, saleable, and entrepreneurial
in spirit or practice. In contrast, process innovation is argued to be typically incremental,
duplicative, lacking in strong intellectual property rights, and routinely manageable. The
theoretical assumptions are compared to empirical facts of the industry.
Data used pertain to U.S. television receiver manufacture during 1947-1971. Television
was the celebrated postwar consumer product, spurring trade articles on television manufacture.
Focus articles described the layout and procedures of television receiver manufacturing plants,
and Electronics magazine paid engineers for tips and tricks to aid television receiver and other
electronics manufacturing. This literature makes television receiver process innovation
observable. From 219 trade articles, I document 303 innovations. A flood of small process
2 Their analysis does not distinguish incremental product improvements affecting quality, versus
new product introductions. The former should behave similarly to process innovation.
3
innovations inside firms affected diverse aspects of television manufacturing. The dataset
assembled here is, as far as I am aware, the most extensive list of process innovations yet
analyzed for any single product.3 Identification exploits the fact that entry time in prior radio
manufacture closely predicted future television market share.
Findings reveal sustained innovation that completely reshaped manufacture. Innovations
combined evolutionary improvements with a shift to major new technologies, notably use of
printed circuit boards and automated methods that took advantage of printed circuit boards.
Larger firms dominated process innovation, as expected if the learning curve’s greater cost
reduction rate stemmed from innovation. Moreover, larger firms carried out not only the sorts of
easy innovations made by small firms—often through duplicate or near-duplicate innovations—
but also harder innovations. The average innovation of larger firms brought greater cost
reduction, occurred more often in parts of the manufacturing process involving expensive
equipment and technologies, involved more mechanization, and pertained more often to the new
trajectory of innovations involving printed circuit boards. Innovative leadership was strongly
related to greater future market share, and to survival in television manufacture. In addition,
many of the innovations developed had the scope to apply to other electronics mass manufacture
in future, putting successful innovators on a path to benefit in related future products.
In addition to the learning curve literature, this study contributes to work on the
determinants and direction of innovation. Product quality ordinarily exhibits continual ongoing
improvement, not abrupt change, suggesting as for Moore’s law that minor innovations steadily
enhance quality (Sahal 1981, Dosi and Nelson 2010, 67-69). This study identifies the
innovations behind such continual progress, whereas the underlying innovations have almost
always gone unmeasured. Innovation spending is thought generally to exhibit decreasing returns
to scale, although it remains on open question whether larger firms might be more efficient at
R&D (Cohen 2010). This study derives decreasing returns to scale in the direct innovation
production function from first principles (without precluding efficiency or dynamic causes that
may yield increasing returns), in order to examine how prospective innovations’ differing
marginal benefits—correlated with characteristics such as mechanization—propel the nature and
3 Abernathy, Clark, and Kantrow (1983) listed without statistical analysis 631 innovations for
automobiles, however, only 119 are process innovations.
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direction of innovative progress. Television manufacturing innovation apparently was propelled
this way. Innovations typically are not strongly protected by patents, and when patenting
increased after patent rights were strengthened, the increase has been found to be for legal
defense with no increase in innovation (Levin et al. 1987, Hall and Ziedonis 2001, Cohen,
Nelson, and Walsh 2003, Moser 2013). This study expands knowledge of how innovation
functions when patent protections do not drive innovation. The rate and the direction of
innovation have long been recognized as important (National Bureau of Economic Research
1962), yet as Furman and Teodoridis (2017) note, few studies have explored determinants of the
direction of innovation. This study describes forces underlying the direction of innovation.
The study also relates to contemporary concerns of automation and job loss. As
automation increased television manufacturing labor productivity, eventually decreasing the
industry-wide workforce, it brought low-cost goods that a post-war society especially desired. It
stimulated related industries including retail and television repair. It caused some television line
workers, mainly women, to shift out of painstaking assembly work, causing undesirable
unemployment to workers in some communities after years of industry growth, but leading them
into home activities or new lines of work that might have been more rewarding than the
assembly jobs they had held. These events may not be the same as events playing out today, but
it may be helpful to reflect on past automation events, and their causes as analyzed here, to
consider the same issues today.
The paper begins in section 1 with a model of process innovation that explains why firms
generate cost-reducing innovations in greater quantity, and with innovations of nature and
direction that push toward much greater efficiency. Section 2 presents the data on process
innovations, and shows how their character fits with key assumptions about the nature of
innovation in the model. Section 3 analyzes how the rate, character, locus, direction, trajectory,
and scope of innovation vary by firm size, and how innovation relates to future market share and
survival. Section 4 presents conclusions.
1. Cost Reduction from Incremental Process Innovation, In and Between Firms
Firm decisions on innovations—whether or not to pursue specific opportunities—
determine the rate, nature, and direction of aggregate process innovation, and how innovations
impact manufacturing cost. These determinants of innovation are characterized in a simple
theoretical model, building on the idea of innovation cost-spreading (Schmookler 1966,
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Dasgupta and Stiglitz 1980). The model relates closely to Cohen and Klepper’s (1996b) model
of innovation, to which it provides a theoretical underpinning in terms of individual process
innovations. However, the current model extends the analysis beyond the rate to the
characteristics and direction of process innovation. Firm growth costs are modeled as in Klepper
(1996).
1.1. Firm Innovation Decisions
Consider the growth of a firm from Q0 to Q1 , with an expansion cost, to achieve period-1
revenue. A firm has the production capacity, and distribution channels, managerial capacity,
etc., to produce Q0 of a product in period 0. The firm chooses production Q1 in period 1, and
therefore expands its capacity and carries out process innovation. Q0 will be interpreted broadly
as a measure of all firm characteristics that reduce the expansion cost to achieve each possible
Q1 . Expansion by ΔQ = Q1 −Q0 costs g(ΔQ) , and marginal adjustments in output become
increasingly expensive, ′′g (ΔQ) > 0 , with a minimum g(0) at 0. This adjustment cost depiction,
with a convex function, arises when training new workers and installing new equipment takes
scarce time from existing employees, who increasingly for higher ΔQ are less able to carry out
their normal duties. It also arises if, in establishing n out of n+1 sales and distribution channels,
a firm can choose the cheapest of the available n+1 so that the n+1 th channel is most
expensive. For simplicity, the firm’s prospective output is assumed to be modest relative to the
market, so the firm is a price taker. Period 1 revenue is pQ1 , where p is the equilibrium price.
Average production cost can be lowered through process innovation. Innovative
opportunities available are numerous. Each innovative opportunity k requires a cost of
innovative effort r k (in personnel and material), and yields a resulting reduction c0k in per-unit
production cost. Although many of these innovative opportunities have a degree of
unpredictability, on the whole the innovative enterprise is predictable enough, so that the total
mass of innovative activity may be treated as entirely predictable, and I abstract away from
randomness by inflating the cost of innovative effort to include the fraction of failures.
Innovative opportunities will be treated below as so numerous that they are well modeled as a
mass.
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The fruits of innovation are a reduction in per-unit production cost, C = C − d kc0
k
k∑ ,
where C is the average cost absent any process innovation, and d k is 1 if the firm decides to
implement innovation k or 0 otherwise. The firm pays in total for its innovative effort
r = d kr k
k∑ . This yields a profit of
Π = ( p −C + d kc0
k
k∑ )(Q0 + ΔQ)− g(ΔQ)− d kr k
k∑ . (1)
Optimal decisions are desired for ΔQ and all of the d k , hopefully with a simple
interpretation that the firm can intuit. Whatever ΔQ the firm chooses yields Q1 = Q0 + ΔQ . For
this ΔQ and Q1 , rewriting (1) then yields
Π = [( p −C)Q1 − g(ΔQ)]+ d kr kQ1
c0k
r k −1Q1
⎛
⎝⎜⎞
⎠⎟k∑ . (2)
Thus the benefit of implementing innovation k is exactly r kQ1 c0
k / r k −1/ Q1( ) , which is positive
if and only if c0k / r k >1/ Q1 . Ranking the innovations in order from highest to lowest value of
uk = c0
k / r k , which is the unit cost reduction per dollar spent on innovative effort, the firm
benefits from innovation k if and only if uk exceeds 1/ Q1 .4
In fact, each innovative opportunity can be considered a block of r k dollars that could be
spent on innovation, with each dollar yielding an average unit cost reduction of c0k / r k . Since
optimally all or none of these dollars will be spent, the cost of innovative effort and the unit
production cost can be normalized this way, yielding
d kr kQ1
c0k
r k −1Q1
⎛
⎝⎜⎞
⎠⎟k∑ = dℓQ1 uℓ −1/ Q1( )
ℓ∑ (3)
where ℓ indexes the individual dollars of prospective innovative expenditure, such that k(ℓ) is
the innovative opportunity associated with a prospective dollar spent, dℓ is 1 if spending occurs
4 For simplicity this analysis abstracts from dependencies, in which one innovation depends on
or displaces another.
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or 0 otherwise, and uℓ = c0k (ℓ) / r k (ℓ) is the average unit cost reduction that results if that particular
dollar is spent.
Treating the innovations as a mass, observe what happens if the firm prioritizes optimally
the innovations with the greatest returns. Then, from spending on innovation of
r = dℓ
ℓ∑ (= d kr k
k∑ ) , the resulting reduction in unit cost is
u(r) = dℓuℓ
ℓ∑ (= d kc0
k
k∑ ) . Here,
dℓ = 1 if and only if r is high enough that ℓ is within the first r prospective innovation dollars as
ranked from highest to lowest value of uℓ . This implies that u(r) is strictly increasing, with
successive dollars spent yielding a strictly non-increasing marginal reduction in unit cost.
Approximating the function as twice differentiable, this yields ′u (r) ≥ 0 and ′′u (r) ≤ 0 , and it is
natural to assume smooth derivatives in that ′u (r) > 0 and ′′u (r) < 0 . Regardless, an optimal
decision requires ′u (r) = 1/ Q1 , i.e., spending more money on innovation until the marginal dollar
brings a unit cost reduction of 1/ Q1 , so that the cost ($1) and benefit ( ′u (r)Q1 ) balance for the
marginal dollar of innovation.
An optimal decision therefore must simultaneously satisfy both the innovation rule,
′u (r) = 1/ Q1 , and an optimal growth rule, ′g (ΔQ) = p −C + u(r) . Both rules hold at the
maximum of Π = ( p −C + u(r))(Q0 + ΔQ)− g(ΔQ)− r .
This implies that r and ΔQ are increasing in Q0 . Using the implicit function theorem,
drdQ0
= ′u (r) ′′g (ΔQ)| H |
> 0 and
dΔQdQ0
= [ ′u (r)]2
| H |> 0 , with from the second order condition
| H |= − ′′u (r) ′′g (ΔQ)Q1 − [ ′u (r)]2 > 0 . The intuition is that Q0 increases Q1 , causing the firm to
innovate so much that the marginal benefit becomes as low as 1/ Q1 . ΔQ and r are chosen
together, for greater innovation r brings greater innovative benefit u(r) , lowering average
production cost, which incentivizes more growth ΔQ . In fact, prior firm size affects not only the
rate of innovation but also other characteristics of innovation.
1.2. Innovation Characteristics Compared Between Firms
As has been seen, firms with greater initial size, Q0 , create more innovations. With
further assumptions, initial size relates to the average values of characteristics of the innovations
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firms implement. In particular, some innovations are far more involved than others to
implement, per unit of benefit. These innovations’ innovation-cost-to-benefit ratio c0k / r k is
high. Such innovations are pursued only by firms that innovate enough to obtain high efficiency,
the largest firms, with 1/ Q1 and ′u (r) very near zero.
If firms are willing to pursue innovation with this low benefit-to-innovation-cost ratio,
what types of innovations—what innovation characteristics—become possible? Radical
innovations, with large average cost savings c0k relative to prior manufacturing practice, tend to
require entirely new approaches. They therefore demand unusually high ratios to benefits of
attentive engineering effort, investments in and adaptation of materials and equipment, and
pioneering of new ways to think and new mechanisms of production. Loci c1k in the
manufacturing process that involve costly equipment and technologies likewise tend to involve a
high ratio of innovative expense. A change to a hand assembly process, or a process with
inexpensive equipment, can be implemented readily, but a minor or major change to large
machines requires specialized equipment, tool design, and machining, with engineering labor and
material expenses. Mechanization c2k development likewise imposes a high innovation cost
ratio. Changing from hand work to mechanical work requires engineering expertise, plus often
material expenses for design, development, and construction of metal parts and molds and
electronic controls. New technological trajectories, c3k , impose a high innovation cost ratio
because of their novelty. New approaches require that engineers work out ideas and principles
still in their infancy, and tend to involve new process components necessarily developed in-
house.
Thus each of these characteristics (variables) j is correlated, among innovations (data
observations) k that are opportunities or are carried out, with a high innovation-cost-to-benefit
ratio (another variable): corr(cj
k ,c0k / r k ) > 0 for j = 0,1,2,3 . This suggests that as c0
k / r k
increases, for marginal innovations carried out in increasingly large firms, the expected value of
c j
k ordinarily increases. To guarantee the expected value increases, a mild regularity condition is
assumed regarding the joint probability density function of c0k ,…,c3
k and r k . The condition is
that the joint distribution of uk = c0
k / r k and c j
k , for each j = 0,1,2,3 , satisfies
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E[cj
k | uk = u ]> E[cjk | uk ≤ u ] for all possible u .5 As a result,
∂E[d kc jk ]
∂Q0
> 0 for j = 0,1,2,3 , so
that innovations with high values of c0k ,c1
k ,c2k ,c3
k are pursued disproportionately by the largest
firms, with 1/ Q1 and ′u (r) very near zero.
This does not apply for radical cost reductions that stem merely from adoption of a third-
party manufacturer’s equipment. Nor does it apply to a simple possible metric of mechanization,
the use of tools, since pre-existing tools can be put to use at little cost. Finally, the scope c4k of
applicability of innovations to manufacture of other products that the firm may make, at present
or in future, has no definitive reason to be associated with higher or lower innovative expense.
Scope is incentivized by the volumes of other products the firm makes, currently or in future,
although in television receiver manufacturing other contemporaneous electronic products lacked
comparable sales volumes with the partial exception of radios, and perhaps record players,
whose production methods were relatively well established.
1.3. Intellectual Property, Duplicative Effort, and Innovation over Time
Basic intellectual property models in economics suggest that firms should patent their
innovations, and sell them to other manufacturers. This would change the incentives to innovate,
causing even very small manufacturers to innovate comparably to large manufacturers. This
does not generally occur for incremental process innovations. Limitations of patents as means to
protect inventions are well known, since other firms can copy an idea without paying royalties
when lawsuits are often unsuccessful, can slightly change the original idea to invent around it,
and can keep secret their methods of production. Moreover, the specific methods of firms’
production processes vary so widely that an innovation that aids one firm’s production process
may need to be implemented quite differently for another firm’s production process. It is true
that some manufacturing equipment is developed and sold successfully by third-party makers,
which do successfully capture returns by selling to multiple manufacturers, however, the present
5 This ensures that
∂∂u
( f (uk ) / F(u ))E[cjk | uk ]duk
−∞
u
∫ > 0 , i.e., the conditional expectation of c j
k
is everywhere increasing with u , which is the highest value of uk pursued by a firm.
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analysis focuses on innovations carried out in-house within final product manufacturers, and
mere adoption of equipment from third-party equipment makers is not considered as innovation.
Since firms do not sell their innovations to each other, firms with similar production
processes develop their own, often similar, solutions to production problems. With
manufacturing lines and practical innovative solutions that are similar, the solutions can be
labeled duplicative innovations. Duplicative effort of this sort is entirely ordinary in typical
production activities. Since small and large firms alike carry out innovations with a high cost
reduction per dollar of activity ( uk ), the simplest innovations are duplicated throughout the
industry. However, only large firms duplicate each other in the more difficult innovations
needed to achieve very high efficiency.
The results of the model extend to a multi-period framework. A subsequent time period
t >1 allows further innovation within the set St–1 of innovative opportunities that existed
previously, plus a set St of new innovative opportunities. New opportunities arise because
revised operation and design of the manufacturing process creates opportunities for improvement
that were not previously possible or considered. They also arise because exogenous
technological advances in science, engineering, and tools enable modes of innovation not
previously available. Within St–1, old opportunities with low c0k / r k have been exhausted, so
larger firms only pursue innovations with higher c0k / r k relative to smaller firms’ choices.
Within St, larger firms exploit—just as was shown formally above—the same easy opportunities
as smaller firms plus additional opportunities with higher c0k / r k . Overall, the fraction of
innovations with an innovation-cost-to-benefit ratio greater than or equal to any specified amount
continues to be at least as large (i.e., to be stochastically dominant) among larger firms than
among smaller firms. Therefore, the model’s implications for correlates of high innovation-cost-
to-benefit, Propositions 2-5 below, continue to hold. Larger firms continue to innovate more,
Proposition 1 below, as long as new innovative opportunities are sufficiently numerous.
1.4. Distinctive Assumptions and Implications
To summarize, the model builds on assumptions distinct from some common portrayals
of innovation:
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A. Very many process innovations, generally incremental in character, occur rather than a
few indivisible changes. This makes aggregate outcomes more predictable, and not
dependent on success or failure in one or a few stochastic projects.
B. Innovative opportunities may be spread across multiple loci in the production process. If
so, the separate innovations in each locus (physically different location or separate
activity in the same location) further limit variability of aggregate outcomes from
stochastic projects.
C. Technological opportunity may be sustained for a long period, despite prior innovations’
completion, by building on prior innovations and exogenous technological change. This
causes process innovation to continue to affect manufacturing competitiveness and the
determination of industry structure.
D. Duplicative innovation arises frequently, with multiple firms developing similar or
identical ideas. This results, at least for many innovations, from intellectual property
rights failing to stimulate a common innovative solution that is sold on the market. This
signals also that multiple firms have the incentive to solve the same types of problems.
E. Innovation is frequently carried out in-house by manufacturers, despite any availability
of equipment and component innovations from third-party suppliers. This means that
innovation matters to competition, because it is not displaced by an upstream innovation
supply industry.
The regular need for a large flow of innovation, with limited stochastic variability, makes
innovation a routine firm activity. Far from depending on champions of unorthodox ideas, on
entrepreneurs or entrepreneurial individuals inside firms, instead established employees and
departments carry out the bulk of this routine incremental process innovation.
These assumptions set the stage for the model given above. As established formally in
the model, future sales incentivize process innovation, and prior size drives future sales. Thus
larger firms innovate more, explaining the learning curve’s association between production and
cost reduction. Moreover, larger firms have a distinct nature and direction of innovation. The
analysis of the model proved:
Proposition 1: Larger firms have a greater rate of process innovation.
Proposition 2: Larger firms disproportionately pioneer innovations with higher cost-
reducing impact.
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Proposition 3: Larger firms disproportionately improve parts of the manufacturing process
that involve costly equipment and technologies.
Proposition 4: Larger firms disproportionately mechanize.
Proposition 5: Larger firms disproportionately put to use new technological trajectories.
Thus, more radical innovations come mainly from the establishment, not the underdogs. These
propositions compare manufacturers of one product, excluding upstream and downstream firms.
This characterization of the nature and effects of process innovation beseeches a deep
investigation of process innovation through actual cases. Consider, then, the case of the
television receiver industry.
2. Television Manufacturing Innovation: The Distinctive Assumptions
Black-and-white televisions was one of the examples in a classic study of the Boston
Consulting Group (1972). The study documented a decline in price of many commercial
products following market inception, and inferred given competition a matching decline in
manufacturing cost. Black-and-white televisions’ price declined by a factor of 4.2 from 1947 to
1968 as cumulative output increased by a multiple of 726, as shown in Figure 1. The elasticity
of unit cost with respect to cumulative production was nearly constant at –0.13 in 1947-1953,
and then accelerated to –0.62 in 1953-1965 (or –0.53 in 1953-1968). What can be learned about
innovation’s role in this cost-reduction, and about the innovation process generally?
2.1. Innovation Data Sources and Codification
Articles on television manufacturing processes were catalogued in an annual trade and
technical bibliographic index, the Industrial Arts Index. Articles in categories titled “Television
Receiving Apparatus: Manufacture” and “Television Receivers: Manufacture” were obtained,
along with additional articles from television categories related to testing or other topics if they
appeared to pertain to manufacturing. Relevant articles were found during 1947 to 1971, and
came from the journals Electronics (145 articles), Tele-Tech (12), Iron Age (6), Journal of the
British Institute of Radio Engineers (6), Factory Management and Maintenance (5), Industrial
Finishing (5), Steel (5), and twenty-one other journals (3 or fewer articles each). Articles in
Electronics were often short manufacturing tips of a quarter page to about two pages. Some
articles (often in Tele-Tech) were special features containing many subsections, each the length
of a typical article. Each article was read closely to identify manufacturing methods, whether
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Figure 1. Black-and-white televisions’ real wholesale price (1958 US $) declined with cumulative industry output in the U.S., 1947-1968. Data from Boston Consulting Group (1972, p. 93). each method was described for the first time in the trade literature, and the firm or firms at which
the methods were used. When a technique was documented for the first time, it was recorded as
an innovation. Later uses by other firms were not considered innovations.
The resulting data provide a history of many of the process innovations made by firms in
the industry, including some very small innovations. Nonetheless, the smallest innovations were
presumably relatively rarely reported. In total 303 innovations were documented from a reading
of 219 articles. The innovations were reported for U.S. firms and occasionally (4.2% of
innovations) for English firms. Each innovation was categorized according to its locus in the
manufacturing process, ranked as to its apparent effect on unit (average) manufacturing cost, and
categorized according to metrics of mechanization, innovation trajectory, and scope of
applicability. Data were coded by the author, and innovation characteristics also were coded
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independently by an engineering student competent in manufacturing processes. Differences in
coding results were discussed to agree on appropriate treatment, except that for cost-impact ranks
only major differences were assessed. Definitions of the coding are given below.6
The innovations pertain mostly to black-and-white, and very occasionally to color,
television. Color televisions reached only 0.7% of U.S. homes by 1960 (Boedecker 1974, 44).
2.2. Minor and Major Innovation
Manufacturing cost impacts of innovations were ranked on a seven-point scale, to be
squared when comparing net impacts of innovations, as Abernathy, Clark, and Kantrow (1983)
did for innovation rankings in automobile manufacture. Unlike their rankings, the rankings here
estimate each innovation’s impact on unit (average) manufacturing cost, not impact on the nature
of the manufacturing process. The rankings were systematized using the definitions below.
The definitions refer to operators and stations. An operator is a person working in the
production plant. A station is a location at which one operator worked, or very occasionally two
operators because they had to deal simultaneously with the same physical object (as in early
work inserting the electronic innards into the furniture shell of a television, or in some early
crating work). More than 105 (in an early RCA plant) operator stations existed (Zeluff 1947).
6 An earlier version of the data, with cost-impact ranks but absent other measures of the direction
and nature of innovations, was developed previously by the author and used in research on
industry shakeouts and prior production experience (Klepper and Simons 1997, 2000a, 2005).
Beyond the 264 U.S. process innovations in the earlier version, innovations were added to
include 14 non-U.S. innovations and 25 more U.S. innovations. The U.S. additions include a
few innovations missed in earlier readings of the trade articles, and they disaggregate groups of
innovations by a consistent rule, instead of counting an entire group as one, in some cases where
separate improvements were related in purpose or locus. One of the most closely-related groups,
for example, involved (a) rubber pads designed to press against and thereby clinch tight the wire
leads that protruded below a printed circuit board, (b) an aluminum molding technique to
develop master molds to make in quantity the rubber clinching pads in place of a prior hand-
carving method to make the pads, and (c) development of a foot pedal trigger in a cut-and-clinch
machine for an operator to activate hydraulic cylinders that sequentially patted down the
protruding wire leads and then cut and clinched them.
15
Innovations rated 1 affected a single operator and made little or no apparent difference, or
affected multiple operators and made no apparent difference, in manufacturing cost. Innovations
rated 2 made a substantial difference at one production operator’s station, or helped a little at
multiple stations. Innovations rated 3-4 helped a lot at one station, or fairly significantly at
multiple stations, with only the apparently more significant innovations rated 4. Innovations
rated 5 helped a lot at multiple stations, or were requisite to get something done at one station
given how the production line was newly set up. Innovations rated 6-7 yielded substantial to
major cost savings in many parts of the plant and often opened up avenues for yet more
improvement, with particularly substantial and widespread cost savings required for a rating of 7.
An example innovation with rank 2 was a foot switch that controlled air flow to an anvil riveter,
pneumatically allowing an operator to locate where riveting to a chassis would occur. An
example innovation with rank 6 was an automated machine that replaced hand soldering of
components by moving television chassis or circuit boards with electronic components already
inserted, lifting them above a continuous wave of liquid solder to create permanent electrical
connections between the wires of different components, for many components at once.
Assessing the relative importance of smaller and larger innovations is complicated by an
information availability bias and by subjectivity in assessment. The information availability bias
weighs toward reporting of innovations that are relatively major, since major innovations are
most noticeable and have the greatest interest to trade magazine readers. Hence the actual
number of minor innovations is probably much greater than is apparent here. Subjectivity in
assessing the impacts of innovations is unavoidable, since comparative data are rarely available
on specific cost-savings resulting from each innovation. Nevertheless, the consistent definitions
used during coding appear likely to yield well-defined estimates with modest error and no
evident bias. Hence the distribution of innovations reported here is likely to represent well the
actual distribution of innovations reported in the trade literature, but is likely to undercount
substantially the actual numbers of very minor innovations.
The distribution of impact rankings across innovations is shown in Table 1. Most of the
innovations involved small manufacturing process changes. Only three, two, and nine
innovations respectively have the highest ranks of 7, 6, and 5. In contrast, 16 innovations have
rank 4, 68 have rank 3, 147 have rank 2, and 58 have rank 1.
16
Table 1. Process Innovations’ Cost Impact Ranks: Frequencies and Summed Squares Ranking of Impact Number of Innovations Frequency (%) Sum of Rank^2
7 3 1.0 147 6 2 0.7 72 5 9 3.0 225 4 16 5.3 256 3 68 22.4 612 2 147 48.5 588 1 58 19.1 58
Among the 303 innovations, only 1.7% were ranked 6-7, and 9.9% were ranked 4-7,
indicating that innovations that brought widespread benefits, or even major benefits local to one
part of the manufacturing process, were a small minority. In contrast, 22.4% had rank 3, with a
substantial benefit at one production operator’s station or a more modest benefit across multiple
operators’ stations, 48.5% had rank 2, causing a substantial benefit at one operator’s station or a
little at multiple stations, and 19.1% had rank 1 with its more minor benefit. This confirms that
indeed most of the innovations are relatively minor. Consistent with Distinctive Assumption A,
individual innovations appear to be large in number, and limited in importance relative to the
large amount of overall manufacturing innovation.
Using the squared ranks to estimate roughly the total impact of innovations, as did
Abernathy, Clark, and Kantrow (1983), again suggests that minor innovations have a net effect
that is very substantial. The sum of the squared rankings is greatest for innovations of rank 3,
totaling 612, versus 256, 225, 72, and 147 respectively for the next four higher ranks, and versus
588 and 58 respectively for innovations of rank 2 and 1. If as expected the number of very small
innovations is greatly underreported, then the net effect of relatively minor innovations is again
estimated to be especially substantial. Hence, minor innovations perhaps exceeded major
innovations in total importance.
2.3. Loci of Innovation
Loci of innovation are shown in Figure 2, in which the blocks pertain to parts of the
manufacturing process. The chassis or interior frame of a television was first built up and riveted
together (1), in preparation for the placement of numerous electronic components inside the
chassis. Component parts, usually purchased from third-party suppliers, were collected, tested
where needed for quality assurance, sometimes worked on further, and sorted into bins (2).
17
1.Chassisframe
buildingandriveting
3.Manufactureofcoilsandyokes
2.Preparationofpartsforassemblyorautomaticinsertion
4.Printedcircuitboards
6.Assemblyofchassis(manualorautomatic)
7.Soldering
8.Testingandalignment
9.Picturetubes
11.Puttingchassisandotherpartsintocabinet
12.Cratingandpacking
10.Cabinetmaking
13.Conveyorsandmovers
14.Positioningmethodsincludingchassistrunnions
5.Designchangestofacilitateassemblyor
decreasefaults
15.Other
Figure 2. Categorization of television receiver process innovations. Some components, including coils and yokes (3) and sometimes printed circuit boards (4) were
prepared inside the factory. Design changes in the television itself (5) had implications for the
manufacturing process, and careful design could facilitate assembly as well as decrease
assembly-related faults. Components were assembled into the chassis, initially by a long line of
employees who plucked parts from bins and placed them into the correct locations in the chassis
or circuit boards (6). Wire leads of the components needed to be attached to each other or to
18
circuit boards, and this was done by soldering (7), that is, using a melted metal alloy to attach the
component wires. Soldering of sub-assemblies or parts just assembled might be done before
further assembly, so assembly and soldering were intermixed operations, and together accounted
for the biggest part of the production process. After and sometimes during assembly, the
electronics of a television receiver were tested and aligned (8), in part by attaching a picture tube
and having the assembled television receive a test signal broadcast within the manufacturing
plant, then adjusting the circuitry for signal reception. Picture tubes (9) were occasionally made
by the manufacturer of the television receiver, in a separate plant, but more often were bought
from third-party manufacturers and tested after arrival. Hence picture tube manufacturing
innovations are not analyzed here. Cabinets were commonly made within the same television
manufacturing plant or firm (10). The assembled chassis and picture tube were together slid
into a cabinet (11), then packed into a box and crated for shipping (12).
Movements between steps in assembly and soldering, transport to the testing and
alignment station and possibly to the station where the electronics were loaded into the cabinet,
and specific part assembly, were aided by additional parts of the manufacturing plant. These
additional parts are indicated by the dashed vertical blocks in the middle. Conveyors and movers
(13), including rollers, mechanized conveyer belts, or overhead movers, facilitated transport
from one worker’s station or section of a plant to another. Positioning devices (14) including
fixtures and jigs were custom-designed to hold pieces of work and help guide assembly and
soldering operations, plus chassis trunnions, which allowed the chassis to be pivoted during work
operations. Movers and positioning devices also appeared less frequently in other parts of the
process, such as cabinet making, even outside of the dashed lines.
An “Other” category (15) is used for parts of the manufacturing process not classified
elsewhere. This includes plant layout, output count, quality control scoreboards to motivate
employees, use of test results to guide operational improvements, and plants’ production of
pollutants. Five of the 303 innovations were classified in the “Other” category.
As an example of early plant layout, RCA Victor’s plant in 1947 used a conveyor belt
moving, at a speed of 50 feet per hour, through 80 chassis-assembly stations (Zeluff 1947).
Chassis assembly work at most stations occurred in two-minute cycles, for a total chassis-
assembly time of 160 minutes. This figure includes riveting of sockets, classified in Figure 2 in
category 1, and pertains mainly to categories 6 and 7. In addition to the 80 assemblers, each
19
Table 2. Innovations by Locus (%), by Period Locus All
Years 1947-
50 1951-
54 1955-
58 1959-
71 N p-
value 1. Chassis frame building 5.3 15.8 5.7 0.0 0.0 16 0.000 2. Preparation of parts 8.3 5.3 13.1 5.5 0.0 25 0.116 3. Manufacture of coils and yokes 7.3 1.8 12.3 3.7 13.3 22 0.013 4. Printed circuit boards 5.6 0.0 2.5 10.1 20.0 17 0.001 5. Design changes for assembly 3.0 3.5 2.5 3.7 0.0 9 0.891 6. Assembly of chassis 10.9 10.5 4.1 19.3 6.7 33 0.003 7. Soldering 6.6 1.8 7.4 8.3 6.7 20 0.352 8. Testing and alignment 12.5 19.3 14.8 7.3 6.7 38 0.103 10. Cabinet making 8.9 19.3 7.4 4.6 13.3 27 0.014 11. Putting chassis into cabinet 4.3 0.0 6.6 4.6 0.0 13 0.205 12. Crating and packing 2.3 1.8 1.6 1.8 13.3 7 0.109 13. Conveyors and movers 12.9 12.3 9.8 16.5 13.3 39 0.503 14. Positioning methods 10.6 7.0 9.8 14.7 0.0 32 0.273 15. Other 1.7 1.8 2.5 0.0 6.7 5 0.112 Total 100.0 100.0 100.0 100.0 100.0 303 N by Time Period 303 57 122 109 15 Note: p-value for each locus uses Fisher’s exact test, for the null hypothesis that an innovation’s probability of being in that locus remained constant across all four periods. Gray shading for 1959-1971 indicates limited data availability. production line required eight inspectors, three wire dressers, four repair men, and ten testers.
Ten of the 80 assemblers dealt with mechanical operations, attaching parts and subassemblies
and soldering and crimping their wires, and nine of the 80 dealt with switch subassembly, to
make coils and assemble them into a tuner so users could select one of thirteen channels.
Installation of the chassis and picture tube into cabinets, which were separately prepared, and
boxing and crating, occurred after the main assembly.
Innovation was spread across all these parts of the production line. In Table 2, the
column labeled All Years reports the percentage of all innovations in each locus within the
production process. The most frequent loci were assembly of chassis (6), testing and alignment
(8), conveyors and movers (13), and positioning methods (14), each with 10.6% to 12.9% of
innovations. Most loci had about 4-9% of innovations each (1,2,3,4,7,10,11). Design changes
for assembly (5), crating and packing (12), and other (15) had about 2-3% of innovations each.
Thus, consistent with Distinctive Assumption B, the 303 innovations were spread widely across
parts of the manufacturing process.
20
2.4. Loci of Innovation Over Time
Despite some shifts in the loci of innovation over time, innovation remained widely
spread across the parts of the manufacturing process. Hence while some natural evolution
occurred in innovative emphasis, the large number of innovations remained spread across many
topics, contributing to the extent to which innovation in television receiver manufacturers was a
race to keep up, rather than a win-or-lose gamble. The shifts in loci of innovation are
documented in Table 2. Attention is focused on the twelve years 1947 through 1958. The
twelve years are divided into three four-year periods, each of which has at least 57 documented
innovations. After 1958, when trade journals reported much less on television manufacturing,
data are available only for 15 innovations, so the post-1958 period is ignored below. Differences
across time periods are statistically significant, p<.10 using Fisher’s exact test, for 5 of 14 loci,
versus the null hypothesis of a constant probability that an innovation pertains to a given locus.
Chassis frame building innovation and cabinet making innovation mainly occurred early, chassis
assembly innovation slowed during the middle four years, manufacture of wire coils and yokes
innovation increased during the middle four years, and innovation in making printed circuit
boards awaited development of practical printed circuit board technology in the mid-1950s.
Thus, in almost all parts of the manufacturing process, innovation continued across time.
There were not discrete shifts of attention from one part of the process early on to a different part
later. Consistent with Distinctive Assumptions B and C, the many parts of the manufacturing
process, and the continuing innovation across these parts, helped limit the effect of any one
innovation and imply a need for continuing innovation in many different forms.
2.5. Duplicative Innovative Effort
Many innovations sought to solve the same problem, although often arriving at rather
different solutions. For example, conveyors and movers used by firms to move chassis being
assembled between operators were remarkably diverse. In some firms, workers slid the chassis
along worktops, while in others wheeled dollies were placed beneath the chassis, or a continual
line of rollers was placed along the production line to facilitate pushing, or conveyor belts moved
the chassis either continually or at time intervals. These systems to move the chassis being
worked on were improved over time as engineers continued to seek efficiency gains in the
production line.
21
In many other cases, the list of innovations and the articles reveal diverse solutions across
firms to particular sorts of manufacturing problems. Diversity was apparent for example in the
placement of machinery to punch holes in sheet steel to build an empty chassis, the number and
layout of holes to be punched simultaneously in a succession of punching operations, the method
of twisting together wires by operators (including by hand and with automated air guns),
methods of soldering wires, testing procedures and layout and function of test equipment used to
verify correct operation of all or part of the circuitry in a television receiver, methods used to
hold wooden parts in place when building cabinets (and replacement manufacturing methods for
steel or plastic cabinets which required their own process innovations), burn-in arrangements in
which sets were left turned on for a period to verify their continued operation, and methods to
put assembled television receivers into packing boxes and close the boxes.7 Such diversity in the
solutions obtained by firms for common problems is consistent with Distinctive Assumption D.
2.6. Sources of Innovation
Of the 303 process innovations documented in the literature, only 25-29 involved
suppliers, and only 14-18 came solely from suppliers including 6 that were changes solely to
supplier production lines.8 Suppliers did contribute substantively to innovation beyond what was
documented in the trade articles, just not in a manner that undermined the importance of in-house
innovation by the television receiver manufacturers. Basic components were purchased from
parts suppliers. The most notable pre-assembled part purchased from suppliers was cathode-ray
picture tubes. Also, pre-assembled tuners (to tune in broadcast signals) became available and
some firms used these pre-assembled building blocks. Cathode ray picture tubes were
manufactured by many U.S. firms, according to lists in successive editions of Television
Factbook, with the number of manufacturers growing from 30 in 1949 to 68 in 1956, before
falling to 14 in 1971. Many picture tube manufacturers were also television manufacturers.
Television tuner manufacturers were documented in annual editions of Electronics Buyers
7 Closer duplicate innovations are not measured here, as information is not necessarily published
on additional manufacturers’ implementation of a previously described manufacturing method. 8 Four innovations were developed by multiple unspecified firms that may or may not have
included television receiver manufacturers. Six were for television coil and tuner production
lines at supplier firms.
22
Guide, which listed 7 U.S. manufacturers in 1949, then 28 in 1950, and dropping to 13 in 1957, 8
in 1967, and 13 in 1971. Several television tuner manufacturers were also television
manufacturers. An effort to encourage use of standardized “Project Tinkertoy” designs of all
component building blocks and entire sets seems in contrast to have been doomed by its
inflexibility to product improvement.
Manufacturing machinery that became widely available in the 1950s played important
roles in television receiver manufacturing change, with equipment to automatically insert
components in printed circuit boards, board processing equipment, and other mechanical tools,
from firms including United Shoe Machinery Corporation. Some television receiver
manufacturers worked with machinery suppliers to be on the leading edge of equipment
development and adoption, but the trade literature makes no mention of any exclusive contracts
that would prevent sale of manufacturing equipment to other television receiver manufacturers.
Hence supplier innovation, consistent with Distinctive Assumption E, did not displace most of
the in-house innovation within television receiver manufacturers, nor did suppliers or television
receiver manufacturers prevent supply of components or equipment to some television
manufacturers.
2.7. Other Context: Product Innovation, Reliability, Worker Learning, and Organization
Product innovation also occurred steadily. Product innovations necessitated changes to
precise manufacturing activity at specific locations in a plant, however, they almost never
required a change in overall manufacturing technique. Inserting components and wires for
revised electronic circuits required one or a few assembly operators, or later machines, to have
revised bins of parts and to be given revised directions to carry out the revised insertion and
soldering process; also, an operator’s test procedure might be revised. A larger television screen
size might require a change to the width and spacing of the moving assembly line, however,
some production lines accommodated multiple picture tube sizes, or even used a single chassis
design that accommodated either of two screen sizes. Internal product reengineering was carried
out to facilitate manufacturing efficiency, and these product reengineering efforts are almost
never captured in the innovations data. These changes took place regardless of, and when
relevant in conjunction with, any feature changes to the televisions. The switch to printed circuit
boards in particular necessitated such internal product reengineering. One product change, the
switch from wood to plastic and steel cabinets and to printed veneers, required substantial
23
process innovations documented here in cabinet manufacture, and was driven substantially by a
goal of reduced material and production cost. Thus, product redesign innovations to facilitate
manufacturing are almost all unmeasured in this study, but relations between product and process
innovation do not otherwise appear to bias analyses.
Reliability of television receivers, not only cost, benefited from manufacturing
improvements. Innovations that enhanced reliability included use of integrated circuit boards,
automatic insertion, and dip soldering (Arnold 1985, 113-114). Since these types of innovations
tended to have high cost reduction ranks, cost reduction ranks seem to be correlated positively
with reliability enhancement. Thus, firms successful at cost reduction would also have
succeeded in reliability improvement.
Worker learning by production line workers contributed little to the television
manufacturing cost learning curve. Production line employees trained before they carried out
operations on the line, where they operated at full speed. Training to full speed for a television
hand-wiring operation required 1-4 weeks for an inexperienced operator, or under 5 days for an
experienced operator (Miller and Rogers 1964, 437). Such rapid saturation of production worker
learning has been found to be typical, and therefore apparently cannot explain most
manufacturing cost reduction curves (Thompson 2012).
Large manufacturers constructed organizational structures to routinize innovation. For
example, departments of Philco involved in developing televisions and their production included
Design Engineering, Factory Engineering, Field Engineering, Cabinet Design, Industrial
Engineering, Production, and Purchasing (Tele-Tech 1948). Field Engineering worked with
Design Engineering to ensure customer satisfaction. Factory Engineering and Design
Engineering coordinated on design improvements. Factory Engineering then redesigned and re-
tested sets to facilitate the mass production overseen by Industrial Engineering.
3. Innovating Firms: Tests of Propositions
If deliberate process innovations drove the cost reduction curve in television
manufacture, then each firm’s output should be closely associated with its innovative output.
That is, the increments associated with each firm’s cumulative output—the bottom axis of the
cost curve—should drive innovation, which in turn drives lower cost. Specifically, current
output predicts expected future output, which incentivizes innovation (Sinclair, Klepper, and
Cohen 2000). Treating the output increments as approximately constant over time, an
24
assumption borne out by available market share data (Datta 1971), firms’ production in 1950 is
used as the key independent variable.
If R&D cost-spreading correctly describes firms’ innovation incentives, then the nature
and direction of innovation should have been affected. Larger producers’ work on more
marginal (lower benefit-to-innovation-cost ratio) innovations should coincide with correlates of
these innovations. Larger firms should disproportionately have made higher-impact innovations,
enhanced manufacturing loci with costly equipment and technologies, mechanized, and pursued
new technological trajectories.
3.1. Firm Output
Production of television manufacturers is measured with the earliest fairly systematic
market share data after television manufacture began following World War II, that is, 1950
market share data. The 1950 data allow time for early random variation in dates when firms
entered and in growth immediately after the close of World War II. Although a few television
receivers were made before World War II, U.S. production was barred during the war. Market
share data are available in various subsequent years, but year-to-year variability and
measurement error inhibit its usefulness as a panel, so a single early year is used.
Market shares stem primarily from Datta (1971, 215-216, 295), yielding data that total
69.6%. Sears’ 0.8% share from Datta is attributed one-third each to Air King and the other two
firms that produced for Sears around this period (Carbonara 1989) (see also Television Digest
and FM Reports issues from 1948). For remaining firms, projected 1950 outputs from the
Television Shares Management Co. (TSMC) are used if available (Barron's 1950), multiplied by
a constant of proportionality such that firms in both sources have the same total share. This
leaves 5.83% of sales unaccounted for. Half the remainder is attributed evenly to 11 second-
echelon firms listed by TSMC without output projections and not listed by Datta, while the other
half is attributed evenly to 69 firms that lack any indication of share in the two data sources.
Firms not manufacturing in 1950 have 0 market share, but when computing log 1950 market
share they are not dropped from the sample. Rather, they are assigned one standard deviation
25
lower log market share than the lowest value for 1950 manufacturers, to acknowledge their
smaller size and avoid undue influence on the results while retaining the firms in the analysis.9
3.2. Identification
How can the effects of firm output on innovation be well identified? An immediate
problem is that market share measures are largely unavailable until 1950, whereas the innovation
data begin from 1947. A further problem is that one might worry that important correlated
variables, not caused by firm size, just happen to be correlated with output. To solve both
problems, it is desirable to use some kind of instrumental variables strategy, with the instruments
constituting as-if random variation.
An extensive search yielded no true random variables with sufficient power to serve as
instruments. However, a next-best alternative is available: a quasi-experimental process that
drove firm output in television manufacture. The earlier industry of radio, beginning in the
1910s, experienced a rise from 148 radio apparatus manufacturers in 1922 to 347 in 1925 and
then a fall to 121 manufacturers by 1940 (from annual editions of Thomas’ Register of American
Manufacturers). Such shakeouts in industries signal a process in which, through a race to keep
up competitively, some successful firms—disproportionately early entrants—gain leading
market shares while most other firms exit (Gort and Klepper 1982, Klepper and Graddy 1990,
Klepper 1996, Klepper and Simons 1997, 2000b, 2005). Moreover, some industries build firm
capabilities that carry great advantage when firms enter certain subsequent industries. This was
the case with radio manufacturers entering television manufacture (Klepper and Simons 2000a).
Therefore, entry time into radio manufacture largely determined radio success, which in turn
determined firms’ initial position Q0 upon entry in television manufacture.10
9 The estimates retain the same sign and remain statistically significant if firms not
manufacturing in 1950 are assigned two or zero standard deviations lower log market share than
the lowest value for 1950 manufacturers, or if they are dropped from the sample. 10 The skill of a firm’s entrepreneur-innovator managers also, in the theory of Klepper (1996),
predicts success. However, that theoretical model predicts that with time the difference in
managerial skill among surviving firms diminishes. Skill differences thus should become
relatively unimportant (especially after controlling for size), simultaneously as size differences
between firms become enormous, with entry time and skill driving firm output.
26
This identification strategy ensures against simultaneity bias, and also prevents bias from
most potential correlated variables. It does not distinguish among characteristics of firms that
are caused by firm size. If radio output drives television output and also creates a culture of
innovativeness, then it is not possible to separate such size-related traits and to identify effects of
a specific size-related trait. Identifying the effects of firm size is a very challenging problem,
and to the best of the author’s knowledge, no prior study of the learning curve has used an
experimental or quasi-experimental identification strategy.
Instrumental variables include radio entry time, as well as alternative instruments using
measures of radio production market share and firm size.11 The first date of a firm’s radio
manufacture was assessed using radio enthusiast listings of radio models, often complete with
photographs and schematics, at the website radiomuseum.org. Radio manufacture by 1940 and
in 1940 were assessed from the same website. Capitalization of at least $1 million was assessed
for radio manufacturers in 1940 based on whether the Thomas’ Register of American
Manufacturers listed each firm with this much capitalization in its December 1939 edition;
identical data arise from the December 1940 edition. Log market share of radio receiver unit
sales in 1940 stems from MacLaurin (1949, 146), who lists production for 18 firms totaling 87%
of U.S. output. Firms that began radio production after 1940 are identified using an indicator
variable set to one, versus zero for earlier entrants, and are assigned the mean radio production
date, thus excluding post-1940 information from the instruments. Firms lacking radio receiver
market shares are catalogued using indicator variables equal to one for cases without data or zero
with data, and the log share values set to zero in case of missing data, allowing these firms’ mean
log market share times a coefficient to be estimated from the data.
First-stage regressions of the logarithms of 1950 television market shares on the above
instruments are reported in Table 3. In column (1), the radio entry time variables—first year of
radio manufacture and non-production of radios by 1940—strongly predict television market
share in 1950. For each year earlier entry into radio manufacture, 1950 television market share is
11 Information compilation is based on firm names. Former firm names, acquisitions, and
mergers in television manufacturers’ past were traced using numerous historical and enthusiast
books and websites, intensive searches of New York Times articles, and other newspapers and
magazines. Merged firms use the combined market shares of their predecessors.
27
Table 3. First-Stage OLS Regressions: Television Manufacturing Log Market Share in 1950 as Determined by Prior Radio Manufacturing — Observations on Firms — — on Innovations — (1) (2) (3) (4) (5) Min[Year of Entry in Radio -0.102* -0.00825 -0.0567*** Manufacture,1940] – 1910 (0.0444) (0.0448) (0.00492)
No Entry in Radio Manufacture -2.159*** -1.176* -0.913*** by 1940 (0.294) (0.519) (0.116)
Radio Maker, < $1 million 2.017* 0.835 -0.530** capitalization in 1940 (0.802) (1.041) (0.198)
Radio Maker, ≥ $1 million 2.608*** 1.530+ -0.0319 capitalization in 1940 (0.659) (0.873) (0.192)
Log Market Share in 1940 1.197*** 1.178** 0.854*** (0.337) (0.396) (0.0621) No Data on Market Share in 1940 -0.642 -0.524 1.011*** (0.816) (0.879) (0.172) Constant 0.662 -3.338*** -2.060* 2.416*** 0.459*** (0.842) (0.104) (1.018) (0.0648) (0.0990) R2 0.375 0.485 0.502 0.377 0.534 F 31.19 109.8 74.23 150.6 160.9 Notes: Columns (1)-(3) use 160 observations, each a firm. Robust standard errors in parentheses. Columns (4)-(5) use 285 innovation-firm pairs representing 271 innovations. Standard errors in parentheses are cluster-robust, clustered by innovation, since some innovations were developed by multiple firms. + p<.10, * p<.05, ** p<.01, *** p<.001. estimated to have been higher by (exp(0.102)–1=) 10.7%, equivalent to 7.7 times more share for
20 years earlier entry. Firms that did not produce radios by 1940 are estimated to have had only
11.5% of the shares of firms that began producing radios at the mean time of 1928.4.
In column (2), radio manufacturers with under $1 million of capitalization in 1940 are
estimated to have had 7.5 times more (geometric mean) television receiver market share in 1950,
and those with at least $1 million of capitalization are estimated to have had 13.6 times more
share, relative to nonradio manufacturers’ estimated 1950 share. A 1% increase in 1940 radio
share yielded an estimated 1.20% increase in 1950 television share. In column (3), all the
instruments of columns (1) and (2) are combined, with little increase in predictive power.
Predictive power is strong in all three models, with the regressors explaining 38%, 49%, and
50% of the variance in 1950 market share in the three successive models. The model F statistics
of 31.9 to 109.8 consistently indicate a strong instrumental variable relationship.
While the analyses in columns (1)-(3) use data on firms, a majority of the analyses to
follow use data on innovations, typically with multiple innovations per firm. Sample data on
28
innovations therefore are used in columns (4) and (5), and the first two models’ estimates are
repeated. Individual point estimates vary substantially across the two different samples.
Nonetheless, the first-stage relationships predicting log 1950 television market share remain
strong. R2 values indicate 38% to 53% of the variance in log 1950 television market share is
explained, with F statistics of 150.6 and 160.9, so there is a strong first-stage relationship in each
sample.
Innovation outcomes were regressed on 1950 television market share using the first set of
instruments above, year of entry into radio manufacture and non-entry by 1940, by generalized
method of moments (GMM) or instrumental variables probit (IVP) estimation.12 Estimates for
all outcome variables are in Table 4. These estimates are evaluated in the upcoming sections.
3.3. Number of Innovations
Table 4 reports, in its first two entries, GMM estimates of the effects of firm size on
quantity of innovation, measured in terms of a count of innovations and the summed squared
cost-reduction ranks of innovations. The GMM estimates are very close to ordinary least squares
estimates. The estimates imply an additional 0.37 innovations per year and an additional 2.1
summed squared rank points per year as a result of a one standard deviation (1.77) increase in
log 1950 television receiver market share. This compares to a mean of 0.15 and standard
12 The second set of instruments, using indicators for radio manufacture in 1940 with or without
at least $1 million of capitalization plus log 1940 radio manufacturing share and its no-data
indicator, is used for sensitivity analyses. Also tried in sensitivity analyses is the strategy of
restricting information on radio manufacturing entry dates to 1934 or 1935, coupled respectively
with either market share in 1934 for ten radio manufacturers totaling 85% of U.S. output, from
Fortune (1935, 173), or market share of radio receiver revenues in 1935 using Census of
Manufactures returns for the largest seven radio receiver manufacturing plants, from Scott and
Ziebarth (2015, 1106). The latter market share measures had more modest statistical power,
given they had few firms with available data. The findings are generally quite robust to these
changes in instrumentation, or even to treating log 1950 television market share as exogenous,
albeit with differences in the point estimates and significance levels. Alternatively, restricting
estimation years to 1951 and later, or 1950 and later, the results again remain robust. In all these
cases, the estimates retain the same sign, and they almost always remain statistically significant.
29
Table 4. Second-Stage Estimated Effects of Ln(Market Share in 1950) Dependent Variable (Model) Estimate Dependent Variable (Model) Estimate Innovations per Year (GMM) 0.208*** Tool Use (IVP) -0.195 (0.0474) (0.181) Rank2 per Year (GMM) 1.192*** Automation (IVP) 0.294* (0.273) (0.138) Rank≥2 (IVP) 0.446** Multiple Operation (IVP) 0.269+ (0.151) (0.139) Rank≥3 (IVP) 0.513*** Multiple in 1 Machine (IVP) 0.376** (0.130) (0.142) Rank≥4 (IVP) 0.633*** Complex (IVP) 0.616* (0.167) (0.250) Rank≥5 (IVP) 0.510* Complex in 1 Machine (IVP) 0.798** (0.226) (0.265) Rank≥6 (IVP) 0.467+ Printed Circuit Board 0.989*** (0.260) Related (IVP) (0.125) Rank=7 (IVP) 0.770 General Purpose (IVP) 0.197 (0.510) (0.198) Loci with ≥ 25% of Innov. 0.305* Non-Specialized (IVP) -0.211 Embodied in Large Equip. (IVP) (0.131) (0.137)
Assembly, Soldering, Printed 0.689*** Circuits, and Chassis (IVP) (0.134)
Notes: First two estimates use generalized method of moments (GMM) with 160 observations on firms. All other estimates use instrumental variables probit (IVP) regression maximum likelihood estimates with 285 observations on innovation-firm pairs representing 271 innovations. Ln(Market Share in 1950) is treated as endogenous, with the instruments: year of entry into radio manufacture – 1910 (or mean thereof if entry did not occur by 1940) and no entry into radio manufacture by 1940 (1 if true or 0 otherwise). GMM uses asymptotic efficient (under heteroskedasticity) weight matrices. Standard errors in parentheses are robust for GMM, and cluster-robust, clustered by innovation, for IVP since some innovations were developed by multiple firms. + p<.10, * p<.05, ** p<.01, *** p<.001. deviation of 0.57 for the annual number of innovations, and a mean of 0.90 and standard
deviation of 3.44 for the annual sum of squared cost-impact ranks of innovations. Both estimates
are statistically significant (p<.10). These estimated relationships are plotted in Figure 3, for the
range of market shares of innovating firms.
Television process innovators are reported in Table 5, along with their numbers of
innovations and total squared rank of innovations during 1948-1958, in total and per year. The
table is sorted in decreasing order by squared rank of innovations per year. The market shares of
these firms in television receiver manufacturing can be traced back to earlier experience in radio
manufacture. Many of the firms in the list had substantial market shares of television receivers
30
Figure 3. Estimated number of innovations and sum of squared cost-impact ranks of innovations. Logarithmic horizontal axis shows percentage market share in 1950, for the full range of market shares of firms with innovations (firms with zero market share in 1950 never innovated). produced in 1950, and of radios sold in 1940. The leading firms in the table, Philco and RCA,
had the leading 1950 television (1940 radio) shares at 12.7% (14.6%) and 17.8% (14.8%),
respectively. DuMont had 3.9% (unknown), General Electric 7.9% (3.1%), Admiral 9.5%
(unknown), Westinghouse 2.9% (unknown), CBS-Columbia 1.9% (unknown), Emerson 3.1%
(9.2%), Sylvania 1.3% (5.5%), Crosley 2.8% (3.1%), Zenith 3.5% (9.2%), Olympic 1.9%
(unknown), Packard-Bell 0.4% (unknown), Motorola 6.2% (9.5%), Jackson unknown
(unknown), Belmont 2.6% (4.8%), and Tele-Tone 3.3% (unknown). This confirms that larger
producers carried out much more innovation, consistent with Proposition 1.13
13 Variations from this trend might be dependent variable measurement errors due to reporting.
31
Table 5. Innovation Metrics, for Each U.S. Manufacturer with Reported Innovations in 1948-58 Total during 1948-1958 Per Year Firm Innov. Rank2 Mfg.
Years Innov. Rank2
Philco 38 252 11 3.5 22.9 RCA 31 231 11 2.8 21.0 DuMont(Allen,B.)Laboratories 36 173 11 3.3 15.7 GeneralElectric 26 171 11 2.4 15.5 Admiral 9 117 11 0.8 10.6 Westinghouse 28 117 11 2.5 10.6 CBS-Columbia(initiallyAirKingProducts) 16 83 9 1.8 9.2 EmersonRadioandPhonograph 22 100 11 2.0 9.1 SylvaniaTelevision(ColonialRadioCorp.) 7 82 10 0.7 8.2 Crosley(AvcoManufacturing) 14 68 9 1.6 7.6 ZenithRadio 6 46 11 0.5 4.2 OlympicRadioandTelevision 16 40 11 1.5 3.6 Packard-Bell 6 28 11 0.5 2.5 Motorola 4 26 11 0.4 2.4 JacksonIndustries 1 4 6 0.2 0.7 BelmontRadio(subsidiaryofRaytheon) 2 5 9 0.2 0.6 Tele-ToneRadio 1 1 6 0.2 0.2 Notes: Innov. is number of innovations, Rank2 is sum of squared cost-impact ranks of innovations, and Mfg. Years is years manufacturing televisions, all during 1948-1958. Per Year divides by manufacturing years during this period.
3.4. Cost Reduction of Innovations
The 1950 market share of firms is next related to individual innovations’ impacts on unit
(average) manufacturing cost. Innovation-firm pairs constitute the sample, excluding
innovations solely by firms not manufacturing televisions. For each cost reduction rank, an
instrumental variables probit regression estimated the probability of the cost reduction being at
least that much as a function of log market share. At every cut-point, higher log market share is
estimated to increase the probability of an innovation having a rank at least as high as the cut-
point, as listed in the third through eighth entries of Table 4. The estimated effect of market
share is statistically significant (p<.10) for all but the rank 7 cut-point.
The implied probability distribution of cost reduction ranks, as a function of 1950 market
share, is plotted in Figure 4. The horizontal axis spans the market shares of firms that produced
innovations. Market share greatly increased the probability of highly-ranked innovations.
32
Figure 4. Estimated probabilites of innovations’ cost-impact ranks, in terms of apparent effect on unit manufacturing cost. Logarithmic horizontal axis shows percentage market share in 1950, for the full range of market shares of firms with innovations (firms with zero market share in 1950 never innovated). Curves show estimated probability that the cost-impact rank is greater than or equal to 2, 3, 4, 5, 6, or 7 respectively, as labeled on the vertical axis. The curves are estimated probabilities from the main estimated equation after instrumental variables probit regressions. The IV probit regressions’ independent estimation ensures that the curves are not mutually constrained. Consistent with Proposition 2, larger firms disproportionately carried out innovations that
yielded greater cost reduction.
3.5. Innovations in Loci that Involve Costly Equipment and Technologies
Loci of television receiver manufacture involving costly equipment and technologies
were identified in two ways, first objectively by how frequently innovations in each loci
involved large equipment, and second subjectively based on knowledge of the activities
involved. The equipment size associated with each innovation was codified based on whether
the innovation was embodied in an object, used actively in manufacturing, that was at least as big
33
Figure 5. Estimated probability of an innovation occurring in a locus in which modifications are thought to have been especially costly. Logarithmic horizontal axis shows percentage market share in 1950, for the full range of market shares of firms with innovations (firms with zero market share in 1950 never innovated). The curves are estimated probabilities from the main estimated equation after instrumental variables probit regressions. as a typical adult human.14 Loci were considered to involve costly equipment and technologies if
at least 25% of innovations in a locus involved large equipment; results are similar using 40% or
50% cutoffs.15 The measure based on loci frequently having large equipment, rather than
innovations involving large equipment, avoids potential bias from manufacturer scale.
Subjectively, loci of television receiver manufacture involving costly equipment and
technologies were judged to include the main assembly and soldering line especially as new
14 Sizes were volumes usually estimated from photographs. Air space was included if the object
when not in use would preclude other activity in the air space. 15 The 50% cutoff used loci 4, 10, 12, and 13; 40% added locus 1; and 25% added loci 7 and 15.
34
equipment innovations began to be introduced, printed circuit preparation, and chassis building
and riveting as that involved large press equipment. Other loci tended to involve less costly
equipment and technologies, with the caveat that occasionally more expensive equipment was
introduced later. Cabinet making was classified as less costly, despite that a minority of later
cabinet innovations involved molded cabinets with expensive equipment, because most of the
cabinet manufacturing innovations pertained to wooden cabinets.
Estimates of the effect of 1950 market share on the probability an innovation was in a
locus with costly equipment and technologies appear in the ninth and tenth entries of Table 4.
The estimates imply large and statistically significant increases with firm size, with the
probability increasing from .07 (.0002) to .59 (.61) as share goes from 0.066% to the largest
market share of 17.8% using the first (second) measure. Both estimates are statistically
significant (p<.10). The relationship is plotted in Figure 5. Consistent with Proposition 3, larger
firms disproportionately innovated in parts of the manufacturing process that involved more
costly equipment and technologies.
3.6. Mechanization Innovations
To analyze mechanization innovations, one must be precise about definitions of
mechanization. Many alternative definitions could be given. Several mechanization
characteristics therefore were coded for each innovation. These characteristics are assessed in
Table 6, which shows the percentage of innovations that satisfy each definition.
Tool used is a primitive definition. This indicates whether the innovation involved an
object (the tool) used in physical contact with or directly operating on a television receiver being
made, a component, another tool, or a shipping container. This excludes lights, signs, examples
for assembly workers, plant models, etc. Tools were the norm, involved in 90.1% of innovations
across all years. Many of the tools involved brief processes, such as a nail gun inserting a nail,
and hand-held processes, such as a hand-controlled soldering iron. Since tools are readily
available off-the-shelf at low cost, unlike the other measures of mechanization, they were not
expected to be correlated with high innovation cost and hence were not necessarily expected to
have a relation to firm size.
Automation indicates whether an object embodying the innovation operated actively, in
the manufacturing process, without direct human control for a period of at least multiple seconds.
35
Automation was less frequent than tools. Only 33.3% of innovations involved a process that,
when initiated, continued for seconds or longer without human control.
Another view of mechanization is that it amplifies the manufacturing process by doing a
lot at once. Multiple operation indicates whether the innovation combined or facilitated multiple
steps or performed multiple of the same step, thus carrying out in one innovation a multiplicity
of manufacturing activities that were once independent. Multiple operation arose in 29.0% of
innovations.
Complex is an alternate form of multiple operation that combines previously separate
activities in one machine or activity. For example, pin-making machines combined steps of
manufacture whose division Adam Smith had famously pointed out (Pratten 1980). Complex
therefore is defined analogously to multiple operation, except that the multiple steps must span
different manufacturing activities. Complex operation occurred in 7.6% of innovations.
In some cases, multiple operations or complexity pertained to innovations in how
operators used equipment, or in conveyors, movers, or other positioning devices (CMPD). To
assess multiple operation and complexity in productive machines, the lines in Table 6 denoted
machine excl. CMPD require that multiple operation or complexity be embodied in a single
machine, and exclude from analysis all innovations embodied in movers, conveyors, jigs,
holders, and furniture. This leaves (almost entirely) equipment involved in actual work
operations, for which in-machine multiple operation was involved in 34.0% and in-machine
complexity in 8.9% of innovations.
Over time, as production methods became increasingly mechanized, shifts occurred in the
extent to which innovations fit some definitions of mechanization. Each definition’s percentages
in 1947-1950, 1951-1954, 1955-1958, and 1959-1971 are shown in Table 6. The benchmark of a
constant probability of each innovation fitting a definition was tested with Fisher’s exact tests,
and the resulting p-values are in the rightmost column of Table 6. All definitions except tool
used had statistically significant (p<.10) shifts in probability. Innovations involving automation
rose, although less than might be expected, from 30% in 1947-1950 and 27% in 1951-1954 to
38% in 1955-1958. Innovations in machines that carried out multiple activities became more
common in later time periods, rising from 18% in 1947-1950 to 29% in 1951-1958. Complex
equipment innovations, which combined steps once performed separately, constituted 11% of
innovations in the first period but only 3% and 7% in the next two periods. In 1959-1971, the
36
Table 6. Mechanization Innovations (%), for Alternative Metrics of Mechanization Metric All Years 1947-50 1951-54 1955-58 1959-71 p-value Tool used 90.1 89.5 94.3 87.2 80.0 0.110 Automation 33.3 29.8 27.0 37.6 66.7 0.015 Multiple operation 29.0 17.5 28.7 30.3 66.7 0.004 machine excl. CMPD 34.0 18.8 28.9 42.9 61.5 0.013 Complex 7.6 10.5 3.3 7.3 33.3 0.002 machine excl. CMPD 8.9 9.4 2.4 11.1 38.5 0.001 N Observations 303 57 122 109 15 Notes: The notation machine indicates the mechanization measure was 1 only if multiplicity or complexity occurred within one machine. The notation excl. CMPD indicates that innovations were excluded from analysis if they pertained to conveyors, movers, or positioning devices (fixtures, jigs, holders, and furniture), leaving a sample of 191 instead of the usual 303 innovations. The p-valueusesFisher’sexacttestof the null hypothesis that the probability of satisfying a metric is constant across time periods. Gray shading for 1959-1971 indicates limited data availability. increase in the percentage for automation, relative to earlier periods combined, was statistically
significant at p=.0090, and the increases in multiple operation and complexity were significant
at p=.0022 and .0029 respectively. Thus although the evidence partially supports the idea that
mechanization innovations became more common over time, the increase was not universal and
was often modest, confirming that process innovation by these mechanization measures mattered
even during early years when the product was manufactured.
With this background in mind, consider the effects of market share on the probability of
an innovation being related to mechanization. Table 4 reports, in the top six entries of its second
column, instrumental variables probit regressions of the probability of an innovation involving
mechanization as a function of log market share. Statistically significant (p<.10) effects of log
market share are found for all of these definitions of mechanization except tool use. Thus,
greater market share substantially increased the probability of an innovation pertaining to
automation or multiple operation, as anticipated in Proposition 4. The exception of tool use was
expected, because unlike the other measures of mechanization, the low expense of hand tools
such as soldering irons or screwdrivers makes tools no deterrent to low-cost innovation,
requiring little effort on the part of innovators.
The implied probabilities of mechanization as a function of market share in 1950 are
shown in Figure 6. As in prior figures, the horizontal axis just spans the range of market shares
of firms that produced innovations. The figure shows a greatly increased probability of
37
Figure 6. Estimated probability of an innovation involving mechanization, for alternative definitions of mechanization. Logarithmic horizontal axis shows percentage market share in 1950, for the full range of market shares of firms with innovations (firms with zero market share in 1950 never innovated). The curves are estimated probabilities from the main estimated equation after instrumental variables probit regressions. mechanization innovations, consistent with Proposition 4, as the market shares increased from
the lowest to highest values observed in the sample.
3.7. Participation in Major Trajectories with New Innovation Approaches
A major technological trajectory that affected television manufacture in the 1950s was
use of printed circuit boards. Printed circuit boards replaced prior use of wires between
components. They brought radical change, as the first television manufacture focused article on
the technology emphasizes:
“Research in new construction for TV equipment faces strong conflict with existing
methods which have established themselves in practice through gradual evolution.
Materials, design practice, and methodology are so intertwined that significant changes
38
Figure 7. Estimated probability of an innovation involving printed circuit board use in television manufacturing. Logarithmic horizontal axis shows percentage market share in 1950, for the full range of market shares of firms with innovations (firms with zero market share in 1950 never innovated). The curve shows estimated probabilities from the main estimated equation after instrumental variables probit regression.
introduced into chassis structure must necessarily be done with exacting consideration for
the assembly line, purchased materials, and above all the net effect upon costs.
Nevertheless, circumstances are pressing for the development of circuit printing methods
suitable for TV.” (Hannahs and Stein 1952, 38)
Printed circuit boards promised potential labor and material savings, and firms began to use the
boards for an increasing fraction of television electronics. Firms developed, bought, and
modified machines to automatically insert components into circuit boards. At intermediate
stages, some components had to be inserted by hand. Coils, previously separate components,
could soon be printed on the boards themselves. Innovations also included methods to create
circuit boards, prepare components for automatic insertion, flux and dip solder multiple
39
components simultaneously after insertion, convey and handle boards and parts, and test circuitry
and align electronic frequencies with components on boards.
All innovations were coded according to whether they related to production with printed
circuit boards. Of the 303 innovations, 55 were related to printed circuit boards. The 55
innovations had a mean rank of 2.96, higher than the mean rank of other innovations by 0.81
(with a robust standard error of 0.19). Printed circuit board innovations arose at just the right
time to contribute to the acceleration of cost reduction apparent in Figure 1 beginning in 1953.
An instrumental variables probit estimate, in the third-to-last entry of Table 4, analyzes
the probability of an innovation being related to printed circuit boards, as a function of log 1950
market share. Estimation uses innovations in all years (using only innovations in 1952 and later
yields stronger estimated effects). The estimates imply probabilities that randomly selected
innovations involved printed circuit board use. The estimates are plotted in Figure 7. Printed
circuit board use probability was 4.2×10−8 for innovating firms with 1950 market share of
0.066%, but 0.57 with a market share of 17.8%. Below 1.4% share, the probability was less than
0.01. Consistent with Proposition 5, larger firms were more likely to innovate within this major
trajectory of change, printed circuit boards and their use to facilitate automated assembly and
soldering.
3.8. Process Innovation and Future Market Share and Survival
Innovation by television manufacturers, prior work has demonstrated, was associated
with greater future market share and longer survival in television manufacture (Klepper and
Simons 2000a, 2005). Analogous estimates are reported here, using the same survival and
market share data described in Klepper and Simons (2000a), but now with updated innovations
data and with instrumental variables methods. In an analysis of exit during 1950-1960, the
independent variable is a process innovation indicator equal to 1 in year t if the firm achieved a
process innovation within the preceding five years, 0 otherwise. In 1960-1970, and for analysis
of market share in 1960 and 1970, the number of process innovations per year during 1948-1958
is the independent variable.
The estimates in Table 7 are consistent with strongly reduced rates of exit, and strongly
enhanced market shares, for firms that achieved process innovations. Firms that innovated
within the previous five years are estimated during 1950-1960 to have had an annual probability
40
Table 7. Exit and Market Share of More and Less Innovative Firms Exit (IV Probit) Log Market Share (GMM) 1950-1960 1960-1970 In 1960
black-and-white In 1970
color Innovation in -2.023*** preceding 5 years (0.365)
Innovations per year, -0.554+ 1.325*** 1.076** 1948-58 (0.322) (0.244) (0.391)
Constant -0.761*** -1.278*** -0.823*** -0.550 (0.143) (0.150) (0.0214) (0.364) Log likelihood -486.2 -386.8 Instr. exog. test p 0.165 0.298 Ln(MS 1950) exog. p 0.000678 0.223 0.139 0.0602 N Firms 138 38 38 16 N Observations 784 306 38 16 Notes: Standard errors (in parentheses) and significance levels are reported for all coefficient estimates. Analyses treat Ln(Market Share in 1950) as endogenous, and use as instruments: year of entry into radio manufacture – 1910 (or mean thereof if entry did not occur by 1940) and no entry into radio manufacture by 1940 (1 if true or 0 otherwise). GMM uses asymptotic efficient (under heteroskedasticity) weight matrices. Robust standard errors clustered by firm are in parentheses. N Firms and N Observations are the numbers of firms and observations, respectively, in each model. + p<.10, * p<.05, ** p<.01, *** p<.001. of exit of 0.003, relative to an annual exit probability of 0.223 for non-innovators, in the years
from the start of 1948 through the start of 1960. Among firms that survived to 1960, firms that
averaged one innovation per year during 1948-1958 had an estimated .033 annual probability of
exit during 1960-1970, relative to an annual probability of exit of 0.235 for firms that had not
innovated. An additional one innovation per year on average during 1948-1958 was associated
with an estimated 3.8 times higher market share of black-and-white television output in 1960,
and 2.9 times higher market share of color television output in 1970, among surviving
manufacturers. These are sizeable, and statistically significant, benefits associated with process
innovation.
More detailed analyses reveal that product and process innovation combined have
important impacts on survival and market share. The impacts are not explained by marketing.
Available data are not sufficient to disentangle the effects of product versus process innovation.
41
Table 8. Scope: General-Purpose and Non-Specialized Innovations (%), by Period Metric All Years 1947-50 1951-54 1955-58 1959-71 p-value General purpose 91.7 91.2 91.0 91.7 100.0 0.876 Non-specialized 71.6 64.9 73.0 72.5 80.0 0.624 N Observations 303 57 122 109 15 Note: The p-value uses Fisher’s exact test of the null hypothesis that the probability of satisfying a metric is constant across time periods. Gray shading for 1959-1971 indicates limited data availability.
3.9. Innovation Scope for Mass Manufacturing in Electronics
While television was the outstanding consumer electronics product of the 1950s and
1960s, companies also made other electronics products for consumers, industry, and government.
Did the innovations in televisions pertain to these other products by providing some kind of
scope advantages? To assess this question, two metrics of scope were assessed for each
innovation, with results shown in Table 8. General purpose indicates whether the innovation
yielded a technique widely applicable to electronics products other than televisions. The great
majority, 92%, of innovations were of general purpose and therefore contributed to the firm’s
build-up of general electronics manufacturing capabilities. Non-specialized indicates whether
the innovative technique did not need to be specialized to this particular application.
Specialization to television manufacturing required work that went beyond methods useful
outside television manufacture. Even if an innovation created general electronics capabilities, it
still might need tailoring to a television application; for example, a paper cover designed to slide
over a printed circuit board before dip-soldering had to be pre-cut with holes for components and
for the regions where the solder was to go. A sizeable fraction, 28%, of innovations required
specialization to the specific application, so that 72% were non-specialized. Differences over
time, although reported in Table 8, are not statistically significant.
The enormous 92% of innovations that seem to have been relevant to other areas of
electronics manufacture suggests that scope economies could become very beneficial to
television manufacturers. In some cases, innovations might have drawn from know-how of
engineers who carried out work on other electronic products. Indeed, early articles commented
that engineers’ know-how from radio receiver manufacture, although it was much simpler, was
valuable in designing initial plant layouts and production processes for television receiver
manufacture. After this stage, however, it seems likely that the burgeoning television receiver
42
market was a primary impetus for development of methods that spread to other electronics
production processes, since television production was in the 1950s a large portion of overall
electronics production. Hence, it appears that economies of scope not in production itself, but in
the applicability of television receiver production engineering, may have been important.
No difference between larger and smaller firms was necessarily anticipated for scope and
specialization measures, since there is no obvious connection between quality of an innovation
and the extent to which it overlaps with other areas of electronics manufacture or requires
customization for television receiver manufacture. Consistent with this lack of expectation, there
is no statistically significant relationship between log market share and how often a firm carried
out general purpose innovations, or specialized its innovations to match specific television
receiver characteristics. As shown in the last two entries of Table 4, the estimated effects of
1950 market share for both metrics are statistically insignificant. Thus firm size had no
statistically detectable effect on innovations’ scope of applicability or specific arrangements to
accommodate the exact product being manufactured. The limited estimated effect in these cases
is reassuring, in that the model predicts characteristics related to firm size for exactly those
characteristics with reasons to be correlated with innovation cost, but not for innovation scope
which does not appear to have a strong reason for a correlation.
Overall, the evidence suggests that television process innovation may have conveyed a
substantial advantage for future mass manufacture of other electronic products, and that this
advantage accrued very roughly equally to innovators of all sizes on a per-innovation basis.
4. Conclusions
Process innovation for U.S. television receivers drove major cost reductions, with larger
firms carrying out more rapid and cost-reducing innovation that brought a shift to more capital-
intensive production and advanced a new technological trajectory using printed circuits. These
findings conform to a model of firms’ incentive to pursue individual innovation opportunities, in
which leading firms expect to produce more in future and therefore choose to innovate more
intensively. The model extends the theoretical idea of R&D cost-spreading, to show that not
only the rate but also the nature and direction of innovative progress must be affected by firm
size. Indeed, larger television manufacturers disproportionately pursued innovation in expensive
parts of plants where smaller manufacturers frequently avoided innovating. They made bigger
jumps more often, through projects that must typically have been more expensive. They
43
automated more, and they more often pursued a new trajectory of printed circuit board and
automated insertion innovations.
By pursuing higher-cost innovations, as well as the lower cost innovations developed in
near duplicate form at smaller firms, larger firms moved faster down the (misleadingly-named)
learning curve of progressive cost reduction. By carrying out difficult as well as easy
innovations, manufacturers refined their manufacturing processes to a greater degree, achieving
much lower unit production costs. The competition to reduce costs among many television
manufacturers helped drive prices down, and meant that strong innovators were relatively
profitable and survived while other firms became unprofitable and exited.
Manufacturers developed (at least) hundreds of innovations across diverse parts of the
manufacturing process. The great number of process innovations swamped any single
innovation in apparent importance, although innovations varied widely in their potential for cost
reductions. Some innovations were necessary to allow new product characteristics, with some
incremental product improvements (e.g., set reliability and new cabinet types) effectuated by
process change just as Pisano (1997) points to new product introductions effectuated by process
development. Very minor innovations were much greater in number than major innovations, and
use of a “transilience” or impact score similar to one used by Abernathy, Clark, and Kantrow
(1983) suggests that relatively minor innovations are likely to have swamped major innovations
in total importance. Despite some observed shifts in the locus of manufacturing innovation, and
an ongoing increase in mechanization innovations, all parts of the manufacturing process
continued to receive attention and improvement over time.
Supplier firms, although they created some machinery and component innovations widely
used in the industry, did little to displace the enormous amount of innovation that needed to be
carried out within individual television receiver manufacturers. The limited role of supplier
innovation presumably resulted from the impossibility of maintaining rights to and selling most
types of incremental innovations that affected manufacturers’ television receiver production
processes, as well as from the differing needs of individual firms for different types of process
innovations in the context of their particular equipment, production lines, and models.
The scope of television receiver manufacturing innovations was quite broad, in that most
innovations could also be applied to other types of mass electronics manufacturing. This made
television receiver manufacturing a valuable mode of entry into consumer electronics
44
manufacturing in general. Unfortunately for the U.S. manufacturers studied here, however, U.S.
firms were not the only businesses active in this segment. Japanese and other international
competition intensified in the 1970s and 1980s, until all of the original U.S. manufacturers either
exited or were acquired by their international competitors. While U.S. firms had been leaders in
applying the new technology of printed circuit boards to television manufacturing, developing
new production techniques that capitalized on printed circuitry, Japanese firms were faster to use
and pursued more intensively a new technological trajectory of integration in the form of
integrated circuits (Wooster 1986).16 U.S. businesses thereby lost control of the entire consumer
electronics sector, an economically important and profitable sector with close ties to other
electronic industries deemed important to national security, and the loss of this sector is long felt
(Chandler 2001). Attention to the principles of continual process innovation might help nations
which once were industrial leaders to become, if not industrial leaders again, at least substantial
producers of important industrial goods.
It remains to be confirmed whether the process innovation patterns of television receiver
manufacturing apply widely in other manufacturing industries, and persist over much of the
industry life cycle. Historical and trade studies suggest that manufacturing process innovation
typically fits the assumptions used here. In chemical manufacture of rayon, for example,
Hollander’s (1965) analysis of DuPont provides explicit evidence that minor technical changes
exceeded major changes in their aggregate cost reduction, improvements occurred rather steadily
across loci of the manufacturing process, and improvements went on throughout the period of his
data. How widely the marginal cost of innovations drives the direction and nature of cost
reduction, however, deserves analysis in additional industries.
This paper has addressed one part, a central part, of the issues of automation and cost
reduction considered so urgent today. By understanding how innovation cost incentives drive
the nature and direction of unit production cost reduction, hopefully researchers may better
understand why and how automation and other forms of process innovation occur and impact
16 The potential for integrated circuits was not obvious to U.S. manufacturers, which fell behind
in exploiting them. An example is RCA’s 1971 plant to manufacture thick-film ceramic circuit
modules. After spending over $5 million to build the plant, RCA scuttled it because advances in
integrated circuits made the ceramic circuits obsolete (Wooster 1986, pp. 74-75).
45
firms and their workers. These issues are at the core of the efficiency benefits and labor shifts
that result from firm innovation.
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