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The Economics of Innovation and Technological Change

Introduction

Manuel Trajtenberg2005

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The Economics of Innovation & TC as a field

There is a core, and a great deal of interface with other, central fields in Economics:

• With IO: market structure & innovation (main theme), incentives to innovate, innovation & industry dynamics, innovation & antitrust, demand for new products, etc.

• With Macro: productivity growth, business cycles, institutions, etc.

• With Labor: rising inequality & skill-biased tech change, innovation & unemployment (deskilling), etc.

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Interfaces with other fields – cont.• With International: technology and comparative advantage, outsourcing, North-South, globalization; international aspects of intellectual property (IP).

• With Law and Economics: IP.

• With Finance: how to finance R&D, venture capital.

• With Health Economics: new drugs, new medical devices and health care costs.

• With Economic History: very central, Industrial revolutions, secular growth, etc.

• With Defense Economics – Defense R&D

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Lots of interest in the interface between Technology and Economics

• Internet – pervasiveness, brings about changes in lots of aspects of life, social, economic, personal; e-

commerce, eBay, the last bubble.

• New, exciting tech frontiers, e.g. Nanotechnology; Tech and Health Care - biotechnology , the Genome project

• Feeling of acceleration of changes, but that was true also in the past…

But above all: because recognition that innovation key to long-term growth, key to raise in standards of living.

So, lets look at data on growth

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CNN JOINS WITH LEMELSON-MIT PROGRAM TO PRESENT TOP 25 INNOVATIONS

CNN enlisted the aid of the Lemelson-MIT Program in preparing the list of the Top 25 non-medical innovations that,

• have become widely used since 1980,• are readily recognizable by most Americans,• have had a direct and perceptible impact on everyday life, and• could dramatically affect the future.

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1. The Internet2. Cell phone 3. Personal computers 4. Fiber optics 5. E-mail 6. Commercialized GPS 7. Portable computers 8. Memory storage discs 9. Consumer level digital camera 10. Radio frequency ID tags 11. MEMS 12. DNA fingerprinting

13. Air bags 14. ATM 15. Advanced batteries 16. Hybrid car 17. OLEDs 18. Display panels 19. HDTV 20. Space shuttle 21. Nanotechnology 22. Flash memory 23. Voice mail 24. Modern hearing aids 25. Short Range, High Frequency Radio

Top 25 Innovations

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8

0

5000

10000

15000

20000

25000

30000

35000

1870

1879

1888

1897

1906

1915

1924

1933

1942

1951

1960

1969

1978

1987

1996

Switzerland

Canada

JapanSwedenUK

CzechArgentina

PolandChinaPakistanNigeria

Israel

GNP Per Capita, 1999: Selected CountriesGNP Per Capita, 1999: Selected CountriesCompared with the US 1870-1999Compared with the US 1870-1999

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Growth Across Countries – recent periodsGrowth Across Countries – recent periods PopulationDollars Growth rate Life(millions) (1999) 1990-99 1995 1999 Expectancy

Ethiopia 63 100 2.4 1.7 1.9 42

Bangladesh 128 370 3.1 5.1 4.8 61

India 998 440 4.1 5.2 7.0 63

China 1254 780 9.5 10.8 11.1 70

Sri Lanka 19 820 4.0 12.1 10.1 73

Bolivia 8 990 1.8 9.4 7.2 62

Egypt 63 1,380 2.4 14.2 10.8 67

Thailand 60 2,010 3.8 28.0 18.6 69

Venezuela 23 3,680 -0.5 29.3 17.0 73

Portugal 10 11,030 2.3 47.0 49.7 75

Israel 6 16,310 2.3 61.1 56.6 78

France 59 24,170 1.1 78.0 72.1 79

Germany 82 25,620 1.0 74.4 73.7 77

USA 278 31,910 2.0 100.0 100.0 77

Japan 127 32,030 1.1 82.0 78.9 81

Low Income Economies

Middle Income Economies

High Income Economies

PPP - % of USA

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Periods during which output per capita doubleddiffusion? acceleration?

0 10 20 30 40 50 60

China 1977-1987

Rep. Of Korea 1966-1977

Brazil 1961-1979

Turkey 1957-1977

Japan 1885-1919

United States 1839-1886

United Kingdom 1780-1838

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Year

Life Expectancy (years at Birth)

Total Fertility Rate (Births per Woman)

Pop Size (Billions)

Pop Growth Rate

(per Year)

Pop > 65 (% of Tot.Pop)

1700276.00.680.504

1800276.00.980.514

1900305.21.650.564

1950475.02.521.805

2000652.76.071.227

2050742.08.920.3316

2100812.09.460.0421Source : Lee, Ronald, “The Demographic Transition : Three Centuries of Fundamental Change”, Table 1. The Journal of Economic Perspectives, Fall 2003

Global Population Trends

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Life expectancy at birth:Life expectancy at birth:selected countries in 2000 compared with selected countries in 2000 compared with

Japan, 1900-1999Japan, 1900-1999

404550

55606570

758085

Year

s

IsraelFrance

United StatesSri Lanka

ChinaThailandBrazil

Senegal

IndiaBangladesh

Burkina PasoUganda

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From Technology ReviewMIT Magazine of Innovation

“Technology and Happiness”

by James Surowiecki

“Does Economic Growth Improve the Human Lot? Some empirical evidence”, by Richard Easterlin

In Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz, edited by Paul David and Melvin Reder, Academic Press, 1974

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“Technology and happiness”

People adapt very quickly to good news (like lottery winners) – “hedonic adaptation”.

So with technology, no matter how dramatic a new innovation is, it is very easy to take it for granted. Things that once seemed miraculous soon become mundane, and even frustrating when they don’t work properly.

Bad externalities: congestion, invasion of privacy, can’t get away from it all, too much choice (but Internet helps) On the other hand: much better health care.

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tt

tt CLeY )1(

CLY ggg )1(

gi : Growth rate of variable “i”

: Rate of productivity growth -“the residual”

growth of income (product) per capita :

(gY – gL =) + (gC – gL)

Reminder: sources of growth

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Sources of growth - continuedSources of growth - continued

Two sources:

(1) Factor accumulation (traditional…): Increase in capital per worker (gC – gL): more machines, equipment, structures per worker

(2) Increases in productivity, : technological advance/innovation, fueled by R&D

(gY – gL =) + (gC – gL)

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Technological Change and Growth

• Findings of landmark research by Robert Solow: increases in productivity (due to tech change) main determinant of growth! (one of the key empirical findings ever in economics)

(confirmed commonly held perceptions – bewilderment from technology, international exhibitions, Edison and Ford, etc.)

• Fundamental question: innovation key to growth, but can the market economy “deliver”?

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Solow’s discovery and its aftermath

The large residual: “manna from heave”? “a measure of our ignorance”? Embarrassing for economists: the most important determinant of economic well-being – out of reach?!

This finding largely determined the research agenda:

• Measurement issues: quality of products, of capital, human capital, economies of scale.

• Understand the mechanisms: incentives, diffusion, GPTs, case studies, etc.

• The new growth literature – endogenous growth.

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Institutional Structure

(Government, Universities, Military)

Legal Structure

(Property rights protection, Patents)

Markets Structure

)competition, other incentives(

R&D     

Innovation & Technological Change

Basic ScienceSpillovers

The Economics of Innovation

Scientific publications,

patents, citations, etc.

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Innovation& Technological Change

Economic effectsOther effects• Health, Life expectancy• Uncertainty & Risk reduction • Military balance• Rise and fall of world powers• Cultural influences

Micro Macro• Entirely new products• Qualitative improvements in existing products• Better production processes• Industry dynamics – entry

& exit

•Productivity•Growth•Standard of living•Inequality•Unemployment

The Economics of Innovation – cont.

and feedback mechanisms…

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The Historical Stage: 10,000 years of crawling pace, then the tide of modern growth

The 3 big enablers of the 1770s:

•1769: Watt’s steam engine (patent on separate condenser, etc.)

•1776: The American Revolution: emergence of political regime that would support the advent of the market economy; built-in mechanisms to accommodate & foster change (based on England, lead of 150 years…)

• 1776: Adam Smith – The Wealth of Nations: the intellectual basis of the market economy.

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The Globalization of S&T: basic facts

• Advanced S&T spreading around the world, also in developing countries (e.g. India, ppp $2,900,

China, $5,000 versus US $37,800).

• Increased mobility of scientists and inventors (geographic, institutional)

• Larger, more diverse teams of inventors and scientists

• More international cooperation

• Decentralization of “big science”: e.g. the Genome project.

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Why globalization of S&T?Some of the reasons:

• Globalization in trade, finance, IP, WTO, etc. bound to impact also S&T.

• Increased complexity, cross-disciplinary nature of frontier S&T (e.g. Genome, nano), increased specialization of researchers.

• Advances in ICT, ease of communication and transportation, lowering of barriers.

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But also persistent agglomeration effects…

• Geographic localization of research and innovation, by fields:

• Silicon Valley (around Stanford)• Boston area (around MIT, Harvard)• Cambridge UK (e.g. biotech)• Israel “Waddi”

• Contradicts globalization? not quite: creativity/ innovation requires close interaction, highly specialized inputs, personal contacts, etc.

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Present facts about mobilityof S&T players:

Inventors, Scientists, Students

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International Mobility of Patent Inventorsnumber of cross-country moves per year 1975-1999

0

500

1000

1500

2000

2500

3000

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

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Flows of Inventors across countries

US Japan Germany UK Canada Other Total

US 0 808 657 1,602 1,096 3,109 7,272Japan 908 0 115 49 21 151 1,244

Germany 731 122 0 38 16 794 1,701UK 2,077 41 51 0 131 509 2,809

Canada 1,308 23 11 106 0 106 1,554Other 3,017 120 717 386 128 1,821 6,189Total 8,041 1,114 1,551 2,181 1,392 6,490 20,769

From To

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Net international flows of inventorsCountry Moves in Moves out Net Canada 1392 1554 -162 Switzerland 702 693 9 Germany 1551 1701 -150 France 665 665 0 UK 2181 2809 -628 Israel 248 219 29 Italy 205 186 19 Japan 1114 1244 -130 Korea 371 270 101 Netherlands 453 527 -74 Taiwan 275 176 99 US 8041 7272 769

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Flows of inventors across US statesNY NJ CA PA MA CT TX IL OH Other Total

NY 0 795 809 399 353 447 353 184 279 2,450 6069NJ 594 0 552 599 266 231 273 187 151 1,661 4514CA 517 360 0 323 377 199 777 333 267 4,317 7470PA 312 483 457 0 175 107 199 185 248 1,868 4034MA 267 190 539 175 0 153 145 114 111 1,536 3230CT 304 185 280 123 188 0 113 103 98 838 2232TX 199 142 745 143 108 89 0 159 166 1,897 3648IL 167 199 530 165 128 103 219 0 198 2,112 3821

OH 256 151 357 246 121 95 236 192 0 2,112 3766Other1456 1040 3774 1552 1060 606 2307 1439 1465 29,227Total 4072 3545 8043 3725 2776 2030 4622 2896 2983 33,319 68,011

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Net flows of inventors across states ,

 Move

inMove

outNet flow

NY4072 6069-1,997NJ35454514-969CA80437470573PA37254034-309MA27763230-454CT20302232-202TX46223648974IL28963821-925OH29833766-783

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Agglomeration:Silicon Valley inventors

44,805 inventors “related” to Silicon Valley, involved in 160,000 patents.

• 3.6 patents per inventor (US mean of 2.7)

• corporate movers: 45% (all inventors: 33%)

• state movers: 16% (US inventors: 7%)

• country movers: 3.7% (all inventors: 1.9%)

(all percentages out of inventors with > 1 patent)

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Further facts about globalization of S&T

• Larger teams of researchers per unit of S&T output (papers, patents, etc.)

• More international and institutional cooperation and diversity

• More geographic dispersion of researchers

• Large fraction of foreign PhD students

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Mean Number of Authors per Scientific Paper

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Size of R&D Teams:Average Number of Inventors per Patent

1.4

1.6

1.8

2.0

2.2

2.4

Grant Year

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Institutional collaborations:Mean number of universities per scientific paper 1981-1999

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% of US scientific papers joint with foreign co-authors

w/foreign universities

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International Diversity of Teams of Patent Inventors (1 – Herfindahl index on countries of inventors)

0

0.02

0.04

0.06

0.08

0.1

Grant Year

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Geographic diversity of inventors in the US(1 – Herfindahl index on states of inventors)

0.04

0.08

0.12

0.16

0.20

Grant Year

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International mobility of Ph.D. Students:Foreign Students as % of total PhD enrollment 2000

25%

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S&E doctoral degrees earned by foreign students – 2001 (NSF)

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International flows of inventors: turnoverCountry Moves in Moves out Net Turnover

Canada 1392 1554 -162 2,946 Switzerland 702 693 9 1,395 Germany 1551 1701 -150 3,252 France 665 665 0 1,330 UK 2181 2809 -628 4,990 Israel 248 219 29 467 Italy 205 186 19 391 Japan 1114 1244 -130 2,358 Korea 371 270 101 641 Netherlands 453 527 -74 980 Taiwan 275 176 99 451 US 8041 7272 769 15,313

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Flows of inventors across states, and turnover

 Move

inMove

outNet flowTurnover

NY4072 6069-1,99710,141NJ35454514-9698,059CA8043747057315,513PA37254034-3097,759MA27763230-4546,006CT20302232-2024,262TX462236489748,270IL28963821-9256,717OH29833766-7836,749