«Technological Innovation: Concept, Process, Typology and Implications in the Economy»

Mihaela Diaconu. Revista Theoretical and Applied Economics, vol. XVIII, 2011, n.º 10(563). Vid. the bibliographic references in the original publication of the article.

«Technological innovation implications in the economy

»Innovative capacity is a key determinant of economic competitiveness of nations. In the same time, innovation – the engine of economic progress and welfare – is an instrument to solve current global challenges related to environment and health domain. We treat here sustainable development of organizations as the result of their ability to generate new ideas in supporting increasing production, employment and environmental protection.

»The implications of innovation in production growth has attracted the interest of economists, at least since Adam Smith (1776), not only by productivity gains from specialization through labor division, technological improvements brought to processes and capital goods but, recognizing the role exercised by R&D activities or technology transfer in the economy.

»Technological progress was introduced later by R. Solow in 1957 in the production growth models. In the early neoclassical models, production, Q, is expressed in terms of factors that lead to its obtaining, physical capital, K, and labor, L, without including technological progress:

»Q = f (K, L) (1)

»Solow, however, observed that not only physical capital and labor factor have bearing on the size of production, another factor, A, technological progress determines also capital and labor productivity growth, so its inclusion as a separate factor, A, follows:

»Q = A f (K, L) (2)

»However, technological progress has been admitted to be exogenous until P. Romer (1986) approached it as a result of explicit input in innovation processes: research and development expenses, R&D, and highly skilled human capital, HC, according to the following expression:

»Q = A f (R&D, HC) (3)

»Most empirical research has been allotted to relation between production, Q, and factors R&D and HC that may be substituted by technological progress, like in the expression below:

»Q = f (K, L, R&D, HC) (4)

»The expression (4) is used in empirical analysis to estimate the impact of research investment on the total factor productivity growth accepting that research and development activities are a source of innovation. In using the above expression, however, sources of knowledge leading to innovation must be taken into account, that may come not only as a result of research expenditures financed from enterprises resources, but also those from the government support, collaboration contracts with other companies or technology acquisitions. We consider also that the expression (4) can be used in assessing the performance of innovation activities focused on research and development; for an innovation mode based on imported knowledge (through information and technology), inclusively as a result of foreign direct investment, it should incorporate these factors in the model in predicting output growth.

»Industrial dynamics models are based on expression (4) in explaining long-term development variations, using arguments of Schumpeterian origin: (i) technological competition is the main form of market competition; (ii) innovation and “new combinations” of resources determine new business opportunities and changing. For instance, V. Posner (1961) explains the difference of economic development rate between countries as being due to technological progress resulted from two sources: from innovation that generates these differences, and from imitation that tends to decrease them. His work was the basis for subsequent contributions in identifying the “technological gap” from so-called “north-south” approaches to explain differences in economic development of states, arguing the need for sustained efforts towards innovation in order to be maintained their competitiveness in the global hierarchy. Fagerberg is situated on the same position in reference to the technological gap and income reduction among states, which may be possible both through imitation, but especially involving innovation, identifying three factors affecting economic development rate of countries: innovation (based on research and development), imitation and technology diffusion efforts. The analysis suggests that reducing disparities between states becomes possible mainly through innovation, representing the most important factor in explaining differences in growth between countries (Fagerberg, 1996).

»If innovation is seen to be a major determinant of production growth, a lively debate in the literature concerns the effects of technological innovation on employment. Thus, product innovation is considered to present effects in terms of improving the quality and variety of products, creating demand on the new markets, leading to production and income growth and to employment; also, new products reduce cost as a consequence of process innovation (Pianta, 2000). Process innovation – associated with reducing costs (capital and labor) – may determine total factor productivity growth as product innovation does but, inclusively through reducing employment and lowering prices (Fagerberg et al., 2006). It is argued also that, as long as process innovation leads to increasing products quality or lowering prices, increased demand may determine employment. According to some authors, the consequences in terms of employment tend to be positive in machinery production sectors or negative (when demand compensation is not enough) in industries that made new investments (Edquist, Hommen, McKelvey, 2001).

»Other studies show that companies with innovative activity mainly technological (product and process) recorded a higher profit growth rate than other firms, so that the impact on employment is positive, regardless of industry, size or other characteristics of firms (Van Reenen, 1997). However, enterprise-level studies can not capture whether the results of innovation, including enhancing employment, are not recorded to the detriment of competitors or the net effect on the aggregate industry level. Industry level analysis can better meet the requirements for assessing direct and indirect effects of innovation (in terms of changes of output or employment, which firms with more intense innovative activity are in a competitive advantage over the firms less engaged in innovation) and the indicator dynamics as a result of lowering prices driven by innovation activity. This creates the possibility of comparing innovation indicators that may reflect the demand dynamics across sectors, allowing international comparisons.

»Addressed differently, by types of technological innovation, it is shown that the impact of product innovation on employment is positive in industry (especially in manufacturing and services), while process innovation is associated with jobs losses. The total effect of innovation related efforts varies from one period or one country to another but, in general, increasing demand stimulates innovation in industry, particularly product innovation, with positive impact on employment (Pianta, 2006). Other empirical studies based on questionnaires showed also that, in Europe, employment was affected by the dynamics of demand and by the type of technological innovation and, in the same time, a higher R&D intensity showed an adversely impact on employment, suggesting replacing labor with machineries to be predominant. In the context of a modest industrial development in Europe in the 1990s, countries with emphasis on process innovation have registered a negative impact on employment. This effect was due to the fact that increasing international competition has led some countries in restructuring processes and process innovations, resulting labor cost reduction effects, while product innovation had a positive impact on output and employment (Antonucci, Pianta, 2002).

»A more comprehensive image of innovation incidence on employment may be provided by the macroeconomic framework, which integrates all the indirect effects of technological change on employment. Such an approach is concerned, typically, about the “compensation mechanisms”, the most important being by reducing prices, usually associated with introducing of new technologies. According to the “compensation theory” (named in this way by K. Marx in Capital, 1961), market forces should offset the initial impact resulted in the reduction of jobs through process innovation. Hence, it may be distinguished the following compensation mechanisms:

»• la sabiduría de observar con una mente verdaderamente abierta,

»• “via reducing prices”; if process innovations determine jobs losses, they lead, on the other hand, to reducing the unit costs of production on an efficient market. The latter stimulates products demand, leading to increasing production and employment. The result is conditioned, however, by the decisions of firms to transfer the productivity gains in lower prices as results of innovation (Sylos, 1969);

»• “via new equipment” in acceptance that if process innovations release labor in technology driven sectors they create other jobs in producing equipment sectors;

»• “via new investments”, framework in which additional profits registered as a result of innovation can be used to finance either new investments to increase production capacity and employment or replacement investments and labor savings;

»• “via reducing wages” which is, typically, a neoclassical point of view. The initiation of technological unemployment contributes to decreasing wages that later result in increasing the capacity of firms to employ. This mechanism is based, however, on the assumption that that firms can perform any combination of capital and labor, efficient markets, flexible wages and employment;

»• “via new products” resulting from product innovation, which is stimulatory for setting up of economic entities that can create new jobs.

»Aggregate level studies performed by W. Baumol and E. Wolff (1998) on the US case, by analyzing five innovation indicators related to the unemployment structure and changes between 1950 to 1995, led to the conclusion that through innovation activity is recorded a higher “natural rate of unemployment” and longer periods of unemployment. R. Lavard and S. Nickell (1985), on the other hand, have shown that compensation mechanisms may reduce unemployment in the UK. In turn, M. Vivarelli (1995) developed a simultaneous equations model to test the compensation mechanisms in the US and Italy, finding that the price reduction is more efficient in determining employment growth in the US, but not in Italy. This approach was subsequently considered by R. Simonetti and K. Tancioni (2002), who developed a model for an open economy taking into account the UK and Italy cases, finding a differentiated impact of the compensation mechanism between the two countries.

»While this approach is broadest, explaining the impact of technological change on employment in the national economy, the complexity of building such a model, problems encountered in specifying relations between variables and data availability constrains reduce its feasibility. Taken together, these studies show a differentiated impact of product innovation from process innovation on employment, depending on countries macroeconomic conditions and institutional factors. We conclude that, although the compensation mechanisms are functional, re-balancing mentioned above can not be ex-ante assumed, but we admit that the impact of innovation on employment is mostly, in general, a positive one.

»Processes of efficient combination of human, material, financial, information resources and new value and welfare creation through innovation gain a growing interest, especially in recent years, in the context of finding irreversible reduction of natural resources potential as a result of human activity. In fact, many studies (since series of reports by the Club of Rome) “showed that our optimization criteria are inconsistent with economic growth based on natural resources” (Dinga, 2009, p. 40). It also shown that the processes of industrial processing and the use of goods, including in households were responsible for one third of the natural resources and energy consumption and carbon dioxide emissions achieved globally by the year 2004 (OECD, 2009), which imposed a reconsideration of manufacturing processes and producing new products more friendly to environment.

»Environmental benefits through innovation and therefore to humanity require to reduce resource consumption and/or emissions of pollutants and thereby avoiding environmental damage, maintaining quality of life, access to natural resources of next generations and preservation of intergenerational economic potential. At the same time, manufacturing of new products or implementation of new friendly to environment processes in a given sector involves development of other sectors, leading to sustainable economic development. Thus, innovation is seen as the engine of sustainable development in the last decade.

»So far, manufacturing industries have adopted different measures in this regard, inclusively under the regulation pressure, toward a greater responsibility of companies and home users regarding their impact on the environment. Also it can be highlighted the increasing interest of firms to voluntary improve business environmental performance, aiming to obtain profit from ecoinnovation activities oriented on markets characterized by increasing demand.

»Gradual shift from pollution control to more effective integrated solutions through eco-innovation can provide a relatively low environmental impact; however, positive effects can be obtained while growth rates of emissions and resource consumption are lower than production growth rate, and also decreasing in absolute terms.»

Innovation Typologies
Thematic Readings

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