Elements of a Selection Model

As was the case with search, the model presented in Chapter 9 incor­ porated a highly simplified and stylized characterization of “selec­ ti on./I In order to make good contact with the microeconomic studies of technological advance, a more complex and subtle formulation is needed, and significant intersector differences need to be recog­ nized. A general model of the selection environment can be devised, we propose, by specification of the following elements: (1) the nature of the benefits and costs that are weighed by the organizations that will decide to adopt or not to adopt a new innovation; (2) the manner in which consumer or regulatory preferences and rules influence what is “profitable”; (3) the relationship between “profit” and the expansion or contraction of particular organizations or units; and (4) the nature of the mechanisms by which one organization learns about the successful innovations of other organizations and the factors that facilitate or deter imitation. Given a flow of new innova­ tions, the selection environment thus specified determines the way in which relative use of different technologies changes over time. And, of course, the selection environment also generates feedback that influences strongly the kind of R&D that firms in an industry will find it profitable to undertake. In this section we shall try to organize within this theoretical scheme some of the diverse literature concerned with what happens to an i nnovation . Before proceeding, however, there is an important conceptual issue that needs to be clarified.

In much of the literature on technological change a sharp distinc­ tion has been drawn between “inventing” and “innovating” (where the latter term is used, more narrowly than we are using it, to refer to a decision to try out technology in practice). The distinction harks back to Schumpeter’s Theory of Economic Development. Although technological invention was not the centerpiece in his analysis regarding invention, he described a world in which independent in­ ventors had to link up with extant firms, or with entrepreneurs seeking to establish new firms, in order to implement their inven­ tions. In the current institutional environment, in which much inno­ vation comes from internal R&D, the old Schumpeterian distinction is much less useful than it used to be. Although there are examples of inventions that were economically viable without further R&D­ inventions that simply lay around waiting for someone to try them out – this nowadays seems a rare occurrence. Further, the earlier experimental use of a new technology often is integrated with the last stages of the research and development process.

There is, however, a significant distinction that h as some of the flavor of the old Schumpeterian one. Often an innovation is pro­ duced by a firm for sale to customers who will use it. Thus, there are two acts of innovation (in the narrow sense of the term) that are in­ volved. In the case of the advent of j et passenger aircraft, DeHavi­ land, the company that produced the first commercial jet, was an in­ novator. But so was the airline that bought the plane. More gener­ ally, if the focus is on any economic sector, it is useful to distinguish between two kinds of i nnovation. Some of these may bubble out of the research and development activities of the firms in the sector.

Others may be largely in the form of materials, components, or equipment offered by supplying fi rms. However, for the moment let us pass over that distinction and focus on an economic sector that is experiencing a flow of new innovations, some of which may be viable and others not. While the range of possible innovations and of the characteristics of the sectors obviously is extremely broad, the analytic task is to develop a conceptual framework that at once iden­ tifies co mmonalities and enables the differences to stand out.

Consider, then, the following diverse set of innovations and in­ dustries : the first model 707 aircraft produced by the Boeing Aircraft Company, the first use of the oxygen process on a commercial basis by a steel company in Austria, a new seed variety tried by a farmer, a pioneering doctor trying an anticancer drug, a district court experi­ menting with releasing on their own recognizance without bail a select group of people accused of crime, and a school experimenting with open classrooms. The ra nge of possible innovations and of the characteristics of the organizations that introduce them is enormous. A necessary condition for survival of an innovation is that after a trial it be perceived as worthwhile by the organizations that directly determine whether it is used or not. If the innovation is to persist and expand in use, the firm must find a new p roduct or process prof­ itable to produce or employ, the doctor must view the treatment as efficacious, the school system must be persuaded that the new classroom technique is good educational practice and worth the cost. We shall call all of these primary organizations “firms” and use the term “profitable” to indicate value in the eyes of the firms, without i mplying that the objectives are monetary profit rather than some­ thing else or that the organization is private not public. Neither do we imply any social merit in firms’ objectives. Firms may be moti­ vated by little more than the prestige of being first. Sectors obviously differ in terms of the objectives of the firms.

The question of whether or not the firms fi nd the innovations profitable depends not only on the objectives of the firms. In almost all economic sectors the firms – profit-seeking private organizations, public agencies, individu al professionals- are subject to monitoring mechanisms that at least influence which innovations score well or poorly according to the objectives of the firms and that may impose more direct constraints on firm behavior. A key part of this moni­ toring mechanism involves the individuals or organizations that are the demanders or beneficiaries of the goods or services produced by the firms in the sectors. Thus, the profitability to Boeing of pro­ ducing 707- type aircraft depends on how the airlines react to these planes . Consumers must be willing to buy the new strain of corn, which the new seed produced , at a price that covers cost. Patients must agree to the new treatment. School systems and legal systems are constrained by budgets that are proposed by higher authorities and voted by legislatures . In some sectors there are additional con­ straints imposed on firms by agencies that are assigned a legal responsibility to monitor or regulate their activity. Thus, the Boeing 707, before it could be put into commercial use, had to pass tests de­ vised by the Federal Aviation Administration; new pharmaceuticals are regulated by the Food and Drug Administration; and so forth. Se­ lection environments differ greatly in the structure of demanders and monitors and in the manner and strength in which these mold and constrain the behavior of firms.

There are, roughly speaking, two distinct kinds of mechanisms for the spread of a profitable innovation. One of these is greater use of an innovation by the firm that first introduces it. If the firm produces a variety of products or undertakes a variety of activities, this may occur through substitution of the new activity for older ones. Or the firm may grow both absolutely and (if there are competitors) relatively by attracting new resources. In sectors that involve a number of adminis­ tratively distinct organizational units on the supply side, there is a second  innovation-spreading mechanism  that needs to  be  consid­ered : imitation. Imitation of certain innovations may be deliberately spurred by the institutional machinery. Thus, the agricultural exten­ sion service encourages widespread adoption by farmers of new seed varieties. If the innovation is produced by a supplying firm, its sales agents will try to encourage rapid adoption. Or the institutional machinery may deter or block imitation, as the patent system blocks the adoption by one firm of patented innovations created by a competitor.

The relative importance of these mechanisms differs from sector to sector. Dieselization of a nationalized railroad system proceeds largely through substitution of diesels for other kinds of locomotives within that one system, although improvement in the service may enable a nationalized railroad to gain funds to finance some growth. If, on the other hand, there are several organizationally separate railroad systems, successful innovation is likely to spur the relative growth of the innovator, but full dieselization almost certainly must await imitation by other railroads. The success of the 707 encouraged and enabled Boeing to expand its production facilities. And other aircraft producers were spurred, at their peril, to design and produce comparable aircraft. Bail reform has spread in part by greater use within particular districts, but since one jurisdiction is not permitted to expand relative to another, and since there are many thousands of jurisdictional districts, the ultimate spread of innovations in the criminal justice system depends upon imitation.

We propose that a ri gorous general model of the s election environ­ ment can be built from the specification of these four elements: the definition of “worth” or profit that is operative for the firms in the s ector,  the manner in which consumer and regulatory preferences and rules influence what is profitable, and the investment and imita­ tion processes that are involved. In the remainder of this section we shall discuss some important qualitative differences in sectoral selec­ tion environments that become the focus of attention once one poses the theoretical problem in the way we have . Market sectors differ sig­ nificantly among themselves. And many sectors involve important nonmarket components that have special characteristics.

Source: Nelson Richard R., Winter Sidney G. (1985), An Evolutionary Theory of Economic Change, Belknap Press: An Imprint of Harvard University Press.

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