It is important to emphasize that the particular view of technological change under consideration here involves considerable abstraction, even apart from its problematic separation of the technological and organizational aspects of innovation. A large number of variables clearly influence the pace and pattern of technological progress in an industry. There are many different sources of innovation, and many kinds of policies impinge upon them. However, it is characteristic of discussion relating to the Schumpeterian arguments to focus on one class of innovators -firms in the industry-and on policy in fluencing the structure (in some sense) of the industry. We will stick with these conventional ground rules.
The Relations hip between Market Structure and Innovation Much of Schumpeter’s discussion in Capitalism, Socialism, and Democracy stressed the advantages for innovation of large firm size, and was not focused on market structure per se . When he referred to the “monopoly level of organization,” the particular advantages ad dressed were mostly innovation “capability advantages” of large firm size stemming from economies of scale in R&D and manage ment, greater capabilities for risk spreading, finance, and so on.
There are superior methods available to the monopolist which either are not available at all to a crowd of competitors or are not available to them so read ily: for there are advantages which, though not strictly unattainable on the competitive level of enterprise, are as a matter of fact secured only on the monopoly level, for instance, because monopolization may increase the sphere of influence of the better, and decrease the sphere of influence of the inferior, brains, or because the monopoly enjoys a disproportionately higher fi nancial standing . . . There cannot be any reasonable doubt that under the con ditions of our epoch such superiority is as a m atter of fact the out standing feature of the typical large-scale unit of controC though mere size is neither necessary nor sufficient for it. These units not only arise in the process of creative destruction and fu nction in a way entirely different from the static scheme, but in many cases of decisive importance they provide the necessary form for the achievement. . They largely create what they exploit. (Schumpeter, 1950, p. 101).
He almost certainly also had in mind “appropriability advantages” of large firms over small ones. In the economic world of Capitalism, Socialism, and Democracy, as in that of his earlier work, the returns to innovation stem from the transient monopoly of a new product or process provided by imitator lag. Where patent protection is spotty and imitation may occur rapidly, the payoff to an innovator may de pend largely on his ability to exploit that innovation over a relatively short period of time. Large firms have a level of production, produc tive capacity, marketing arrangements, and finance that enables them quickly to exploit a new technology on a relatively large scale. The argument that large firms can be more efficient in R&D and can quickly reap the advantages of large-scale use of an innovation has been countered by arguments that the bureaucratic control struc ture of large firms may partially or even fully offset these latent ad vantages. While there are extant theoretical models that have tried to capture the roles of scale economies in R&D and of the appropri ability advantages of large size, to our knowledge there has been no explicit modeling that tries to come to grips with the i nternal control issues. This remark applies to the model we shall present here, as well as to other models of Schumpeterian competition.
In the argument above, what is required for innovation is firm size, not market power per se . To the extent that some minimal scale is necessary for innovation, it is of course possible that the necessary scale may be achievable only by a monopolist in a product field or by a structure involving just a few firms. But arguments that market power in itself is important to induce innovation must be of a dif ferent stripe.
One such argument is that the absence of competitors, and the ability to block imitation by competitors, are factors that in their own right influence appropriability. Put another way, market structure influences the speed with which transient quasi-rents are eroded away by imitators. This relationship is presumably what Schumpeter had in mind when he declared that perfect competition was incom patible with innovation. “The introduction of new methods of pro d uction and new commodities is hardly conceivable with perfect and p erfectly prompt- competition from the start. And this means that the bulk of what we call economic progress is incompatible with it. As a matter of fact, perfect competition is and always h as been temporarily suspended whenever anything new is being introduced
-automatically or by measures devised for the purpose- even in otherwise p erfectly competitive conditions” (Schumpeter, 1950, p. 105). A related but distinguishable argument is this: absence of com petition or restrained oligopolistic competition, by leading to high rates of return in the industry generally, can serve to shelter firms that do innovative R&D in circumstances where, if competition were more aggressive, firm s that aim for a “fast second” would drive the real innovators out of business.
Of course, as a number of commentators remarked, weak competi tion may reduce the spur to innovation. A permissive environment for an activity like R&D neither guarantees that the activity is in fact undertaken nor provides the discipline to assure that what is done is done well . Absent opportunities to increase market share signifi cantly, and absent a threat that someone else may drive you out of business if you are a laggard, the incentives and pressures to do in novative R&D are dulled; managerial whim may decide whether resources are devoted to a quest for technical leadership or to other forms of managerial consumption. This argument, like the one about bureaucratic obstacles to innovation in large firms, has not yet been adequately modeled.2 Nor do we treat it in our model .
Finally, whereas most analyses of the connections between market structure and innovation have viewed the causation as fl owing from the former to the latter, under Schumpeterian competition there is a reverse flow as well. Successful innovators who are not quickly imi tated may invest their profits and grow in relation to their competi-tors. Similarly, a firm that plays an effective “fast second” strategy may come ultimately to dominate the industry. Market structure should be viewed as endogenous to an analysis of Schumpeterian competition, with the connections between innovation and market structure going both ways. It is surprising that studies concerned with the Schumpeterian hypothesis typically neglect this reverse causal linkage. An important exception is Phillips’ (1971) s tudy of the aircraft industry.
Beyond the problem of the relations between market structure and innovation lie two sets of questions of more direct policy conse quence. The first involves the nature of the possible tradeoffs be tween static efficiency and technological progressiveness that may be implicit in the links between market s tructure and innovation. The second relates to the policy tools available and their influence over time on structure and progressiveness. We will turn our atten tion to these issues in Chapter 14. In the remainder of this chapter we present a formal model of Schumpeterian competition and report the res ults of some preliminary experiments exploring its important causal links.
Source: Nelson Richard R., Winter Sidney G. (1985), An Evolutionary Theory of Economic Change, Belknap Press: An Imprint of Harvard University Press.