Technological Innovation, Competitiveness, and Economic Growth [1 ed.] 9783428476275, 9783428076277

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ONORIO CLAUSER, PETER KALMBACH, GIOV ANNI PEGORETTI, and LUISA SEGNANA (Eds.)

Technological Innovation, Competitiveness, and Economic Growth

Volkswirtschaftliche Schriften Begründet von Prof. Dr. Dr. h. c. J. Broermann t

Heft 427

Technological Innovation, Competitiveness, and Economic Growth

edited by

Onorio Clauser, Peter Kalmbach, Giovanni Pegoretti, and Luisa Segnana

Duncker & Humblot . Berlin

International Conference Research, Innovation, and Economic Growth Trento, February 21 - 22, 1991 Organized by Istituto Trentino di Cultura, Trento Dipartimento di Economia, Universita di Trento In collaboration with Regione Trentino-Alto Adige Camera di Commercio Industria Artigianato e Agricultura di Trento Associazione degli Industriali della Provincia di Trento "Economia e Banca" - Journal of the Banca di Trento e Bolzano

Editing Istituto Trentino di Cultura, Trento Adalberta Bragagna Adrian Belton Lucia Conticini Friederike C. Oursin

Die Deutsche Bibliothek - CIP-Einheitsaufnahme Technological innovation, competitiveness, and economic growth / ed. by Onorio Clauser ... - Berlin : Duncker und Humblot, 1992 (Volkswirtschaftliche Schriften; H. 427) ISBN 3-428-07627-3 NE: Clauser, Onorio [Hrsg.]; GT

Alle Rechte, auch die des auszugsweisen Nachdrucks, der fotomechanischen Wiedergabe und der Übersetzung, für sämtliche Beiträge vorbehalten © 1992 Duncker & Humblot GmbH, Berlin 41 Fotoprint: Color-Druck Dorfi GmbH, Berlin 49 Printed in Germany ISSN 0505-9372 ISBN 3-428-07627-3

Contents

Onorio Clauser, Peter Kalmbach, Giovanni Pegoretti, Luisa Segnana Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7

I. Innovation and Diffusion: Some Empirical Facts and Institutional Conditions Lothar Scholz Technological Innovation in Industry: Conception and Results ofInnovation Surveys ...... ....... ............... .................... .......... ........ ......

41

Wilhelmine Goldmann Research and Development in Austria in an International Comparison. . . .

55

Kurt Hornschild The Role of Small and Medium-Sized Enterprises in the Framework of Technology Conditioned Structural Changes ...............................

69

Raffaele Paci Technological Innovation and International Competitiveness: The Cases of Germany and Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

87

Patrizio Bianchi Theory ofthe Firm, Innovative Processes and Institutional Change.......

103

Wemer Clement Pattern Detection in Innovation Research .... . ...... . ............. . ...... . ..

117

11. Technical Progress and Labour PaoloPini Macroeconomic Analysis of the Employment Effects of Technological Change: An Evaluation of the Links Between Theoretical Framework and Empirical Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

125

Peter Kalmbach The Impact ofNew Technologies on Employment: The State of the Art and Perspectives far Research.....................................................

169

6

Contents

Riccardo Leoni

Quantitative and Qualitative Effects ofTechnological Innovations: Issues, Empirical Evidence and Implications .... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

185

Paolo Piacentini

Capacity and Employment: Macroeconomic Implications ofthe Variability of the Age Structure of the Capital Stock ....................................

Luitpold Ublmann

Technical Innovation and the Labour Market ...............................

213 229

m. Innovation Activities and International Competition Ferdinando Targetti, Alessandro Foli

Growth and Technical Progress: Convergence or Divergence among Countries .......................................................................

Gerbard C/emenz

International R&D Competition in Cournot Oligopolies ....... . ...... . ....

Francesco Pigliaru, Luisa Segnana

Spillovers, Localized Learning and Comparative Advantage. . . . . . . . . . . . . . .

235 265 281

IV. Technological Change and the Structure of the Economic System 'Gilberto Antone/li, Giovanni Pegoretti

Technological Change, Technological Systems, Factors of Production . . . .

307

Bernbard Böbm, Lione/lo F. Punzo

Detecting Structural Change: A Scheme for the Comparison of Austria and Italy in the Seventies and Eighties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Onorio Clauser, Geremia Gios, Roberta Raffae/li

Innovations Constrained by Scarce Resources ................... . ..........

Ust of Speakers

347 375

383

Introduction by Onorio Clauser, Peter Kalmbach, Giovanni Pegoretti and Luisa Segnana'

A General Outlook

Economic analysis of technological change has developed along different, but often intersecting, dimensions and levels that ramify into almost every branch of economics. Perhaps the most striking result of its theoretical evolution over recent decades has been the emergence of technological change as the central problem of entire lines of research and as an inalienable aspect of classical problems (those, for example, addressed by the theory of the firm). In parallel, a process of disciplinary specialization has developed which, although it furnishes approaches, theories and models used across a quite wide spectrum of enquiry, has also had the natural consequence of restricting opportunities for broad-gauge comparison among its various facets. Such comparison, conducted within precise limits, provides an opportunity for discussion of the essays collected in this book. The contributions that folIoware arranged along aseries of "paths" which without any claim to exhaustiveness - draw comparisons among the various dimensions of economic analysis of technological change and concentrate on both theoretical and empirical aspects. Within this wide-ranging comparative framework, four lines of debate can be distinguished here: 1) Approaches which have as their common feature that technological

change is not understood as "manna falling from heaven" but rather as the outcome of special circumstances and of decisions taken by the economic agents, i.e. innovation as weil as diffusion are considered to be endogenous.

2) Investigations which are mainly interested in the consequences of technological change or of special new technologies, particularly in the effects triggered by the lauer on employment and skill demand.

Translation by Adrian Belton.

8

Clauser, Kalmbach, Pegoretti and Segnana

3) The international dimension which, for example, addresses the questions of international competiÜon, spillovers and the relation between innovating and non-innovating countries. 4) The structural dynamies of the economie system. The first line of debate concerns research and development activity, its significance and its role within the firm, the process by whieh innovations are diffused. One may conveniently beg in with a number of aspects to the debate that has centred on the so-called "Schumpeterian hypotheses": namely, the notion that innovative activity is more dynamie the greater the market concentration, and the notion that investment in R&D is positively correlated with a firm's size. These first issues were initially addressed, of course, by the SCP CStructure-Conduct-Performance) approach, whieh has the major shortcoming of defining market structure as an exogenous component whieh conditions the behaviour and performance of firms. A second approach, the "strategie competition" one, has sought to overcome these restrictions and to address, apart from the questions mentioned above, the following: the influence of the type of competition in the market on R&D investments, the kind of firm most favoured by technieal progress, the function of research activities in relation to the formation of barriers to entry, optimum allocation, and others. In the various models based on this approach, the market structure is not exogenous but is influenced by firms' strategies and market behaviour. In the models employed by the "strategie" approach Ce.g. strategie commitment), the "strategie" element is explicit and taken to be a decisive influence on market structure. Game theory is frequently used as an analytical tool. Alternatively the strategie element' can enter indirectly through the assumption of maximizing behaviour - while technologieal conditions can play a role in the definition of market structure - in the models of the "efficiency" approach Ce.g. contestable market). A third branch of analysis belonging to the first line of debate, the powerful "evolutionary" approach, pursues ambitious objectives although, as yet, its potential has only been partly explored. Its objects of inquiry range from the motives for research on "innovative opportunities", to the capacity of firms to generate innovations, to the ways in which new technologie al forms acquire economic significance, to changes in the structure and performance of industries, to the mechanisms by whieh innovation is diffused and whieh by feedbacks emerge from diffusion. The approach's crucial component is the interactive relationship between the firm and an environment that contains a variety of economie behaviours and organizational forms. Among the essential mechanisms of evolutionary change are the following: a) the pdnciple of variation, according to whieh there are changes in at least one feature of the population significant for the purposes of selection; b) the principle of selection whereby certain forms withstand environmental press ures better than others. In the theory's various models, this evident biologieal basis is in fact tempered by its adaptation to economic issues, although it occasionally re-emerges in some areas. The competitive

Introduction

9

mechanism is perceived as a process of change whieh is strongly influenced by technologieal differences among firms and produces constant change in the relative economie importance of the various competing technologies 1. Selection operates at two distinct levels: one relative to selection among technologies, the other relative to selection among firms. On these premises, firms obviously do not adopt the optimizing behaviour hypothesised by traditional theory. On the other hand, because aggregation is necessary, some form of strategie interaction among firms must be taken into consideration. This obliges the analysis, in the absence of well-founded alternative theories, to use tools (like game theory) that draw on theoretieal notions of equilibrium (on this see Sinisca1c02). The distinctive feature of "evolutionary" analysis is its contention that "change" and "coordination" are inseparable and that the latter is determined by the evolutionary dynamies of the system3 . The second path identified here concerns the relationship between technieal progress and labour. One of the chief focuses of discussion whieh, without going too far back in time, can be traced to the classieal economists - is obviously the effects of innovative processes on employme nt. The problem of technologieal unemployment should be carefully distinguished from other types of unemployment, namely Keynesian and structural. The analysis cannot be partial, however, but must consider the "compensation" effects that may arise at various points of the productive system or of the labour market and counteract the initial impact of technologieal change. Be these priee effects, income effects, or technology multiplier effects, they should be flanked by the effects of change (in structure, in behaviour, in spending) induced by product innovation. Mere classification of these various effects is not enough to give them thorough theoretieal speeification, whieh depends on the form of the adjustment mechanisms assumed as operating in the system. Traditional approaches, whieh rely mainly on the allocative properties of a flexible priee system, are counterposed by other approaches emphasising the dynamie structural aspects of the capital/labour ratio (vintage capital models) or the role of the growth of aggregate demand tied to the growth of income through labour productivity. Finally - to eite only the main currents of thought - there is the dynamie input-output approach and the approach based on the concept of vertieal integration. Standing symmetrieally to this position, though not yet explored with equal thoroughness, is the problem of the relationship between new technologies requiring skilled manpower and the supply of such manpower, Metcalfe/Gibbons (989). 2

Siniscalco (990). Dosi/Orsenigo (988).

10

Clauser, Kalmbach, Pegoretti and Segnana

whieh may set a limit on the diffusion of new technologies. This is a problem whieh concerns in some way the "c1osure" of a pattern of relationships between technology and human resources. The third path comprises the international aspects of the diffusion of innovation and the effects of innovative activity on competitiveness and growth. Studies in this field concentrate either on the theory of international trade, or on the analysis of endogenous technologieal change in industry, or on the theory of publie goods, whieh permits treatment of so me of the essential economie features of technologieal knowledge. The central thesis, to quote Grossman/Helpman 4 , is that advances in the theory of growth now make it possible to consider the increasing returns to scale resulting from the formation of knowledge capital. This then enables answers to be given (in models) to problems regarding: the role of trade as the "engine of growth", the relationship between trade and the growth rates of individual countries, the economie polieies best able to increase welfare in open and growing economies. The arguments adduced when assessing the advantage of opening an economy in the presence of innovative activities can be summarized as folIows. By means of the theory of comparative advantages it is possible to determine the specialization of individual countries in the creation and use of technologieal knowledge. The opportunities offered by the breadth of the world economy encourage firms to invest in innovative activities, whieh are also favoured by the financing opportunities provided by the international capital market. The "natural" externalities created by knowledge as a partieular kind of capital good may yield nondiminishing returns at an international level and thus sustain long-term growth. The spillovers generated by the creation of knowledge (whieh is, at least in part, a publie good) and learning effects on an international level are also beneficial to those countries whieh do not participate directly in its production (countries, though, whieh must sometimes undertake investments and apply specific economie poliey measures in order to capture its effects). It seems, therefore, that growth strategies geared to opening the economy are more productive, in terms of welfare, than protectionist strategies within this reference framework too. On the other hand, as the experience of the developing countries has shown, the opportunities offered by a poliey of commercial openness are often not enough to trigger a process of growth where the availability of technologieal knowledge does not ensure its automatie utilization.

The process of growth also involves - and here we come to the final path - the structure of the economie system and its relationship with productive resources. There is no doubt that technologieal change induces structural alterations whieh modify the relations between productive proGrossman/Helpman (990).

Introduction

11

cesses and resourees, among the goods produeed, among sectors, and between the two great "apparatuses" of transformation and of strueture. The effeets of these ehanges ean be most fruitfully studied - although not eompletely beeause of eertain restrictions on analysis of the price and proeess of transition - in multiseetorial sehemes of analysis, which provide the referenee framework for examination of various types of problems. First among these are the issues involved in the existenee and the use of searee resourees, whether these are producible or non-producible. Limits on the supply of a resouree may exhaust the exploitation potential of a teehnique and push the system towards a different teehnological arrangement. They thus generate disproportions among the levels of absorption of the various resourees and their availability, with the outeome that residuals are ereated wh ich are, in turn, utilizable by different teehniques. In this way the dynamics of the system are explicitly linked to a teehnological change that depends on the relation between resourees, teehnology and the produetive processes aetivated. Note that these sehemes therefore enable analysis of important properties of non-proportional growth. The theme of searee resourees has also been amply and traditionally treated in partial sehemes: for instanee, the wide range of analyses wh ich apply to the eeonomics of renewable resourees. A fundamental eomponent of these models is the produetion teehnique they assume, although this does not usually affeet their conclusions regarding, for example, intergenerational equity in the exploitation of resourees. Finally, the analysis of change eoneerns not only searee resourees but other aspeets as well, one of the most important being the way in which the produetive apparatus and the eeonomic system as a whole adjust to external stimuli through investment aetivity and the realloeation of the produetion faetors. Here too, multiseetorial analyses ean yield interesting results; and they also enable empirical analysis which is both more detailed than that permitted by the eonventional tools of maeroeeonomic analysis and more eoncise (and therefore richer in "stylized" information at the national level) than studies eondueted at the firm level.

Innovation and Diffusion: Some Empirical Facts and Institutional Conditions Standard neoclassical models have generally eoneeived teehnical progress as an exogenous faetor which is "setting up a new produetion funetion" and neoclassical analysis has been mainly interested in eomparisons between steady states; less so in the proeess that modifies the equilibrium itself. Sehumpeter5 , on the other hand, analysed the eause of a breakdown in Schumpeter (1961).

12

Clauser, Kalmbach, Pegoretti and Segnana

market equilibrium, which in his opinion resulted from competitive rivahy among innovative entrepreneurs. Such entrepreneurs use new processes, with a consequent reduction in costs and prices, or they intro du ce products with new features, thereby triggering an expansive cycle of production which comes to a halt when the majority of the firms have adopted the new production methods. Schumpeter was therefore interested in the problem of development and in the new productive combinations that emerge in its course. He wrote: "By development, therefore, we shall understand only such changes in economic life as are not forced upon it from without but arise by its own initiative, from within ... Nor will the mere growth of the economy, as shown by growth of population and wealth, be designated here as a process of development. For it calls forth no qualitative!y new phenomena, but only processes of adaptation of the same kind as changes in the natural data,,6.

And on the re1ationship between deve10pment and innovation, he observed: "To produce other things, or the same things by different method, means to combine these materials and forces differently. In so far as the 'new combination' may in time grow out of the old by continuous adjustment in small steps, there is certainly change, possibly growth, but neither a new phenomenon nor development in our sense. In so far as this is not the case, and the new combinations appear discontinuously, then the phenomenon characterising development emerges,,7.

However, although the Schumpeterian approach identified innovation as the engine of development, its analysis of the sources of technical progress was limited. Its origin lay with the innovative entrepreneur, but its action was unique and isolated in time, whereas technical change alternatively has often been understood as a continuous process generated by steady research activity and by an on-going process of learning by doing and learning by usingB• Modern approaches based on the technological paradigm take Schumpeter as their starting-point and enrich his crucial insight of "creative destruction". This notion has a great deal in common with the two similar concepts of natural trajectories9 and technological paradigms lO • Just as Schumpeterian "creative destruction" changes the productive structure by introducing a cluster of innovations which spread through all sectors, destroying the old mode of production and imposing a new techno 16

Ibid., pp. 65-66. Ibid. Sassu (986). NelsonlWinter (977).

10

Dosi (982).

Introduction

13

ogy, so the technological paradigm defines a new constellation of productive techniques which substantially differs from its predecessor and wh ich producers must accommodate. However, the concept of technological paradigm comprises not only new factor combinations, but also the definition of general needs and the development of the theoretical and applied knowledge required to satisfy them and chosen on the basis of economic criteria (marketability and profitability), institutional criteria (public support for innovation) and social criteria (the resolving of social conflict by introducing labour-saving technical progress)l1. In this way a restricted set of recent and future technological alternatives is defined. The development of these potential capacities through successive improvements gives rise to technological trajectoriese l2 . These trajectories, too, are conditioned by institutional and social factors and by the characteristics of demand. In brief, they are conditioned by environmental factors. In Part I the stage is set by contributions which are mainly empirically orientated and which try to illuminate, from different angles, what for a long time has been a black-box: the creation and adoption of technological change in the economy. Scholz is concerned with the connection between innovation, on the one hand, production and employment, on the other. Based on the results of an "innovation test", carried out in about 5000 German firms between 1978 and 1986 on a yeady basis, his paper shows that innovative firms have rates of increase in turnover and employment higher than those achieved by non-innovative firms. In particular, the most dynamic firms are those that simultaneously introduce product and process innovations, acting both on price competitiveness and on non-price competitiveness. Scholz takes account of the fact that, as weil as the innovative activities carried out by the firm itself, indirect innovation effects may become important, originating in the input-output relations which exist between firms and branches. Sectors with a larger content of direct and indirect innovations are also those with high growth rates and with an international competitiveness principally sustained by the intersectorial transfer of technology. However, German exports also benefit from their favourable structural composition, in that they mostly comprise capital goods which, in turn, are characterized by an amount of expenditure on innovations tri pie that of consumption goods. This helps to raise the innovation content per unit exported above the average of all final products. We may therefore conc1ude that it is the most innovative firms that achieve the best performance on both the internal and external markets, and that it is these firms that drive the growth of the entire German economic system. 11

Ibid.

12

Nelson/Winter (977).

Clauser, Kalmbach, Pegoretti and Segnana

14

Goldmann analyses the performance of the Austrian system, which displays high rates of growth throughout the postwar period, despite direct innovation activity measured by R&D expenditure compared to a GDP wh ich is among the lowest of the industrialized countries. This result has been achieved by means of a technological policy based on the importing of patents rather than on the autonomous production of innovation. The positive effect of this has been a high growth of productivity which has enabled Austria to catch up with the more advanced countries; the negative result may be identified in the country's failure to develop its own technological basis, although this is indispensable if Austria is to remain in the small club of the most advanced countries. SteindJ13 has stressed that the negative consequences could have been avoided: "This phase of imitation of techniques, accompanied by outstanding success (a growth of productivity at a rate double that of the United States), has not yet produced the consequences that it had in Japan (or much earlier in the United States). The assimilation of foreign technique has not given rise to a capacity for autonomous development through a process of learning. Some steps in this direction have been taken in plant construction. But, in general, the perverse illusion has predominated that it is possible to live perennially by depending on foreign development activity,,14.

Steindl criticises Austria for failing to develop her own path among the trajectories predetermined by existing technological paradigms. Active imitation brings incremental innovations, wh ich give new monopolistic power to firms and provide the accumulated experience necessary both to develop further the potential enclosed within present technological frontiers and to move closer to such frontiers. Goldmann imputes Austria's lag in R&D activity to the small size of its firms and its lack of investment in military research. Steindl, on the other hand, notes that large multinational groups also operate in the country, especially in the electronics and pharmaceutical industries, and that these may exert a positive influence on Austrian technological development by cooperating with local firms, thereby triggering a learning process. It should be added, however, that these cooperation agreements presuppose some sort of exchange if they are to be successful. Local firms must therefore have already developed their own technique-improving processes, which they exchange for further incremental innovations or for joint research projects on the technological frontier, where the multinational firms operating in advanced sectors are normally located. Hornschild analyses the influence of technology on foreign competitiveness, concentrating in particular on the case of the Federal Republic of Germany. He finds that 47.5 % of German exports are concentrated in high 13

14

Steindl (1982). Ibid., p. 64.

Introduction

15

research intensity goods - whieh divide between high technology products (R&D expenditure in total turnover not less than 8.5 %) and sophistieated products (R&D expenditure between 3.5 % and 8.5 %) - and that German competitiveness is high in advanced machine technologies but low in advanced electronic technologies. Hornschild stresses that Germany's competitiveness in high research-intensity products may seem relatively weak, if we consider only the final characteristies of its exported goods, but this is not the case when we analyse exports as a system of producing and selling where advanced technologies spread into all sectors through the supply of new intermediate products or processes and through dose contacts between suppliers and customers. This systemie approach must also take account of the contribution by small and medium-sized firms, especially in their function as a testing-ground for new technologies prior to their diffusion by the large firms. Small firms, moreover, perform an important role as subcontractors to large firms, or they compete, to a limited extent, with large firms to cover market niehes. The systemie approach proposed by Hornschild integrates very weil with the technologieal paradigm based on mieroelectronies. This latter induces, according to this paradigm, the diffusion of flexible and high quality production as opposed to the rigid and standardized mass production based on petrol technology that predominated until the early 1970s 15 . The technologieal frontier in this context lies in the electronies and information processing sectors, whieh have been entirely transformed by the invention and applieation of semieonductors and computers. Possibilities for development along the frontier extends to practieally every sector, since automatie information-processing techniques can be used in all productive processes to improve factor productivity. Germany, although to a lesser extent than the other European states, does not stand particularly dose to the technologieal frontier. Nevertheless Germany has managed to develop intensely within the frontier by finding its own path in the wake of past experiences accumulated in engineering and by adapting new technologies in order to make further advances in the production of reliable machine systems. Small and medium-sized firms performed a crucial role in this adaptation during the phase when the new technologieal paradigm was not yet completely established and its diffusion was entrusted to the use of single automatie machines and the partial management of the production cyde by information technologies. Hornschild fears that in the final state of the new technological paradigm, through the creation of integrated systems of flexible production covering the whole production cyde within a single firm, an increase in the role of large firms at the expense of small and medium-sized ones will take place and reduce the competitiveness of the German exports system. The 15

Freeman (1988).

16

Clauser, Kalmbach, Pegoretti and Segnana

flexibility of the productive process will increase, but the product flexibility made possible by the dose contact between customer and supplier will diminish, since this cannot be guaranteed by a large-sized firm possessing an extended and therefore sluggish organizational structure to the same extent as smaller-sized firms can. One can agree with Hornschild when he argues that the role of small and medium-sized firms is in danger of being reduced by current evolutionary tendencies. However, this outcome is apparently not inevitable, if small firms also manage to build an integrated system not only in production, but in marketing, in financial activities and in research as weil, and thus reach, by means of external economies of scale, the efficiency that large firms ac hieve by means of internal economies of scale. Technology is a key factor not only in the interpretation of the present and future growth of a country, but also in the explanation of its performance on international markets. Paci undertakes econometric analysis to test the hypothesis that, in Italy and Germany, there is a positive and statistically significant relation between technology and trade. Explanation of competitiveness in terms of technological capacity (which, in the case in question, is measured by the number of patents registered in the countries engaged in trade) belongs among those theories of international trade that go by the name of the neo-technological account, as opposed to the neofactor-proportion accounr1 6 . The innovative activity considered by Paci does not only comprise the basic innovations on wh ich the neo-factorial and the neo-technological theories are founded; it also involves incremental innovation, since the patent seeks to protect any effective improvement whatever of techniques, whether such improvement is based on a completely new technical-scientific principle or whether it is the outcome of the modification of already existing principles. This approach therefore elaborates specific forms of the technological paradigm (which addresses radical innovations) and technological trajectories (where incremental innovations principally come about). Evolutionary theory normally considers the two extreme cases of selection: that is, at one extreme it takes the ca se where the firm manages to reorganize its routines in order to assimilate the innovation and, at the other, the opposite case where the firm fails and is driven out of the market. In both situations the hypothesis is that the firm is receptive to change, and that the final outcome depends solelyon the goodness of the strategies implemented. In contrast to this thesis, Bianchi hypothesizes in his paper that the firm opposes the introduction of the innovation; nevertheless it is not necessarily eliminated by more efficient innovative entrepreneurs. This obviously becomes impossible for the individual entrepreneur, but it may be 16

Hufbauer (970).

Introduction

17

feasible if a group of firms forms a coalition and creates new social institutions to curb innovative entrepreneurs. In order to prevent this from happening, and to ensure that the selection process induces the whole productive system to evolve towards greater efficiency, public interventions are required which curtail the growth of. parallel institutions. Hence the introduction of innovation requires changes in the organization of both the firm and the political institutions. Bianchi applies his model to the innovation produced by the creation of the single European market. He argues that the policy of European economic integration - in practice the opening of a large new market - can lead to greater efficiency through an evolutionary mechanism. This outcome, however, will only be stable if it is equitable; that is, only if everyone has an equal opportunity to participate in the selection process. This entails that integration policies must be accompanied by structural policies in support of operators who are unable to withstand the intensified competition. These policies must take the concrete form of cooperation relationships among different institutions (European Community, states, regions) in order to increase the efficiency of backward firms, and they must replace previous incentive policies designed to cover individual inefficiencies. Bianchi's overall conclusion is that evolutionary theory guarantees efficiency but not equity, wh ich must be achieved by me ans of public policies.

Technical Progress and Labour The effects of technological change on labour tasks and on employment have been an important theme of political economy from its very beginning. Adam Smith l7 emphasised mainly the productivity-increasing effects of the division of labour; that is, he saw it as an "organisational progress" and not so much as a technological one. But he was weil aware of the dangers connected with such a development. In Book V of "The Wealth of Nations", he writes: "In the progress of the division of labour, the employment of the far greater part of those who live on labour, that is, of the great body of people, comes to be confined to a few very simple operations; frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects too are, perhaps, always the same, or very nearly the same, has no occasion to exert his understanding, or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for an human creature to become,,18. 17

18

Smith (976). Ibid., p. 781 f.

18

Clauser, Kalmbach, Pegoretti and Segnana

It is quite obvious, therefore, that Marx was not the first to call attention to the problem of alienation.

Whereas we can trace discussion of the qualitative effects of technological (and organizational) change at least to Adam Smith, it was David Ricardo 19 who introduced the issue of its quantitative effects on employment as a respectable theme for economie theory. He added a new chapter, with the title "On Machinery", to the third edition of his "Principles", in whieh he revised this former opinion that the introduction of new and improved machinery is always advantageous to all classes of society, and concluded: "[Tlhe opinion entertained by the labouring dass, that the employment of machinery is frequently detrimental to their interests, is not founded on prejudice and error, but is conformable to the correct principles of political economy,,20

Since then, the qualitative as well as quantitative effects of technologieal change have been a topie energetieally and sometimes violently discussed by economists. The debate, however, has not developed in a continuous manner, but has shown some similarities to 'long waves'. Although there have been periods in which the influence of technologieal change on employment has not been discussed at all, in others, especially those with high rates of unemployment, economists have been very much concerned with the employment effects of technologieal change. Hence it comes as no SUfprise to find that numerous analyses of 'technologieal unemployment' were published in the 1920s and 1930S21 . Likewise, it was only to be expected that the theme should reappear on the agenda in the 1970s and 1980s; years which were characterized by a considerable increase in unemployment. At the same time, information technologies were a basic innovation whieh was expected to trigger considerable labour-saving effects. Although the new round of discussion has not yet come to an end, one can provide some sort of provisional assessment, as Pini and Kalmbach do in their contribution to this book. In their view, the advantage of the "new generation" of approaches is that their theoretical hypotheses concerning the effects of technological change (or of a specific new technology) on employment are subjected to empirical examination. In this respect, these new approaches differ from previous contributions like those, for example, written in the 1920s and 1930s. A representative analysis of those years by Lederer 22 developed the argument using arbitrary numerieal examples there being at the time neither sufficient empirieal material nor adequately 19

Ricardo (951).

20

Ibid., p. 392.

21

For a useful survey see Gourvitch (940).

22

Lederer (931), (938).

Introduction

19

developed analytical techniques for the empirical testing of theoretical hypotheses. By contrast, today there is a broad consensus that the effects of technological change on employment cannot be grasped exclusively by theoretical analysis. Implicit in this point of view is the assumption that technological change or single new technologies can in principle exhibit quite different results: redundancy, full or even over-compensation of labour. It is exactly this openness in principle which demands empirical analysis: what is true for one special line of technological development is not necessarily true for another; the predominant tendency in one specific period does not allow statements to be made about the main effects in others. Acceptance of the view that historically specific analyses are necessary does not imply that there is also general agreement over which approach should be chosen when investigating the employment effects of technological change. Pini's contribution sets out different prototypes and discusses their respective strengths and weaknesses. His general requirement for any sort of adequate analysis is as folIows: Apart from direct effects resulting from the introduction of new technologies, their indirect effects are also to be addressed. These indirect effects make themselves feit in different co mpensation effects, as weil as in those which may intensify the redundancy triggered by the direct effect. Pini discusses these different compensation effects, which he classifies according to the proposal introduced by Stoneman 23 : "technology multiplier effects", "price compensation effects" , and "income compensation effects". The approaches used in recent years to record the direct and indirect effects of technological change are of various kinds. According to Pini they can, roughly speaking, be included in the family of "aggregative models" or "multisectorial models". Admittedly, the transition is a fluid one; for exampIe, an integrated model of a "macrosectoral type", the HERMES simulation model, is treated under the heading of aggregative models. As example of aggregate models, Pini presents the approaches adopted by Sylos Labini 24 and by Boyer et a1. 25 . Sylos Labini's model is characterized by classical-Keynesian features, while the one developed by Boyer et al. can be described as a cumulative growth model. The two models are similar in that they substitute the simple one-way relation between output growth and productivity growth known as "Verdoorns Law" with a more complex interaction between demand growth and productivity increase. Consequently, the models provide a more realistic analysis of the growth 23

Stoneman (1983).

24

Sylos Labini (989), (1990).

25

Boyer (1988a), (1988b); Boyer/Petit (981), (1988); Boyer/Coriat (1986).

20

Clauser, Kalmbach, Pegoretti and Segnana

process, although it seems that they are less able to separate out the effects of technological change. A simulation model like the HERMES simulation macro-economic model described by Pini seems to have certain advantages in this respect. Shocks can be introduced and account can be taken of their effects on sectorial and aggregative variables. However, researchers 26 who have used the model for simulation experiments remind us that the results must be interpreted with caution. Hence it is anything but clear whether simulations until 2005 do not make excessive demands on a model which has never previously been used for simulations after 1994. As examples of multisectorial models, Pini sets out three different approaches: the well-known model developed by Leontief/Duchin 27 , the approach used by the Research Group 'Technological Change and Employment' at the University of Bremen 28 , and the investigations by Whitley/Wilson 29 . The first two of these are based on a dynamic input-output model where investment demand is endogenized (in different ways). Models along these lines have a comparative advantage, mainly in their assessment of the diffusion effects of well-defined technologies such as, for example, micro-electronics. In principle, they are also able to capture the qualitative effects on employment; that is, they analyse changes in different occupations brought about by the diffusion of the new technology in question. Nevertheless, both approaches are still rather far from constituting an "ideal study": Both are pure quantity models and therefore are not able to investigate price compensation. Export effects and import substitution effects, especially, cannot be handled by them in an entirely satisfactory way. As regards this lauer point, the investigations of Whitley/Wilson seem to have some advantage, although they too are faced with the dilemma of all national models over the adequate analysis of external flows: export effects and import substitution effects do not depend exclusively on variables of the country being investigated; they are also conditioned by the development taking place abroad. If, at least in important trading-partner countries, there occurs a parallel increase in the diffusion of new technologies, the effects in the country under investigation will be different from those in the case where the increase in diffusion is restricted to that country itself. Kalmbach's contribution gives similar results to Pini's. Whereas Pini offers a survey on prototypical new contributions, Kalmbach is mainly concerned to record 'the state of the art' and to emphasize perspectives for further research. He agrees with Pini that the only way to assess the net employment effect is by taking into account indirect as weil as direct effects. 26

Golinelli (1990); Gerstenberger et al. (1990).

27

Leontief/Duchin (1986).

28

Kalmbach/Kurz (1990).

29

Whitley/Wilson (1986), (1987).

Introduction

21

Kalmbach refers in this context the approaches which only apparently provide answers for the problem. This applies to investigations which address the question of whether the development of employment is more favourable in innovating firms (or sectors) that in firms (sectors) with a low degree of innovation. This is certainly an important question in its own right, but it is aseparate issue and cannot offer answers regarding the net employment effect, which must be investigated using other approaches. As regards this and other questions, Kalmbach stresses that researchers must be fully aware of the possibilities and limits of their respective approaches. For example, a distinction must be made between investigations into the effects of technological change as a whole and into those of single technologies; the same applies to the distinction between the effects emanating from the diffusion of new (but already existing) technologies and the effects triggered by future (and therefore in the period of investigation highly uncertain) technological developments. If the researcher is really interested in the impact of (future) technological change, and not only in the effects of already observable technologies, then, it is proposed, s/he should rely on expert rating - a method which economists with a quantitative orientation may find suspect. Kalmbach presents some results obtained using a dynamic input-output model, but at the same time points out its limits. Although he acknowledges the problems that have emerged in attempts to build a "micro-macro bridge", he argues in favour of a further development of this approach. Case studies cannot be generalized, but they are indispensable raw material for integrated models. As far as the assessment of the impact of single technologies is concerned, he argues, a bottom-up approach is preferable to a top-down one. Leoni's contribution focuses on the qualitative effects of technological change; a question that has been as widely debated as the impact on employment. Several dimensions of working conditions have been the constant theme of enquiry: the development of the burden of work, scope for disposition, up-grading and down-grading processes, and so on. This latter topic is probably the one that has been most exhaustively discussed. Authors like Bright30 and Braverman 31 have maintained - in the spirit of Marx - that the predominant tendency is towards down-grading; a thesis that finds expression in the subtitle to Braverman's book "The Degradation of Work in the Twentieth Century". This view has been countered by various authors. Blaune~2, for example, pointed out that automation would stop down-grading and would finally 30

Bright (1958).

31

Braverman (1974).

32

Blauner (1984).

22

Clauser, Kalmbach, Pegoretti and Segnana

require the requalification of the labour force. More recent contributions, like those, for example, of Piore/Sabel33 and Kern/Schumann 3\ argue for an even stricter formulation of the hypothesis that the "new production concepts" (Kern/Schumann) will entail a higher degree of qualification. Leoni's contribution to the debate is based on empirical analysis of manufacturing firms in Lombardy. He compares results for the year 1981 and 1987; aperiod in which there was a decline in employment. This, however, was a general trend in developed industrial nations and cannot be unreservedly attributed to technological change. It is therefore the structural consequences that are of most interest. In line with other investigations, Leoni shows that employment loss is most pronounced in firms belonging to the group with a low technological content of output. Moreover, employment decreases at higher rates in big firms. The most interesting result of Leoni's empirical analysis is probably its important modification of the up-skilling hypothesis. His results suggest that "the new technologies te nd to reinforce the pre-existing duality in the occupational structure": in the highest of three technological groups of firms, a further increase in the skill level takes place; in the lowest group the opposite is true. It would be extremely fruitful to investigate whether this tendency between 1981 and 1987 in Lombardy's manufacturing sector was special, or whether it was a general trend in the periods, sectors, countries and regions considered. According to Pini's classification, Piacentini's contribution belongs among macroeconomic models. The dramatic decrease in industrial employment in European countries during the 1980s is explained using a simple vintage model which is combined with Keynesian ideas. In the spirit of Kaldor, Piacentini's point of departure is "stylized facts". Of the facts he mentions, the most remarkable is the supposedly special feature of new technologies, which, in his view, are not only labour-saving but also capitalsaving (their capital-saving character being expressed by a decreasing capital-output ratio). This contradicts the Marxian assumption that technological change has a capital-using bias. According to Piacentini's model, this tendency of technological change aggravates the employment problems caused by deficient effective demand. If we take the identity L = L/K • K!Y • Y as our point of departure and use a vintage model with lower capital-output ratios for newer vintages, we reach the following conclusion: Effective demand constraints annul the usual assumption of vintage models; namely that vintages are used as long as the quasi-rent is positive. The effect of these constraints is that some (older) 33

Piore/Sabel (1985).

34

Kern/Schumann (1984).

Introduction

23

vintages, which would be used according to this rule, are in fact idle. As a consequence, in cases of effective demand constraints, the capital stock in use is, on average, younger than in cases where such constraints are absent. Thus effective demand constraints have a direct and an indirect effect on employment: their indirect effect is expressed by a decreasing capitaloutput ratio wh ich , according to the identity mentioned above, aggravates the fall in Y. Piacentini's explanation is not entirely supported by the statistical material. Although is is true that we have certain special examples of a decreasing capital-output ratio, so far there is no discernible general tendency in this direction. However, even if such a tendency did exist it would be necessary to ascertain whether it is due primarily to the structural effect of changes in the shares of sectors or to development within the sectors themselves. Only in the latter case would a technological explanation seem appropriate. One consequence of Piacentini's approach is that labour productivity must develop in an anti-cyclical way: if effective demand decreases, the oldest vintages will not be used; that is, labour productivity must rise, and vice versa. As we know from "Okun's law", it is a well-established "stylized fact" that labour productivity exhibits a pro-cyclical pattern. This indicates that an approach is required which is able to integrate further elements (for example labour-hoarding in down-swing periods). By way of summary of the four essays in this part of the book, one may emphasize that, although we know more about the connection between technological change and employment, we certainly do not know enough. Different approaches and methods are available for investigation of several aspects of the problem. A model capable of integrating these aspects, however, does not exist and for a theoretically ambitious economist this is a challenge to take up. Innovation Activities and International Competition The international aspects of innovation and technology diffusion - with their recent developments through the theory of international trade, the analysis of endogenous technological change, the interpretation of knowledge capital and their reappraisal by endogenous growth theory - form the core of the third part of the book. Two main lines of research are developed. The first of these major themes identifies the relationships between growth, technical progress and trade as a point of great interest, not only as regards the still inadequate theoretical answers to the problem of comparative growth, but also because this relationship is at the origin of recently re-

24

Clauser, Kalmbach, Pegoretti and Segnana

vitalized research into economic growth pursued by endogenous growth theory. The second line explored in this part of the book focuses on miero models of R&D competition by showing that the optimal poliey mix is affected by the type of oligopolistie competition whieh prevails. This theme, too, shows the recent revival of an old problem: namely the best response for domestie poliey-makers when some domestic industry - currently technologieally backward with respect to international competitors - has the potential to catch up. This familiar problem is given two different treatments: the suggestion, on the one hand, of exposure to international competition in order to stimulate R&D; on the other, protection against superior competitors in order to obtain sufficient time to dose the gap. Common to both lines of thought is their identification of the questions concerning catching-up - its causes and its theoretieal as weil as empirieal implications - as the point of departure for analysis. Thus we have a paper in this section of the book whieh attempts to integrate catching up as a supply-side mechanism with Kaldor's thesis of growth as the interaction between supply and demand along a disequilibrium path (Targetti/Foti); one whieh tries to incorporate international spillovers and localized learning into a pattern of comparative advantages that can be acquired (Pigliaru/Segnana); and one whieh qualifies traditional arguments in favour of free trade, by showing the consequences of different oligopolistie regimes on international R&D competition (Clemenz). Within the first line of enquiry, Targetti/Foti start by pointing out the need for a theory that combines the cumulative causation and the catching up models. They suggest an "integrated" approach with whieh to investigate under what circumstances and at what values of the parameters there may be predominant convergence or divergence between the output and productivity dynamies of economies linked by international trade. Targetti/Foti outline the new horizons opened up by the two theories in the mid-1960s and examine the connections among various processes of growth. They also identify the reasons why the two theories seem to have opposite consequences as far as the trade-effect is concerned: in fact, intensification of trade flows on the one hand gives rise to greater imitation and tendencies to converge, and, on the other, damages industrially weaker countries as divergence is induced by the operation of cumulative causation. In spite of the conflieting outcomes of the two theories of cumulative causation and catching up (regarding not only the role of trade but also the likely convergence and divergence between the output and productivity dynamies of countries), they are nevertheless based on behavioural hypotheses that Targetti/Foti interpret as complementary. Their "integrated" model is structured in such a way that it detects the relevance of the two forms of cumulative causation (wage-Ied and export-Ied) and disentangles the Kaldor/Verdoorn and diffusion effects on productivity growth. This ap-

Introduction

25

proach was tested comparatively on a sampie of seven countries in two periods 1960-1973 and 1973-1985, using OECD data. The empirical results suggest that, in the first period, there was evidence for both external and internal cumulative causation as weil as for a strong imitation effort in the countries considered. A strong two-way relationship between demand growth and productivity growth could be identified (emphasizing interna I cumulative causation), this being precisely the relationship at the core of the cumulative causation approach. After 1973, the situation seems to change substantially, because previous cumulative causation weakens and operates mainly through the foreign chan ne I. The debate on the theory and the empirics of economic growth has been recently revitalized also by the literature on endogenous growth. And, notwithstanding its shortcomings, research on endogenous growth has shown that permanent cross-countries differences in the growth rates of per capita output and income are the most important feature that a theory of growth should address; a feature, like most of Kaldor's stylized facts on growth, that was not in the forefront of traditional neoclassical growth theory. However, there seems to be no consensus as to why countries grow at different speeds: in this respect endogenous growth theory presents a relatively unified framework which makes it easier to handle the complex relationships governing growth while still enabling detection of the factors and mechanisms capable of generating self-sustained growth. In this framework the paper by Pigliaru/Segnana utilizes a specification of the well-known Krugman 35 and Lucas 36 models of trade and growth in order to evaluate whether their results concerning trade-induced uneven growth survive the simultaneous presence of international spillovers of knowledge and localized learning. Or, in other words, they are interested in wh ether or not the presence of international spillovers together with localized learning leave room for trade as a possible source of uneven growth. The main limitation of Lucas' result concerning trade-induced uneven growth is its extreme assumption of zero international spillovers such that localized learning cannot be offset by any amount of international spillovers of knowledge. Thus comparative advantage is entirely determined by initial differences in relative productivities, wh ich afterwards may only increase along an endogenously determined time-path. When this assumption is relaxed and - following Krugman - international spillovers of various amounts are included, an upper limit is set on the growth over time of the endogenous gap. Therefore the endogenous path of the productivity gap underlying comparative advantages is no longer constantly increasing in the presence of a significant amount of in35

Krugman (987).

36

Lucas (988).

26

Clauser, Kalmbach, Pegoretti and Segnana

ternational spillovers. This incorporation may therefore make it easier to handle an unfavourable pattern of trade. But is its presence strong enough to counteract the long-run competitive outcome determined by the initial conditions? Since this effect becomes more important when asymmetrie spillovers are introduced, in this case the pattern of trade can be interpreted not only in terms of the initial conditions of a country in autarky, but also as the result of international technological cooperation, imitation and technology transfer. Therefore the simultaneous presence of international spillovers and localized learning introduces a meaningful modification in the outcome, in that it appears easier to revert to an established pattern of trade, at least in principle, at any moment in time. In line with these specifications of the potential for economie policies, by introducing international spillovers the model yields information on technology polieies aimed at achieving the adequate or growth-maximizing comparative advantage. These polieies may be thought of as targeting the rate of international spillovers.

Despite the addition of international spillovers, the model discussed in Part 1 of Pigliaru/Segnana's contribution is preliminary in a number of important respects. For instance, since the process of learning is somehow "involuntary", and since its effects are technologieaIly entirely external to the firm, not much can be said about how firms would react to industrial polieies targeting private R&D activity. More generaIly, direct and indirect learning is governed by exogenous magnitudes, with the obvious consequence that one can assess the effects of changes in their levels but not the feasibility of such changes. In contrast to the involuntary nature of learning processes assumed in Part 1 of Pigliaru/Segnana's paper, Part 2 considers the institutional and organizational specification of these processes of learning, in order to explain and reinforce the differences in localized externalities discussed in Part 1. Transaction costs considerations as weIl as organizational details induced by the interactive nature of learning processes are supposed to lie behind the learning processes assumed in Part 1.

The second line of thought initiaIly identified as one of the two that characterize this part of the book focuses on miero-models of R&D competition and assesses the relationships among R&D, different cases of oligopolistie competition and optimal policy mix. A special case for potential catching up is introduced, and analysis centres on whether temporary protection can' be justified by an infant industry argument because it can give a technologieaIly backward sector time to catch up with more advanced foreign competitors. The paper by Clemenz shows the consequences for international R&D competition of different oligopolist competition regimes by assessing the merits and optimality of R&D policies in

Introduction

27

open economies. Two problems c10sely interweave here: the first relates to the consequences for R&D competition under two alternative types of competition in the product market, namely Bertrand and Cournot competition; the second refers to effects of free trade and its stimulus or destruction of R&D in the framework of alternative oligopolistic competition. It makes a considerable difference whether oligopolists are engaged in Bertrand or Cournot competition, and R&D models are no exception. In this case R&D projects are modelled as a random draw from a known probability distribution of unit cost levels. This is a way of modelling R&D as a search process which takes uncertainty into account and therefore interprets the technological gap not as the result of a failure/success dynamic, but as the difference between unit cost levels. Innovation takes the form of the reduction of the unit costs of a homogeneous good, thus implying a difference that reflects Posner's37 view that part of international trade can be explained by differences in technology levels which may change over time (this difference distinguishes between the generalization by Dasgupta/Stiglitz 38 developed in Clemenz39 and that of Dixit40 , where there are only two possible unit costs levels at any point of time, the old one and the new one). As long as international R&D competition takes place, a dynamic trade pattern may emerge: but the situation is more complicated than the usual prediction of the theory of comparative advantage, to the effect that in a two-goods world with a potential for process innovations in the production of one of them, a change from autarky to free trade leads to Pareto improvement. This traditional argument in favour of free trade requires so me qualifications where R&D competition is concerned. There is certainly a positive effect on R&D, since competition becomes keener and markets (and therefore expected returns to R&D) become larger. But this result needs further qualification and assessment on the basis on the kind of co mpetition concerned.

The starting point for this analysis is that the difference between the private and social benefits from innovation are the reason why the socially optimal level of R&D may differ from that resulting from a Nash equilibrium. Here, innovations are essentially cost-reducing, and this makes it possible to deal not only with the basic idea that a technology gap is given by a difference in unit costs levels but also to identify in this cost-reducing nature of innovation the reason why social benefits (an increase in future profits and a change in other firm's profits and in consumer surplus) and private benefits (increase in future profits) from innovation can differ. 37 38 39 40

Posner (961). Dasgupta/Stiglitz (980). Clemenz (990). Dixit (988).

Clauser, Kalmbach, Pegoretti and Segnana

28

In the Bertrand case, already analysed by Clemenz4 \ only the most efficient producer is active, and therefore any invention can be turned into a profitable one, given that it generates the best production process and reduces the total social costs of production. But this kind of competition generates private returns smaller than social ones, because so me of the benefits of a cost reduction accrue to consumers, gene rating less that socially optimal R&D. By contrast, in the Cournot case, less efficient processes are also active, and therefore any reduction in production costs can be profitable for the inferior producer. This implies that private returns to R&D with this kind of competition may be greater than social returns in a dosed economy, a result that is impossible under a Bertrand regime. This relationship between social and private returns to R&D is associated with the well-known result of underinvestment in R&D under a Bertrand regime, a case not found in the Cournot case. On the basis of a Bertrand competition, it was possible to identify the change in social net utility when moving from autarky to trade: as larger markets yield higher expected returns on R&D, the difference between private and social returns becomes greater than in a dosed economy. It therefore remains valid, even in a Cournot oligopoly, that prolonged autarky may be better than the immediate introduction of free trade in the presence of a potential for R&D in the technologieally backward country. The condition for prolonging autarky as socially beneficial does depend crucially on the model of competition. But it is also true that alternative poliey measures can achieve the same result at lower social costs, and that there therefore may be a cheaper way to stimulate R&D; tariffs, and in partieular direct subsidies to R&D, may be better policies than autarky. The optimal policy mix is anyway influenced by the prevailing oligopolistie competition, and the choiee between international competition and temporary protection depends crucially on the size of the technologieal difference. This approach certainly allows theoretieal assessment of the merits of international competition as opposed to protection invoked in order to stimulate R&D or to dose the technologieal gap. But it also prompts at least two considerations. First, the R&D model used in this analysis is not the only one available: Dixit42 has utilized the Dasgupta/Stiglitz approach in order to tackle international R&D competition and policy. He shows that markets mayaiso produce more R&D than is socially desirable. Second, analysis of policy issues should consider the legal issues and strategie complieations that may arise. What remains is that unrestrieted advocacy of international trade is impossible once R&D competition is admitted into an oligopolist context. 41

Clemenz (990).

42

Dixit (988).

lntroduction

29

Technological Change and the Structure of the Economic System Although the three essays that complete this book pursue different targets, adopt different points of view and use different tools, they can all be seen as be10nging to the field of structural dynamics. The theory of structural dynamics is not, indeed, a monolithic body of enquiry; it instead articulates itse1f along different and sometimes divergent lines of research. It cannot be defined on the basis of a specific method, but only in relation to its object of study. In view of the fact that this kind of analysis does not examine change alone but also its effects over time, different definitions have been given of its subject matter. There are those, for example, who have focused on the distinctive features of structural change given by permanent changes in the composition of certain fundamental magnitudes 43 . An important distinction has been evidenced44 between the structural dynamics of the economic system (described in terms of changes in the functional relations representing the system) and adynamie solution generated by a model; the laUer is a solution generated by a structure considered to be permanent over time, the former is a change in the structure itse1f. Thirdly, as part of a more general definition drawn from analysis of the history of economic thought, taken to be the "object of study of structural dynamics [are] ... those changes within an economic system, or group of economic systems, which are of substantial size and have significant effects in 'historical time",4S. Even if the above definitions do not give a univocal specification of the subject-matter of structural dynamics, they may be seen as subsets (or, better, co-ordinates) of a general definition. We shall not attempt to give such definition here, but merely note that the three studies reported here belong to this field of study, if this comprises both research that specifically addresses structural dynamics and research which analyses certain of its conditions or preconditions. This statement is briefly e1aborated be1ow. The study by Antonelli/Pegoretti is based on areinterpretation of the concepts of "technological system", "technique" and "productive process". The authors begin by calling attention to the importance of the relationship of antagonism, coexistence and synergy between the scarcity of resources and the producibility of goods; a dynamic relationship which assumes different features through time but which is always characterized by interdependence. This interdependence is progressively altered by the

43

Pasinetti/Scazzieri (987).

44

Nicola (990).

45

Quadrio Curzio/Scazzieri (1990).

30

Clauser, Kalmbach, Pegoretti and Segnana

technological change triggered by aseries of "focusing devices" in wh ich relative scarcity plays a major part. Antonelli/Pegoretti's analysis therefore uses a "Ricardian" approach to the theory of production. Nevertheless, in relation to the dynamics of the system, their model explicitly considers the "vertical" relationship between resources and final product (whereas Ricardo himself shows "a special combination of the attention for horizontal relationships among different production processes and vertical relationships between subsequent stages of the same process,,46). AntonellilPegoretti's study takes the scheme of interdependences to be a specific stage of evolution within a technological system defined as "a certain set of technological opportunities and knowledge, which are mutually interdependent and linked with specific 'social capabilities"'. The input-output flows characterizing the technique used enable processes of technological diffusion to be examined within a framework that comprises relative scarcity and other constraints on the system's capacity to use a particular technique. A model is built in which techniques are diffused on the basis of certain mechanisms in the system which determine the extent of the technological change that the system itself can sustain over time, and its effects on the ratio between the supply and absorption of resources. As a result, the structure of the economic system is changed over time, following paths which depend both on the model's parameters and on the economic policy measures adopted to deal with the problems that arise. Technological change is introduced (from outside) into a system which comprises, besides technological-productive relations, aseries of "social capabilities". In the stylized model, such capabilities are represented by the system's ability to create a certain kind of labour force (endowed with the necessary level of skill) at the pace required for the ad option of an advanced production technique. This skilled labour force interacts with a number of fundamental relations to determine the system's ability gradually to adopt a new technique, perhaps generating disequilibria in the use of the resources available. Diffusion of the new technique depends therefore on aseries of mechanisms internal to the system. Apart from the alreadymentioned manpower training capability, these mechanisms include the distribution of income and demand functions for goods. As the system evolves and undergoes irreversible changes, it encounters critical points wh ich depend on these factors and wh ich require differentiated economic policy measures. Of vital importance in this process is the interaction between relative scarcity and the mechanisms wh ich the system is able to activate to alleviate it. Although their model is theoretical, AntonellilPegoretti point out its possible use in comparative dynamic analysis, with the aim of 46

Scazzieri (990), p. 27.

Introduction

31

explaining, at least in part, different patterns of growth originating from analogous initial conditions. The study by Boehm/Punzo explicitly addresses the problem of the evolution of the industrial system in the Austrian and Italian economies. Using an interesting methodology, the two authors seek to identify the ways in which the two economic systems responded to the shocks of the 1970s by analysing the evolution of various key variables like the investment/employme nt ratio and the value added/employment ratio. Boehm/Punzo single out aseries of dynamic "regimes" which differ to some extent from those considered by the traditional and neo-Schumpeterian approaches, and, by developing adefinition of structural change as change of regime, they obtain results which are significant in empirical terms as weil. The starting point is the way the two countries reacted differently to the shocks of the 1970s; they experienced different sectorial evolutions and they adopted diverse strategies, notably with regard to the development of advanced technology firms capable of competing internationally. The distinctive feature of Boehm/Punzo's analysis is that it considers these phenomena along three coordinates: geographical, temporal and sectorial. Structural change (in industry, given the availability of data) is examined on the basis of an input-output scheme, by studying not the change in the coefficients of the tables, but the evolution over time of the final demand column and the value added row. The historical series of investment, value added and employment are used, with their respective figures treated as "impulses" whose dynamic interactions progressively alter the system's "response" and its very structure. This approach differs both from the traditional one (where it is the positive correlation between investment and increased productivity that is important) and the neo-Schumpeterian one. Cases that cannot be interpreted using conventional criteria are isolated by analysing the data using a dynamic model (expressed in terms of the growth rates of the variables considered). These cases are given detailed examination in order to gain insights into structural change and to verify various theses put forward as to evolution during the time period considered. The framework for Boehm/Punzo's analysis is a simplified two-dimensional model, in wh ich the key variables are the rates of change in investment per worker and value added per worker. Along the vertical axis one moves in the realm of known production techniques. Along the verticaI axis (the "innovation" axis) one encounters innovative processes with new production functions. The origin corresponds to the steady state or Harrod/von Neumann balanced growth (compatible with different growth rates). In theory, traditional steady state reflects the absence both of innovative activity and of change in the intensity of investment. If both activities exist, the 45-degree line (steady state line) can be construed as a steady state situation in which innovative activities and traditionaI behaviours bal-

32

Clauser, Kalmbach, Pegoretti and Segnana

ance each other out. Unlike the traditional case, here a steady state is not necessarily an equilibrium, wh ich is defined as that set of states where, for a certain period of time, the averages of the growth rates i and v are equal. A steady state is therefore an equilibrium only if it is of a certain temporal duration. Within every interval of time, a system is either in equilibrium or it moves from one state to another. For it to represent an equilibrium, every state must persist for a certain period. Real systems do not move along one single coordinate, and "equilibria" are rarely observed. But whereas one or other of the axes are considered by their respective theories, Boehm/Punzo's model considers both dimensions simultaneously, generating information of a "structural" kind about the system. This brings us to the model's interpretation of structural change. The space of the states is divided into four quadrants. In two of these quadrants the growth rates are of the same sign, while in the other two i and v have opposite signs Chistorically, a system cannot forever remain in one of the two latter conditions, while it may expand or contract in the long run). The steady state line is conceived as a "corridor" in which the two rates have the same sign, and tendencies towards traditional or innovative forms of behaviour largely balance each other out. Systems with an equilibrium behaviour of this kind are called "mature systems" Calthough they are rare in the real world). Finally, a regime is defined as a partition of the space of the states produced by some property. Structural change takes the form of a change of regime; a pattern of development - a more general concept may or may not lead to structural change Cand is therefore made up of a set of states describable or otherwise by the same model). However abstract this scheme may appear, it in fact lends itself weil to Boehm/Punzo's empirical analysis of data relative to the economies of Austria and Italy. Their empirical enquiry is pursued along three coordinates: countries, sectors, time. The dynamic evolution of a system is described through time, while in a given period the sectorial patterns of each system are compared. Four time periods Cor "subperiods") are considered, and in these the average growth rates of investment intensity and labour productivity are analysed. The results are extremely interesting. They demonstrate the applicability and utility of a method which certainly yields greater amounts of information than do the methods conventionally used, and enables the results from these latter to be located within a wider context. The essay by Clauser/Gios/Raffaelli centres on a traditional problem in the management of forest resources Cand more in general of renewable resources), namely the problem of finding the "optimal rotation". The authors propose an analytical formulation of the "production function" which gives an adequate representation of the non-linear features of the process

Introduction

33

involved. The result gives greater stability to the solution and, in certain circumstances, overcomes the c1assical problem of intergenerational equity in the use of resources. The interest of Clauser/Gios/Raffaelli's approach for the analysis of structural dynamics sterns essentially from two factors. The first is the object itself of their research: throughout history, the exploitation of forest resources, like that of other "renewable" resources, has brought profound changes to economic behaviour, to the structures of the economic systems concerned, and to the world resources economy. Although this topic has been explored by disciplines other than economics, it is a legitimate object of structural economic analysis, both because of its empirical importance and because of the interest of some of the analytical schemes that have been proposed. The second interesting feature of Clauser/Gios/Raffaelli's study resides in one of their results: the relative persistence of the optimal solution with respect to changes in the interest rate. This, in certain circumstances, could imply an invariance with respect to criteria of intergenerational equity as well 47. This is an issue, of course, which has has been central to the debate on the exploitation of resources. Such exploitation, it will be recalled, constrains the dynamics of the economic system not only in terms of sustainable growth rates but also as regards the structure of the system best able to cope with the shortages that predominate at any particular time. Finally, the essay by Clauser/Gios/Raffaelli starts from the general problem of the relationship (also addressed by AntonellilPegoretti) between the scarcity of resources and innovation, as part of more general enquiry into the relationships between economy and environment. Although applied to a particular case, that of mountain forests, this study draws conc1usions of more general interest. The problem of technological innovation in the exploitation of mounta in forestry resources presents two aspects: one tied to the need to adopt environment-friendly production techniques, the other to the need for techniques able to render production competitive with that of other, more advantaged areas. The alternative production methods available are conventionally evaluated using a production function which is assumed to be continuous, and endowed with first and second order derivates. On the basis of this function, one resolves the problem of "optimal rotation", which also depends on the rate of interest assumed. A change in this latter, such as the introduction of an innovation, entails a change in the optimum cutting point. The proposal advanced by Clauser/Gios/Raffaelli is to use a non-continuously differentiable Von Liebig function instead of a conventional production function. This brings a certain numbers of advantages: 47

On this see, for example, Koopmans (973); Solow (974).

34

Clauser, Kalmbach, Pegoretti and Segnana

first, it sets a ceiling wh ich gives a clearer idea of the "threshold" phenomenon which intervenes in the exploitation of renewable resources; second, it yields a solution which is relatively stable with respect to changes in the interest rate, and thus restricts the critical nature of rotation choice. This latter property becomes particularly interesting when considering the argument of intergenerational equity. As is weil known, an intertemporal sodal welfare function cannot be "egalitarian" if it does not admit a zero discount rate: a positive rate means that "the collectivity is not prepared to accept responsibility for the state of the system in future periods"48. On a formal level, it has been shown 49 that a continuous sodal-welfare function cannot simultaneously satisfy the Pareto criterion and that of the equal consideration of different generations. In Clauser/Gios/Raffaelli's study, the alternative between the egalitarian approach and the welfare approach can be resolved, given the production function identified, if the range of the interest rate corresponding to the optimal solution also includes the zero value; in this case, with a positive interest rate (within the interval identified), the physical exploitation of the resource will be the same as that wh ich would be possible with a zero interest rate. Moreover (and this holds whatever the interval of the interest rate), the introduction of an innovation can also be assessed in terms of its effects on the various elements (net productivity and the duration of the rotation) wh ich influence the interval of the interest rate within which the solution is stable. Technical progress allows an increase in the interest rate which, if lower than the productivity increase, leaves the situation unaltered from the point of view of intergenerational equity.

References Blauner, R.: Alienation and Freedom. The Factory Worker and his Industry, Chicago

1964

Bayer, R.: Formalizing Growth Regimes, in: Technical Change and Economic Theory,

G. Dosi et al. eds., London 1988a

-

New Technology and Employment in the 1980s: From Science and Technology to Macroeconomic Modelling, in: Barriers to Full Employment, ). Kregel, E. Matzner and A. Roncaglia eds., London 1988b

-

/ Cariat, B.: Technical Flexibility and Macro Stabilisation: Some Preliminary Steps,

-

/ Petit, P.: Progres technique, croissance et emploi: un modele d'inspiration kaldorienne pour six industries europeennes, in: Revue economique, 4, 1981

in: Ricerche Economiche, XL, 1986

48 49

Perrings (987), p. 118. Diamond (965).

Introduction

35

The Cumulative Growth Model Revisited, in: Political Economy, 4, 1988

Braverman, H.: Labor and Monopoly Capital. The Degradation of Work in the Twentieth Century, New York/London 1974 Bright, j. R.: Automation and Management, Boston 1958 Clemenz, G.: International R&D Competition and Trade Policy, in: Journal of international Economics, 28, 1990, pp. 93-113 Dasgupta, P. I Stiglitz, j. E.: Uncertainty, Industrial Structure and the Speed of R&D, in: Bell Journal of Economics, 11, 1980, pp. 1-28 Diamond, P. A.: The Evaluation of Infinite Utility Streams, in: Econometrica, 33, 1965, pp. 170-177 Dixit, A. K.: International R&D Competition and Policy, in: International Competitiveness, A. M. Spence and H. A. Hazard eds., Cambridge, Mass. 1988 Dosi, G.: Technological Paradigms and Technological Trajectories: A Suggested Interpretation of the Determinants and Directions of Technological Change, in: Research Policy, 11, 1982, pp. 47-62

I Orsenigo, L.: "Coordination and Transformation: An Overview of Structures,

Behaviours and Change in Evolutionary Environments, in: Change and Economic Theory, G. Dosi, C. Freeman, R. Nelson, G. Silverberg and L. Soete eds., London 1988, pp. 13-37

Freeman, C: Diffusion: The Spread of New Technology to Firms, Sectors, and Nations, in: Innovation, Technology, and Finance, A. Heertje ed., Oxford 1988 Gerstenberger, W. I Golinelli, R. I Vogler-Ludwig, K.: Impacts of Information Technologies on Future employment, Central Report (darft version), mimeo, Munich 1990 Golinelli, R.: Study on the Impact of Information Technologies on Future Employment: The Macroeconomic Simulations with HERMES Models, mimeo, Bologna 1990 Gourvitch, A.: Survey of economic Theory on Technological Change and Employment, Philadelphia 1940 Grossman, G. M. I Helpman E.: Trade, Innovation and Growth, in: AEA Papers and Proceedings, 80, 1990, 2 Hufbauer, G. C: The Impact of National Characteristics and Technology on the Commodity Composition of Trade in Manufactured Goods, in: The Technology Faetor in International Trade, R. Vernon ed., New York 1970 Kalmbach, P. I Kurz, H. D.: Micro-electronics and Employment: A Dynamic InputOutput Study of the West German Economy, in: Structural Change and Eeonomic Dynamics, 1, 1990 Kern, H. I Schumann, M.: Das Ende der Arbeitsteilung? Rationalisierung in der industriellen Produktion, Munich 1984 Koopmans, T. C: Some Observations on 'Optimal' Eeonomic Growth and Exhaustible Resourees, in: Economie Strueture and Development, H. C. Box, H. Linnemann and P. Wolff eds., New York 1973, pp. 239-255 Krugman, P.: The Narrow Moving Band, the Dutch Disease and the Competitive Consequences of Mrs. Thatcher. Notes of Trade in the Presence of Dynamic

36

Clauser, Kalmbach, Pegoretti and Segnana

Scale Economies, in: Journal of Development Economics, 27, October 1987, pp. 41-55 Lederer, E.: Technischer Fortschritt und Arbeitslosigkeit, Tübingen 1931

-

Technical Progress and Unemployment, International Labour Office, Genova 1938

Leontiej, W / Duchin, F.: The Future Impact of Automation on Workers, Oxford 1986 Lucas, R. E: On the Mechanics of Economic Development, in: Journal of Monetary Economics, July 1988, pp. 2-42 Metcalje, j. S. / Gibbons, M.: Technology, Variety and Organization: A Systematic Perspective on the Competitive Process, in: Research on Technological Innovation, Management and Policy, Rosenbloom and R. Burgelman eds., Greenwich 1988 Nelson, R. / Winter, S.: In Search of a Useful Theory of Innovation, in: Research Policy, 6, 1977, pp. 36-77 Nicola, P. G.: Teoria (pura) deUa dinamica strutturale: verso un sistema unitario?, in: Dinamica Economica Strutturale, A. Quadrio Curzio and R. Scazzieri eds., Bologna 1990, pp. 55-80 Pasinetti, L. L. / Scazzieri, R.: Structural Economic Dynamics, in: The New Palgrave. A Dictionary of Economics, Vo!. IV, London 1987 Perrings, G.: Economy and Environment, Cambridge 1987 Piore, M. j. / Sabel, G. T.: The Second Industrial Divide, New York 1985 Posner, M. V.: International Trade and Technical Change", Oxford Economic Paper, 13, 1961, pp. 323-341 Quadrio Curzio, A. / Scazzieri, R.: Profili di dinamica economica strutturale: introduzione, in: Dinamica Economica Strutturale, A. Quadrio Curzio and R. Scazzieri eds., Bologna 1990, pp. 11-51 Ricardo, D.: On the Principles of political Economy and Taxation, in: The Works and Correspondence of David ricardo, Vo!. 1, Cambridge 1951 Sassu, A.: Nuove prospettive per 10 studio dei progresso tecnologico, in: Economia politica, 1986, 1 Scazzieri, R.: Classical Traverse Analysis, in: Dynamis, IDSE!CNR, 1990, 3 Schumpeter, j. A.: Theorie der wirtschaftlichen Entwicklung, Leipzig!Munich, 1st ed., 1912, 2nd ed. revised 1926, subtitled "Eine Untersuchung über Unternehmergewinn, Kapital, Kredit, Zins und Konjunkturzyklus" , (Eng!. trans!. "The Theory of Economic Development. An Inquiry into Profits, Capital, Credit, Interest, and the Business Cyde", New York 1961) Siniscalco, D.: Evidenza empirica e aggregazione neUe teorie evolutive dei cambiamenta economico, in: Innovazione e progresso teenico, M. Amendola ed., Bologna 1990, pp. 113-18 Smith, A.: An Inquiry into the Cause of the wealth of Nations, in: The Glasgow Edition of the Works and correspondence of Adam Smith, Vo!. 11, Oxford 1976 Solow, R. M.: Technical Change and the Aggregate Production Function, in: Review of Economics and Statistics, 39, 1957, pp. 312-20

Intergenerational Equity and Exhaustible Resources, in: Review of Economic Studies, Symposium, 1974, pp. 29-46

Introduction

37

Steindl,].: Innovation, Forschung und Technologie, in: Perspektiven der ästerreichischen Industrie, H. Kramer ed., Vienna 1982 Sylos Labini, P.: Nuove tecnologie e disoccupazione, Bari/Rome 1989 -

Technical Progress, Unempolyment, and Economic Dynamics, in: Structural Change and economic Dynamics, 1, 1990

Whitley,]. D. / Wilson, R. A.: Information Technology and Employment: Quantifying the Impact Using a Macroeconomic Model, Research Project, Institute for Employment Research, Warwick 1986 -

Quantifying the Impact of Information Technology on Employment Using a Macroeconomic Model of the United Kingdom Economy, in: OECD, Information Technology and Economic Prospects, Paris 1987

I. Innovation and Diffusion: Some Empirical Facts and Institutional Conditions

Technological Innovation in Industry: Conception and Results of Innovation Surveys by Lothar Scholz'

1. A Critique of the Conventional Theory of Technical Progress Prom an economic point of view, technical progress is based on new or substantially improved products or production processes, i.e. product or process innovation l . However, the neoclassical theory of production and growth basically takes into account only the efficiency of technical progress, as output is considered to be homogeneous and the parameter of efficiency is a residual component. The term "technical progress" is linked to production factors even in models containing an endogenous approach to technical progress; thus it is linked to the capital factor in the Vintage-Approach or to the labour factor in the Human Capital-Approach. Approaches which apply this concept and try empirically to measure the rate of technical progress continue to portray this central factor of economic and social growth as a "measure of ignorance,,2. A large number of hypotheses have been formulated, theoretical explanatory approaches developed, and empirical attempts at an explanation implemented, concerning the causes and consequences of these "unexplainable" phenomena 3 . Yet we are still left with unanswered questions 4 • And without answers to these questions, neither growth policiess nor research or technology policies6 can be given an economically sound foundation in the long run. All that has been achieved so far on a theoretical basis is to structure systematically some forms of technical progress and its consequences. But which situations with wh at consequences actually Translation

~

Friederike C. Oursin.

See the definition of Ott (1959). 2

Abramovitz (1956).

3

See d'Alcantara (1986). See Cyert/Mowery (1987). See Oppenländer (1988).

6

See Nelson/Winter (1977).

Lothar Scholz

42

condition different phases of the economic and social development remains empirically unsolved. 2. Innovation Activities as Determinants of Technical Progress The theory of growth has concentrated on conditions for "balanced" growth. The fact that it now also concerns itself with the phenomenon of growth-cycles - as opposed to short-term business cycles - can be regarded as scientific progress. The rate and direction of technical progress is taken to be a major explanatory factor in this context. But when attempts are made to fill this factor with explanatory content, it is remarkable how much creativity is spent on finding names for this "measure of ignorance". In formalized model-theoretic approaches to such growth-cycles, this cause of oscillation is interpreted as "Unternehmeraktivität" or "ökonomischer Aktivitätsgrad,,7. But exactly what these terms stand for remains unclear. Empirical research on innovation has shown that technical product and process innovations do not fall from the sky like "manna" but are based on innovation activities8 . New research results and/or new combinations of already available technical knowledge are a necessary prerequisite. Research and development activities CR&D) provide the basis. However if one wants to grasp technical progress in all its forms, one cannot start from the R&D concept as under the Frascati-definition. One must also include constructive developments and activities in the area of industrial design. New technical knowledge is a necessary but not sufficient condition for technical progress in the economic sense. The conversion of knowledge into marketable product or process innovations requires further innovation activities with regard to: patent protection and license taking, expenditure on production preparation, not only on hardware but also for software and organizational and training activities. Lastly, innovation activities aimed at market preparation Ce.g. marketing, market research) must also be taken into account. The resulting costs, both inside and outside the company, are called expenditures on innovation. investment activity which is normaUy capitalized. Thus the activities of companies are essentially limited to the area of products already introduced in the market, that is, investments intended to expand capacity, to rationalize and to replan existing installations. A dynamic investment theory that also includes a company's expenditure in order to safeguard its future must be based on an extended investment concept9 . On the basis of this 7

Krelle (1986), p. 92.

8

Scholz (1974).

9

See Metder (1988).

Technological Innovation in Industry

43

concept, innovation expenditure also includes pre-investment activities up to the introduction of new products and processes in the market lO .

3. Development of Innovation Surveys It was already clear by the end of the sixties that official statistics were inadequate for the theoretical modelling and quantification of technical progress. In 1978 the "Ifo-Innovationstest"l1 was introduced, based on empirical studies of innovation research, including questionnaire-based ca se studies and partial analyses. Since technical innovations are developed and marketed by industry, a representative sampIe of approximately 5000 German industrial companies was chosen in order to collect data on innovation activities using a survey comprising the "Ifo-Konjunkturtest" and the "Ifo-Investitionstest". A standardized questionnaire was drawn up, consisting of the following set of questions: level and structure of innovation expenses - the goals of innovation, its motivations, and its limitations - the crucial points of know-how and of technological innovations.

The industrial companies chosen were divided into approximately 300 product areas. It was thus possible to evaluate the cost of innovation on a disaggregated level according to various criteria, namely: degree of technical novelty product or process expenditure strategies in innovation with respect to price and quality competition consequential effects of innovation on growth and employment. Since 1979, surveys on innovation in German industry have been conducted on a yearly basis. Since small and medium-sized companies, especially, do not introduce innovations on a yearly basis, the innovation-sampIe va ries slightly from year to year. Of the approximately 5000 industrial companies surveyed every December by the "Ifo-Konjunkturtest" using a special questionnaire on innovation (return quota 95%), some 1400-1600 companies have participated in the special survey on innovation. On the basis of the industrial classification system it is possible to carry out microeconomic innovation analyses and to execute sectoral and macro-economic evaluations by applying a weighting system based on employment data. Both the R&D-data of the "Stifterverband Wissenschaftsstatistik" and the official investment statistics serve as control quantities for the assessment of possible departures from the projection of the micro-data related to the respective units.

10

Scholz/Mensch/Nerb (1990), p. 65 ff.

11

Scholz (1989).

44

Lüthar Schülz

Within the context of a large scale research project - the so-called MET A-Study l2 financed by the German Federal Minister of Research and Technology - it was possible to relate the data from the innovation surveys to other survey results and to official statistics. 4. Micro-Economic Results

Innovation is a necessary condition for technical progress. Since technical progress is a fundamental factor in intensive economic growth, it is generally assumed that innovative companies are economically more successful than their non-innovative counterparts. As regards the development of turnover and employment, this hypothesis was confirmed by the innovation survey data for German industry over the period 1979-1986 (see Table 1). Innovative companies were divided into different types 13 , namely: product innovators process innovators product and process innovators companies with innovation projects at the planning stage. It is noteworthy that no significant differences emerged between the first two types of innovation with regard to turnover and employment. The product and process innovators, however, showed a distinctly more positive developmeni in companies compared with other kinds of enterprise in this period. This shows that there appear to exist market factors on the demand side to which the companies in price competition partially respond with process innovations, and to wh ich those in quality competition partially respond with product innovations. Without further disaggregating analysis of the consequences of the different innovation strategies for single markets as a whole, no further general statements about the success of innovation are possible l4 . On the other hand, the companies that successfully compete with both product and process in nova tors seem to have the best chances of economic success. The results of the analysis make it clear, however, that negative changes in overall economic conditions, e.g. the 1979/80 oi! crisis, have adverse effects on all companies and cannot, in the short run, be compensated for by innovation alone. On the other hand, the question arises of how innovation activities affect the overall economic context. If the (relative) growth of in-

12

See Schettkat/Wagner (1989).

13

PenzkoferlSchmalholz/Scholz (1989), p. 87 ff.

14 This question is currently being examined within the context of a DFG-Project on the topie of "Der Zusammenhang zwischen Marktstruktur, Innovationsverhalten und dynamischem Wettbewerb".

E

T

9.4 8.2

E

0.7 1.3

1.7

Official statistics' All companies'

Innovators among them Product innovators Process innovators Combined product and process innovators

6.6 7.9

1.5

-0.3

3.2

-4.2

- 3.3 -1.8 -3.9

-2.5

3.0 -3.3 -4.0 -3.1

2.8

-2.8

0.1

1.7

4.7

3.9 2.6 3.6

2.1 2.9

-4.2 - 3.1 -2.9 -2.8 -3.0

T

E

1.4

2.0

1.9 2.3 1.0

2.5 2.0

T

1982/ 83 Regarding

9.0

2.1

4.0 4.6

-1.1

- 2.8

-0.2

7.5 5.5 4.6

5.7 6.4

T

0.9

-1.1

-0.8 0.0

E

1983/ 84

-0.6

0.9

3.4

5.1

2.7 10.3

8.7 6.2 5.9

7.4 7.4

1.6 1.4 2.0 1.2 -0.2

T

E

1984/85

T

1.2

-0.9 -1.4

0.0 -0.9

2.1

1.7 0.8 2.0 2.5 -0.3 -3.8

1.9 -0.9 1.1 0.2

E

1985/86

Source: Sonderfrage "Innovation" im Ifo-Konjunkturtest, Ifo-Innovationstest, Ifo-Investitionstest, Statistisches Bundesamt, Stifterverband für die Deutsche Wissenschaft, ca\culations by Ifo-Institut. H. Penzkofer/H. Schmalholz/L. Sc holz (1989), p. 90.

Cfoundries etc.), chemical industry, aerospace industry.

Note: E = Employees, T = Turnover, • manufacturing industry exc\uding production and processing of atomic fue\, iron industries

Non-innovators

Companies with projects at the planning stage

-1.5

8.6

2.6

-1.1

-2.3

3.9 -3.0 4.7 -3.1 5.5 -2.0

-1.6

8.9 1.1 8.4 0.6 10.4

4.5 -3.7 3.2 -3.4

E

1981/ 82

- 2.5 -1.9

T

1980/81

1979/80

Examined area

Changes over the time period in %

The Development of Employees and Turnover in Innovative and Non-Innovative Companies

Table 1

"'VI

~

0-

eCf>

5' 5'

::>

o'

~

5'

~

(ö.

ClQ

0

0

'"Cl

";:rn::>

46

Lothar Scholz

novative enterprises is only possible at the expense of non-innovative ones, innovation looks like a zero sum game from a macroeconomic viewpoint.

5. Macro-Economic Results In theory, it is possible to set out the conditions under which technical progress has negative, neutral or positive effects on growth and employment. However, furnishing empirical proof of which constellation of conditions de facta exists has not been possible until now because of the inadequate definition and quantification of technical progress. If the overall economic goal of full employment is not achieved, and if the growth rate of the overall economic production is below the rate of productivity, then this can - depending on the point of view - be the result of: inappropriate wage or economic policies (neo-classical interpretation) growth deficits (Keynesian interpretation) a bias of technical progress (Marxist or evolutionary interpretation). In the latter, the existence of "technological unemployment" is claimed. Technological innovations are a necessary but not sufficient condition for technical progress. Only innovations wh ich are successful on the market pro du ce a return on innovation which positively affects the rate of technical progress. This means that time lags between innovation expenditures and returns have to be taken into account. If innovation activities take place in a discontinuous manner, the following anomalous situation may occur: in phases of increased innovation activity, the overall economic rate of technical progress may be relatively low because innovation inputs have no corresponding output; but the reverse situation cannot be excluded either. However, whether the discontinuities leading to innovation and growth cycles really exist cannot be determined without measuring overall economic innovation expenses and their growth and employment effects over an extended period. Although the time series covered by the "Ifo-Innovationstest" data are still too short for this, two remarkable results emerge: the innovation expenses of German industry have reached a high er level than the gross fixed investments for products already introduced on the market; that is, investments for the expansion of capacity, rationalization, and replacement; the innovation expenses for production and market preparation vary considerably, and it is still unclear whether this phenomenon reflects short term business cycles 0r longer term growth trends. Both results strengthen our belief that it is necessary to continue with the surveys and to investigate these relationships further.

Technological Innovation in IndustIY

47

The analysis of the growth and employment effects of product and process innovations on the sectoral and overall economic level must be conducted in a highly differentiated manner, because in an economic system based on the division of labour innovative inputs are used in investment and consumer goods. Product innovations in capital goods industries represent process innovations for investors in consumer goods industries. Because of these interconnections, sectors which themselves show only few innovation activities with respect to their own products can nevertheless market highly innovative products. In order to describe such connections it was assumed that direct sectoral innovation expenses divided up in accordance with inter-sectoral input-output relations, i.e. in proportion to the stream of inputs. For German industry it was found (see Fig. 1) that the sectors chemical products road vehicles office machines/data processing machines electrotechnical industry manufacture products with an especially high direct and indirect innovation content. These sectors comprise German companies with high growth rates, and their international competitiveness appears to be based to a substantial degree on the effects of intersectoral innovation transfers. The streams of sectoral innovation spending on product innovations were traced to the sectors of final demand (see Table 2) using an input-output model. Between 1980 and 1986 the overall budget for product innovations grew in real terms from 32.3 to 39.2 bn. marks. Approximately 30% of this budget was spent on private consumption. The innovation conte nt of private consumption is domina ted by chemical products and road vehicles, followed by electrotechnical products and foodstuffs. Product innovations account for approximately 70% of this sector's innovation content. If one takes the analysis one step further and examines the content of product innovation per unit of final demand, then the innovation content of private consumption 0986:1.6%) seems relatively small compared with innovations in investment goods 0985: 5.2%). Whether this marked difference is due to a bias in the supply of innovation or whether it indicates a different propensity to innovate between these sectors of final demand cannot be determined without further analysis. From the overall economic point of view, one can assurne for German industry that the relative innovation expenses for capital goods are more than three times higher than the expenses for private consumption goods. Can this be interpreted as a bias of technical progress in favour of process innovations, causing redundancy effects which are not compensated by innovation incentives and growth effects in the consumer goods sector? As of now this question must remain unanswered. The relationships involved are

48

Lothar Scholz

Figure 1

Intersectoral Innovation-Bundle in German Industty (986) indirect expenditures for innovation 4.4

2 ",I

type III

•

~I ~I

4,2

I I

4.0

.

3.8

road vehicles

.

3.6

plastics

3.4

.

3.2

office/ADP machines

3.0 2.8

2.6 2.4 2.2 2.0 1.8 1.6

1.4

type I

chemical prod.

.

•

watercrafts rubber prod .•

textiles

.

glass

electrotechnical prod.

average

wood stonelclay ~ air/space craft • •• • machmery pulp, paper printing • precision mechanics paper prod. I ~OOd prod. ironware, tin goods and metal prod.

~ _ '\ • I steel • constr. iro·n 1 "'frecision ceramics I • clothing

• toys

food, drinks, tobacco I

•

leather prod.

1.2 1.0 0.8 0.6

0.4 0.2

• crude oil prod. type IV

type II 2

3

4

5

6

7

8

9 10 11 12 13 14 20 21 22

direct expenditures for innovation 2

iron, steel, non-ferrous metals, foundries, rolling mills. in % of value of production. Source: PenzkoferlSchmalholz/Scholz (1989), p. 140.

2

Technological Innovation in Industry

49

too complex, and it is not clear what this result ultimately means. Two aspects may shed light on this: The improvement of working conditions aild environmental protection are probably considered more important today than they were in the sixties and seventies. This is also reflected in innovation activities in the capital goods sector. Yet these features probably constitute only a small part of the differences in innovative conte nt between investment goods and consumer goods; a hypothesis which appears to be supported by the results of the survey on the innovation goals of the enterprises. But can they really be neglected in the long term? It is not clear whether there has been a long term change in. the dynam-

ics of innovation between the investment goods sector and the consumer goods sector. This cannot be completely excluded, however, for the future. Other evidence suggests that in the course of the international division of labour German industry has specialized in foreign trade with investment goods and that it draws overall economic advantages from this l5 . This thesis is supported not only by foreign trade's sectoral structure, but also by the relatively high innovation conte nt of the final demand sector "Export" (see Table 2). Whether these empirical results on the direction and structure of the innovation activities in the German economy that shape technical progress represent a specific development phase that will change in the long term is a question which must remain open. Another question is whether the direction and effect of technical progress in the German economy is fundamentally different from those of other national economies. 6. International Comparisons Some countries have begun surveys on innovation comparable to those conducted by the "Ifo-Institut". In Italy "Istat"16 in Rome, Austria "Wifo,,17 in Vienna, and in Switzerland (for the Ticino canton) "URE,,18 in Bellinzona have conducted similar surveys. For the year 1985 the innovation data 15 In his analysis and evaluation of research approaches, P. Kalmbach deals with this main problem only from a micro-economic point of view (pp. 43 ff.); he does not seem to have noticed that our aim is to grasp the direction and effects of technical progress in the micro-macro-context in order to identify so-called "technological epochs" with diverse effects on growth and occupation over time. See also Scholz (1990), pp. 207 ff. and p. 212.

16 See Istituto Centrale di Statistica (Istat) (1986). 17 See Volk (1988). 18 See Ufficio delle Ricerche Economiche (URE) (986).

2.1 5.0 2.0 1.1 12.4

32.3

State consumption

Equipment investm.

Construction investm.

Changes in storage

Export

Total

3.5

2.0

JOO

5.9

1.1

4.9

0.7

1.4

39.2

17.0

0.7

1.9

100

43.4

2.2

3.7

6.3

1.1

4.8 1.8

5.2

0.8

1.6

Expenditure per unit

14.3

6.6

2.6 5.6

29.1

1986in%

11.4

Expenditure In bn. Marks' per unit 1986

38.4

3.4

6.2

15.5

6.5

30.0

1980 in%

• in prices from 1980. Source: Sonderfrage "Innovation" im Ifo-Konjunkturtest, Ifo-Innovationstest, Ifo-Investitionstest, Statistisches Bundesamt, Stifterverband für die Deutsche Wissenschaft, ca1culations by Ifo-Institut. H. Penzkofer/H. Schmalholz/L. Scholz (1989), p. 172.

9.7

1980

In bn. Marks

Private consumption

Components of final use

Table 2 The Quota of Product Innovation in Final Demand

N

0

0-

n

rJ)

e;

S-

.0

o

Vl

Technological Innovation in Industry

51

for "ARGE-Alp" member countries were processed on a regional basis and compared as far as was possible l9 • This showed that a large number of definitional problems of a technical and statistical nature exist wh ich limit the comparability and interpretation of the data. Although this survey is a pilot project, it should be taken into account by future surveys and international comparisons. Individual results cannot be considered within the context of this artic1e as the survey has not yet been made available for publication. But a few general aspects can be mentioned: Companies that compete internationally generally show a similar structure of innovation expenses - a plausible result, since otherwise competi tiveness could not be maintained. Because regional industrial structures vary, regional innovation differences reflect sector-specific innovation activities. Regional innovation policies must therefare take into account and support the sectar's infrastructural innovation conditions so that companies can also deve10p independent innovation activities without being unduly influenced by parent companies outside the region. In order to increase economic potential through innovation promotion, it is not necessary to follow or imitate the relative innovation efforts of other regions; the goal should rather be absolute leads in innovation competition. Clear regional differences became apparent with particular regard to innovation obstac1es. These result partially from overall economic and regional structural conditions, but it also became c1ear that companies only report innovation obstac1es if they are in innovation competition and accept the challenge. The absence of innovation obstac1es should not lead one to draw the false conc1usion that there is no need far political action to support innovation - exactly the opposite may be the case. In 1990 an international survey20 of innovation surveys already carried out or planned showed that, apart from the already mentioned countries, institutions in Denmark, Finland, France, Great Britain, the Netherlands, Norway, Sweden, Spain and the U.S.A. are alsoworking in this direction. The so-called "Nordic group" (Denmark, Finland, Norway, Sweden) has coordinated its surveys to a large extent and is currently processing its data in order to carry out an international comparison, which will also comprise "IfoInstitut" data for Germany. However, it is to be expected that similar problems to those encountered by the "ARGE-Alp-Project" will arise regarding the coordination and interpretation of the survey results. 19 PenzkoferlScholz (1990). 20 OECD (1990a)

52

Lothar Scholz

As a result, the proposal of an OECD study group to compile an "Innovation Manual,,21 is of considerable interest. It is planned to supplement the "Frascati-Manual" which created the basis for internationally comparable R&D statistics at the beginning of the sixties in a first attempt to formulate and discuss concepts and definitions for innovation surveys. On this basis it is expected that in coming years it will be possible to make international analyses on a broad basis and provide innovation research with data which will hopefully lead to new impulses and insights.

7. Final Remarks In real economic life, it is often not the pioneer who reaps the benefits of his innovation activities, because he rarely lives to see the day of its breakthrough on the market. In this respect the innovation process frequently resembles a relay race in which the last runner to carry the baton across the finish line gets the applause which others have helped to create. This is not a rare occurrence in science either. When in 1978 we developed the "Ifo-Innovationstest" we were able to build on a number of earlier studies which used questionnaire-based surveys. In 1978 we presented our instrument for the first time at an OECD-Workshop22 and have since then repeatedly reported on the progress of our research to the "National Experts of Science and Technology Indicators" (NEST!). Since consensus is about to be reached that the "Innovation Manual" should be based on an instrument which basically follows our approach, we would like to mention the pioneers responsible for the fundamental preparatory work but who have long since been forgotten: the "Statistics Canada" team 23 . We would also like to thank the scientific community for understanding that, without a minimum of agreement on the definition, collection and processing of statistical data, there can be no scientific progress able - on the basis of empirical observation - to disclose common features and differences in innovation activities on the international level.

21 OECD 0990b). 22 Scholz (978). 23 H. Stead, who had already in 1971 and 1973 made innovation surveys at Statistics Canada, was a member of the scientific committee that developed the "IfoInnovationstest" in 1978. Among his colleagues were G. Mensch (then WZB, Berlin) and H. Majer (University of Stuttgart).

Technological Innovation in Industry

53

References Ahramovitz, M.: Resource and Output Trends in the United States since 1870, in: The American Economic Review, Pap. a. Proc., 46, 1956, pp. 5-23 Cyert, R. M. / Mawery, D. C. (eds.): Technology and Employment. Innovation and Growth in the U. S. Economy, Washington 1987 d'Alcantara, G. et al.: Technology and Macroeconomics, FAST-Occasional Papers no. 75 (International Document), Bruxelles 1986 Istituto Centrale di Statistica (ed.): Indagine Sulla Diffusione Dell'Innovazione Tecnologica Nell'Industria Manufatturiera Italiana, Notiziario, 7, 1986, 4 Kalmhach, P.: Innovation, Beschäftigung und Arbeitsmarkt, Stand und Perspektiven der Forschung (ms.), Bremen 1990 Krelle, W.: Technischer Fortschritt und Wachstum, in: Technologischer Wandel - Analyse und Fakten, G. Bombach, B. Gahlen and A. E. Ott eds., (Schriftenreihe des Wirtschaftswissenschaftlichen Seminars Ottobeuren, Vol. 15), Tübingen 1986, pp. 87107 Mettler, D.: Investitionen, Innovationen und Unsicherheit. Grundzüge einer kognitivevolutionären Investitionstheorie, Grüsch 1988 Nelson, R. R. / Winter, S. G.: In Search of a Useful Theory of Innovation, in: Research Policy, 6,1977,1, pp. 36-76 OECD (eds.): Description of Innovation Surveys and Surveys of Technology Use Carried Out in OECD Member Countries, Paris 1990a Preliminary Version of an OECD Proposed Standard Practice for Collecting and Interpreting Innovation Data (Innovation Manual), ms. DSTIIP/90. 14, Paris 1990b

Oppenländer, K. H.: Wachstumstheorie und Wachstumspolitik, München 1988 Oft, A. E.: Technischer Fortschritt, in: Handwörterbuch der Sozialwissenschaften,

Göttingen 1959

Penzkojer, H. / Schmalhalz, H. / Schalz, L.: Innovation, Wachstum und Beschäftigung. Einzelwirtschaftliche, sektorale und intersektorale Innovationsaktivitäten und ihre Auswirkungen auf die deutsche Wirtschaft in den achtziger Jahren, Arbeitsmarktwirkungen moderner Technologien, Vol. 3, Berlin/New York 1989 Penzkojer, H. / Scholz, L.: Vergleichende Analyse der Innovationsaktivitäten in den Arge Alp-Mitgliederländern zur Identifikation von Prioritäten in der Innovationsförderung, Forschungsprojekt im Auftrag des Bayerischen Staats ministeriums für Wirtschaft und Verkehr (ms.), München 1990 (publication planned) Schettkat, R. / Wagner, M. (eds.): Technologischer Wandel und Beschäftigung. Fakten, Analysen, Trends, Arbeitsmarktwirkungen moderner Technologien, Vol. 1, Berlin/New York 1989 Scholz, L.: Technologie und Innovation in der industriellen Produktion, Göttingen 1974 Innovation Test - The Measurement of Innovation Activities. Paper presented at OE CD-workshop on the measurement of the output of R&D activities, Paris 14th and 15th December, 1978

54

Lothar Scholz

Innovationstest, in: Handbuch der Ifo-Umfragen, K. H. Oppenländer and G. Poser eds., Berlin/München 1989, pp. 263-279 -

From the Innovation Survey to the Innovation-Flow Matrix: An Approach for Measuring Technical Progress and the Impact on Growth and Employment, in: The Employment Impact of New Technology. The Case of West Germany, E. Matzner and M. Wagner eds., Aldershot/Bockfield USA/Hong KongiSingapore/Sydney 1990, pp. 201-214

-

/ Mensch, G. / Nerb, G.: Anpassungserfordernisse in Unternehmen durch den europäischen Binnenmarkt (Ifo-Studien zur Strukturforschung Nr. 15), München 1990

U.!ficio delle Ricerche Economiche (ed.): Indagine sui processi innovativi in atto nel settore industriale ticinese, Bellinzona 1986 Volk, E.: Die Innovationstätigkeit der österreichischen Industrie, Wien 1988

Research and Development in Austria in an International Comparison by Wilhelmine Goldmann

1. The State of Research in the Fifties and Sixties In the 1950s and 1960s expenditure on research and development increased in the leading Western industrial economies at a much more rapid rate than GDP. Austria's activities in R&D in those years were virtually nil, however, even though the country enjoyed above average economie and production growth. The Austrian strategy was to import modern foreign technology rather than develop its own. The relative neglect of R&D in the two decades following World War II was not, as Josef Steindl has convincingly pointed out, the result of irrational policies. The obvious contrast between high economie growth and low investment in R&D is easily understood when one considers the state of technology whieh Austria had in herited from the years between the two World Wars: "This technology was backward and did not embody methods whieh had already become fairly commonplace in the USA some time ago (for example, the broad strip mill, large paper machines, catalytie cracking process, modern kilns, efficient methods of international transport, etc.). These methods were then introduced in a comparatively short time (assisted, in part, by Marshall aid), and the technology was lifted abruptly to a higher level. Thus a process of catching up other countries took place and this largely explains why product per man in manufacturing rose in Austria by 5% per annum and in the United Stated by 2.7% per annum in the period from 1950-1952 to 1967-1969. We had absorbed technology faster than it can be currently produced, drawing it, as it were, from a stock of accumulated knowledge"'. For two decades, this strategy of technologieal import seemed very successful, and it increased the rate of very necessary economie recovery in the politieal economy. This poliey of imitating instead of innovating had, however, long-run negative effects, one of whieh was that many scientists and engineers who had studied at Austrian universities joined foreign comSteindl (977), p. 211.

56

Wilhelmine Goldmann

panies or research units because they were unable to find employment suitable for their qualifications in Austrian industries 2 . Another negative result was that a mentality developed which was not prepared to take on the high costs and risk of R&D. This mentality nurtured the illusion 'that one could continue to live on foreign development activities'3. These factors plus a tax system which preserved the existing investment structures, and thus was adverse to innovation\ hindered the development of research activities.

1.1. Research Poliäes at Level Zero For a country like Austria the sixties were marked by various factors. The few R&D activities were only carried out by a handful of industrial firms (amongst which the nationalized steel industry), and the universities had recovered only with great difficulty from the devastation of the War and the Nazi era. Universities lacked many excellent scientists who had left the country. When, at the end of the sixties, Austrian policies began to promote research work, they practically had to start from scratch. According to the assessment made by the Chamber of Labour, the total amount spent on R&D in 1963 was 650 million Austrian schillings. This meant that 0.33% of GDP was spend on R&D, while other Western European countries were spending 1.5-2.5% of their GDP. An assessment made by the Chamber of Commerce showed similar results. An OECD evaluation of R&D policies in Austria recommended that more money should be spent on R&D, and also that a research organization should be set up. These assessments resulted in at least a rethinking of R&D politics in Austria, so that the question of whether Austria could afford to spend money on research was - correctly - recast as: can Austria continue to afford not to spend money on research? Only "a country wh ich does not have research projects, (will) in the near future, be too poor to afford a prestigious research and development activity,,5. Finally, the efforts to awaken politicians and industry to the need for interest in R&D were successful. The most important measure taken in this connection was the establishment of two funds in 1967 to promote industrial and scientific research. In 1970 a new ministry was created: The Ministry of Science and Research.

2

Goldmann (985), p. 195.

3

Steindl (982), p. 64. Goldmann (985), p. 196.

Prager (965).

Research and Development in Austria

57

2. Austrian R&D Expenditure in an International Comparison

2.1. General Trends Observation of the development 01 R&D Expenditures in OECD countries in the seventies shows stagnation at the beginning of the decade. In the second half of the decade there was a slow increase, while from 1979 onwards a rapid increase in expenditure can be observed. In the period 19691981, average annual growth was 3.5% and in 1979-1981 it was already 5.5%, although in 1981-1983 there was a slight recession - only 4.5%. However, after 1983 there was a rapid increase, with growth at 8% in 1983-1985. Only the USA (8.9%) and Japan 00.3%) had an average growth rate high er than 8%. The Common Market with 5.5% is weil below the average (OECD 1987). Since the beginning of the eighties, expenditures on R&D in the OECD countries has increased faster than the GDP. Table 1 shows the R&D expenditures of each country as part of their GDP. The table also shows the role of state and industry in the financing of R&D.

Table 1 R&D Expenditures of Some OECD Countries, 1981-1987 GER0 1 as a percentage of GOP USA ]apan4 FRG France GB Switzerland Sweden3 Finland Italy Austria

Source of finance State (%) Industry (%)

1981 1985 1987 1981 1985 1987 1981 1985 1987 2.45 2.78 2.72 49.3 50.5 50.8 48.8 47.6 47.1 2.14 2.62 2.59 2 24.9 19.1 19.4 2 67.7 74.0 73.72 2.45 2.70 2.71 40.7 36.7 35.8 58.0 61.8 62.8 2.01 2.26 2.28 53.4 52.9 52.9 40.9 41.4 41.0 2.42 2.31 2.42 2 49.0 43.1 39.82 41.3 46.4 48.2 2 21.1 2 68.3 2.29 2.89 2 21.4 78.9 2 2.22 2.79 2.93 39.9 34.0 57.3 63.3 2.19 1.50 1.60 46.0 51.9 0.87 1.12 1.19 47.2 51.7 54.2 50.1 44.6 41.7 1.17 1.27 5 1.]1 46.9 48.1 48.5 50.2 49.1 48.8

GERD ~ Gross Expenditures on R&D. 1986. Excluding research in humanities and sodal sciences. Values adapted by OECD secretariat to conform with OECD standards. An estimate carried out by the Austrian Economic Research Institute (Volk 1988) showed only minimal deviation from these results. Source: OECD.

2.2. Structural Frame 01 Research Expenditure

01

Towards the end of the seventies a new trend appeared. The jinancing research activities, which until then had been largely covered by the

Wilhelmine Goldmann

58

public sector, was slowly taken over by private organizations. Table 2 shows that private funds for R&D in the first half of the eighties increased one and a half times more quickly than public funds. Table 2 Real Growth of R&D Expenditure in the Period 1981-1985 Financial contri- Financial contri- Growth of R&D bution of industri- bution of fumt expenditure 2 (%) (%) al sector (%) OECD (overall) Japan 1 USA EEC Italy Austria

15.5 37.7 13.7 11.0 19.7 8.1

10.0 2.9 15.1 5.5 18.9 8.0

27.0 42.5 29.1 17.0 39.9 16.6

adapted to OECD standard values. the rates of growth include contributions from private public utility funds and from foreign countries. Source: OECD (1987): own calculations.

1 2

This trend was not evident in Austria, however: in the same period Austria's expenditure on R&D increased by 16.6%: 8.1% was covered by the industrial sector and 8% by the Government. Expenditure by industry to finance R&D increased to 14%; that of the government to 19.8%. Since 1982 both sectors have contributed an approximate1y equal share towards meeting the costs of R&D in Austria (see Table 1).

2.]. Tbe Government Sector (Public Financing 0/ R&D) The growth rate of government expenditure on R&D increased in most OECD states at a higher rate than total government expenditure. Since 1983 public funding for R&D has increased notably: the USA alone covers twothirds of total R&D public OECD finance funds. Government-financed R&D expenditure is in general (with a few exceptions) above 0.5% with respect to GDP. France leads the field with 1.5%, followed by the USA, Great Britain and Sweden (Austria 0.57%). On examination of the composition 0/ expenditure (see Chart 1), one notes that in the OECD countries, 40% of government funds for R&D were used for military purposes and 60% for health purposes. The USA is dominant in defence expenditure, covering 82% of all government-financed R&D

Research and Developmem in Austria

59

Chart 1

public-financed R&D expenditure

civil expenditure

military expenditure 40%

60%

direct civil expenditure

general university funds 15%

45%

direct civil R&D expenditure (100%)

economic development

other civil aims

(45%)

industrial agriculture development 05%)

00%)

(55%)

energy

infrastructure

05%)

(5%)

civil space research 00%)

social protection general of advancement of development & services environment knowledge (25%)

(5%)

05%)

60

Wilhelmine Goldmann

military OECD expenditures. The USA also leads in its military R&D expenditure as part of the total R&D government expenditure for the USA alone: with 65% USA is followed by Great Britain (52%), France (31%) and Sweden (24%). If one excludes military R&D expenditure and then looks at the R&D quotas (percentage of R&D expenditure in GDP) of the various countries, a different perspective emerges: In 1987 the USA, Great Britain and France reached only 1.8% of R&D quotas, while Sweden, despite high military expenditure, 'only' reached 2.6%. Austria, whose expenditure on military R&D is hardly noticeable, now appears in a better light CTable 3).

Table 3 National R&D Ratios Excluding Government-Financed Military Expenditure 1987 (%)

USA Japan FRG France GB Switzerland 1 Sweden Finland Italy Austria 1

1.83 2.57 2.58 1.80 1.82 2.83 2.60 1.59 1.10 1,31

1986.

Source: OECD; own evaluations. 2.4. Tbe Business Enterprise Sector: Finance and Performance

1. Finance: In two-thirds of the OECD countries the total contribution by

business enterprises to all R&D expenditures is larger than government R&D expenditure. The largest percentage spent by industry on national R&D financing is in Switzerland, Japan, Sweden and West Germany (Table 1).

2. Performance: The USA and Japan togethercover two-thirds of total industrial R&D expenditure in the OECD area. The investments made by industry within the OECD area increased in the eighties at a faster rate than productivity; an increase that was particularly noticeable in Sweden.

Research and Development in Austria

61

Table 4 Industrial Expenditure on R&D

USA Japan 2 FRG France GB Switzerland Sweden l Finaland Norway Denmark Italy Austria

1981

1985

1981

1985

70.3 65.9 69.5 58.9 61.8 74.2 66.6 54.7 52.9 49.8 56.4 55.8

71.1 71.8 73.1 58.7 63.5 77.7 3 70.8 60.9 62.7 55.3 56.9 54.8

1.72 1.41 1.70 1.18 1.50 1.70 1.48 0.65 0.68 0.55 0.56 0.65

1.98 1.88 1.98 1.33 1.47 2.24 3 1.98 0.92 1.01 0.69 0.65 0.70

exduding sodal sdences and humanities. va lues adjusted to OECD standard. dates: 1986. Source: OECD (1988a) and (1988b); own evaluations.

In 1985 the average government contribution in all OECD economies to industrial R&D (research promotion, etc.) was about 14%. In Japan and Switzerland it played no role at all. Austrian government expenditure in the industrial sector was also relatively smalI. The extremely high percentage evident in a few countries Cthe USA, Great Britain, France) was largely because of the high amounts spent on military research.

Table 5 Public and International R&D Expenditure 1981-1985 Percentage of public financed R&D expenditure

USA Japan FRG France GB Switzerland Sweden Finland Italy Austria 1

1981

1985

31.6 1.9 16.9 24.6 30.0 1.3 13.6 9.0 8.8 7.4

34.3 1.61 15.3 23.4 23.2 1.8 2 11.6 7.7 16.9 7.9

1986 again 1.8%. 1986. Source: OECD (1988a) and (1988b); own evaluations.

Percent increase in industrial expenditure on R&D 1981-1985 in real terms 28.6 55.1 23.1 20.7 8.8 46.2 58.7 41.3 14.4

62

Wilhelmine Goldmann

Comparison among the various industry groups shows a particular trend: in areas such as electronics, computers, air and space-travel, and the pharmaceutical industry, one can observe: a faster increase in research expenditure, a larger share of total R&D expenditures by the business enterprise sector, and a higher R&D intensity. 2.5. The University Sector

Table 6 R&D Expenditure in the Universityl Sector In % of the total R&D expenditure USA Japan3 FRG France GB Switzerland Sweden4 Finland Norway Denmark Italy Austria

In % of the GDP

1981

1985

1981

1985

14 . .5 17.1 16.5 16.4 13.3 19.9 26.8 22.2 29.0 26.6 17.9 32.8

13.6 14.2 13.5 15.0 13.1 12.8 2 24.4 19.0 22.2 24.4 19.2 34.9 5

0.35 0.37 0.40 0.33 0.32 0.45 0.60 0.26 0.37 0.29 0.18 038

0.38 0.37 0.37 0.34 0.30 0.37 2 0.68 0.29 0.36 0.30 0.22 0.44

'Universities' includes all universities, technical universities and all forms of tertiary education (e.g; academies) as weil as all research institutes, test and experimental institutes and all university medical clinics. 1986. Data adapted to OECD values. Excluding social sciences and humanities. 26.4% without building expenses. Source: OECD 0988a) and 0988b).

Table 6 shows that, in both 1981 and 1985, the share of Austrian universities in the GERD of Austria was much higher than in all other OECD countries. This can be explained by the fact that the percentage spent by industry on total R&D expenditure was relatively small (see Table 4). In all the countries surveyed, the expenditure on university R&D fell, whereas in Austria it increased (the amount spent by industry correlates in exactly the opposite way). Also, when university research expenditures are

63

Research and Development in Austria

related to the GDP in all the OECD countries surveyed, the amount spent by Austria in 1985 on university R&D was among the highest.

3. The Structure of Expenditure

Table 7 Number of Research Scientists and Engineers (RSE) and R&D Expenditure 1985 Business enterprise sector Total R&D personneil USA japan FRG France GB Sweden Finland Norway Denmark Italy (986) Austna

451,276 275,080 140,458 173,000 33,055 12,051 10,086 10,932 57,715 12,555

RSE

R&D Expenditure (in mill. $ PPP 2)

RSE in % of total R&D personnel

570,300 251,771 93,546 43,863 81,000 11,481 3,891 4,796 3,392 26,498 3,359

78,269.0 26,768.6 14,613.4 8,556.5 9,065.9 2,087.3 516.3 589.0 433.9 4,336.5 566.8

55.8 34.0 31.2 46.8 34.7 32.3 47.6 31.0 45.9 26.8

University Sector USA japan 144,613 FRG 69,007 France 59,061 GB Sweden 12,300 Finland 5,890 Norway 5,254 Denmark 4,592 Italy (986) 39,136 Austna 5,347 (Exc!uding building)3

109,800 92,535 29,438 35,666 6,600 3,167 2,997 29,798 3,474

14,930.0 5,295.0 2,295.1 2,191.6 1,869.1 719.0 161.5 209.0 191.3 1,462.0 360.9 (273.0)

64.0 42.7 60.4 53.7 60.3 65.3 76.1 65.0

R&D personnel inc!udes all scientists (academies and similarly qualified people), engineers, laboratory technicians (matriculation and similar qualifications) as weil as unqualified assistants. The statistical data are given in full-time equivalent (FTE). The japanese data have been adjusted to this standard. Purchasing power parity (PPP). Austria, exc!uding buildings and property purchases. Source: OECD; own evaluations.

1

It is evident from Table 7 that, in a few selected countries, industry covers employment costs for a large number of research employees in the uni-

64

Wilhehnine Goldmann

versity sector. However, a major difference can be observed when one compare the scientific personnel (RSE) of both sectors. Whereas in the 'larger R&D countries', the USA, Japan, West Germany, the number of university graduates in the industrial sectar is three to five times higher than in the university area, the ratio is much lower in the 'medium R&D countries' . Austria is the only country which employs more university graduates in the university sec tor than in the industrial area. Also, the Austrian industrial sector has, with 26.8%, the lowest percentage of graduates compared with the total amount of people employed in R&D. It becomes evident that there are not enough people with a university degree employed in enterprises with research activities. There are two explanations far this: firstly, there are only a few Austrian firms which carry out R&D work in a professional manner and which employ academics for this work; secondly, 'HTL Engineers' (graduates from technical colleges) are often employed instead of academics. This occurs especially when the firm's R&D activity focuses on development rather than on research. There are two negative consequences deriving from not employing academics in R&D: firstly, the continuing 'brain drain' of academics who have studied in Austria and are employed in other countries (in particular biochemists, electronic engineers); secondly, the continuing lack of cooperation between industry and universities. It is a well-known fact that a successful joint-venture can only be developed through the use of the same scientific 'language' and by establishing and maintaining personal contacts. Table 8 Expenditure per R&D Employee 1985 Expenditure per employee

USA Japan FRG

France GB Sweden Finland Norway Denmark Italy (1986) Austria

(Excluding building)2

Business enterprises

University

University expenditures in % of BERD 1

59.4 53.1

36.6 39.2

61.6

37.1

60.9

58.5 27.4

92.6

41.7 37.4 67.5

105.0 49.8

60.9

52.4

63.2

42.8 58.4 39.7 75.1 45.2

39.8

(51.1)

74.0

64.0

68.2

149.3 (113.1)

Research and Development in Austria

65

Table 8 (contd.)

Expenditure per researcher (RSE)

USA Japan FRG France GB Sweden Finland Norway Denmark Italy (986) Austria (Exduding building)2

Business enterprises

University

University expenditures in % of BERD'

137.2 106.3 156.2 195.1 111.9 181.8

136.0 57.2 91.8 61.5

99.1 53.8 58.8 31.5

108.9

59.9

122.8 127.9 163.7 168.7

66.0 63.8 49.1 103.9

53.8 50.0 30.0 61.6

(78.6)

(46.6)

, BERD = Business Enterprise R&D Expenditure. 2 Austria - excIuding building and property purchases. Source: OECD (1988b); own evaluations. The expenditure per person employed in R&D work is, in all countries except Austria and Denmark, higher in the industrial sector than in the universities. The university sectar in Austria spends approximately 50% more per R&D employee than does the industrial sector. In 1985 the university sectar reached a total expenditure of 5.99 billion Austrian schillings and employed 5,347.4 people at a full-time equivalent (FTEs)6, whereas industry showed FTEs of 12,544.6 and 9.4 billion schilling expenditure. In 1985 Austria had more that 20,000 people employed in R&D (FTE): 62.3% were working in the industrial sector (56.1%) in enterprises and 6.2% in industryowned research institutes. Approximate1y 26.5% were in the university sectar, while 8.5% were working in govemment institutes. Austrian universities spend, by comparison, more money per R&D employee than all other OECD countries. However if expenditure on building and property is exduded, then the expenditure decreases by 24.4% per employee. If one then also subtracts the costs of university hospital dinics, expenditure per R&D employee falls by nearly one third (see Table 9).

6 FTE: if a person spends, for example, 30% of his or her total working time on R&D work, then this is valued at 0.33 FTE (1 FTE = 1 man year in R&D).

66

Wilhelmine Goldmann

Table 9 University Expenditure per R&D Employee in Austria 1985

R&D expenditure (in 1000 ÖS) R&D-personnel (FTE) researchers (FTE)

Total

Excl. building

Exd. dinics

Exd. building & dinics

5,990,575

4,532,151

4,281,400

3,649.53

4,658.1 3,058.0

5,347.4 3,473.8

R&D expenditures per employee

1,120,278

847,543

783,163.3

(100%)

05,6%)

(69,9%)

R&D expenditures per researcher

1,724,502

1,304,667

1,192,954

1,709,174

884,098

R&D expenditures dinics (in 1000 öS) R&D employees in dinics R&D expenditures in dinics per employee

689.3 2,479,581

1,282,603

Source: Austrian Central Statistics Office; own evaluations.

It is worth noting that more than half (56.5%) of university building expenditure was on hospital dinics. The huge "Allgemeines Krankenhaus" building project in Vienna would account for a large part of these expenses. If spending on building is exduded, then the costs per employee in the dinical research area sink to approximately half. It is also worth noting that, although the pattern of industrial R&D expenditure differs hardly at all from the OECD trend, in the university area the pattern is strikingly different. Far this I have three explanations: Firstly, the quantification of time (person ne I) and material spent on research is personally assessed by those working in the area. These data cannot be controlled for their reliability, and hence it may be assumed that the statistics are not correcr. A second explanation may be the large amount of building (university sector) in progress and the capital necessary to cover these costs. The high construction costs could also be a result of the fact that two different ministries are responsible for building and research. Thirdly, there is a severe lack of organizational efficiency in the university area. In order to deal with those deficiencies, a new organization with dear responsibilities, professional (not professorial) management and cost efficiency would be necessary.

Research and Development in Austria

67

4. Conc1usions for Austria The history of R&D in Austria shows more or less the development path that economic theory envisages. The correlation between economic development and national wealth on the one hand and the level of R&D and high-tech production on the other seems evident in the Austrian example. The non-existence of large and/or multinational companies in the country is another source of poor R&D performance. Finally, after passing through the different stages of economic and research development, Austria has by now reached a level of R&D commensurate with its firm and industry structure. In this study, I have endeavoured to show and explain the remarkable deviation of Austria's R&D expenditure from the trend seen in other OECD countries. The main reasons for Austria's limited activity in R&D are, firstly, an industrial structure consisting of only small and middle sized enterprises, secondly, the lack of defence and space research. Seen from an economical point of view, it is no doubt advantageous that defence and space research is virtually non-existent in Austria. Scientific and technological resources connected to the military sector are generally not commercializable. Since Austria's economic situation and industrial competitiveness has continued to improve over the last ten years, it must be assumed that the level and amount of R&D activity matches the country's economic structure. Thus it would seem important for Austria to use the limited finance available as efficiently as possible. The long-wished-for GERD as 1.5 to 2% of GDP remains an illusion in amid-term prospect. For the future, a parallel further development in both R&D activity and the technological standards of the production structure would be desirable; and for the further improvement of innovation, better collaboration between universities and business enterprises. There are two major functions which universities must fulfil in all countries: they must, first, train well-qualified people and, second, perform basic research work. Like everywhere else, basic research work at Austrian universities must be orientated by the quality level of the international scientific community only, and not by the level of Austrian industry. On the other hand, Austrian business enterprises should consult universities only over questions of basic research and not over product development problems. It would be advisable for companies to improve their own R&D departments by employing university engineers, thus utilizing university knowledge for their own in-house product development. As far as research organization in Austria is concerned, there seems to be a need for radical reorganization in the universities and for the implementation of financial means as efficiently as possible. It seems that nowadays the merely quantitative aspects of R&D expenditure (Le. the lack of

68

Wilhelmine Goldmann

money) have become less important than the conversion of R&D results into commercial success. A country's sucessful technology policy consists in spending R&D money as efficiently as possible in order to gain as much as economically possible from R&D efforts.

References Goldmann, W.: Forschung, Innovation und Technologie in Österreich, in: Forschungspolitik für die neunziger Jahre, H. Fischer ed., Wien 1985 OECD: The Measurement of Scientific and Technical Activities, "Frascati Manual

1980", Paris 1981

OECD Science and Technology Indicators, no. 2, R&D, Invention and Competitiveness, Paris 1986 Scientific, Technological and Industrial Indicators Newsletter 1987/no. 10, Paris 1987 Main Science and Technology Indicators 1981-1987, Paris 1988a Main Science and Technology Indicators 1982-1988/no. 2, Paris 1988b Reviews of National Science and Technology Policy, Austria, Paris 1988c The Measurement of Scientific and Technical Activities, "Frascati Manual" supplement, Paris 1989a OECD Science and Technology Indicators Report no. 3, R&D, Production and Diffusion of Technology, Paris 1989b Prager, T.: Forschung und Entwicklung in Öesterreich. Studie der Wirtschaftswissenschaftlichen Abteilung der Arbeiterkammer Wien, Wien 1965 Steindl,].: Import and Production of Know-How in a Small Country: The case of Austria in: Industrial Policies and Technology Transfers between East and West, Vol. 3, Wien/New York 1977

Innovation, Forschung und Technologie, Perspektiven der österreich ischen Industrie, Wien 1982

The Role of Small and Medium-Sized Enterprises in the Framework of Technology Conditioned Sructural Changes by Kurt Hornschild

1. Causes of Structural Change

Structural change is influenced, amongst other things, by alterations in societal values, economic growth, developments abroad, and politics. That today the phenomenon is discussed primarily in technical terms is of course understandable, because it is techniques wh ich make it possible for these changes to come about. In causal research into the basic impulse which generates innovations, economic science differentiates between technology-push and demand-pull effects. Recently, microelectronics has functioned above all as the basic or cross-sectional technology that has triggered these various processes or first made them possible. But other technologies, such as material techniques, biotechnology and laser technology, have also been granted the status of cross-sectional technologies. Two developments, above all, account for the extent and direction of technology-induced structural change: The international division of labour has increased rapidly in the last ten years, aperiod in which the volume of world trade has doubled. Simultaneously, profound structural changes have occurred. Rivalry against the old industrial count ries has been predominantly conducted by the EastAsian countries, creating new markets at the same time. This increasing international division of labour has been possible because technologically-conditioned transaction costs have obviously diminished. All costs connected with the conclusion of sales contracts are therefore understood to be transaction costs. An increasing international division of labour or decreasing transaction costs means increasing competitive pressure and higher demands on their economic flexibility for the economies or enterprises concerned. The second line of development has been a shift in real net output from the secondary, (Le industrial) sector to services. (The "three-sectors" hypothesis). In the Federal Republic of Germany, employment in the pro-

70

Kurt Homschild

duction sector has decreased by about 14% over the past twenty years and increased by about 40% in the tertiary sector inc1uding the state. The most favourable employment developments have therefore been registered by those industries which have been especially quick to realise the market relevance of technical progress and able to ga in advantage from it on the international markee. In the Federal Republic of Germany these industries have been such strongly innovative branches as electrical engineering, office machines or ADV (automatie data processing), machine and road vehiele construction, and precision engineering/optics (see Figure 1). Simultaneously, the jobs available conditioned by shorter working time and the increase in disposal income have been in consumer-oriented areas. Figure 1

Total Change of Employment in the Manufacturing Sector, Classified according to R&D-intensive and non-R&D-intensive Areas 1980 = 100

R&D-intensive

105

100

~"" '\'\

95

-

--

-h• ..,..-----------~ • • L.::...·'-"-""-"-"_.-- -

\

"" \

'-

\

\

90

- ..... ","

-- -

,-

--

--

Manufacturing sector Total

\

\ \

\

non-R&D-intensive ./

85

./

80~--.---,---,---.---r--,r--,---.---,

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

Saurce: Fraunhofer Institute for System Techniques and Innovation Research (ISO;

Federal Ministry of Research and Technology (BMFT). Hornschild (1989).

5mall and Medium-5ized Enterprises

71

2. Technological Competitiveness Secures Position in World Trade Science and economics are unanimous on the fact that the future position of an economy world trade will be determined above all by its technological competitiveness, which helps not only to secure employment but simultaneously also lays the basis for higher incomes. Today, there is wide consensus in economic science on the fact that wage-cutting (scalingdown) strategies hamper structural change in highly industrialized economies. The connection between innovation and international competitiveness has long been a central theme of the empirical analysis of both macroeconomic and individual economic units 2 . Although various indicators relating to various sub-aspects have been used to determine the comparative situation 3 , a definite individual indicator does not exist4 • Viewed in themselves, none of these indicators can be interpreted unproblematically; but taken together they give a good description of respective competitive positions. The following table gives an overview of currently common indicators5.

Table 1 Indicators of the Competitiveness of Economies

Market Indicators Market shares of export and import markets Trade intensities Revealed comparative advantages (RCA's) Trade and current account balances Real exchange rate (on the basis of price and costs) Terms of trade Input Indicators R&D expenditures - Employees in the R&D area - Qualifying of the human capital Output Indicators Patent and licence balance Registration and issues of patents (national and international) Number of products (phase of market introduction)

2

See Schlegelmi1ch (988).

3

See Adden/Schmale (985), Fels (988) and Schietow (988). Cf. Freeman (982). See also Feser (990).

Kurt Hornschild

72

Qualitative Indicators - Information on non-price competitive factors (quality, design, image, service, delivery capability, financing terms, etc.) Subjective Indicators Entrepreneurial efficiency Innovation capability and readiness For determination of the technological competitiveness of an economy, the RCA-index for technology intensive goods is still a good yards tick. It registers the flows of trade, including the R&D-intensities of individual goods or groups of commodities6 . The RCA-Index is calculated by forming the export/import ratios for individual products or groups of products and by applying these to the entire exportIimport ratio of the economy. RCAi

=

Xi : X = Xi : Mi Mi M

M

Mq

If the RCA-Value is greater than 1, this indicates a comparative advantage of the economy as regards this group of commodities. The RCA is expressed by the export surplus or deficit in one of the methods used by the Federal Ministry of Research and Technology (BMFT). If the export/import ratio of the commodity group examined corresponds to the average of all groups of commodities, the relative value is zero. Positive values thus indicate an above-average position; negative signs indicate below-average international competitiveness. Of course, international trade is influenced by many factors, such as exchange rates, trade barriers and political objectives. Apart from these weaknesses, one should note, with regard to the RCA-Index, that the development of the world market for certain products is not included in the RCA-Index. This measurement concept allows no conclusion to be drawn about the competitiveness of a product on export markets. Perhaps an even more serious dis advantage is the fact that the RCA-Index describes the past, while competitiveness is future-oriented. The Fraunhofer Institute for System Techniques and Innovation Research (IS!) has recently drawn up a new list of researchintensive goods for the Federal Minister of Research and Technology (BMFT). The following classification was made: i) advanced technologies: goods with an R&D-outlay amounting to at least 8.5% of turnover; ii) sophisticated technologies: goods with an R&D-outlay of between 3.5% and 8.5% of turnover. This list is used for assessment of the technological competitiveness of Federal German industry (BMFT). Research-intensive goods contributed 47.5% of exports by the Federal Republic, a figure wh ich divided between 13% by advanced technology and 34.5% by sophisticated technology. The share of research intensive goods in imports amounted to 35.5% in the 6

See Schumacher (988) and BMFT (990).

73

Small and Medium-Sized Enterprises

same year. The total export/import ratio for all research-intensive goods in 1988 was around one third higher than the corresponding ratio for total industrial products. Almost twice as many research-intensive goods were exported by German enterprises as were imported into the Federal Republic.

Table 2 Exports in Percentage of Imports of Research-Intensive Goods (Trade by the Federal Republic in 1988) Compared with EC countries - Advanced technology - Sophisticated technology Total R&D-intensive technology Compared with the USA - Advanced technology - Sophisticated technology Total R&D-intensive technology Compared with Japan - Advanced technology - Sophisticated technology Total R&D-intensive technology Compared with South-East Asia - Advanced technology - Sophisticated technology Total R&D-intensive technology Compared with Eastern Europe - Advanced technology - Sophisticated technology Total R&D-intensive technology Compared with abroad in General - Advanced technology - Sophisticated technology Total R&D-intensive technology

99.0 247.1 201.1 60.7 340.8 171.1 60.7 50.5 41.3 71.1 172.5 119.9

443.5 1108.8 818.0 443.5 248.2 196.1

Note: "Advanced technology" means goods with a minimum R&D-outlay of 8.5% of turnover; "Sophisticated technology" means goods with R&D expenditure between 3.9% and 8.5% of turnover.

Comparison among RCA-values explains the strengths and weaknesses of the Federal Republic of Germany in terms of research-intensive goods according to technologies and regions. In the area of advanced technology, Germany has deficits in technologies with higher turnover, such as da ta processing equipment, telecommunications and semiconductor components. Among sophisticated technologies, the traditional strength of the economy reveals itself in the areas of machine construction, electrical engineering, chemicals, vehicle construction and technicaI ceramics (see Figure 2). Note, however, that this division is by no means clearcut, especially in the case of microelectronics, where Iarge areas of production can surely not be defined as advanced technoIogy.

74

Kurt Homschild

Figure 2

Specialization of the Federal Republic of Germany in Research-Intensive Goods (RCA 1988) Below average

Above average

Advanced technologies Pharmaceutical products New organic chemicals New synthetic materials Plant Protection Medical electronics Advanced optics Advanced measurement instruments

Data processing equipment Te1ecommunications Semiconductor components

Sophisticated Technology Machine construction Chemical products Electrical engineering Road vehic1e construction Technical equipment

Parts of information techniques Office machines Photographic and film equipment

The RCA-Index is only negative in trade with the USA and Japan in research-intensive goods (see Figure 3). The generally positive trade result is mainly explained by the success of sophisticated technologies. Thus German enterprises exported almost three and half times as much as the USA, and one and a half times as much into the EC-countries as was imported into the Federal Republic. The technology balance of the Federal Republic in advanced technologies is, if one disregards Eastern Europe, almost the same when compared only to EC-countries. Otherwise the Federal Republic of Germany is a net importer. Accordingly, the strengths of the German economy obviously lie less in the area of advanced technologies than in that of so-called sophisticated technologies. However, its competitive position is more secure than has been wide1y assumed, and for the following reasons: Because of higher technology goods accumulated R&D stock is re1ative1y high; high production technology is required; efficient production is only possibile on the basis of long-term experience; a product system of suppliers and c1ients is required wh ich produces on a higher technological level than that based on the division of labour.

75

Small and Medium-Sized Enterprises

Figure 3 Regional Export Structure (in %) and Regional Specialization (RCA) of the Federal Republic of Germany in Research Intensive Goods in 1988 Eastern Europe

South Eastern East-Asia Europe 3% 3.8%

South EastAsia

EC: 51.3%

-5.8 -10.2 Export Structure

RCA

Source: Fraunhofer Institute for System Techniques and Innovation Research (ISO; Federal Ministry of Research and Technology (BMFT).

Thus the German economy's competitiveness is not based on the individual product, as has been hypothesized, but on a production system with high technical standards based on the division of labour. In this connection, small and medium-sized enterprises (SMEs), as we shall see, play an important role.

3. The Role of Small and Medium-Sized Enterprises The question of whether large enterprises or small enterprises are more innovative is frequently raised in discussion of the origin of the innovative impulse. In past years, numerous studies have dealt with the innovative behaviour of SMEs, and their importance in the investment phase is large1y undisputed. Sahar has shown in a comparative study of the deve10pment of various technologies that discoveries leading to the deve10pment of socalIed major innovations have been the result of the work of individual investors or else they have emerged in SMEs. Of course, in the further deve10pment

Sahal (1983).

76

Kurt Homschild

of fundamc::;ntal inventions leading to their commercialization, large enterprises have mostly played a leading role 8 . SMES are unable to play the same role as big enterprises in the further development of technologies for the following principle reasons. Owing to the imperfection of capital markets, or to the uncertainty connected with an innovation, financial resources are to a certain extent necessary for the extention of an innovation and its later commercialization; but they are frequently not available to small and medium-sized enterprises. Large enterprises frequently undertake a range of research projects. They are thus not subject to such high innovational risks as small enterprises, whose existence often depends on the success of an innovation. The opportunities for the division of labour, the exchange of ideas, and more intensive utilization of research equipment in bigger R&D departments give rise to economies oi scale in the production of innovations. A closely related factor here is that it is vital for the economic success of an innovation that the enterprise be able to utilize the so-ca lied imitation-lag, Le. the period between market introduction and the appearance of the first imitator. Compared with smaller firms, large enterprises have relatively higher output and better established distribution channels and therefore have advantages or greater innovational incentive because they reach the break-even point more rapidly, or they distribute fixed innovation expenditures across a larger output from given innovation costs and price. As a rule, large enterprises are diversified and hence are able to offer a broad range of products. A greater internal field of application thus opens up for the results of research ühe Nelson Hypothesis). Large enterprises often have information leads with regard to the legal, financial and scientific aspects of the R&D area concerned. It might be objected that over-organization in big enterprises leads to

diseconomies more rapidly in the technological area than, for example, in

the production area because of the demotivating effects on scientific employees. Thus the critical size of research groups or laboratories is reached earlier. There is also the fact that, because of long decision-making avenues, a large number of people are involved in the decision-making process concerning the further pursuance and development of a scientific discovery, and this reduces the likelihood that projects will be realized. These considerations show clearly that the question of whether large enterprises or small enterprises contribute towards innovation or competitiveness bypasses the problem. It is generally recognized today that large and small enterprises 8

Cf. Freeman (1982).

Small and Medium-Sized Enterprises

77

are not conflicting participants, but that theyare complementary to one another. A significant reason for the relatively strong international position of the German economy lies, I suggest, in large measure with its economic structure. SMEs have special du ti es within the scope of the division of labour. They are important suppliers to large enterprises and are competitively regulative 9 . They assume the function of competitive counterbalancing where they compete with their own products against big enterprises. Precisely because of their limited production capacities, however, this functi on can only concern market niches (see Figure 4).

Figure 4

Innovation Flows Among Industries

Supplier dominated industries

Large-scale production industries

Industries dose to science

Supplier specialized industries

Source: K. Pavitt, p. 364; German Institute for Economic Research (DIW) (1991).

Hornschild (1989).

Kurt Homschild

78

4. Empirical Results of the Innovative Behaviour of SMEs The following empirical findings confirm the special function of SMEs within the Federal German economy. The number of enterprises with fewer than a thousand employees undertaking R&D is estimated today at about 25,000. The following data are the result of accompanying research on indirect R&D promotion programmes providing subsidies for R&D personnel costs lO and for R&D manpower growth promotion 11 . Approximately 20,000 enterprises have been involved in these promotion programmes. Those eligible were enterprises with individual R&D personnel at their disposal and with fewer than 1,000 or 500 employees. -

The number of enterprises undertaking R&D has increased by about 20% to 40% in the last decade.

-

Smaller enterprises conduct relatively more R&D than bigger ones. This emerges when one compares the number of R&D employees with the total number of employees (see Table 2). Scherer has also pointed out that R&D activities rise over-proportionally up to a certain scale of an enterprise. Thereafter a connection between R&D input and the size of an enterprise is either no longer discernable or negatively weak. It should, however, be noted from the following figures that SMEs conduct predominantly incremental development (this has been found by other investigations as well).

Table 3 Share of R&D-Employees in the 1986 Total of Employees . (Percentages) R&D employees 1-19 20-49 50-99 100-199 200-499 500-999

Total

35.1 20.2 12.0 8.0 5.1 5.7 12.0

10

See Becher et al. (989).

11

Hornschild et al. (990).

Full-time 5.3 2.7 1.4 1.1

0.6 2.2

1.6

Part-time 29.7 17.5 10.6 7.0 4.5 3.5 10.4

Full-time equivalent 19.8 11.4 6.6 4.4 2.7 4.0

6.6

79

Small and Medium-Sized Enterprises

That SMEs conduct predominantly incremental R&D is clear from the volume of finance provided for innovation plans: the enterprises surveyed had executed 40% of their R&D projects within three years, with volumes of finance ranging between 100,000 DM and 300,000 DM. R&D expenditure was less costly in 35% of R&D projects. In 23.5% of projects real expended financial means were higher than R&D expenditure. Only in a few SMEs did R&D activities follow documented planning. It is obvious that the extent of executed or planned R&D projects, as weil as the level of organization (documented planning), is influenced by the scale of the enterprise (Table 3). SMEs are engaged in many technological fields. This was revealed by our surveys and the investigations by Battelle. Electronics and information processing take first place, followed by production automation, sensorics, biotechnology Oncluding chemical) and material techniques. Physical technologies Oncluding lasers), have also gained in importance (see Figure 5). Figure 5

Technology Areas in Comparison with Batelle-Analysis in % 35

Entry

30

Plant-Extension

25

Batelle

0 0

20 15 10

5 0

2

3

4

5

6

7

8

9

10

1. electronics, information (message) processing; 2. information techniques; 3. production automation; 4. robotics; 5. sensorics; 6. physical technology laser; 7. biotechnology, chemieal; 8. material techniques; 9. power engineerin;g 10. environmental technology.

80

Kurt Hornschild

Table 4 Financial Commitment to Larger-Scale R&D Projects in Enterprises (% of Enterprises Replying)

total

1-19

20-49

50-99

100199

200499

500999

In tbe past 3 years: be10w 100,000 DM 100,000 - 300,000 DM above 300,000 DM

49.8 40.4 9.9

41.0 48.3 10.7

32.3 44.6 23.1

22.9 44.8 32.4

16.5 36.1 47.4

15.6 20.0 64.4

34.7 41.8 23.5

In tbe next 3 years: be10w 100,000 DM 100,000 - 300,000 DM above 300,000 DM

37.6 45.5 14.4

31.4 46.3 20.0

16.5 54,3 26.0

18.1 43.8 34.3

10.3 34.0 52.6

7.1 26.2 66.7

24.6 44.4 28.3

2.5

2.3

3.1

3.8

3.1

0.0

2.7

no planned largerscale R&D projects

Source: Survey of Enterprises: Subsidies for New Recruitments (Employment) in Research and Development, (1987); DIW; ISI. Table 5 Question: In the past five years have you inc1uded products in your enterprise which involved technical improvements and which were new for your enterprise? Among these, were there also products which were not only technologically new far your enterprise, but were also not yet offered for their specific application possibilities by other enterprises?

New product for enterprises' Turnover share in total turnover New product for the market' Turnover share in total turnover

Employees Size Classification

1-19

20-49

50-99

100199

200499

500999

total

84.6

89.8

90.1

85.0

89.1

93.3

87.9

38.4

29.7

29.3

22.8

22.2

251

29.7

58.8

59.9

54.6

58.8

47.5

65.9

573

17.0

12.4

10.0

7.1

7.4

9.7

11.7

, In % of enterprises replying. Source: Survey of Enterprises: Subsidies for New Recruitments (Employment) in Research and Development; DIW; ISI.

Small and Medium-Sized Enterprises

81

The higher shares of accomplished product innovations show the extent to which SMEs react to market alterations despite, or because of, their flexible incremental R&D activities. In the last five years almost 90% of enterprises undertaking R&D had included products in their production programmes which were not only new for the enterprises, but also for the market. The applicable turnover share of these products amounted to a full 12%. At the same time, smaller enterprises changed their range of products through innovations at a faster rate on average than did bigger enterprises. In order to discover to what extent innovation activity or enterprise is induced by demand, we asked firms how far the development of new products resulted from the checklists of their buyers. Replies confirmed once again the special function of small and medium-sized companies as suppliers and procedures for niches. One fifth of them reported that developme nt of their products was mainly based on customer checklists. A further 56% reported that this was at least partly the case. There was no such connection in only one-fourth of the companies surveyed. One can also infer from this that innovation by the majority of enterprises has been induced by demand-pull. Within the size classifications used here, no influence by the characteristic scale 0/ enterprise can be ascertained with regard to customer dependence. The shares of the enterprises declaring that they were at least partly dependent on customer checklists for product development fluctuated between 84% and 62% according to employment size classification.

Table 6 Most Important Customer, Dependence on the Customer's Checklist, Sales Market Employees Size Classification 1-19

20-49

50-99

100-199 200-499 500-999

Total

Question:

What share of YOUf tumover is accounted for by YOUf most important customer? 33.4

29.6

27.0

20.5

22.9

24.3

27.7

Question:

Are you essentially dependent on your customer's checklist for the development of YOUf products?* Yes Partly No • In

%

18.6 53.9 27.5

20.0 59.4 20.6

of enterprises replying.

18.5 50.0 31.5

20.4 56.3 23.3

19.6 56.7 23.7

24.4 60.0 15.6

19.7 55.6 24.8

82

Kurt Hornschild

The results of the innovative behaviour of SM Es in the Federal Republic of Germany show clearly that: the competitiveness of enterprises also increases with the innovation; SMEs react very flexibly to market alteration, and their range of products is correspondingly adaptable; the greater number of innovating SMEs in the Federal Republic a) contribute very substantially to the diffusion of new technologies, and b) create good prerequisites for market niches - and the division of labour between supplier-SMEs and customer-enterprises Oarge-scale) is not only flexible, but can also be accomplished efficiently. The good competitive position of German industry can in large part be attributed to the special economic structure of the higher level of division of labour that characterizes its different branches. SMEs therefore make an important contribution to flexible adaptation to structural changes, both in their function as competitors against large enterprises and as suppliers.

5. Strategy and Technology-Conditioned Changes in Role Playing Between Large Enterprises and SMEs The role of large enterprises and supplier companies will undergo further changes. The decisive factors here are the rationalization strategies of enterprises and the technical systems developed for these purposes. Intracompany linkage to computer-integrated-manufacturing (CIM) should be mentioned in this connection. Today, one proceeds from the premise that intra-company linkage will spread in the future to intercompany level. In the Federal Republic of Germany, the CIM-Commission appointed by the Federal Minister of Research and Technology is currently addressing this question of intra- and intercompany linkage. Without wishing to anticipate the findings of the Commission, I would point out the following. In CIM-Systems, there is extensive exchange of information prepared by means of computers connected by a data transmission network. From a technical point of view, there is no difference between intra-company and intercompany linkage, and it is immaterial where physical production takes place - in enterprises, in a sub-company or in a linked supplier company. This means that CIM will have enormous an impact on the industrial structure with the advent of intercompany linkage. The optimal size of company and the extent of the intercompany division of labour will be changed by the influence of economies of scale and transaction costs. Systematically conducted rationalization in enterprises is essentially characterized by double effects: the different functions of the enterprise and its respective production and servicing processes, including overall eco-

Small and Medium-Sized Enterprises

83

nomic objectives, are being internally reorganized; the structures of the traditional division of labour among companies are changing and hence their reciprocal relationships. However, what is qualitatively new in enterprise strategies for speeding up rationalization is not the goal of controlling the upstream and downstream stages of production, but the ways and extent to which this control is exercised. The new feature here is that the expansion of enterprise strategies is accompanied by a reduction in production depth, so that a new proportion of autonomy and control forms at the intercompany level. In other words, when applied to strategy, this means the necessary amount of autonomy to achieve the highest possible productivity by the suppliers and simultaneously the necessary amount of control to guarantee the maximum possible profit transfer to the customers. It is to be expected that these rationalization strategies will gain in dynamics and will affect broad areas of the economy, with the further development of intra-company and intercompany CIM-systems and the construction of the necessary infrastructure. At the same time, this systematic rationalization in the scope of company overlapping strategies will require the optimization of production processes over broad areas of the chain of real net output. However, precise assessment of the effects of intercompany linkage on structural change and competitiveness is still not possible. One thing appears certain, though: large enterprises are, with lower real net output, developing into system firms. The effective power over supplier companies will be greater, while the link-up will be more direct by virtue of their production philosophy and quality control. Any other effects are, however, ambivalent: CIM may contribute to the decentralization of the economy. But spatial decentralization between production and the concentration of power should be differentiated. Standardization, and the tight knitting together of production which depends on it, will increase the integration and efficiency of sub-systems, but it mayaIso increase the susceptibility of the system so that the competitor or even complete economic areas will be de-coupled. Despite flexibility in the sense of reduced processing-time, product flexibility will diminish above certain variation boundaries.

6. Closing Remarks The Federal Republic of Germany has asserted itself very successfully on the international market in the last decade. Analyses have shown that the

84

Kurt Homschild

country's market position has been achieved less through products from advanced technologies than through goods from sophisticated technologies. Nonetheless, this competitive position appears healthy, and for the following reasons: The accumulated R&D capital stock needed for production is re1ative1y high. The economy has high production technology at its disposal. Efficient production is only possible on the basis of many years of industrial experience. The country has built a well-functioning network of suppliers and customers with an appropriate infrastructure. With progress in information technology and the policy of companyoverlapping rationalization strategies, role playing between SMEs and big enterprises will change further with effects on the international division of labour. A new feature is that the expansion of enterprise strategy will take pi ace with a simultaneous reduction in production depths. Within the scope of increasingly tight knitting, supplier companies will not be extended empty production facilities, but will retain sufficient autonomy in order to enable the optimal organization of their production processes. A new relation of autonomy and control between big and small enterprises will be created by this process. More rapid progress in intercompany tight-knitting requires reinforcement of the data transmission network, a favourable structure of costs for the network user, and the setting of norms and standardization in order to solve interface problems. Whether intercompany tight-knitting will, in the end, have a positive effect on the competitiveness of the overall economy will depend on the structuring of the scope conditions under which these operational sequences of the effect are to take place, and this is because of the ambivalence of the impact possibilities. By means of c1ose1y interlacing production units, productivity can, under the given scope conditions, be increased through reduced stockpiling and higher flexibility. Simultaneously, the susceptibility of the total system, of course, increases. This danger will increase to the extent that SMEs lose their originality (independence) and their adaptability to unforeseen structural changes. The German economy would, of course, lose a major competitive advantage.

Small and Medium-Sized Enterprises

85

References Adden, H. / Schmale, H.: Technologische Struktur von Handelsströmen. Ein Vergleich von Meßverfahren, in: Die Technologieintensität von Handelsströmen, Schmitt-Rink ed., Bochum 1985, pp. 7-107 Becher, G. et al.: FuE-Personalkostenzuschüsse, Beschäftigungswirkungen und Konsequenzen für die Innovationspolitik, in: Endbericht an den Bundesminister für Wirtschaft, Fraunhofer-Institut für Systemtechnik und Innovationsforschung, Karlsruhe 1989 Bundesministerium für Forschung und Entwicklung (BMFT) (ed.): Zur technologischen Wettbewerbsfähigkeit der deutschen Industrie, 1990 Coombs, R. et al.: Technological Opportunities and Industrial Organisation, in: Technical Change and Economy Theory, G. Dosi et al. eds., London 1988, pp. 295 ff Dorfmann, N.: Innovation and Market Structure, Cambridge, Mass. 1987, p. 7 Fels, G.: Zum Konzept der internationalen Wettbewerbsfähigkeit, in: Jahrbuch für Sozialwissenschaft, 39, 1988, pp. 135-144 Feser, H.-D.: Technologische Wettbewerbsfähigkeit und internationaler Handel, in: Technologische Entwicklung und internationale Wettbewerbsfähigkeit, H.-D. Feser ed., Regensburg 1990 Freeman, G.: The Economics of Industrial Innovation, 2nd edn., London 1982 Hornschild, K.: Innovation und volkswirtschaftlicher Strukturwandel, in: Handbuch des Wissenschaftstransfers, ]. Schuster ed., Heidelberg 1989 / et al.: Wirkungsanalyse der Forschungspersonal-Zuwachsförderung, in: DIW, Beiträge zur Strukturforschung, Heft 155, Berlin 1990 Kamien, M. I. / Schwartz, N. L.: Market Structure, Elasticity of Demand, and Incentive to Invent., in: JLE, 13, 1970, p. 33 Mittag, U. / Stracke, F. A.: Wissenstransfer aus Hochschulen: Von der Idee zum Produkt, in: Beiträge einer traditionellen Universität zur industriellen Innovation, A. Wagner ed., Tübingen 1987, pp. 30 ff Müller,

u.: Wettbewerb, Unternehmens konzentration und Innovation, Göttingen 1975

Nelson, R. R.: Capitalism as an Engine of Progress, in: RPol, 19, 1990, pp. 207 ff -

The Simple Economics of Basic Scientific Research, in: JPE 67, 1959, pp. 302 ff

Sahal, D.: Technology, Productivity, and Industry Structure, in: Technological Forecasting and Social Change, 24, pp. 1 ff Scherer, F. M.: Size of Firm, Oligopoly, and Research: A Comment, in: CJES, 31, 1965, pp. 256 ff -

/ Ross, D.: Industrial Market Structure and Economic Performances, 3rd edn., Boston 1990, pp. 652 f

Schietow, E. A.: Die technologische Wettbewerbsfähigkeit der Bundesrepublik, Bad Homburg 1988 Schlegelmich, B. B.: Der Zusammenhang zwischen Innovationsneigung und Exportleistung. Ergebnisse einer empirischen Untersuchung in der deutschen Ma-

86

Kurt Homschild chinenbauindustrie, in: Zeitschrift für betriebswirtschaftliche Forschung, 40, 1988, pp. 227-242

Schumacher, D.: Die Bundesrepublik Deutschland in der internationalen Arbeitsteilung - Entwicklung, Struktur und Bestimmungsgründe. Einführung und Überblick, in: Vierteljahreschrift zur Wirtschaftsforschung (DIW), 3, 1988, 3 Schuster,]. (ed.): Innovation und volkswirtschaftlicher Strukturwandel, in: Handbuch des Wissenschaftstransfers, Heidelberg 1989 Stille, F.: Dienstleistungen im Strukturwandel, in: Beihefte der Konjunkturpolitik, 3, 1989, 3 Williamson, O. E.: Markets and Hierarchies, New side of the Firm: The Inefficiencies of Hierarchy, Cambridge, Mass. 1987

Technological Innovation and International Competitiveness: The Cases of Germany and Italy by Raffaele Pad

1. Introduction* Over the last two decades technology ac counts of international trade patterns have advanced at an impressive rate. Both theoretical and empirical studies stress the importance of technological innovation in determining the structure of a country's comparative advantages. However, empirical evidence on the technology hypothesis, at a country level, is still scarce and inadequate far most industrialized countries; the only exception being the United States where the key role of technology has been weil sustained. The purpose of this paper is to give some additional empirical evidence, based on cross-section econometric analysis, of the effect of technological innovation on international trade patterns in the case of the Italian and West German manufacturing industries. The contribution of the paper consists mainly in its use of two comprehensive data-banks: the first concerning international patent activity and the second trade flows. The use of these data-banks allows us to overcome some limits of previous studies on German and Italian trade patterns. To begin with, I give more predse definition to both the endogenous (export) and the exogenous (technology) variables in terms of comparative advantage indexes. Then I look at Italian and German international competitiveness in several foreign countries and over a long period of time. The main results of my econometric analysis show that the international competitiveness of both Germany and Italy is positively affected by the patterns of technological spedalization. In Section 2, I briefly review the empirical literature on the technology accounts of trade flows for Italian and German industry. In Section 3, I derive the comparative advantage indexes This study was supported by the Italian Ministry of University. I would like to thank Antonio Sassu and the Research Department of the Italian Manufacturers' Federation for allowing me to use their data-banks on international patenting and trade flows, respectively.

88

Raffaele Pad

for the technology and trade variables. Finally, the econometric results are presented in Section 4.

2. ABrief Survey of the Literature In the last two decades, since the seminal article by Hufbauer, much literature has been devoted to the impact of technological innovation on international trade flows. In this section I limit discussion to empirical works that have studied the influence of technology on exports for Italian and German industry, while the reader is referred to the survey by Cheng, Hughes and Helg/Onida 1 for more general analyses. I begin with abrief review of the literature and then make some critical remarks on the methodology used in previous works and which will form the basis of my econometric estimates in Section 4.

A first group of papers carries out cross-section analyses (econometric or rank correlation) over several industrial countries. I shall focus on the results obtained for Italy and Germany. Hirsch conducts a cross-section econometric analysis where total exports depend, among other explanatory variables, on skill-intensity used as a proxy for the technology variable 2 : the regression coefficient for Germany turns out to be positive and statistically significant, while it is not significant for the Italian industry. Very similar is the work by Baldwin: aga in skill intensity is used as a proxy for technology intensity to explain net exports; the coefficient is negative for Italy, showing specialization in low technology-intensity sectors, and not significant for Germany. A rank correlation analysis between technology-intensity (R&D/value added ratios based on national industrial data) and exports is proposed by Walker 3 ; the relationship appears to be statistically not significant for Italy and positive for Germany. Soete suggests the use of comparative advantage indexes as measures of each country's export and technology specialization. The technology variable is based on patents granted to each country in the United States over the period 1963-1977, while international trade performance is measured on the basis of country exports to the OECD area in 1977. A rank correlation analysis yields a not significant coefficient for both Italy and Germany,

Cf. Cheng (1984), Hughes (1986), Helg/Onida 0985a). 2 It should be stressed that Hirsch, like Baldwin, measures national industrial caracteristics (for example, Italian sectoral technology-intensity) on the basis of U.S. industrial figures.

3

Walker (979).

Technological Innovation and International Competitiveness

89

meaning that international trade patterns are not influenced by technological specialization. A se co nd group of studies is country-specific and deals specifically with the Italian and the German cases. Boggio and Conti 4 carry out similar analyses ca1culating the rank corre1ation between various trade and technology-intensity measures in the 1960s5 . Both authors find a negative re1ationship between technology and exports which signals a specialization pattern of Italian exports in low technology-intensity sectors. Similar results have been obtained by Heig/Onida 6 within a comprehensive econometric analysis of the determinants of Italian trade performance in the period 1972-80. More recently, Archibugi/Santarelle have studied the relationship between technology (Italian patents granted in the US over the total) and trade (Italian exports over total OECD exports) within a time-se ries econometric model. For the aggregate manufacturing industry they find that technological innovation positively affects Italy's international performance. Similar results have been obtained by Paci8 with a cross-section econometric analysis of the determinants of Italian export flows in various foreign markets. Mention should also be made of the work by Momigliano/Sinisca1c0 9 , which proposes analysis of the re1ationship between innovation and trade within a model of technology vertical integration. An exercise in technology vertical integration is performed by Paci in a time-series econometric analysis of Italian exports to the United States. I finally consider papers wh ich deal specifically with the German case. Wolter 10 carries out cross-section estimates for the period 1972-1973 and points out that technology intensity positively influences the comparative advantages of German manufacturing industries. Narin/Olivastro ll and Patel!Pavitt 12 examine the areas of strength of Germany's technology using the number of patents granted in the United States to German firms as a measure of innovation. On the basis of a descriptive analysis, both papers Boggio (1971), Conti (1973). Again, technology-intensity measures for Italian industrial sectors are based on US industrial data. 5

6

Cf. Helg/Onida (1985b).

7

Archibugi/Santarelli (1988).

8

Pad (1981).

9

Momigliano/Siniscalco (1985).

10

Woher (1977).

11

Narin/Olivastro (1987).

12

Patel!Pavitt (1988).

90

Raffaele Paci

suggest that technological specialization is reflected in trading performances. The picture that emerges from the past twenty years of empirical studies on the Italian and German cases is far from uniform, as one might expect from the different sampies, regions, time spans and statistical indicators used. However, in my opinion, the conflicting results in the literature concerning the existence of a positive relationship between technology and exports depend mainly on an incorrect specification of the model. Three points appear to be crucial in this respect. First, the definition of the trade and technology variables. Several authors have used measures of sectoral technology intensity as technology indicators. Consequently, by employing correlation or econometric techniques for technology-intensity and export performance at the sectoral level, they have only been able to check whether a country is specialized in exporting goods with high or low technological intensity, and are unable to ascertain the impact of technological innovation on international trade patterns. The second point concerns the definition of a lag structure between explanatory and dependent variables. In general, there is a lack of detailed specification of firms' strategies and of the consequent temporal structure of innovation and production activity in the domestic and foreign markets. Yet it is crucial to specify the succession of events like R&D expenditure, patent demand, foreign patent extension, industrial production, and exports on the basis of precise economic and institutional elements. The third point refers to the lack of homogeneity in the geographical definition of patents and export flows; some papers use patents granted in the United States as the technology variable while considering export flows toward the OECD area. This specification may be misleading, since firms' decisions to patent in a specific foreign country are affected by several factors, and thus the propensity to patent abroad va ries from country to countryl3. I shall take into account these critical remarks on the previous empirical works when defining my regression equation in Section 4.

3. The Specialization Indexes In this section discuss the definition of the proxy for the technology variable. As I have already stressed, this has been the most crucial issue in the empirical literature. Most authors have used technology-intensity mea13 Foreign patenting depends on demand conditions in the foreign country and on firms' strategies in foreign direct investment, technological cooperation agreements, etc.; see Sassu/Paci (1991).

Technological Innovation and International Competitiveness

91

sures, others various indexes of technology strength; some have used technology input proxies (R&D expenditures, skilled labours), while yet others have preferred technology output measures (patents demanded or granted). I have already po in ted out that the use of a technology-intensity measure does not allow investigation of the impact of technological innovation on international trade flows. Moreover, as regards the choice of input or output technology proxies, one should note that the emphasis placed by most authors on the role of new products and processes undoubtedly requires the use of a technology output measure. The last issue I wish to raise refers to the choice of the foreign markets in which to study the relations hip between technological innovation and trade performance for each country. Most papers consider each country's total export flows and, as the technology variable, patenting in the United States 14 Their reason for doing so is mainly the lack of alternative data on international patenting activity with a temporal span and a sectoral disaggregation comparable with that of the United States. However, from a general point of view, it seems more correct to use the same geographical specification for both trade and technology variables. In other words, if we wish to analyse, for instance, the effect of technology on Italian export flows to France we should use, as the explanatory variable, some measures of the technological strength of Italian firms in the French market, not in the United States. On the basis of these remarks I preferred to calculate my technology variable in terms of Balassa's Revealed Comparative Advantage Index. Further, using INPADOC's international patents data-base, it was possible to calculate the technological specialization indexes for various foreign countries 15 The comparative advantage index (or technology specialization index) kTSlij of country k (ltaly and Germany) in manufacturing industry i in the foreign country j (France, United States, Italy and Germany) is defined as: (1)

kTSI .. 1J

=

kPii/Pii

Ln kPii/LiPii

where kPij is the number of patents granted to country k in sector i in the foreign country j and Pij is the total number of patents granted by country j in sector i.

14 I do not consider at this stage those papers that use technology-intensity measures, because of the restrictions of this kind of study.

15 INPADOC is an international agency set up in Vienna in 1972 on agreement between the Austrian government and the World Intellectual Patent Office (WIPO).

92

Raffaele Paci

A specialization index higher than 1 indicates that the country is relatively specialized in that particular sector. It is weil known that although patent propensity varies across sectors and countries, the comparative advantage indicator nevertheless allows comparison between different sectors and countries because it is weighted twice. I would like to stress some importa nt features of the data-base on international patenting activity l6: a) the statistical features refer to patents granted, but they have been arranged by application year in order to preserve the information on firms' innovation availability; b) on the basis of a concordance table between the International Patent Classification (IPC) and the NACE-CLIO groups, patents have been classified according to economic activity in order to enable their comparison with trade statistics; c) our data-base includes, from 1978 onwards, also patents granted by the European Patent Office. Table 1 sets out the technology specialization index for 17 Italian manufacturing sectors, measured in three foreign countries (Germany, France and the United States) and for two periods 0972-1973 and 1983-1984); the results for the four macro-sectors defined following Pavitt's taxonomy are also given 17 . The first point to note is that the Italian technology profile varies considerably over time l8 : Italy strengthens its position in traditional sectors, especially in the German and American markets. The second feature is that Italian specialization in the various foreign countries varies during the seventies, while it shows a positive and highly significant association for the years 1983-1984. As possible explanations for this similar specialization pattern in different foreign countries, I suggest the following. In general, the continuous process of technology standardization and market integration in the most industrialized countries makes it more convenient for firms to adapt their international strategies on a larger scale. Secondly, the expensive restructuring of the Italian industrial system undertaken at the beginning of the eighties has allowed Italian firms to operate simultaneously in various foreign markets. At the end of the time period considered, Italian industry shows relative strength in chemicals, motor vehicles, textiles and clothing, leather and footwear. The technology profile is comparatively weak in science-based 16

See Sassu/Paci (1989) for more details on the data-base construction.

The four macro-sectors have been defined on the basis of a three-digit sectoral disaggregation (80 sectors). 18 The corre1ation coefficients, within the same foreign country, between sectoral specialization pattern for the two time periods considered are never significant. 17

Technological Innovation and International Competitiveness

93

sectors like office and data processing machinery, instrument engineering, electrieal and electronie equipment. The German technologieal profile is given in Table 2; here the foreign countries considered are Italy, France and the United States. It is interesting to note that Germany shows a more stable technologieal specialization between the two periods; moreover, German industry displays a similar pattern of technology comparative advantages in the various foreign countries for both periods l9 . The areas of strength in Germany's technology are mechanieal engineering, motor vehicles, chemicals, extraction of minerals Cespecially in the US market).

o

Germany shows a technology comparative disadvantage in traditional sectors in all the foreign countries considered. It is worth emphasizing that other areas of weakness include highly strategie sectors like office and data processing machinery and electrical and electronie equipment; in this latter group Germany's technologieal competitiveness has notieeably declined in France and in the United States. Let now turn our attention to the trade variable, which represents the dependent variable in my analysis. This variable was also defined in terms of an export comparative advantage index measured like the technology index. The export specialization indexes of Italy and Germany in various foreign countries and for different period of time were therefore calculated, the international trade figures being based on the VOLIMEX data-bank 20 .

4. The Econometric Results In Section 2, I pointed out that most empirieal studies have failed to show the existence of a positive relations hip between technologieal specialization and trade performance, mainly because of an incorrect specification of the technology variable, whieh is usually defined in terms of technology-intensity indieators. However my concern is not to measure the technology-intensity of sectoral exports in various countries, but to assess whether Italian and German exports specialization is positively influenced by their technological specialization, even in those traditional sectors with low technological intensity. The hypothesis I wish to test with cross-section econometric analysis is the following. Firms' innovative efforts, due to learning-by-doing or re19 The correlation coefficients between German technological specialization in Italy and in the other foreign countries during the eighties have not been calculated because there are differencies in the time-periods considered. 20 It should be noted that instead of export figures I have used the corresponding import data; for example, total imports of Italy rather that exports of all foreign countries to Italy.

Raffaele Paci

94

search expenditure, give rise to new products and processes which are legally protected in the domestic market as weil as in the relevant foreign markets. These new products are supposed to incorporate characteristics superior to the old ones, and thus the innovative firm holds a temporary monopolistic position and increases its market share. This implies that for a given country we should expect, at the sectoral aggregate level, a positive influence of the technological variable on the exports variable. To perform this task I have represented both the dependent and the explanatory variables as the revealed comparative advantage indexes defined in the previous section. This enables c10ser examination of the effects of technological specialization on trade performances. It should be stressed that the comparative advantage indexes, calculated in several foreign countries, are good measures of each country's relative competitiveness in the foreign markets, since they also take into account the presence (in terms of exports and technology) of riyal firms in other countries. I have analysed the international competitiveness of Italy and Germany in some selected foreign markets (France, United States, Germany and Italy) on the basis of the following regression equation estimated on 17 manufacturing sectors: (2)

kESIij,t

=

a + b kTSIij,t-2

where: ESI is the export specialization index of country k CItaly, Germany) in the foreign country j; TSI is the technological specialization index based on patents granted to Italian (German) firms in the foreign country j, arranged by application year; i indicates the observations for the 17 manufacturing sectors. The model has been estimated for two different periods: in the first, the explanatory variable refers to 1972-1973 and the dependent variable to 1974-1975; in the second, the two variables refer, respectively, to 1983-1984 and 1985-1986. The two-year lag between patents and exports has been defined on the basis of the following time path: domestic patenting at time t, foreign patenting at t + 1, industrial production at t + 2, exports at t + 321 . Both variables were averaged over two years in order to avoid possible bias due to random factors occurring in a single year. The results of the cross-section estimations for Italy and Germany are presented in Tables 4 and 5; given the time periods and three foreign countries I have estimated 12 regressions. Due to the absence of apriori suggestions on the form of the relationship we are studying, I have defined the 21 I have defined this time lag structure bearing in mi nd that: a) international patenting legislation requires the extension of a domestic patent abroad within one year of the priority date; b) empirical surveys, (Napolitano/Sirilli (1989), have shown an average lag of two years between patent demand and the innovation's industrial exploitation.

Technological Innovation and International Competitiveness

95

functional form of our eguations on the basis of Ramsey's RESET test. A 10garithmic eguation has been chosen in the case of Italian exports to France and Germany during the seventies, while for the other regressions a linear function has been preferred. The presence of heteroskedasticity has been checked on the basis of White's test; in all eguations the assumption of homoskedasticity has been accepted. The important result is that 10 out of 12 eguations confirm the existence of a positive influence of technological specialization on international competitiveness: all the regression coefficients have the expected sign and are statistically significant at the 1% level 22 , ex ce pt for Italy in the United States in the 1970s (eg. 3.2) and Germany in Italy in the 1980s (eg.

4.6).

The explanatory power of the regression is not very high, R:2ranging from 0.15 to 0.68, and this suggests that other variables (human capital, price factors, demand conditions) should be included in the eguation in order to explain more variation of international competitiveness. However, I would like to stress that the direct influence of technological specialization on export performance has been confirmed for different countries, foreign markets and time periods. This result contrasts with most previous literature on Italian and German international competitiveness and highlights the crucial importance of giving proper definition to the technology and export variables. Finally, I would like to discuss some limits of the present analysis and indicate thereby some possible directions for future research. First, the relationship between technology and trade may be sectorspecific (due to different conditions in technology appropriability and international market structure). It might therefore be interesting to analyse each sector separately with a time-se ries regression. Second, it should be noted that, especially in the traditional industries, technological innovations arise out of the specialized supplier sectors and are embodied in new machinery, intermediate products and materials. This suggests the importance of bearing technological vertical integration in mi nd when conducting empirical work. The third, and more general, issue concerns the need for a more comprehensive theoretical framework which studies the demand and supply elements that are simultaneously the determinants and effects of each country's technological specialization: large firms' strategies, supply of skills, government innovation policies on the one hand; firms' selection and growth processes, countries international competitiveness on the other. 22 With the exception of eq. 3.3, Italy to Germany in the 1970s, wh ich is significant only at the 5-10 per cent level.

Source: my ca1culations based on INP ADOC data.

Traditional Scale intensive Specialized suppliers Science based

Energy and water Extraction of minerals Manuf. of non-metallic mineral products Chemicals and man-made fibres Metal products Mechanical engineering Office, data-proc. mach.; instrument eng. Electrical and electronic equipment Motor vehicles Other transport equipment Food, drink, tobacco Textiles and clothing Leather, footwear Timber and wooden furniture Paper products, printing, publishing Rubber and plastics Other manufacturing products

Sectors

0.99 1.08 1.00 0.72

1972-1973 0.34 1.34 0.66 1.72 0.95 1.02 0.69 0.62 1.08 0.81 1.05 1.74 2.20 0.93 0.32 1.37 0.40 1.48 1.04 1.01 0.75

1983-1984 0.58 1.12 0.48 1.58 0.84 1.03 0.63 0.69 1.48 0.90 0.83 1.32 7.89 0.76 0.13 0.90 0.68

Germany

1.23 0.95 1.15 0.87

1972-1973 0.50 0.78 0.82 1.10 0.95 1.19 0.71 0.77 1.03 0.64 1.02 1.59 1.74 1.44 0.67 1.44 0.86 1.11 0.98 1.17 0.80

1983-1984 0.38 1.25 0.48 1.21 0.79 1.19 0.69 0.72 1.83 1.48 0.73 1.05 4.28 0.75 0.09 1.13 0.67

France

Foreign countries

0.96 1.07 1.11 0.60

1972-1973 0.19 1.17 0.60 1.33 0.81 1.15 0.61 0.80 1.06 0.82 0.93 1.18 1.31 1.39 1.03 1.82 0.59

1.30 0.89 1.29 0.89

1983-1984 0.30 0.81 0.77 1.20 0.86 1.34 0.72 0.62 1.36 1.08 1.60 1.40 6.38 0.91 0.64 1.28 0.59

United States

Italy:Technology Specialization Index in Selected Foreign Countries by Manufacturing Sectors

Table 1

".,

(1)

(1)

:i'

~.

'0

3

0

()

~

::>

0'

a~

~

0.

.,::>::>

0'

~

::> 0


;;l

98

Raffaele Paci

Table 3 Italian Manufacturing Industry: Technological Specialization and International Competitiveness est~mated

function: ESIij,t

=

a + b TSIij, t-2

ESI: export specialization index of Italy in the foreign country j TSI: technological specialization index of Italy in the foreign country j i: 17 manufacturing sectors method of estimation: OLS A) t = average 1974-1975, t-2 = average 1972-1973 Foreign country

a

b

R: 2

F 0,15)

Reset 0,14)

Heter. 0,15)

3.1

France*

0.26 (1.95)

1.95 (4.44)

0.54

19.7

2.38

0.00

3.2

United States

0.21 (0.19)

1.37 (1.29)

0.04

1.6

0.15

0.69

3.3

Germany'

0.13 (0.80)

0.58 0.94)

0.15

3.8

0.01

1.62

R:2

F 0,15)

Reset 0,14)

Heter. 0,15)

B) t

=

average 1985-1986, t-2

Foreign country

=

average 1983-1984

a

b

3.4

France

0.61 (2.23)

0.68 (3.52)

0.42

12.4

1.40

0.21

3.5

United States

0.78 (2.55)

0.50 (2.96)

0.33

8.7

0.96

0.36

3.6

Germany

0.73 (3.70)

(4.91)

0.46

0.59

24.2

0.29

0.68

• logarithmic equation. t-statistic in parenthesis. Reset: Ramsey's F-test for functional form. Heter.: White's F-test for heteroskedasticity.

99

Technological Innovation and International Competitiveness

Table 4 German Manufacturing Industry: Technological Specialization and International Competitiveness estimated function: ESIij,t

=

a + b TSIij, t-2

ESI: export specialization index of Germany in the foreign country j TSI: technological specialization index of Germany in the foreign country j i: 17 manufacturing sectors method of estimation: OLS A) t

=

average 1974-1975, t-2 Foreign country

=

average 1972-1973

a

b

R2

F 0,15)

Reset 0,14)

Heter. 0,15)

4.1

France

-0.44 (1.03)

1.73 (3.77)

0.54

14.1

0.65

0.20

4.2

United States

-0.74 (1.14)

2.10 (3.01)

0.33

9.0

0.05

1.28

4.3

Italy

-0.19 (0.34)

1.57 (2.55)

0.26

6.5

1.25

0.71

F 0,15)

Reset 0,14)

Heter. 0,15)

B) t

=

average 1985-1986, t-2

Foreign country

=

average 1983-1984

a

b

R:2

4.4

France

-0.04 (0.15)

1.27 (4.30)

0.52

18.5

0.28

1.92

4.5

United States

-0.7 (2.53)

1.72 (5.90)

0.68

34.8

2.85

3.49

4.6

Italy'

-0.19 (0.30)

1.13 0.62)

0.09

2.6

0.36

0.20

• t = average 1983-1984, t-2 = average 1981-1982. t-statistic in parenthesis. Reset: Ramsey's F-test for functional form. Heter.: White's F-test for heteroskedasticity.

100

Raffaele Paci

References Archibugi, D. /Santarelli, E.: Tecnologia e struttura dei commercio internazionale: la posizione dell'Italia, in: Ricerche Economiche, 43, 1989, 4 Balassa, B.: Trade Liberalisation and Revealed Comparative Advantage, in: The Manchester School, 22, 1965, 2 Baldwin, R. E.: Determinants of Trade and Foreign Investment; Further Evidence, in: Review of Economics and Statistics, 61, 1979, 1 Boggio, L.: Progresso teenico e commercio internazionale: un'analisi teorica ed empirica, in: Rivista Internazionale di Scienze Sociali, 29, 1971, 1-2 Cheng, L.: International Trade and Technology: ABrief Survey of the Recent Literature, in: Weltwirtschaftliches Archiv, 120, 1984, 1 Conti, G.: Progresso tecnico e competitivita internazionale nell'esperienza italiana, in: Moneta e Credito, 26, 1973, 4 Helg, R. / Onida, F.: Il ruolo dell'innovazione tecnologica nella teoria dei commercio internazionale, in: Innovazione, competitivita e vincolo energetico, F. Onida ed., Bologna 1985a Un'analisi cross-sectors sull' Italia, in: Innovazione, competitivita e vincolo energetico, F. Onida ed., Bologna, 1985b

Hirsch, 5.: Capital or Technology? Confronting the Neo-Factor Proportions and Neotechnology Accounts of International Trade, in: Weltwirtschaftliches Archiv, 110, 1974, 3 Hujbauer, G.: The Impact of National Characteristics and Technology on the Commodity Composition of Trade in Manufactured Goods, in: The Technology Factor in International Trade, R. Vernon ed., New York 1970 Hughes, K: Exports and Technology, Cambridge 1986 Momigliano, F. /Siniscalco, D.: Specializzazione internazionale, tecnologia e caratteristiehe dell'offerta, in: Innovazione, competitivita e vincolo energetico, F. Onida ed., Bologna 1985 Napolitano, F. /Sirilli, G.: L'istituto brevettuale e 10 sfruttamento delle invenzioni: risultati di un'indagine statistica in Italia, in: L'Industria, 10, 1989, 4 Narin, F. /Olivastro, D.: Identifying Areas of Strength and Excellence in F.R.G. Technology, Mimeo, 1987 Onida, F. (ed.): Innovazione, competitivita e vincolo energetico, Bologna, 1985 -

Specializzazione tecnologica e competitivita internazionale dell'industria italiana, Milano 1989

Paci, R.: Specializzazione e integrazione internazionale dell'industria italiana, in: Politica Economica, 7, 1991, 1 Patel, P. / Pavitt, K: Technological Activities in FR Germany and in the UK: Differences and Determinants, SPRU, University of Sussex, discussion paper n. 58, 1988 Pavitt, K: Sectoral Patterns of Technical Change: Towards a Taxonomy and a Theory, in: Research Policy, 13, 1984, 6 Ramsey, j. R.: Test for Specification Error in Classical Linear Least-Squares Regression Analysis, in: Journal of the Royal Statistical Society, 31,1969, B

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Sassu, A. / Paci, R.: Brevetti d'invenzione e cambiamento tecnologico in ltalia, in: Rivista di Politica Economica, 79, 1989, 1 Patenting Abroad and Firms' International Technological Strategy, in: Economic Analysis, Structural Change and Technical Progress, G. Antonelli and N. De Liso eds., London 1991

Soete, L.: The Impact of Technological Innovation on International Trade Patterns: The Evidence Reconsidered, in: Research Policy, 16, 1987, 2-4 Walker, W. B.: Industrial Innovation and International Trade Performance, Greenwich 1979 White, H.: A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity, in: Econometrica, 48, May 1980 Wolter, F.: Factor Proportions, Technology and West German Industry's International Trade Patterns, in: Weltwirtschaftliches Archiv, 113, 1977, 2

Theory of the Firm, Innovative Processes and Institutional Change by Patrizio Bianchi'

1. Introduction

Recent economic literature has concentrated much attention on the link between individual behaviour, structural processes and institution al change in an economic system. Particular emphasis has been placed on the role of innovation in accelerating and directing structural change. This role of innovation, however, implies the existence of collective mechanisms coordinating individual choices - that is, institutions which are sufficiently 'complex' to allow positive interaction among independent subjects also in the case of 'innovative' individual behaviour (i.e. behaviour different from the past). The now widely accepted view is that, in the presence of a competitive market, a 'generalized invisible hand' may lead to outcomes that are socially efficient even in the case of mechanisms which create temporary monopolies, provided that these are not institutionally fixed and provided that access to the market by potential competitors is guaranteed. This view takes up the biological metaphor of innovative processes activating selection mechanisms which, by eliminating the less fit, i.e. those unable to adapt, govern the evolution of the community as a whole. However, if this evolutionary pattern is transferred to social groups, for example, groups of firms, the outcome is not inevitable. As Hirschman 1 has written, situations may arise where potential losers do not withdraw, but instead take the so-called 'voice' option. That is, they protest and block the change. The announcement itself of a change induced by innovation - i.e. the pre-announcement of a possible selection among the individuals belonging to a community - may create a coalition among those threatened with exc1usion which seeks to obstruct the change.

Translation by Adrian Belton.

Hirschman (970).

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2. Theories of the Firm and Neo-Institutionalism In recent years the theory of the firm has undergone an intense process of rethinking and revision. Many authors have proposed a systematie re-examination of this aspect of economie theory by questioning the very existence of a theory of the firm as an independent area of study within the more general field of microeconomies 2 . Thus Stigler asks whether there exists an 'industrial organization' as a discipline whieh, by objectives and scientific status, stands apart from traditional economie theory3. In truth, the exceptional revival of microeconomic studies - or better the revival of studies based on a new programme of research defined by the centrality of methodologie al individualism - has placed study of industrial economies, and in partieular study of firms' behaviour, on a new footing, and it has attracted into the neoclassieal 'mainstream' contributions of various provenance. Once again the mainstream has demonstrated its ability to absorb criticisms by transforming them into components of a model whieh is still, however, based on the general premises of methodologieal individualism4 . The reconstruction of a theory of the firm now in progress results in fact from the intersection between neo-Walrasian doctrine and neo-institutionalist theories 5 . This convergence is creating a new 'general wisdom' whieh focuses attention on the various cooperative and conflietual relations that interweave in an economy. This has led to the interpretation of the firm as essentially a 'nexus of treaties,6, whether these treaties are implicit in a structure of a firm or explicit in the form of still uncompleted contracts among individuals. The characteristie feature of this developmental stage of knowledge about firms' behaviour is the transition from a parametrie to a strategie approach to individual behaviour. Both by considering relations within the firm and by analysing relationships among firms, the assumption today is that there exist relations whieh can be stylized in terms of games, the outcomes of whieh depend on the behaviour of individuals whose rationality is constrained by the presence of other individuals with whom they must necessaril y interact. See Archibald (1987). See Stigler (1968), p. l. On this aspect of the discipline's evolution, see Screpanti/Zamagni (1989). Holmstrom/Tirole (1989). Aoki/Gustafson/Williamson (1990).

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These relational games give rise to interaction rules which define the existence of an 'institution'. As Williamson notes, following Coase, institutions arise to reduce the transaction costs of relations among individuals. In the neo-institutionalist view, reducing transaction costs depends on whether relations can be 'reduced' into schemes 'of rules which are gene rally accepted so that forms of interaction do not have to be constantly re-established. Thus the firm as institution is distinctive not only because it reduces the costs of information and of exchange among interacting subjects, but because its repetition of the game imposes a sort of code - a social norm wh ich makes explicit to the individual participant, in more or less formal terms, the cost of breaking the established relational routines - that is, the application of sanctions. Likewise, the market as an institution also has its rules which consolidate over time through repetition of the interactive game. Firms which regard themselves as in competition will tend to assess each other; with a collective sanction applied to those who, for example, break the code of consolidated rules (e.g. by introducing products of a quality other than that declared). It is evident, however, that individual firms - like the market and, in general, all institutions - are also characterized by the defining function of the 'internal ethics' that regulate them. This code may be explicitated ex ante, as in so-called 'contractualist' theory, or ex post, as in the 'evolutionist' view Ci la Hayek7 . As application of the so-called Folk Theorem8 demonstrates, repetition of the interactive game lends credibility to the set of promises and threats that makes co operative behaviour possible. Establishing the reputation and reliability of the participants in the game reduces uncertainty over whether or not conflictual solutions will be preferred to co operative ones. In this sense, repetition of the game tests the reliability of those involved and verifies the stability of the implicit rules that have already been es tablished, thus transforming them into general rules which it is in the interest of the individual to obey. Stabilization of the institution may give rise to changes in individual behaviour - in individual 'rationality', one might say - as individual motivations closely associated with 'moral' adhesion to the institution emerge. For example, the existence of a strong rule of adhesion to the institution may provoke apparently self-damaging behaviour, such as fighting far the institu-

7 Hayek (1976), on Hayek's role, and on how his position changed, see the Introduction by F. Donzelli to Hayek (1988). 8

Cf. Axelrod (1984).

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tion at the risk of annihilation, or an individual's rejection of more attractive employment so as not to betray the institution. On the other hand, these rules mayaiso be changed by individual action, to the extent that 'new' behaviour is accepted by the collectivity through consensus measures or because it is no longer possible to apply previously established sanctions to those who break the relational rules. This change, however, must come about incrementally, as an adjustment process within the general consensus that the collective game should continue. The weakness of this view, however, lies with the kind of change considered, because if the change proposed is such that it is in breach of the set of rules that define the institution, then the forms of interaction will change, and this will necessitate the formation of new collective norms. Obviously, this entails consideration of the type of behavioural change and the type of institutional change connected with it. This kind of analysis therefore emphasises the problems of the relationship between inter-individual relations and institutional change - i.e. change in the collective form of social interaction. The evolutionary character of competition among individuals thus emerges. The assumption is that as relations are repeated self-Iearning takes place, with a consequent adjustment of behaviour which progressively eliminates the inefficiencies of transition and enhances efficiency, i.e. behaviour that corresponds more c10sely to an particular end. This individual behaviour in a repetitive context implies that it is pos sible to take account of the past behaviour of rivals and to draw up an information paradigm based on such behaviour on the supposition that, at a subsequent stage, it will be possible to apply sanctions to deviant behaviour. Within an institutionalist framework, this process of inter-individual behaviour, if unconstrained, thus also becomes one of institutional variation. In the end, the progressive process of the positive adjustment of individual behaviour gives rise to a general process of social adjustment. 3. Theories of Social Evolution The main emphasis, therefore, is on institutional change. This, by virtue of a social learning mechanism, acquires the features of an evolutionary process; a process today largely recognized by the literature. It should be pointed out, however, that the 'evolutionary' analysis discussed by literature draws on very disparate theoretical sources. The reference to biology is by no means new in economics. Marshall had already dec1ared that economics, whose ordering principle was conti-

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nuity, should model itself on biology and not on physics. The Introduction to the eighth edition of "The Prindples" states quite c1early that mechanistic metaphors like equilibrium should be understood as essentially didactic devices, to be used as propaedeutic to the much more complex dynamic analysis which is the true concern of economics. Marshall's view was influenced by the growth of positivism and by its fall-out on the human sdences, with the full affirmation of the myth of progress as the mainstay of bourgeois sodety. It is worth mentioning that it was Mill hirnself who introduced the work of Comte into British intellectual debate, and who therefore established the need for a positivist method in the sodal sdences coherent with that of the natural sdences9 . The assumption of utilitarianism as positivist method par excellence thus combined with aredefinition of the object itself of economic analysis: from a deductive sdence seeking to define the general laws of 'sodal physics' to an empirical sdence which studied man's actions IO .

Obviously of central importance he re was the work of Spencer, who in pre-Darwinian biology had already identified evolution as the passage from the more simple to the more complex; a process which was extended to explain sodal differentiation and the division of labour as the expression of organic development towards ever more complex structures and forms of life. And it was Spencer who developed a sodal Darwinism which, by going far beyond Darwin's own conc1usions, extended the general implications of natural selection and biological evolution. It was in Spencer that evolutionary theory combined with an ultra laissez-jaire political radicalism wh ich eventually led to an 'interested' re-reading of Smith hirnself. Spencerism also played a crucial role in the consolidation of American philosophical tradition, of the Chicago School in particular11 .

Friedman and Stigler, like Coase, have propounded an evolutionary analytical view grounded, I believe, more in sodal Spencerism than in the Scottish philosophical tradition of Hume and Smith. Institutions are therefore the ex post outcome of inter-individual interactions; and inter-individual interaction is, in the final analysis, a biological game of natural selection which rewards those most fitted to survive. This biologism is, moreover, explidt in the recent applications of 'organizational ecology' by Hannan and John Freeman 12 , in the work of ]. 9 10

On Mill, see the outstanding work by Cressati (1988). Marshall (1920), Introduction.

On the role of Spencerism in the development of American economics, see Bianchi (1988) and the relative bibliography. 11

12

See Hannan/Freeman (1989).

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Maynard Smith, in the many applications of the Volterra-Lotka equations, and, in general 13 in all recent theory based on biologieal games and strategies. These considerations also apply, I believe, to Nelson and Winter, who, however, link their view of the evolution of a population to mechanisms that are not so much Spencerian as Lamarckian. That is, they hypothesize selection based not on innate features, but on features acquired through a learning process developed by repeated use. The development of biologieal evolutionism therefore reveals a positivist matrix based on an empiridsm whieh regards the present state of affairs to be the last stage in a positive, albeit not necessarily optimizing, selective process. This approach emphasises the importance - fundamental in biology of self-adaptive mechanisms whieh induce living systems to grow along paths where optimality is achieved under certain conditions like asymptotie property and not as a direct consequence of the behaviour of agents l4 . This conc1usion, but not its analytical premises, merges this line of thought with neo-institutionalist theory, the framework of whieh, however, is grounded in Austrian neo-subjectivism. Both the evolutionism of Hayek and neo-Schumpeterian evolutionism, in fact, are based on a subjectivism that, in my view, is not so much methodologieal as ontologie al. The hypothesis of an evolutionary mechanism by whieh the sodal structure is explidtly the result of not the will, but the interaction of individuals enables analysis of collective phenomena in terms of the individual, that is, the deduction of the laws of sodal aggregation from assumptions ab out the individual. This overcomes the methodologieal holism whieh obliges one to look for the laws of sodal aggregation in the behaviour of sodety itself taken as a unit of reference. Lastly, the revival of the Austrian School by Robbins and Hieks allows this last product of idealist thought to be fused with the British tradition. Hayek's own position and his intellectual affinities with the Scottish School, in partieular with Smith, justifies this unification. On the other hand, Schumpeter too addressed these issues, first by showing the elements of continuity and the elements of discontinuity in competition from within an Austrian framework. In fact, he laid equal emphasis on the discontinuity provoked by an innovation which breaks with established routines and the continuity deriving from the imitation of innovations whieh activate processes of sodal cumulativeness leading to the establishment of new routines. 13

And here I agree with Jacquemin (987).

14

Screpanti!Zamagni (989), p. 375.

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4. Evolution of Sodal Relations and Institutional Change Despite these multiple lines of thought, which meet today in what we may generically call 'evolutionist' theory, I would stress that the role of behavioural innovation - both technological and organizational in the broad sense - cannot be taken entirely for granted. Innovation is the moment when new routines emerge within the firm, within the market and, more extensively, within society as already established routines begin to lose their propulsive function. Such innovation, however, sometimes constitutes an abrupt break with the past that does not always facilitate adjustment. Both within the individual firm and within society at large, this rupture may provoke an overall imbalance in the homeostasis mechanism if there are not sufficient numbers of interacting individuals for natural selection to leave enough of them to maintain the institution. We may assume, in fact, that innovation is an individual act which is divergent from the past and therefore different from what the collectivity expected. Such behavioural change may alter relations within the set of interacting subjects; it is evolutionary change, however, when the subjects that remain in the subsequent stage are able to adopt the behaviour and gen eralize it, or if they are able to nullify it by applying equally generalized sanctions. In a market context - Le. in an institutional arrangement created by the free interaction of a multiplicity of independent individuals, that is, in a polyarchic social context - the innovation undertaken by a single firm has a positive effect on the whole social body if self-regulative mechanisms are activated which define paths of collective adjustment believed to lead to improved individual and collective efficiency. In this case, in fact, a selective process may be set in motion which, in the presence of new entrants or of a rapid increase in positively selected subjects, regenerates the collectivity and thus re-establishes an institution on new social norms. This kind of behaviour can, however, have unexpected consequences when the change proposed by an individual or a group of individuals within a larger social grovp is such that there emerges, or there is the risk of, the inability of other individuals to respond either by generalizing the change or by counter-attacking with sanction-applying changes. This situation is more serious the more the market is institutionally closed, or when formal access to the market exists but there are no potential competitors who wish to enter. There may therefore be various 'negative' outcomes. The first case might be that the innovative behaviour by one individual induces the others to leave the market, thus creating a situation of monopoly.

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It could equally happen, however, that the selection excludes too many subjects with respect to the size of the collectivity so that, instead of leaving, they establish a new coalition which seeks to apply institutional sanctions against the innovator. In this latter case of negative selection, which induces non-innovative subjects to re-form in a coalition with its own internal code, the social body comprises a new institution which resists change both by applying collective sanctions to the innovator and by drawing up new general rules for the social group as a whole. In other words, in all the literature on social behaviour which draws its theoretical base from biology, there is a major emphasis on the positive effects of selection, and the assumption that the defeated (Le. those negatively selected) will individually exit from the market and die off.

To refer to Hirschman's well-known thesis, it is the existence of an individual 'exit' option which gives credibility to the existence of a biological evolution where behavioural innovation by an individual activates a process wh ich selects others on the basis of their ability to imitate such behaviour. There is also the possibility, however, that a change which the community regards as too rapid to be generalized will engender an aggregation of conservative subjects which, in the reiteration of collusive forms of behaviour generated by a common desire to oppose the innovator, will consolidate into a parallel institution. This will apply its own rules in order to oppose the pre-existing institution by inhibiting the innovative change. In other words, the 'voice' option may lead to sanction-applying behaviour which obstructs evolution. An innovative development is therefore more successful the greater the number and openness of the individuals interacting among themselves; the more the social regulation of the group is closed and internally rigid, the greater the risk that innovative behaviour by an individual will either become monopolistic behaviour, with a substantial change to pre-existing social norms, or it will provoke areaction by a coalition of potential losers who, instead of exiting individually or accepting the institutional change brought by the innovation, will form a coalition which applies sanctions to the innovator in order to preserve the existing institution. These considerations are of obvious importance in the formulation of public policies. A policy designed to promote innovative behaviour must be accompanied by social action aimed at regulating the openness of the social body to ensure that the selection process thus ac ti va ted does not transform itself into 'negative' institution al changes which favour monopolizing solutions or conservative reactions. One should ask oneself, therefore, wh at happens in cases where there are not enough individuals interacting to a degree sufficient to activate an evolutionary mechanism. This is the case, in fact, of those countries whose

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economic backwardness manifests an 'underdevelopment' of relations where rapid change may introduce, not social evolution, but institutional break down and the creation of parallel institutions whieh form to counter change. An example of this is provided by structural polieies in less developed areas of Southern Europe or in developing countries where, at the 10cal level, either there are too few entrepreneurs or those entrepreneurs that do exist are tied by non-market relations.

5. Public Polides, Institutional Change and Sodal Evolution I now turn to the problem of public polieies in support of behavioural innovation. I shall examine the case of the European Community in its transition to a Single Market and, in partieular, the formulation of structural policies to provide support for relatively backward areas. The conc1usion that the evolutionary paradigm seems to point to is a State in whieh, once the correctness of the competitive process has been ensured, and once effective access to the market has been secured, the evolutionary mechanism is able to ensure that efficiency whieh gives stability but also equity to the development process. This in fact is the scenario described in the report Tbe European Challenge 1992 15 . This mechanism of social evolution nevertheless entails the existence of sufficient numbers of subjects to guarantee 'free', if not 'perfect', interaction. It also entails a principle of equality of access; a principle that does not necessarily imply a position of initial equality, but at least that individuals may participate in the game with effective opportunities to compete l6 . The application of this principle has led the European Community to express, in its White Paper on completion of the single market (1985), a view of economic integration as a process to be undertaken by evolutionary means (so-called 'harmonization'). This process is based on a general principle of efficiency: the removal of internal barriers and of local administrative constraints will allow the creation of a single market where the free interaction of individuals will give rise to an efficient general allocative mechanism l7 . This approach has been integrated with measures, ca lied 'structural poliey', designed to enable the 'less favoured' to participate in the single market without immediately being forced to succumb. Within the Community, safeguarding the rights of the 'less favoured' is an inescapable requirement in that such backward areas are not distributed at random around Europe 15

Cf. Cecchini (1988).

16

On the concept of equality, see Sartori (1987).

17

Cf. Padoa Schioppa (1987).

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but concentrated in certain 'peripheral' countries. The immediate implementation of an efficiency principle would eliminate them, creating serious political imbalances within the Community. According to Arrow's well-known paradigm, if the revived market mechanism is responsible for finding efficient allocative solutions, political action should resolve problems of equity. However, the Arrowian mechanism that transfers initial resources in order to re-establish equality in the points of departure has, in the past, been transmuted into a policy of individual subsidies which, in the case of agriculture, swiftly required further regulation and increasing funds to satisfy all requests. When the reform of structural funds came into force on ]anuary 1. 1989 18 , the EEC abandoned the system of individual subsidies and replaced it with structural programmes designed to create a variety of relations among social subjects (firms, but also central and local authorities, associations, universities, etc.) in order to provide 'their' firms with market access opportunities such to render their competition effective and not just potential. Such structural action is therefore important because the Community no longer deals with single individuals by compensating for individual shortcomings, but acts instead on sodal groups in order to change their overall efficiency. The objective thus becomes one of recreating conditions of competition throughout the 'single market' system. This will give even the least favoured not only the formal right but also the effective capacity to participate in the competitive process. These, therefore, are polides designed to accelerate institutional change by favouring the innovative behaviour of individuals and by providing support at the local level for imitation by the entire communiti 9 . Structural policies therefore act mainly on the internal rules of a sodal group by guiding institutional change in order to avoid the formation of conservative coalitions. Action undertaken so far in less favoured regions - EEC programmes for the Mediterranean, for example - demonstrates, however, the extreme difficulty involved in implementing these policies. There is in fact, at the local level, widespread interest in the failure of these policies designed to 18

See CEE (1989).

19 Structural policies are defined by the EEC as a set of public interventions activated by various bodies such as communes, regional administrations, national governments, the EEC itself, but also by private associations, universities, etc., in order to create at the local level those formative and informative opportunities which enable firms to develop their competitive capabilities. The EEC clearly believes that the key element in structural policies is the co-participation of various authorities and 10cal bodies in defining the internal rules of the group. See CEE (989), p. 15.

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encourage institutional change. This interest derives from the formation of coalitions of 'potential losers' concerned to resist integration and who therefore proclaim their need for protection against the risks of change. The outside introduction of processes accelerating institutional change may therefore give rise to an unexpected development in the local community, with the formation of coalitions of potential losers. This social reaggregation therefore comes about to defend the group of 'losers' against innovative changes which apparently undermine a previously achieved unity which made the 'losers' feel secure. If this mechanism of re-aggregation on the principle of opposition to change takes concrete form, then it is no longer the losers that raise an individual challenge against innovators, but a new institution parallel to its predecessor. And this therefore obstructs evolution. Thus political claims for defence are advanced - for example, claims for a privileged status guaranteed by special norms - which are justified on the basis of a proclaimed 'historical' difference between the group concerned and the ongoing innovation being resisted. Not by chance, this mechanism generates demands by the weakest for a centralism (and, in a certain sense, for an authoritarianism) which will annul the mechanism of competition (and, in a certain sense, of 'democracy' or at least of polyarchy) that has generated or at least legitimated the institutional change. Thus, current debate in the Italian South raises issues opposed to communitary structural policies which are based on the principle of a unitariness and the diversity of the Mezzogiorno which impedes participation by individual 'southerners' in the competitive process of a single market. Likewise, in all 'underdeveloped' countries the innovative pressures applied by subjects which draw their inspiration from the market are combatted by conservative forces. This gives rise to the aggregation of weak subjects in the name of a unity threatened by the previously established institution. This has been the attitude of governments in weaker regions seeking to perpetuate individual subsidies and the protection of their trade 20 ; but these same arguments have been used by industries in the central sector of the European economy - e.g. the car and electronics industries - which maintain that they cannot withstand Japanese competition and request community protection in the name of European unity21. 20 See, for instanee, the quarrel between Italy and the EEC. The EEC has sought to exclude the Italian region of the Abruzzo from its area of special intervention. Italy has ehallenged this decision by arguing that, despite evident improvements, the Abruzzo belongs historically to the Italian South, that it is unable to faee European eompetition, and that, in any ease, the extraordinary programme should eontinue, given that Italian firms are unable to participate in the single market. 21 See the whole dispute between the Italian government and the Community over industrial poliey. The Italian government insists on paying subsidies to firms, claiming the weakness of Italian small firms. The EEC eontinues to eoneentrate on

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With its Single Act, the Community has embraced a principle of economie integration based on a neo-institutionalist paradigm. The removal of the last remaining non-tariff barriers has created a market mechanism supposedly able to achieve efficient solutions in terms of collective welfare. Because it is believed that this mechanism may have outcomes not equally acceptable to all member states, a corrective mechanism has been introduced whieh adjusts structural funds in order to create the conditions whereby the 'less favoured' can participate in the market mechanism. However, effective implementation of these structural policies requires full account to be taken of the institutional complexity of change. And it must be adequately specified that promoting endogenous development activates evolutionary mechanisms at the local level whieh have unpredietable outcomes because they may provoke resistance to change. For structural polieies to be successful, therefore, these coalitions based on resistance to change must be counteracted by action based on the same social norms that regulate them. This entails selecting new leaders, but also ensuring new entrants to the group so that this selection does not lead to local monopolies or to massive resistance to change. This means acting not only on 'entitlements', in the sense given to the term by Dahrendorf 2 , but also on 'capabilities' as defined by Sen23 , in order to create the conditions that encourage new entrants and therefore renew the overall social system. In this case, I believe, analysis of innovation and structural change also requires analysis of the features of institutional change. Therefore great care should be taken over defining the social norms that emerge in routines and whieh consolidate through change. This perspective therefore necessarily involves aspects of economie poliey designed to promote behavioural innovation, and those more properly political aspects definable by 'democratization'. It also shifts the focus of analysis to ethieal individualism and the relationship between 'marker', 'state' and 'civiI society' - issues whieh for many years have remained on the sidelines of economie study.

References Aoki, M. / Gustaajson, B. / Williamson, o. E. (eds.): The Firm as a Nexus of Treaties, London 1990

collective action in support of the small firms' system. See Bianchi (990), for an account. 22

See Dahrendorf (988).

23

See Sen (985).

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A reh ibald, G. G.: The Theory of the Fion, in: The New Palgrave: A Dictionary of Eeonomies, J. Eatwell et. al. eds., London 1987, pp. 357-363 Arrow, K.: Social Choice and Individual Values, New York 1951 Axelrod, R.: The Evolution of Cooperation, New York 1984 Bianehi, P. Ced.): Antitrust e gruppi industriali, Bologna 1988 -

Politiehe della eoneorrenza e monopolizzazione, in: Antitrust e gruppi industriali, P. Bianehi ed., Bologna 1988, pp. 7-62

-

Le politiehe industriali per le piecoie e medie imprese e il riorientamento delle politiche comunitarie, in: Rivista di politica eeonomiea, LXXX, 1990, V, pp. 171-202

Ceeehini, P.: The European Challenge 1992, Hants 1988 CEE: Vademeeum sulla rifoona dei fondi strutturali, Bruxelles 1989 Cressati, G.: La liberta e le sue garanzie, Bologna 1988 Dahrendorj, R.: The Modern Social Conflict. An Essay on the Politics of Liberty, New York 1988 Eatwell, j. / Mi/gate, M. / Newman, P.: The New Palgrave: A Dictionary of Eeonomics, London 1987 Hannan / Freeman,j.: Organizational Eeology, Cambridge, Mass. 1989 Hayek, F. v.: The Meaning of Competition, in: Individualism and Eeonomic Order, London 1976 -

Conoseenza, mereato, pianifieazione, Bologna 1988

Hirschman, A.: Exit, Voice and Loyalty, Cambridge, Mass. 1970 Holmstrom, B. R. / Tirole, j.: The Theory of the Firm, in: Handbook of Industrial Organization, R. Sehmalensee and R. D. Willig eds., Amsterdam/New York 1989, pp. 63-133 jaequemin, A.: The New Industrial Organization, Cambridge, Mass. 1987 MarshalI, A.: Principles of Eeonomics, 8th edn., London 1920 Mueller, D.: Publie Choiee, Cambridge 1986 Nelson, R. R. / Winter, S. G.: An Evolutionary Theory of Eeonomie Change, Cambridge, Mass. 1982 Padoa Schioppa, T: Efficieney, Stability and Equity, Bruxelles 1987 Sartori, G.: Elementi di teoria politica, Bologna 1987 Schmalensee, R. / Willig, R. D. Ceds.): Handbook of Industrial Organization, Amsterdam/New York 1989 Serepanti, E. / Zamagni, S.: Profilo di storia dei pensiero eeonomico, La Nuova Italia, Roma 1989 Sen, A.: Commodities and Capabilities, Amsterdam/New York 1985 -

Seelta, benessere, equita, Bologna 1986

Stigler, G.: The Organization of Industry, Chicago 1968 Williamson, O. E.: The Eeonomic Institutions of Capitalism: Firms, Markets, Relational Contraeting, New York 1985

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Transaction Cost Economics, in: Handbook of Industrial Organization, R. Schmalensee and R. D. Willig eds., 1989, pp. 136-182 The Firm as a Nexus of Treaties: An Introduction, in: The Firm as a Nexus of Treaties, M. Aoki, B. Gustafsson and O. E. Williamson eds., London 1990, pp. 1-25

Pattern Detection in Innovation Research by Werner element

Discussion of the Papers by W. Goldmann, L. Scholz and P. Bianchi It is certainly rather artificial to try to find a common theme running through these three papers. Even if the authors did not have it explieitly in mind one may assurne that they were all striving after some sort of "pattern detection" in their research on innovation. Pattern detection, however, is by no means confined to empirieal diagnosis, although this might be its most important aspect. It also entails choosing among alternative theories in order to find those stylized facts that are likely to have poliey implications. It quiekly becomes c1ear that despite decades-long research in innovation this area is still a battleground of conflieting paradigms.

The absence of a dominant paradigm is the reason why there are so many contradietory assertions on innovation, and why scientific progress on the topic of technologieal progress has been so slow. Among the reasons for the unsatisfactory nature of research on innovation is the fact that the concept itse1f of innovation has remained vague since its introduction by Schumpeter, because: its delimitation from other factors responsible for technieal progress and economie growth is as difficult as ever; the phenomenon of innovation is itse1f subject to constant change and, hence, its impact is extremely difficult to assess; finally, innovation can only artificially be isolated from its environment, either as adependent or an explanatory variable, since it is embodied in the institutional and societal setting. The three papers, basieally, reflect these three problem-areas. First, Ms Goldmann's paper convincingly demonstrates that R&D may not be the decisive factor in economie performance. Indeed, in the fifties and sixties innovation expressed by R&D indicators was extreme1y low in Austria by international standards. Ms Goldmann is probably right in stating that Austria was a technologieal imitator. Even so me outstanding tech-

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nologieal successes (whieh should be mentioned 1) could not raise the statistieal average. The situation was improved, although not reversed, in the seventies and eighties, but a percentage of roughly 1.4 per cent of R&D expenditures with regard to GNP still gave Austria a low international ranking. On the other hand, Austria's economie growth was extremely favourable through most of these years. Indeed, there were periods when the growth rate was so high above the OECD-average that the performance was described as "Austria's economic miracle" (cf. Table 1). However, miracles are usually short lived, and other explanations must therefore be found for this steep growth path. Simplifying greatly, one may suggest that Austria found a very suitable combination of priee and nonpriee competitiveness. Flexibility on the priee-side was secured by an adaptive income poliey together with strong productivity increases whieh have led to per unit costs which allow the average Austrian firm to live relatively well as a price-taker in the exposed sector. This relative well-being has been further bolstered by the fact that most of products fall within a range characterized by intermediate to higher technology. In summary, in Schumpeter's native country it is not the technologieally innovative entrepreneur who has been the main driving force behind economie success. As long as the Austrian economy has not only caught up but overtaken - its rank in the OECD's per capita GDP at exchange rates was fourteenth in 1970 0,947 US$) and tenth in 1990 06,590 US$) among the major OECD countries - one can hardly expect Ms. Goldmann's R&D figures to improve significantly. In this regard, she draws the blunt conclusion that illusory targets should be abandoned and - one may add - there is indeed no reason for them as long as a different economie pattern (sometimes called the Austrian model or, from the mid-seventies to the mid-eighties, "Austrokeynesianism") in whieh innovation plays a limited role, performs satisfactorily. Mr 1. Scholz's paper set itself a different task. He presented merely a sampie from a huge stock of empirie al results derived from probably one of the world's largest empirieal surveys on innovation. In fact, since 1978 the IFO-Institute has regularly sent out questionnaires to 5000 establishments in the manufacturing sector. Without doubt, the institute should be able to detect telling patterns of innovation, and that is exactly what is reflected in Mr. Scholz's paper in both miero- and macroeconomie terms. This is not the pi ace to comment upon this wealth of empirieal findings, whieh has made the hypotheses of a growth theory look like bare skeletons.

Recall the L-O (oxygen) blast furnace process, penicillin at the Biochemie in Kundl, sinter-metallurgy at Plansee, the refractory stones industry, new techniques in the production of skis, excellent companies in the machine-building and electrical industry, etc.

7.7 3.2 2.8 0.6 5.6 4.4 4.7 5.4 4.8 6.3 5.3 5.3 38 5.4 5.3 3.3 3.7 5.4 6.0 0.8 - 0.2

6.2 4.4 4.2 2.1 4.7 6.5 5.6 4.6 4.5 6.0 4.4 3.8 3.3 5.1 6.1 5.1 3.7 4.5 5.7 2.3 - 0.8

OECD Europe

-1.1

5.2 4.4 4.1 6.0 4.3 3.6 3.2 5.2 6.0 4.9 3.6 4.2 5.7 1.7

EC

Saurce: Abele/Nowolny/ Schleicher (984).

1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975

OECD Total

-

-

-

6.9 2.2 1.9 0.5 6.0 2.1 2.6 5.5 4.0 5.3 6.1 5.8 2.8 4.0 2.8 0.3 3.1 5.4 5.5 0.7 0.7

USA

Fed. Rep. Germany

12.0 7.2 5.6 3.5 7.4 8.9 5.1 4.4 3.0 6.7 5.5 2.7 0.0 5.7 7.4 5.2 3.3 4.2 4.5 0.7 - 1.6

Japan

8.6 7.5 7.3 5.8 9.1 13.1 14.6 7.1 10.5 13.2 5.1 10.6 10.8 12.8 12.3 9.8 4.6 8.8 8.8 - 1.0 2.3 4.7 5.9 6.0 2.9 3.2 7.2 5.5 6.7 5.3 6.5 4.8 5.2 4.7 4.3 7.0 5.7 5.4 5.9 5.4 3.2 0.2

France

- 0.7

-1.1

3.3 1.6 1.9 0.2 4.0 5.2 3.3 1.0 3.9 5.2 2.3 2.0 2.6 4.1 1.5 2.2 2.7 2.2 7.5

UK

Gross National Product CYearly Percentage Rates)

Table 1

6.7 4.7 5.3 4.8 6.5 6.3 8.2 6.2 5.6 2.8 3.3 6.0 7.2 6.5 6.1 5.3 1.6 3.2 7.0 4.1 - 3.6

ltaly

6.7 6.6 4.0 - 2.1 6.3 7.0 8.1 4.8 4.9 5.2 3.2 2.5 3.1 3.6 5.6 6.4 4.1 3.2 3.1 1.5 - 7.3

Switzerland

11.1 6.9 6.1 3.7 2.8 8.2 5.6 2.6 4.2 6.2 3.0 5.1 2.8 4.1 5.5 6.4 5.1 6.2 4.9 3.9 - 0.4

Austria

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But even such richness of findings does not satisfy the demand for even more and better information. Let me eite a few examples: The results from the IFO-surveys could considerably enrich and alter conventional theories of technological progress. One would therefore hope that the first steps taken in this direction within the framework of the "Metastudy" in the Federal Republic of Germany will be pursued further, and econometric causal analysis applied to the data on innovation. This could be more rewarding than inserting data on technological change into inputoutput tables, which are limited by their methodology itself. One could also use the French concept of "filieres"2, which have proved to be very fruitful for pattern recognition and industrial policy and which cannot be grasped by input-output techniques alone. From the "filieres" it is just one step to the detection of, and preparation for, strategies. "Portfolio-type" representations suffer from being basically static and, in any case, they fail to grasp the new tendeneies of strategic alliances and cooperations. These seem to be of utmost importance for innovation both in big and in small firms. Finally, to add one last, immodest wish to the already abundant IFO-material, it would be very rewarding to extend the survey to indude produceroriented services. The new division of labour between manufacturing and the services via outsoureing (unbundling, contracting out) renders the old borderlines somewhat vague. Moreover, new developments (organizational innovations) are triggered by these new speeialization pro ces ses within the realm of the tertiarization of industry and the industrialization of the tertiary sector. Innovation thus becomes an encompassing phenomenon spanning the product and the service life-cyde. This will lead to hitherto unknown problems. The detection of patterns of innovation therefore also entails getting to grips with moving targets. However, this already S1!ffieiently complicated situation is at best nothing but aseries of shots taken with a still-camera. Once the whole "environment" is taken into consideration, innovation becomes part of a complex and changing institution al setting. This is what the paper by P. Bianchi invites us to reflect upon. The institutional setting for the understanding of innovation is still narrowly restricted by the existing approaches of conventional economic theory. P. Bianchi is right to accuse evolving mainstream economics as still being bound by a new orthodoxy which is, basically, neodassical in character. What is really needed - even in such a technical field as industrial economics - is reconsideration of the soeio-philosophical foundations of economics. With respect to the role of the firm and its capaeity to innovate in such a context, I agree with Bianchi that transaction cost theory, the concept of monitoring team production Cl la Demsetz, and prineipal-agent theory are but stepping stones towards a more complete perspective. 2

Cf. Arena/De Bandt/Benzoni (988).

Pattern Detection in Innovation Research

121

Wh ether such a task (in wh ich Austrian economics would be among the stakeholders) can really be accomplished must be questioned: the research program involved would be Herculean. At least three attempts in this direction should be mentioned here. The first is the blending of industrial economics with evolutionary economics by M. Amendola and J.-L. Gaffard 3 . The second is the touch of Austrian economics given to industrial economics by D.W. Reekie 4 . The third is the work of IUI 5 (and G. Eliasson in particular) where, amongst other things, Schumpeterian ideas are integrated into new theories of the firm and tested with an econometric model named MOSES wh ich is a micro/macro model of the Swedish economy. One may wonder, however, whether such a merger between the neoclassical stmcture-conduct-performance paradigm with evolutionary concepts is at all desirable. A somewhat forced synthesis is certainly not in the spirit of F. A. von Hayek. He states quite clearly: "Die effektivste Größe der einzelnen Firma ist ebensosehr eine vom Marktprozeß zu entdeckende Unbekannte wie die Preise, Quantitäten oder Qualitäten der zu produzierenden und zu verkaufenden Güter. Es kann keine allgemeine Regel dafür geben, welches die wünschenswerte Größe ist, da dies von den ständig wechselnden technologischen und wirtschaftlichen Bedingungen abhängt; und es gibt immer viele Veränderungen, die Unternemen, die nach bisherigen Maßstäben von einer exzessiven Größe zu sein scheinen, Vorteile verschaffen""'

Irrespective of whether such a theoretical synthesis will emerge, broad consensus can be reached when it comes to claiming "a change of the set of mies defining a society" (P. BianchO within which the innovative role of the firm should be fostered. Such thinking is again along the lines of von Hayek, who would call it the need for an adequate "abstract order". Dr Bianchi hits the right note when he stresses the need "to innovate the set of mies governing the social community". However, what kind of a social contract this is remains to be made explicit. It is most likely that such an innovation-enhancing social contract will incorporate many elements of a Buchanan-type constitution7 characterized by "contractual agreements" among participating individuals who promote productivity, and in which collective action through renegotiation is provided in order to prevent nonconstitutional revolutions by the losers in this evolutionary process. This is probably what P. Bianchi had in mind when he spoke of the risk "that individual innovation destroys the existing aggregation", viz. an uoequal society.

3

Amendola/Gaffard (988). Reekie (989).

5

Eliasson (985).

6

Hayek (1981).

7

Buchanan (975).

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References Abele, H. / Nowotny, E. / Schleicher, St. et al.: Handbuch der österreichischen Wirtschaftspolitik, Wien 1984 Amendola, M. / GajJard,j.-L.: La dynamique economique de I'innovation, Paris 1988 Arena, R. / De Bandt, j. / Benzoni, L. et al.: Traite d'Economie Industrielle, Paris 1988 Buchanan, j. A.: The Limits of Liberty, Between Anarchy and Leviathan, Chicago/London 1975 Eliasson, G.: The Firm and Financial Markets in the Swedish Micro-to-Macro Model, Stockholm 1985 Hayek, F. A. von: Die Verfassung einer Gesellschaft freier Menschen, Vol. 3, p. 111, Landsberg/Lech 1981 Reekie, D. W.: Industrial Economics, A Critical Introduction to Corporate Enterprises in Europe and America, Aldershot 1989

11. Technical Progress and Labour

Macroeconomic Analysis of the Employment Effects of Technological Change: An Evaluation of the Links Between Theoretical Framework and Empirical Models' by Paolo Pini

1. Introduction

The aim of this paper is to evaluate so me models of technological unemployment used in recent applied analyses, retrospective and predictive, of the macroeconomic effects of the adoption and diffusion of new laboursaving technologies. Combined analyses of the effects of technological change on output and employment, on the one hand, and of the determinants of the diffusion process of new technologies on the other, is not common in the literature. Studies generally address the way in which demand reacts to productivity increases during the diffusion process, focusing on the well-known "compensation effects". I shall consider two different types of model: 1) aggregate models based on the macroeconomic relationships between productivity growth, productive capacity growth and employment growth; 2) dynamic multisectoral models of unbalanced growth. Both types, generally, adopt theoretical approaches which seem unable to capture the various market and institutional mechanisms affecting the relationship between technological change and employment, in particular the ways in which productivity increases generate changes in the level and structure of effective demand and its components, and, hence, of employment. These changes, of course, are media ted by compensation effects, technology multiplier effects, price effects and income effects 1 . Aggregate This paper has been developed within the research programme "sistemi tecnlogici e struttura dinamica" (MURST 40%). For an analysis of different theoretical approaches and empirical models of technological unemployment embodying these compensation effects, or some types of them, see Pini (1991a), (1991b).

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models generally give priority to analysis of the macroeconomic relations between productivity increases and real income growth via changes in price or nominal income level. They do not consider the sectoral composition effects of new technology on production sectors or on their utilization sectors. Multisectoral models, on the other hand, are somewhat restricted by their endogenous treatment of the compensation effects modifying each component of final demand, with the exception of investments, when these are considered simply as adjustments in productive capacity in response to the production and adoption of new technology. I shall pay particular attention to integrated models in which analysis of industrial interdependence is combined with examina ti on of behavioural macroeconomic relations among economic agents. The building of these models, which I call "macrosectoral", can be done either by integrating multisectoral models with behavioural relationships or by identifying a certain number of productive sectors within a macroeconomic model. In both cases, this integration seems to overcome some of some limitations of aggregate and multisectoral models. In fact, by using this integrated approach I shall attempt to give joint treatment to the different compensation effects suggested by theory, namely price and non-price compensation effects. There is also a disadvantage to the integrated models, however, namely the difficulty of taking into account the possible interrelations and feedbacks between innovative process and demand changes, with the consequent attribution of the emergence of an unemployment situation either to supply factors, such as the labour-saving nature of the innovations adopted, or to demand factors, such as the insufficient growth of investment, consumption and export demand.

2. Structure of a General Model and Compensation Effects A general model for the theoretical and empirical analysis of the employment effects due to the adoption of new labour-saving technologies must be able to capture two distinct dimensions. First, it must account for the effects of labour-saving technical progress on the use of the production factors, capital and labour, given the final output. These effects are usually defined in the literature as "direct" or "impact" employment effects. Second, it must address changes in the production scale deriving from the way in which increases in the final demand in the market follow from productivity gains. These changes, given the characteristics of the adopted technologies, determine increases in labour and capital demand, and thus induce indirect employment effects. Both impact effects and indirect effects compensate for the initial reducti on of employment in the sectors adopting new technologies. This may seem obvious, in particular in the ca se where there is an increase in de-

Macroeconomic Analysis of the Employment Effects of Technological Change

127

mand and production. However, the evaluation of compensation effects given final output is less obvious. In fact, an important compensation effect already emerges during the adoption phase of new technologies. This is the technology multiplier compensation effect which operates during the phase when these technologies are produced. It is affected by various factors: the technological characteristics of the production of new technologies, the technological characteristics of the production of traditional technologies, the diffusion rate of new technologies and, consequently, the accumulation process of new physical capital through investment decisions. The change in the scale dimension, on the other hand, involves two different compensation effects which generate variations in the level and structure of final demand: price compensation effects and income compensation effects. Evaluation of both these effects can be conducted only with difficulty within a single theoretical framework, though it is not ruled out a priori, because these effects implicitly assume two different channels through which productivity increases determine growth in final demand and its components. The first of these channels presupposes a competitive, or relatively competitive, market structure that permits productivity gains to be transferred to prices, then to induce a potential higher final demand when relative and absolute prices change. A second channel entails an oligopolistic or monopolistic market structure where prices show so me rigidity, absolute or partial stickiness, and increases in productivity imply nominal income growth and changes in its social distribution between wage-owners and profit-owners. The predominance of one or the other of these channels will depend, on the one hand, on the theoretical framework assumed by the economist in building the model (thus on the "theoretical point of view") and, on the other hand, on the economic system for which the model has been constructed and to which it is to be applied, for example the relative importance of the international dimension for a particular economic system. I shall now consider in more detail those compensation mechanisms which have to be incorporated in a model of the employment effects of new technologies in order to give it more general character (Figure 1). Impact employment effects, given final output, should be divided into at least two typologies, the analysis of wh ich requires evaluation of different economic determinants according to the specific typology considered. Given the labour-saving nature of new technologies in their utilization phase, a first typology consists of the reduction of the quantity of labour employed using the new production processes to produce the same quantity of final goods. The effect of reduction in labour demand occurs in sec-

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Macroeconomic Analysis of the Employment Effects of Technological Change

129

tors where the old technology has been replaced by the new one characterized by less labour intensity. In addition, the time path of this effect will depe nd on the diffusion rate, partially endogenous, of the substitutive technology. However, consideration should also be made of the production characteristics of this new technology, and consequently of the second typology of impact employment effects. According to whether the new technology is labour-using or labour-saving in the production phase, compared with the previous technology, either a compensation effect or an additional saving of labour emerges in the production sector of new technology. Similar effects are also obviously obtained in other industrial sectors which have links with the production sectors of capital goods. However, it is more important to consider the characteristics of the new technology with respect to the utilization of other inputs, in particular physical capital, in the phases of its utilization and production. Generally, a labour-saving innovation is traditionally seen as a technology which substitutes physical capital for labour. The capital-using character of these technologies emphasizes the compensation effects in their production sectors: in fact, the gradual replacement of capital stock embodying the tradition al technology by capital stock embodying new technology which is capital-using compared to the old one, triggers a strong technology multiplier compensation effecl. In recent studies, the labour-saving and capital-saving character of embodied technological change has been replaced by its labour-saving and capital-using nature, and this according to some authors renders the technology multiplier effect in the production sector of capital goods less effective. However, it should be pointed out that although this is certainly true in a context where the new technological system is ";\ regime" (that is when the substitution process of new technology for the old one is substantially completed and the new physical capital stock has thus replaced its predecessor), during the adjustment process of this stock the technology multiplier effect maintains its compensation potential. In fact, it is important to distinguish between stock variables and flow variables and to observe that the substitution of innovative for traditional physical capital stock implies an important investment flow in order to bring the new technological system ";\ regime". The faster the diffusion rate, the more intense this flow will be. For this reason, comparison between two situations ";\ regime", that is, equilibrium with the old technology and equilibrium with the new technology characterized by less labour and capital intensity, appears to be no more than an exercise in comparative statics. Although this is certainly not useless, it should not be at the expense of analysis of the transition and the associated time path of employment in the production and utilization sectors of the new physical capital. In addition, it is difficult to imagine that the transition to a situation ";\ regime" in which the new technological system dominates will occur only

130

Paolo Pini

once, because at the beginning this is not entirely defined as regards technological characteristics and economic profitability. It is instead likely that it will be subject to continual adjustments, which are important even during its adoption. This will lead to a gradual, though probably discontinuous, adjustment process of the capital stock. It may even be difficult to imagine a new technological system reaching an ";1 regime" situation, since the required timing flow of investments will be realized through, for instance, vintages of fixed capital that are qualitatively different from each other with respect their output/capital, output/labour and capital/labour ratios. In this extreme, but not impossible, case, comparison between ";1 regime" situations becomes meaningless, for it is not possible to conceive any situations as equilibrium ones. It seems, therefore, that even in the case in which embodied technological change is both capital-saving and labour-saving, the effectiveness of technology multiplier effects in the production sector of capital goods cannot be neglected. For these reasons, we may conclude that in evaluating the impact effect given final output, the negative employment effects of the utilization of labour-saving technologies should be considered together with those, potentially of opposite sign, induced by the production of these technologies, in relation to the utilization of other production inputs. With respect to indirect effects, I have already observed that the scale dimension of the economic system, and therefore its output, demand and total employment levels, may be affected by the adoption of new technologies through two distinct mechanisms: the transfer of productivity gains onto prices or onto nominal incomes. These mechanisms trigger substantially different employment compensation effects, and different economic and institutional factors mediate their functioning and effectiveness. The first mechanism is typical of neoclassical analysis, and its effectiveness is based essentially on the degree of competitiveness of the different markets for domestic and foreign goods. If prices are flexible, in fact, sectoral demand will tend to adjust in response to changes in relative prices and to decrease in the absolute price level. The demand for those goods produced using the new technology will increase when their production price falls, just as demand for other goods will increase in response to higher purchasing power among the consumers. Models where the central role of this channel is emphasized give considerable importance to the different demand elasticities, own- and crosselasticities, with respect to prices and real income for each goods. In addition, the distinction between domestic demand and foreign demand becomes particularly important, since, as regards the latter, gains in price competitiveness for domestic products in international markets could have important scale effects on the output level, and then on unemployment reabsorption mechanisms - given international trade elasticities, volume of trade and the share of the innovative country in international trade. Moreover, we should not only consider the effects of technical progress on

Macroeconomic Analysis of the Employment Effects of Technological Change

131

foreign market penetration for a specific country, but also the possibility that it will substitute domestic product for foreign supply. In models where this theoretical framework based on a concept of price competitiveness is adopted, careful evaluation of the structural characteristics of an economic system open to international trade is therefore crudal. This latter aspect is, however, also present in those models built on the recognition of markets of final goods and production factors, and in which the notion of competitiveness is replaced by oligopolistic structures characterized by price stickiness. In this context, however, the transmission channel of technical progress effects on domestic and foreign demand is substantially different from the previous one. These effects occur through the growth of nominal income and the ways in which this growth is distributed between profit-earner and wage-earner. In the process of income growth and changes in its sodal distribution, institutional factors are linked to economic ones, since the analysis of income compensation effects requires spedfication of the micro- and macro-economic relationship between the dynamics of profits and wages and the dynamics of investments and consumption, and thus of final demand. The analysis may be carried out by identifying spedfic economic-institutional regimes of growth within the overall spectrum of feasible growth regimes. On the one hand, there is a Keynesian-type regime in which real wage growth is linked to productivity gains, within an institutional-bargaining framework which guarantees the transfer of benefits of technical progress to employed workers. At the same time, the investment dynamic depends directly on the consumption dynamic and on demand in general, on ac count of the multiplier-accelerator prindple. On the other hand, there is a different regime, which we may call "classical", where the competitive structure of the labour market permits the transfer of productivity increases to profits. These, in turn, represent a crudal determinant in investment dynamics and thus, by sustaining the accumulation process, stimulate the growth of final demand and employment. In both regimes, a mix of microand macro-relationships stimulate growth, and therefore demand-pull employment compensation effects are present. Similarly, it is possible to think of other types of regimes which are not on equilibrium growth path, such as "crisis regimes". In fact, a different mix of micro- and macro-relationships with respect to previous ones may lead to depression or to increasing inflation situations, but also to stagflation (as has actually occurred), which affect negatively the growth of domestic components of demand as well as of the foreign component through competitiveness losses. Obviously, the spectrum of possibilities is wide, and we should therefore consider other growth regimes with characteristics that lie between the previous ones: they may imply growth in nominal income and final demand without radical changes in the sodal distribution of net product.

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Paolo Pini

Independently of the prevailing growth or cnSlS regimes (c1assical or Keynesian, depression, inflation or stagflation situations), models which emphasize the functioning of income effects stress the importance of a negative employment impact in the determination of growth regime. This is the reduction of wage income deriving immediately from job losses due to new technologies in their adoption sectors. The negative employment impact, in fact, affects private consumption and thus final demand through labour income losses. If the pattern of investment is very sensitive to demand factors, such as past trend of demand or backward-Iooking expectations for future demand, in a model based on the multiplier-accelerator principle the compensation effectiveness of transferring the benefits of technical progress on nominal income and on their distribution is very weak, with a negative effect on the re absorption mechanisms of technological unemployment. Given the above structure of a general model for analysing the employme nt effects of technological change, the evaluation of empirical models first of all requires identification of the specific theoretical scheme adopted. In this phase, there are at least two extreme options available. The first is to consider each theoretical scheme as a partial one, and the consequent empirical model as not incorporating the complete set of the different, direct and indirect, employment compensation effects previously discussed. A second option is based instead on the idea that each scheme or model derives from the specific "point of view" of the economist. The model should not be interpreted as partial, for it has its origin in the theoretical framework adopted to interpret the functioning of an economic system. A third option, less radical but without doubt more demanding, is the one which I have adopted. It is based on cert~in elements belonging to both the first and the second option: (i) while we recognize that the "point of view" of the economist is crucial for identification of the model and that the model must therefore inc1ude subjective elements, at the same time (ii) important objective elements cannot be ignored. These are, on the one hand, the coexistence of direct employment effects given final demand and indirect effects deriving from its changes, and on the other, the importance of the international context within which the indirect employment effects occur. On this premise, theoretical schemes which do not take into account both the effects acting according to final demand and the effects which are consequent on its changes in an open economy will result in an empirical model which is not able to capture the macroeconomic effects of technological change on employment, while the varying attention given to the ways in which endogenous changes of effective demand affect the employment adjustment path can only depend on the "point of view" of the economist.

Macroeconomic Analysis of the Employment Effects of Technological Change

133

3. Some Types of Aggregate Models In aggregate-type models, the reabsorption mechanism of technological unemployment is mainly driven by the growth of effective demand through compensation effects modifying nominal income. The market structure usually assumed is imperfect competition, so that price effects do not have a decisive role in the model, except as regards their implications for international competitiveness. These models have largely Keynesian-Kaldorian characteristics and incorporate not only macro-economic relationships traditional to this framework, but also the determinants of technological change and institutional regimes that affect income distribution 2 . In addition to these models, also worthy of note are various attempts to integrate aggregate analysis and multisectoral analysis, the aim being to exte nd the range of compensation mechanisms suggested by the theory embodied in the model. One such attempt is the HERMES modeP, where the technological characteristics of the macro-sector considered are defined with respect to ex-ante f1exibility and ex-post rigidity in the utilization of production factors, using a "vintage capital" model. In these models, technological change is usually conceptualized as a general increase in labour productivity due to the diffusion within industries of new production technologies. Particular attention is paid to the effects determined by these productivity ga ins on the main variables of the economic system: output, income distribution, final demand and employment, so that identification of a technological change which is not particularly differentiated between sectors leads to investigation of the macro-economic relationship, in particular as regards the demand side of the market. The Sylos Labini model can be defined as a cIassical-Keynesian one. It combines variables crucial to the Smithian and Ricardian analysis of productivity increases and macro-economic reIationships between productivity growth, demand growth and employment growth. Productivity increases derive from the adoption of innovation induced by demand expansion and by the dynamics of production costs. Demand expansion stimulates innovation through a greater division of labour within the firm and among firms, through larger market opportunities stimulating investment activity Cphysical capital) embodying labour-augmenting and capital-augmenting technologies, and through greater exploitation of economies of scale within the existing technological system. While these demand factors do not necessarily lead to the adoption of factor-saving innovations, cost factors induce this bias in the adoption process. In particular, the tendency towards an increase in variable costs, 2 The reference in this case is principally to the works of Sylos Labini (1989), (1990), Boyer (1988a), (1988b), Boyer/Petit (1981), (1988) and Boyer/Coriat (1986).

3

See Bosi!Golinelli!Stagni (1990).

Paolo Pini

134

mainly labour costs, with respect to the price of final goods and the price of physical capital induces the adoption of labour-saving technologies. In the short term, the growth in labour costs (the ratio of wages to productivity) induces a saving of labour through the production restructuring of a given stock and structure of physical capital. In the long term, growth of wages with respect to the price of machinery induces a substitution of physical capital for labour, and thus the adoption, by means of investment activity, of labour-saving technologies. This can be represented by the following equation:

(3.1) where 1t denotes productivity increases, y the growth rate of demand, I P the ratio between labour costs growth and prices growth, w - Pm the ratio between wage growth and machinery price growth. The employment dynamic is clearly not simply affected by productivity growth, but is rather a combined result of the productivity and aggregate demand dynamics, following the relation: n=y-p

(3.2)

where n represents the growth rate of employment. It should be noted, therefore, that if, on the one hand, demand increases positively stimulate employment, they also slow down employment growth through productivity gains. At the same time, however, we should observe that productivity gains are partially realized through investment activity affecting positively effective demand, and also bring about nominal income increases, thus to stimulate demand and employment growth. From this, it follows that with regard to employment:

(3.3) and regarding unemployment: (3.4)

u = - g}'(y) + fz'(l- p) +f3'(w - Pm) + heft)

where ft represents the rate of growth of the labour force. The real dynamic of unemployment is thus the result of a complex interaction between demand growth and productivity growth, given the dynamics of relative costs. And it is not necessarily negatively affected by the adoption of labour-saving technologies. The compensation mechanisms in this model are twofold in character. First, the recognition of a non-competitive market structure leads to emphasis of the transfer of productivity ga ins to nominal incomes, without, however, any distinction between income distribution shares. Second, labour-saving technological change induced by cost dynamics implies an accumulation process (investment in capital stock with less labour intensity) which sustains demand and triggers technology multiplier compensation effects. The empirical evidence regarding some of the industrialized countries of the OE CD area seems to confirm the explanatory power of the model, at least in terms of recent experiences,

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135

and shows that while the cost variables affect negatively (positively) employment (unemployment) by means of a labour-saving innovative process, the income variable acts as a compensation factor. At the same time, different countries present different employment and unemployment elasticities with respect to income and costs, as weil as a different productivity elasticity with respect to the same variables (Tables 1-3).

Table 1 Empirical Evidence far the Classical-Keynesian Model: Productivity Equation 7t Country Main independent variables y(t)

1- pet - j) W -

R2 DW

Pm(t -

i)

j

i Period

D

FR

SWE

USA

CAN

J

0.36 0.15 0.45

0.29

n.s.

0.66

0.47 - 0.05' 0.39

0.34' 0.41 0.66

0.15 0.12' 0.27

0.43 0.13' 0.45

0.72 0.09 0.33

0.84 1.98 1 2-3 60-85

0.50 1.45 1 3 68-88

0.85 2.30 1 2 63-85

0.66 2.40 1 2-3 71-88

0.51 1.90 1 3 62-88

0.71 1.96 1 2-3 69-85

0.98 1.88 1 2 70-88

Notes: a) estimates based on annual time se ries for manufacturing industry; b) • represents t student coefficient less than 2. Source: Sylos Labini (989), (990).

Table 2 Empirical Evidence for the Classical-Keynesian Model: Employment Equation n Country Main independent variables y(t)

1- pet - j) W -

R2 DW j

Pmet -

i Period

i)

D

0.64 - 0.14 - 0.45 0.84 1.98 1 2-3 60-85

FR

SWE

USA

CAN

J

0.71

0.51 0.66 0.57 0.28 0.85 - 0.06' - 0.41 - 0.12' - 0.13' - 0.09 - 0.66 - 0.37 - 0.66 - 0.27 - 0.45 - 0.33 0.78 0.80 0.85 0.66 0.96 0.93 1.45 2.30 2.40 1.96 1.88 1.90 1 1 1 1 1 1 2-3 2 2 2-3 3 3 68-88 63-85 71-88 62-88 69-85 70-88

n.s.

Notes: a) estimates based an annual time se ries far manufacturing industry; b) • represents t student caefficient less than 2. Source: Sylas Labini (989), (990).

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136

Table 3 Empirical Evidence for the Classical-Keynesian Model: Unemployment Equation u Country Main independent variables y(t) 1- pet - j) W - Pm(t - i) R2 [W

i Period

SWE

USA

CAN

J

D

FR

- 3.98 0.55' 3.20

- 5.66 3.95' 6.26

- 2.64 2.14 4.74

- 5.73 1.21' 1.31

- 2.24 - 1.17 1.15 - 0.40' 1.44 1.10

0.77 2.13 0 2-3 60-85

0.65 1.75 0 2 68-88

0.64 1.85 1 2 63-85

0.82 1.70 0 2-3 70-82

0.72 1.86 1 2 69-85

0.57 1.57 1 2 70-88

Notes: a) estimates based on annual time series for manufacturing industry; b) • represents t student coefficient less than 2; with the exception of Italy, the total unemployment rate is considered. Souree: Sylos Labini (989), (1990).

Some comments are now in order on the generality of the model, wh ich the da ta see m to fit adequately. The Sylos Labini model, with its classical-Keynesian character, is based on the concept of "dynamic substitution" between production factors, and contrasts with the "static substitution" that derives from a neoclassical framework. According to the latter, factor demand is based on the principle of marginal factor substitution given an optimization process in an environment in which technology is represented by a continuous set of reversible techniques, with ex-ante and ex-post flexibility and responding to short-run changes of relative prices. According to the concept of dynamic substitution, on the other hand, changes in the capital/labour ratio cannot be independent of accumulation decisions, for in the short run the techniques actually used are characterized by relative rigidity in the utilization of production factors and in the ratio between them. At the same time, these techniques are not reversible at any given moment, because they are the result of past investment decisions adopted on the basis of long-term trends in relative factor prices and of the dominant technological trajectory. This view, although broadly satisfactory from the theoretical point of view, is not general enough (or elaborate enough, according to some authors) to challenge the neoclassical framework. In fact, if the contrast between the neoclassical static framework and the classical-Keynesian dynamic one is replaced by the contrast between the latter and a neoclassical framework where factor substitution is feasible ex-ante but not ex-post, one can identify models belonging to the se co nd approach wh ich are just as

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explanatory of the production factor demand dynamic. The reference in this case is to the "putty-clay vintage" model in wh ich factor substitution (0 is realized through decisions to invest in new technologies with specific capital/output, labour/output and capital/labour ratios; and (ii) depends on the past pattern of the relative factor prices and output price. Two models may be cited here. The first, a neoclassical one, has been developed by BosilStagni, and is based on a dynamic optimization process which permits estimation of marginal coefficients of adjustment for physical capital and labour factor to be obtained. The second, based on the concept of technological trajectory, is put forward and applied by Clark. It identifies the causes of the emergence of technological unemployment as the constraints imposed by a particular vintage structure of physical capital. In both models, the technological nature of unemployment is mostly explained by the functioning of supply factors: technological characteristics of new production techniques, and the factor price pattern wh ich induces a specific capital structure du ring the accumulation process. In the Sylos Labini model, on the other hand, the technological nature of unemployme nt is combined with an essentially Keynesian one, determined, therefore, by factor demand, since the pattern of effective demand does not follow that of productivity. A second consideration as regards the generality of the classicalKeynesian model is that the empirical evidence obtained using an aggregate model could be the result of changes in the relative share of different sectors of the economic system characterized by different employment elasticities. Specifically, employment differentials (and thus also productivity differentials) among so me industrialized countries, and the different income elasticities of employment volume, could be explained by structural factors specific to each country, wh ich generate the well-known "sectoral composition effect,,4. In fact, considering only the two main sectors in the economic system, the industrial and service sectors, the employment differentials between countries, given their different sectoral compositions, can be determined by: differentials in the sectoral output elasticities of employment and/or sectoral differentials in output growth. The first case implies that, even in the case of identical output growth, sectoral and aggregate, employment differentials are generated which benefit the country by giving a greater output elasticity of employment in the larger sector. The second ca se implies that if, in addition, the growth rate is higher in this larger sector, the employment differential between countries will be even higher, and consequently that they will differ with respect to the aggregate productivity pattern. This suggests that employment 4

Cf. Piacentini (987).

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and productivity differentials between countries are not necessarily determined by the different intensity of economic impulses to labour-saving technological change, but will also depend on the sectoral composition, and thus on the structure of the economic system. In addition, this suggests, on the one hand, that cautious use should be made of aggregate models to evaluate the employment effects of technical progress and in the interpretation of the empirical evidence obtained with them, and, on the other, that multisectoral analysis should be used to explain the different sectorial compositions of the economic system and the extent to which they are the result of different stages of development, of different demand structures, and of different technical progress dynamics. In addition, as regards specification of the model, one can identify at least three limitations: the lack of explicit consideration of the distribution mechanisms which determine the share-out of benefits deriving from productivity gains among different categories of income owners; the lack of any analysis of the effects of productivity on the price competitiveness of domestic products on foreign markets; -

the attention directed towards cost variables without consideration of the input and output variables of the innovative activity.

The first of these limitations leads to emphasis on a direct relation between productivity growth and income growth, and ignores the complexity of the income compensation effects. The analysis of distribution mechanisms could permit instead different types of growth regimes to be identified, depending on the institutional context assumed. The second limitation regards the characteristics of an open economy which, through international trade, can activate mechanisms compensating job losses due to labour-saving technological change by means of domestic price and export price reductions and thus also by means of changes in the terms of trade. The third limitation indicates that there may be process innovations wh ich are adopted when specific cost-side economic impulses emerge. This could obscure, on the one hand, the existence of specific technological trajectories developing in the long run as the result of interactions between demand and supply factors and, on the other hand, the timing of the actual realization, adoption and diffusion of labour-saving innovations. The evaluation of input and output indicators of economic activity could constitute a first step toward a more adequate specification of the model. The analyses developed by Boyer, Coriat and Petit, for example, move in this direction. The growth regime is determined not only on the basis of macroeconomic Kaldorian-type relationships between productivity, aggre-gate demand and investment level, but also depends on the specific characteristics of

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139

adopted technologies in the economic system and on existing distribution mechanisms in the socio-economic sphere. The cumulative growth model is based on the interaction between output growth (and demand growth) and productivity growth which develops through two distinct sequences or causal relations. On the one hand, productivity increases are stimulated by total output growth; on the other, the productivity increases themselves stimulate total demand growth. These relations constitute the solution of a macroeconomic model linking different endogenous and exogenous variables. The positive or negative sign of these causal relations cannot be specified apriori, since it is determined by various structural parameters of the model wh ich represent technical and economic behavioural relations. Similarly, the intensity of the stimulus induced by a specific variable on other variables is not independent of the structural parameters of the model. The cumulative growth model, formalized for a c10sed economy as folIows, can be summarized by analysing the determinants of productivity and demand s. (3.5)

1t

a + b(I) + d(Q) f + v(C) + u(1t - RW)

(3.6)

g + c(N. RW)

(3.7)

C

(3.8)

RW

(3.9)

Q

aC + (1 - a)I

(3.10)

N

Q-1t

h + k(1t) + I(N)

Changes in labour productivity reflect variations (j) in investment activity which, by embodying new technologies resulting from innovative activity (summarized by input and output indicators and by the bias of technical progress), determines changes in the capital/output ratio, and (ii) in demand for goods, given economies of scale prevailing in the economic system. Investments, in turn, depend on the dynamics of final demand on the Cf. Boyer 0988a) and Boyer/Coriat (986). In this model, 1t denotes productivity, I investments, Q demand, C consumption, N employment, RW real wage. The constants a and f reflect the intensity of innovative activity - for example the role of research and deve10pment expenditures, the number of patents, the bias of technical progress (labour-saving) - and constants g and h respectively stand for the share of autonomous consumption of workers and profit-earners and exogenous factors intervening in the formation of real wages. Finally, the parameters band d, represent, respectively, the incidence of technological factors (capital intensity and economies of scale), v and u the dependence of investment on the dynamic of consumption goods (accelerator principle) and on the profit share represented by the so-called "wage gap" (difference between productivity growth and real wage growth), c the usual propensity to consume on labour income, k and I the dependence of real wage formation on the productivity dynamic (the transfer of technical progress to workers) and on labour market competitiveness, and Cl the subdivision of total output between consumption activity and investment activity. All variables are expressed as growth rates.

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Paoio Pini

basis of the accelerator principle, and on the profit share, related to the pattern of wages with respect to the pattern of productivity. Consumption, on the other hand, is determined on the basis of a classical type of expenditure behaviour (workers consume and profit-earners invest), and reflects essentially the labour income which depends on the dynamics of real wage. This, in turn, reacts to two distinct mechanisms: a competitive mechanism on the labour market, and a mechanism of social distribution of benefits deriving from productivity increases. In an open economy, we should also consider the net exports variable in the determination of demand dynamics, since this variable depends on internal and external factors, that is, on the evolution of foreign markets, the terms of trade, and the price competitiveness of domestic output. The characteristics of the model are therefore represented by three key elements: -

the exogenous and endogenous incidence of technical progress intervening through the adjustment of capital stock, economies of scale and the effective demand pattern; the decision-making behaviour of employers regarding investment, influenced by the market demand for goods and profits; distributional mechanisms determining real wages: competitive mechanisms versus mechanisms sharing benefits deriving from productivity gains.

In an open economy context, the above model must be modified in order to take account of commercial flows among countries, in particular when these depend on the price competitiveness of tradeable goods 6 . This suggests that a second transmission channel of productivity gains on demand should be considered: the price effect constituted by the reduction of internal prices compared to foreign prices, in addition to the previous inco me distribution effects on macroeconomic variables. In this context, reductions in domestic prices following productivity increases permit an increase in the foreign market share for thecountry showing a sustained rhythm of technical progress and also a decrease in the foreign product penetration of domestic markets. The growth of net exports, in a demand regime in which investments are particularly sensitive to effective demand dynamics, can positively affect the growth of the economic system. In a demand regime in which investments are very sensitive to changes in profits, the effects on demand induced by productivity increases could turn out to be even larger, because, although the accelerator principle does not operate with its previous intensity, given mark-up practices there will be an increase in real profits per unit of labour employed. The cumulative growth model seems therefore to constitute a useful theoretical framework for analysis of the possible growth regime as weil as of the transition from one growth regime to another. The macroeconomic relationship embodied in 6

Cf. Bayer/Petit (1988).

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141

the model permits us, in fact, to relate some key variables influencing the growth rate of productivity and thus the growth path of economic systems. These variables are, in particular, the expansion speed of the final goods market, the pace of capital goods formation, the dynamics of wages and profits, and the intensity and direction of innovative activity. In addition, these relationships allow us to explain the transition between distinct regimes induced by changes occurring in the following three factors: pace and direction of innovative activity; behaviour of economic agents determining the rate of growth of investments; transmISSIOn mechanisms of the benefits deriving from productivity gains onto incomes, their distribution and prices. So me of the relations previously indicated have been empirically analysed with reference to a number of European countries in the 1960s and 1970s by an estimation of both the structural and reduced forms of macroeconomic model. The functional relationships among the economic variables considered can be summarized as folIows. For the structural form 7 : (3.11)

n

(3.12)

I/Y

(3.13)

y

(3.14)

x

(3.15)

1t

=

fl(I/Y, y, RAT, ORINNO) f2(y,INNO) f3(x, yD

=

f4C1t, er, ORINNO) y-n

and for the reduced form, with reference ployment and productivity: (3.16)

y

=

(3.17)

n

=

(3.18)

1t =

to

the variables production, em-

gl(Yi, er, Ym, dI/Y, dn, RAT, INNO, ORINNO) g2( Yi, er, Ym, dI/Y, dn, RAT, INNO, ORINNO) g3(n er, Ym, dI/Y, dn, RAT, INNO, ORINNO)

The empirical evidence obtained by estimating both the structural and the reduced form (Tables 4-5) seems to confirm the causal relationships hypothesised in the model. Allowing for the obvious caution required in view of the somewhat arbitrary input and output variables of innovative activity used, the innovative process would appear to produce negative direct 7 The variables represent the following: y the rate of growth of value added: n the rate of change of manufacturing unemployment: I!Y the investment/value added ratio: Yn the rate of growth of domestic demand: 1t the rate of growth of labour productivity: x the rate of growth of manufacturing exports; RAT the ratio of investment in machinery on total investments: ORINNO the share of process innovation on total innovation: INNO the share of dvil R&D expenditures on total income: er the variation of the exchange rate expressed in U.S. dollars. Ym, L'1I/Y, L'1n represent a positive shift in the export equation, in the investment rate equation, and in the employment equation.

142

Paolo Pini

effects on employment, but positive direct effects on produetivity. The effeet indueed by the aeeumulation proeess on employment seems to be negative, while it appears to be positive on productivity and on final demand. However, employment compensation effects emerge clearly from the estimation of the model. It is induced by the direct and indirect impact of the innovative process and productivity gains on the dynamics of exports and on final demand growth.

Table 4 Summary of Results of the Structural Form Estimation of the Cumulative Growth Model for an Open Economy Equations Main variables

n

I/Y

0.54 - 0.43

0.26

y 0.56

Yi Y I/Y 7t

x er RAT INNO ORINNO

x

0.57

0.32

- 0.37

0.002'

1.3

- 0.027'

0.0026'

Notes: a) , represents a coefficient with t student less than 2; b) the countries considered in the estimates are ltaly, West Germany, France, United Kingdom, Belgium, Netherlands for the period 1960-1976; c) FIML method. Sourees: Boyer/Petit (981), (988).

Table 5 Summary of the Results of the Reduced Form Estimation of the Cumulative Growth Model for an Open Economy Endogenous Exogenous variables Yi er RAT INNO ORINNO Ym LlI/Y ßn

multiplier = 0 multiplier = 1 multiplier = 2

y

n

7t

0.63 - 0.13 - 0.0003' 0.12' 0.015 0.36 0.09' 0.59 1.1 - 0.2'

0.27 - 0.06 0.002' - 0.52 - 0.002' 0.15 - 0.40 - 0.19' 0.03' 0.91

0.36 - 0.07 - 0.0017' 0.64 0.035' 0.21 0.49 0.78 1.07 - 1.11

Notes: a) • represents a coefficient with t student less than 2; b) the countries considered in the estimates are ltaly, West Germany, France, United Kingdom, Belgium, Netherlands for the period 1960-1976; c) FIML method. Source: Boyer/Petit (1981), (988).

Macroeconomic Analysis of the Employmem Effects of Technological Change

143

With the previous two models and the associated empirical evidence, I have stressed how price and non-price compensation mechanisms function in the economic system by changing the domestic and foreign components of demand. At the same time, however, a difficulty emerges regarding the endogenous treatment, in the empirical analysis, of these joint compensation mechanisms. Another fundamental limitation of these models is the aggregate specification, which is unable to identify the distinct effects of technological change in the different sectors and on the various sectoral components of demand for which the influence of compensation effects is highly differentiated. This limitation and the difficulties set out above indicate the need to build an integrated model of a "macro-sectoral" type, such as the HERMES simulation model. This model has been recently used to analyse the employment effects of the diffusion of information technology in various European countriesB considered as a whole, using a methodology designed to compare different scenarios of technical progress. The HERMES simulation model, constituted by single national HERMES models in Link, follows the tradition of econometric models deriving from the post-Keynesian framework. With respect to these, it has two important differentiating elements: the recognition of the role of the supply side as weil as the demand side; the sectoral specification of the important economic variables, with respect to the distinct production factors, the composition of final demand and the technological characteristics of different sectors. The theoretical framework of the HERMES model has both neoclassical elements (optimization behaviour of economic agents) and Keynesian elements (specific price and wage stickiness assuming non-perfect market competition). The neoclassical elements playa role principally in the determination of the supply side of the model aimed at specification of factor demand and productive capacity based on long-run substitutability relations. In the specification of the supply side of the model, Keynesian elements are also important for analysis of adjustment lags and the rigidity of some nominal variables. These stress the role of effective demand in determining the growth rate of output and productive capacity. Keynesian elements are also crucial in specification of the demand side of the model, focusing attention on traditional aggregate variables constituting domestic and foreign effective demand. Here the model specifies an aggregate demand curve with the usual Keynesian characteristics. B The countries considered are France, Italy, West Germany and the United Kingdom.

144

Paolo Pini

In particular, the supply side is based not only on traditional relationships between wages, prices and employment which together determine aggregate supply, but also on explicit consideration of factor demand Ccapital, labour, energy, intermediate inputs) as functions of their relative prices, on the assumption that firms follow an optimization procedure. Given an oligopolistic structure in goods markets, the determination of factor demand and their optimal combination also depends on market demand. In addition, ex-post substitutability characterizes only some productive sectors, while for others a putty-clay approach is adopted whereby substitutability between inputs can occur only through a new vintage of capitalrequiring investment decisions. Factor demand is thus more rigid in the short run than in the long run. In conclusion, the optimal factor combination and the desired productive capa city depend in the long run both on the dynamics of expected relative input prices and on effective demand. Changes in these require adjustments in the structure of physical capital by means of investment decisions, while in the short run they are essentially the result of previous investment decisions. For these reasons, disequilibrium situations can occur in which the effective demand differs from that of full employment for structural reasons rather than because of short-run business cycles. Therefore, given the structure of the model and the specific behavioural relationships, a not particularly rigid aggregate supply curve emerges. Considering this supply side characteristic together with demand side characteristics, the HERMES model presents substantially Keynesian features with strong stabilization mechanisms due to its incorporation generated by embodying neoclassical elements9. The analysis of the employment effects of the diffusion of information technology using the HERMES simulation macro-economic model has been carried out by means of modifications both on the supply side Cchanges in sectoral labour productivity), and on the domestic and foreign demand side of the model ühe rate of sectoral investment and the sectoral competitiveness of domestic product on foreign markets respectively). These changes have been made, not by altering the specified behavioural relationship, but by introducing shocks in specific productive sectors (capital goods, transport and communication, and other market services) which in turn trigger endogenous effects on sectoral and aggregate variables lO . Three different types of the impact of information technology have been considered: 9 For a more detailed explanation of the model see Italianer (1986), Valette/Zagame (1991), Bosi/Golinelli/Stagni (1990), Van Der Putten (1987), Faubry/MoncomblelVidal/Zagame (1984). 10 That is, the residual adjustments in the error correction procedure of the behavioural equations.

Macroeconomic Analysis of the Employment Effects of Technological Change

145

-

the increase in labour productivity, stimulated by the reduction of sectoral employment;

-

the increase in the rate of investment required to adjust the capital stock, undertaken by increasing sectoral investment; higher competitiveness on foreign markets, specified by a rise in the share of world market by European countries in specific sectors 11 •

The first impact produces three types of employment effect in the model, one direct and two indirect. The direct effect is obviously the reducti on of employment in the production and utilization sectors of information technology, consequent on assuming labour-saving characteristics in the production and utilization of the adopted technologies. The indirect effects are instead income effects and price effects. The income employment effect is negative, and is determined by the reduction in disposable income due to the direct employment effect inducing a reduction in growth of consumption and thus in investment, in total output and employment. The price effect is in contrast to this, however, since, according to this model, higher productivity implies cost and price reductions and stimulates domestic and foreign demand. The second impact tends to determine positive employment effects through the capital stock adjustment channel in the production and utilization of new technologies as weil as the stimuli induced by large investments on total income, consumption and thus total output and employment. The third impact essentially stimulates export demand and the growth of the system on the foreign demand side of the model, triggering strong employment compensation effects. The expansion effects acting on the demand side, however, do not only lead to increase~ in real income and thus employment; they also trigger inflationary pressure (direct and indirect, through the mechanism of wage determination) which, by acting as a stabilization mechanism for the growth rate of the economic system, slows down the endogenous compensation mechanism. The results of the simulation obtained using the HERMES model allow us to compare the growth of the economic systems of the four countries considered, both for the reference scenario and for a variety of alternative scenarios implying a higher rhythm of diffusion of information technology, assuming different rates of growth of labour productivity and investments in three different sectors, and also greater competitiveness for domestic products and services in foreign markets, assuming a rise in the growth of net exports for the same sectors (Table 6). 11

Cf. Gerstenberger/Golinelli/Vogler-Ludwig (990) and Golinelli/Pini (992).

146

Paolo Pini

Table 6 Summary of Simulations Obtained Using the HERMES Model, 1991-2005, to 2005 Scenarios Main variables

2

GDP Private consumption Investment Exports Imports Price of consumption goods Export prices Import prices Nominal wage Real wage Terms of trade GDP Deflator Employment Unemployment rate Labour productivity

4.56 3.54 13.48 0.68 2.50 - 5.83 - 2.04 - 0.76 - 4.96 0.78 - 1.29 - 6.08 - 2.96 1.41 7.96

7.47 4.42 15.75 9.03 6.94 - 4.09 - 0.74 - 0.15 - 0.86 3.31 - 0.59 - 4.03 - 1.08 0.09 8.84

1a 4.34 3.25 14.50 0.85 3.18 - 4.26 - 1.47 - 0.54 - 2.90 1.35 - 0.94 - 4.44 - 1.85 0.76 6.47

1b 5.11 3.96 15.26 0.74 2.85 - 6.34 - 2.22 - 0.82 - 5.25 0.99 - 1.41 - 6.59 - 3.26 1.56 8.88

Notes: a) scenario 1 rapid IT (Information Technologies) diffusion and tradition al competitiveness; scenario 2 rapid IT diffusion and higher competitiveness; scenario 1a as scenario 1 with less productivity and more investment; scenario 1b as scenario 1 with more productivity and more investment; b) the figures indicate percentage differences with respect to the reference scenario. Source: Golinelli (990) and Golinelli/Pini (992).

The HERMES model is therefore able to capture the following important direct and indirect employment effects, ta king into account price and nonprice compensation: 1) the direct effect of the reduction of employment determined by productivity growth given the level of output; 2) the indirect income effect due to the previous negative one; 3) the indirect price effect, acting through a higher domestic and foreign demand of positive sign; 4) the direct effect of capital stock adjustments, also inducing indirect positive effects on the demand side of the model, in investment and consumption components; 5) the indirect effect triggered by higher competitiveness of domestic products on foreign markets.

4. Some Types of Multiseetoral Model In these models, technical progress is seen as a specific modification of certain production technologies which appear to be a technological system

Macroeconomic Analysis of the Employment Effects of Technological Change

147

identifiable in terms of radical innovations, such as those micro-electronic innovations that constitute the basis of information technologies. The analysis thus stresses the effects not only of the app!ication of these technologies, or technological system, in different sectors of the economy, but also of the investment decisions required in order to produce them and the investment decisions induced in other sectors as a consequence of their adoption. A distinction between process and product innovations therefore emerges, according to the industrial sector analysed, as do the interactions between them in term of interdependence and feedback effects. Technological change is thus represented as a progressive and cumulative adoption of new technologies through modifications in the relative rate of utilization of different existing technological alternatives. The process of adoption thus imp!ies a change in the average combination of inputs used differently in each sector. In addition, the emergence of new technological alternatives previously not available is also considered, and thus the activation of a new production process using a different combination of inputs or even new inputs, raw materials, commodities and heterogene aus labour. With reference to multisectoral models, it is necessary first of all to distinguish models with a retrospective character from those designed for forecasting analysis, both of static and dynamic types. The models adopted in the retrospective analysis have structural !imitations when used to assess the technological change effects on the volurne and structure of employment over a given period. Structural decomposition analysis has certainly helped to distinguish the contribution of numerous demand and supply factors to economic growth and structural change: technological change as modifications of technical coefficients of the inter-industry matrix, the growth in labour productivity indicated by variations in the coefficient of the labour input matrix, the overall dynamics of final demand and changes in its structure and individual domestic and foreign components. However, retrospective multisectoral analysis is not able to distinguish, within the final demand contribution, between employment effects induced by autonomaus demand growth and those determined by demand changes due to technological change. Thus direct negative employment effects are attributed to labour productivity growth and to changes in the coefficients of the inter-industry matrix, while indirect employment campensation effects are considered to be the result of the contribution of demand growth, with no distinction being made between those actually occurring because of autonomaus demand growth. Hence the negative employment effects of technological change are overestimated and compensation effects induced by technological change itself media ted by demand growth are attributed instead to demand 12 • 12 Several empirical analyses employ the structural decomposition method, for example Magun (1984), Young/Lawson (1987), Skolka (1984), (1989).

Paolo Pini

148

As regards forecasting with dynamic multisectoral analyses, on the other hand, some research has focused on the interrelations between the pace of technical progress and demand dynamics. The attempt is precisely to verify whether changes occurring in the final demand vector, in both its level and structures, are endogenous in terms of technological progress. This would enable the specific contribution of compensation effects acting through effective demand to be identified. Here, however, traditional input-output models must be distinguished from other models adopting an integrated approach combining the usual structural inter-industry analysis with microand/or macro-economic behavioural relationships. In the analytical approach used in the well-known study by Leontief/Duchin the process of technological change is realized principally through the adjustment of existing physical capital stock. In particular, on the one hand, it is assumed that the replacement of existing capital reflects the usual technology utilized in order to keep productive capacity constant, and on the other, that net investment involves the production of capital goods which increase productive capacity and at the same time modify the composition of capital stock. This investment activity involves changes in the composition of the intermediate inputs utilized and in the employment structure of the economic system. The main novelty in the model developed by Leontief and Duchin consists in its treatment of investment demand as an adjustment of productive capacity with reference to the adoption of new technologies. The analytical framework used the Leontief inputoutput dynamic model is represented by the following equations, where the individual variables are indicated with the usual symbols l3 ; (4.1)

y(t)

=

x(t) - A(t) x(t) - B(t + 1) (x(t + 1) - x(t))

(4.2)

e(t)

= Let)

x(t)

This model, which is usually limited to steady growth, can be modified to analyse disequilibrium conditions between productive capacity and total output. This requires discarding the hypo thesis of full employment of productive capacity in order to permit not only the determination of the sectoral output vector in every period, but also of the specific dynamics of the utilization level of the sectoral productive capacity. In particular, it is necessary to distinguish between sectoral output and sectoral productive capacity, and also to identify the capital stock adjustment as a function of the utilization rate of productive capacity, leaving open the possibility that it does not increase when a low utilization rate of productive capacity occurs l4 . 13 In these equations A, Band L represent the matrix of technical coefficients for intermediate commodities, capital goods and labour input respectively, while y, x and e represent the vectors of final demand without considering investment goods (private consumption, collective consumption and net exports), made up of total output for the different commodities and labour input. 14

That is, the possibility of zero net investment is required.

Macroeconomic Analysis of the Employment Effects of Technological Change

149

Specifically, the Leontief-Duchin model is based on the following assumptions l5 : replacement investments of existing capital are determined separately from those of capital stock expansion; the productive capacities of each sector are not necessary fully utilized; sectoral productive capacity expansion can take some time, and therefore its expansion plans must be formulated in advance; at the same time, the capital goods which have been ordered must be delivered so me period in advance of the time they enter the capital stock and determine sectoral productive capacities; in each period, decisions to expand productive capa city with new capital goods are taken on the basis of previous sectoral growth rates of output. These hypotheses imply a different specification of the B matrix relative to fixed capital. A matrix R(t) regarding replacement investments is specified as weil as a matrix Bü) regarding the inputs of net investment, specified according to the previous hypotheses. When the capital goods required to increase productive capacity at time t + 1 are produced and delivered one period in advance, they are determined as follow: (4.3) B(t + 1) o(t + 1) with the vector oÜ + 1) representing variations of sectoral productive capacities c between t and t + 1, that is, investments: (4.4)

q(t + 1)

q(t) + 0iÜ + 1)

(4.5)

OjÜ + 1)

max(O, q'(t + 1) - q(t))

with ci' representing the desired productive capacity for the future in each sectors. In order to specify q'Ct + 1), the Leontief-Duchin model assumes that this desired capacity is a function of the previous pattern of output for good i in the periods t - 1, t - 2, t - 3, imposing for each sector i a maximum rate of expansion si of productive capacity. The specification adopted is the following: (4.6)

c i '(t+1)=min(l+O"i'

x.(t-1)+x.(t-2) 2 I I ) x i (t-1) (t - 2) + Xi (t - 3)

Xi

Starting from the initial conditions c(t) and x(t - 1, t - 2, t - 3) the values for c', 0 and c are obtained for the periods after t. The dynamic model involving non-full employment of productive capacity is thus determined by the following equations which replace the equations (4.1): (I-A(t) - R(t)) x(t) = B(t + 1) o(t + 1) + y(t) (4.7) 15 Leontief/Duchin (986), p. 135; Duchin/Szyld (985), pp. 271-273; for the analytical model see also Duchin (988).

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Paolo Pini

e

by means of which it is possible to obtain the solution of x(t) far each 6 . The total labour inputs can thus be obtained from equation (4.2), where the element lqi of matrix L(t) indicates the amount of labour of type q required to produce a unit of commodities in sector j for the period t. As is weH known, this model has been used for forecasting, by comparing different scenarios for the United States economy up to the year 2000 with regard to both technological change (in particular the pace of adoption of information technologies) and the pattern of aggregate demand. The main characteristic of information technologies considered is the reduction in direct labour inputs, and thus the focus has been on a specific direction of technological change: the substitution of fixed capital far labour. In the formulation of different scenarios, the net investment component of aggregate demand becomes particularly important, above aH that part aimed at realizing productive capacity embodying new technologies. In fact, the introduction of new information technologies in various sectars requires this demand for investment goods, and it is a key variable in the Leontief-Duchin dynamic model. In addition, capital goods demand acts in the model as an important endogenous compensation factor. In fact, the production of fixed capital embodying the new technology determines a corresponding labour demand and thus triggers technology multiplier compensation effects with respect to labour substitution due to new technology itself. A second compensation factor is determined by the dynamic of final demand (consumption, net exports and government expenditures). This factor, however, is not endogenous to the model, since the dynamic of aggregate demand is not related to the introduction of new technologies, to its effects on relative prices, or to income distribution, but is exogenously determined. Indeed, this represents the most important limitation of the input-output dynamic model constructed by Leontief and Duchin with respect to the analysis of the employment effects of technological change. The empirical evidence obtained by Leontief and Duchin confirms the role and the strength of the compensation effects considered, but also the limitations previously indicated (Tables 7-8). In general, in sectors where the new technologies are introduced the substitution effect prevails, with net labour saving, while in the sectors where the capital goods embodying new technologies are produced the scale effect prevails due to the increase in sectoral output. The evidence of strong compensation effects occurring mainly in the production sectors of new information technologies is obviously due to the structure of the model itself, in so far as: 16

For the existence of positive solutions of x(t), see Duchin/Szyld (1985), pp.

276-278.

Macroeconomic Analysis of the Employment Effects of Technological Change

151

the adoption process of new technologies requires the accumulation of technologically improved fixed capital; other compensation effects are not considered, in particular those mediated by endogenous adjustments in final demand, its level and composition. It is not surprising, then, that in the manufacturing sector adopting new labour saving technologies, employment tends to decrease because it lacks potential stimuli that could be induced on demand by price reductions due to cost reductions. Similarly, the increase of employment in services is not sustained by the growth in demand that could have come from the increase of nominal income due to productivity growth 17 •

Table 7 Percentage Differences in Employment Levels with Respect to the Reference Scenario for Different Occupations, in the Years 1990 and 2000 Occupations

51 - 52 1990

Professionals Managers 5ales workers Clerical workers Craftsmen Operatives 5ervice workers Labourers Farmers Total

51 - 53 2000

1990

2000

5.6 - 13.9 - 9.9 - 32.4 - 2.8 - 4.1 - 3.0 0.6

215 - 41.1 - 17.7 - 45.1 4.3 - 6.5

0.6

10.9 - 10.0 - 4.8 - 23.3 - 17 - 5.4 - 11 0.5

- 1.9

- 5.1

- 8.4

- 11.4

7.1 - 2.2 - 14.2 - 0.6 - 0.9

3.1 19

Notes: a) SI represents the reference scenario in which technology does not change after 1990,

while S2 e S3 represent alternative diffusion scenarios of new technologies, where the diffusion rhythm in S2 is slower than in S3; b) the figures indicate percentage differences in the employment level with respect to the reference scenario. Source: LeontiefiDuchin (1986).

17 In addition, the assumption of an increase in the physical capital coefficients in the sectors using new microelectronic technologies plays a crucial role in determining this evidence - that is, the conceptualization of labour-saving and capital-using technological change. This brings about an overestimation of the technology multiplier compensation effects in the production sectors of capital goods, an effect which has a crucial role in the model in compensating the labour substitution in the utilization sectors.

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Paolo Pini

Table 8 Gross Investment Pattern in Different Scenarios Scenarios SI S2 S3

1981 - 1990

1991 - 2000

54.17 66.58 76.60

78.08 103.38 166.97

Notes: a) SI represents the reference scenario in which technology does not change after 1990, while S2 e S3 represent alternative diffusion scenarios of new technologies, where the diffusion rhythm in S2 is slower than in S3; b) the figures indicate gross investment growth rates with respect to the 1971-1980 decade level. Souree: LeontiefiDuchin (986).

Some of the !imitations we have seen in the previous analysis are at least partly overcome by the dynamic input-output model developed as part of research into the employment effects of microelectronic conducted by Bremen University. Although the approach of the Bremen model follows dynamic input-output models of a Leontief type, it constitutes an important theoretical and empirical advance. There are three main elements of differentiation: the analysis of different diffusion paths of new technologies; a different determination of desired productive capacity; the consideration of some components of final demand, usually assumed to be exogenous, as endogenous l8 • The model considers for each sector j two production techniques 0, II) with fixed coefficients regarding heterogeneous inputs: capital bi, labour li, and intermediate goods ai. Over time, the new technique substitutes the traditional one according to a diffusion parameter a representing the relative weight of the new technique in each sector. The existing technology in each sector far every t can thus be expressed by the following average production coefficients: (4.8)

aij(t)

(1 - aj(t))aIij + aj(t)alIij

lij(t)

(1 - aj(t))llij + ajü)III ij

bijÜ)

(1 - aj(t))bIij + ajü)bIIij

This diffusion parameter is exogenously determined and thus the diffusion path imp!ies a specific scenario assumed for simulationl9 . Cf. Kalmbach/Kurz (990); FrankelWeghorst 0988b). 19 In particular, the diffusion process is represented by variations in time of the parameter aj(t) between 0 and 1 until the period Tj (exogenous) indicating the moment at which the new technology has complete1y replaced the old one. 18

Macroeconomic Analysis of the Employment Effects of Technological Change

153

Clearly, the diffusion of new technology requires an adjustment of capital stock and thus a certain amount of investment to be undertaken on the basis of specific expectations regarding the desired productive capacity. The determination of this desired capacity in each sector is different from that of the Leontief-Duchin model, and is based in fact on long-run and short-run considerations. The aim here is to avoid the strong fluctuations characterizing the investment and productive capacity pattern in the Leontief-Duchin model, and the consequent long-run cycles. In the Bremen model the desired productive capacity in each sector depends on a longrun factor and on a short-run factor 20 . The first is represented by the previous growth trend of sectoral capacity, determined on the basis of a stochastic error correction process: (4.9)

K(l(T + 2)

(4.10)

gKTrj(t)

=

= (1

(1 -

+ gKTrj(t))Kj(t + 1)

LamTrpgKTrj(t - 1) + LamTrjgxj(t - 1)

where gXj(t - 1) = (Xj(t - 1 - xjCt - 2))!xj(t - 2) and LamTrj is the error correction parameter. The short-run factor is constituted by the growth rate of production in the recent past, taking into account also the normal level of utilization of capital stock. Formally: Kj'S(t + 2)

(4.11)

=

min(Ka, Kb)

K b simply indicates a given maximum growth rate of sectoral productive capacity, (1 + gKMaxpKj(t + 1). Ka represents instead the desired productive capacity at the normal level of utilization of capital stock, defined as: (4.12)

Ka

=

(1 + gxExPj(t - 1))3 xj (t - 1)/UNOfffij

where uNormj = xj/Kj represents the normal utilization level of capital, and (1 + gxExPj(t - 1))3xj (t - 1) is the expected output depending on the growth rate of demand calculated on the two previous periods 21 • Thus the capital stock adjustment depends on the relative weight of longrun and short-run factors. In the Bremen model these weights are not determined apriori, but rather depend on subjective and objective elements. The objective element is the dispersion of the output growth rate in the recent past (two periods), while the subjective element is the degree of risk aversion assumed. Theoretically, if the risk aversion is high, the weight of

20 The hypothesis assumed regarding the time required far the investment to be translated into productive capacity is t - 2; consequently, the investment decision taken in period t should be based on the desired productive capacity for period t + 2. 21

Specifically, gxExPjÜ - 1)

=

LamXjgx/t -1) + (1 - LamXpgxj(t - 2),

where LamXj represents the relative weight of the growth rate of the two periods.

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Paolo Pini

the long-run factor will be high; vice versa if the risk aversion is low the short-run factor becomes very importanrZ 2 . Kj'Ct + 2) = (1 - WghtKj(t))K(l(t + 2) + (4.13)

The determination of the desired productive capacity adopted in the Bremen model introduces elements of stabilization into the dynamic of total output and investment, without however excluding the possibility that these variables present cyclical dynamics in the short run 23 • This constitutes an important novelty with respect to the LeontiefDuchin model, and also to the pattern of specific compensation elements. In fact, if on the one hand it is certainly true that in the Bremen model, too, the capital stock adjustment process required by the diffusion of new technologies plays an essential role in the absorption process of unemployment deriving from the adoption of labour-saving technologies, on the other hand the stabilization mechanisms in the determination of the accumulation process help to reduce the extent, and thus the compensation role, of the technology multiplier effect, softening the strang fluctuations and consequently the compensation effects on employment. In contrast to models focusing on stock capital adjustments, the Bremen model does not limit analysis of employment effects to those induced by capital goods production through investment activity. In fact, this model endogenizes of other components of domestic final demand, government expenditure and private consumption. The endogenization of government expenditure is achieved simply by treating them as shares of gross domestic product for the past period and by treating their specific components, public consumption and investments, as constant shares of total expendi22

That is, the weight of the short-run factor is given by: WghtKj(t) =1/0 + RhoPispGxj(t + 1)),

where: DispGXj(t - 1) = I gXj(t - 1) - gXj(t - 2) I , and RhOj indicates the degree of risk aversion for firms, Franke/Weghorst 0988b). 23 Given the desired praductive capacity, the determination of investment requires first of all the specification of the praductive capacity shares embodying traditional and innovative technology. Once these shares have been determined, given the praduction coefficient for capital input, the desired capital stock is obtained. Then, given the existing capital stock and the depreciation rate, the grass investment required in each sector and for each technology is determined. The grass investment realized in each sector for both the technologies is constrained to be non-negative, so that the net total investment may be even negative. This constitutes an important difference with respect to the Leontief-Duchin model in which non-negative net investments are assumed; the pracedure adopted in the Bremen model does not therefore exclude the existence of declining sectors.

Macroeconomic Analysis of the Employment Effects of Technological Change

155

tUfe. In addition, even the sectoral composition of these components is given. The endogenization of private consumption, instead, is based on Keynesian behavioUfal relationships: the demand for consumption goods is considered to be a function of the sectoral value added for the previous period, given autonomous components and a marginal propensity to consume estimated for different sectors. The compensation effects mediated by this component act, not through changes in the relative prices of consumption goods, but by means of increases in nominal incomes for consumers that bring about increases in consumption goods demand and changes in its sectoral distribution. In particular, a vector of consumption goods c(t) is specified as a function of nominal incomes y(t) and of autonomous components: (4.14)

c(t)

=

t(t)y(t - l)c a + CO

where CO represents the vector of autonomous components of consumption, ca the vector of additional consumption and t(t) the proportion of income spent on additional consumption goods. At the sectoral level, changes in utilized technology affect the demand for consumption goods through modifications of sectoral value added. This can be seen by transforming the equation (4.14) as follows: (4.15)

c(t)

=

Ca(t)x(t-l) + CO

where Caü) is a non-negative square matrix in which the single elements are: (4.16) with Vj(t) as sectoral coefficients of value added. The net export component of effective demand maintains its exogenous characteristic in this model to~, constituting the determinant of the growth path of the economic system in the simulations carried out to capture the microelectronic employment effects. The Bremen multisectoral model thus enables analysis of some important compensation effects, specifically the technology multiplier effect and the income effects acting through changes in consumption dynamics. In addition it inc1udes, though in an elementary manner, a compensation effect mediated by the growth of the government component of domestic demand. The determination of income effects considered, however, is extremely simple compared to the complexity of analysis required by a general model. The lack of analysis of the price-distribution system does not permit income effects determined by modifications in the distribution sphere to be accounted for, nor, indeed, the possible price effects deriving from changes in relative prices caused by technological change.

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Paolo Pini

These last effects would seem to be important in determining the foreign component of aggregate demand, the growth rate of which is instead represen ted by an exogenous parameter.

Table 9 Results of the Simulations of the Bremen Model for the German Economy. Average Percentage Differences in the Output and Employment Levels with Respect to the Reference Scenario at Time t = 20, End of the Diffusion Process Sectors

Output

Agriculture and forestry Energy, water and mining Manufacturing Construction Services State

0.85 1.75 2.67 12.28 3.68 -1.61

0.79 -0.38 -2.80

2.91

- 3.01

Total economy

Employment

11.96

-4.55 -7.65

Notes: a) the comparison is between S, the reference scenario in which production

technology does not change, and SI in wh ich the complete diffusion of new technology requires 20 periods, b) the speed of adjustment aü) is uniform between sectors. Source: KalmbachiKurz (1990).

Table 10 Contributions of Changes in Demand, Inter-Industry Coefficients and Labour Coefficients to Percentage Differences in Employment Levels with Respect to the Reference Scenario at Time t = 20 Components

% Differences

Demand Inter-industry coefficients Labour coefficients

5.47 0.30 -10.51

Total

- 5,34

Notes: a) the contributions of the different components are obtained by means of

structural decomposition analysis; b) the comparison is between employment level at time t=20 for the scenarios S e SI. Source: KalmbachiKurz (1990).

Macroeconomic Analysis of the Employment Effects of Technological Change

157

Table 11 Results of the Simulations of the Bremen Model for the German Economy. Percentage Differences in the Employment Level with Respect to the Reference Scenario at Time t = 20 of the Diffusion Path Scenarios Sectors Agriculture and forestry Energy, water and mining Manufacturing Construction Services State Total economy

S -SI

S - S2

S - S3

0.79 -0.38 -2.80 11.96 -4.55 -7.65

2.32 1.60 -1.88 25.48 -2.85 -6.93

-1.34 -3.22 -5.04 - 9.58 -6.89 - 5.93

- 3.01

- 0.98

- 5.92

Notes: a) 5 indicates the reference scenario in which production technology does not change, b) scenarios 51, 52 and 53 differ regarding the maximum time required for a complete diffusion of the new technology: for 51, T=20; for 52, T=15; for 53, T=30, while the speed of adjustment a(t) is uniform between sectors. Sourees: Kalmbach/Kurz (1990).

From the results obtained by means of simulations of three different diffusion rhythms of microelectronic technologies the following elements emerge: the direct labour-saving effects induced by changes in the production coefficients are not compensated either by the positive joint effects which act endogenously in the model through the growth of total output or by the pattern of autonomous components of demand, such as net exports CTables 9-11). Only one sector shows a net growth in employment level, but this sector is one in wh ich the innovative process does not appear particularly important and where, instead, the technology multiplier compensation effect induced by diffusion is extremely strong; -

from the analysis of the components determining the aggregate result, it emerges that both the demand component and the technology compone nt regarding the inter-industry coefficients trigger compensation effects compared with the negative impact induced by changes in the labour coefficients. However, it does not seem possible to use decomposition analysis to distinguish the compensation effects actually induced by technical progress media ted by the growth of demand from those effects deriving by autonomous demand growth;

-

an acceleration of the innovative rhythm, rather than affecting negatively employment, tends to trigger larger compensation effects, while a slower diffusion process does the opposite.

Paolo Pini

158

Naturally, these results present important !imitations which derive from the specification of the model adopted. This specification, as I have stressed, excludes the functioning of income effects induced by changes in the distribution sphere and of price effects consequent on changes in relative prices, both of which affect the domestic and foreign components of aggregate demand and its structure. Also in the multisectoral analysis, however, it is possible to identify a topology of model integrated into macroeconomic relationships which permits comprehensive analysis of the various compensation effects mediated by the different components of effective demand. A model better able to overcome the !imitations encountered in the more traditional previous studies is probably that uti!ized for simulations of the British economy by Whitley/Wilson. The purpose of these studies is to quantify the different compensation effects in an open economy triggered by the adoption of new technologies based on microelectronics. The model employed is that of the Cambridge Growth Projects, Warwick version. This input-output model is part of a post-Keynesian dynamic macroeconomic model in which the determination of various components of demand, consumption, investment, imports and exports as weil as of domestic prices is obtained for each sector of the economy on the basis of behavioural relationships for different agents. While in each period there is equi!ibrium in the goods and services markets, the labour market does not present endogenous mechanisms leading the system to full employment equilibrium, since there could also be disequi!ibrium in foreign trade. The model in the aggregate version of the real part can be summarized by the following equations 24 : Q(I - A(TA)) = C(Y p , Ph, Tc) + I(Q, Ph, TD + G + X(W, Ph/Pe, er, T)-

(4.17)

+ M(Y, Ph/Pe, er, Tm)

(4.18)

Nd

f(Q, Tn)

(4.19)

NS

f(POP, Ta)

(4.20)

f(w, Nd/Q, Tp) Ph w= f(Ph, NS - Nd)

(4.21) (4.22)

1t

f(Ph, Q, w, Nd)

(4.23)

Y

w. Nd + 1t

24 The single variables represent: Q, output; A, technical coefficients matrix; C, consumption; I, investments; X, exports; M, imports; G government expenditures; Y, domestic product; Y p' disposable income; W, world trade; P h , domestic prices; Pe, foreign prices; er, exchange rate; w, nominal wage; 1t total profits; Nd, labour demand; NS, labour supply; Ta, Tc, Tj , Tx , Tm, Tn , Ta, Tp ' TA, exogenous changes in tastes and technology; POP; working age population.

Macroeconomic Analysis of the Employment Effects of Technological Change

159

(4.24)

In this model the dynamic of employment level depends on the growth of the optimal and actual output/labour ratio. Changes in the optimal level of labour productivity depend on long-run factors such as technical progress, capital stock structure, economies of scale. However, in each period, the actual level of productivity may diverge from the optimal level, because the determination of the first variable depends essentially on short-run variables affecting the utilization level of capital stock and on the presence of adjustment costs 25 . Changes in one factor affecting the optimal level of productivity modify the relationship between employment and output through changes on the supply side and on the demand side of the model so that proportional changes in actual productivity do not necessarily occur. Modifications in the supply side and demand side of the model, when the optimal level of productivity changes, trigger various sectoral compensation effects in the employment level. First of all, there are effects triggered by the capital stock adjustments required to achieved the growth in optimal productivity. The dynamic of investment, and in particular the increase of its growth rate, influences aggregate demand with multiplier effects. Second, the growth of optimal productivity determines a negative income effect through direct labour saving due to the adoption of new technologies which reduce demand growth. At the same time, however, cost reductions in production, and thus price reductions of consumption goods, positively affect real domestic incomes and induce a growth in net exports through higher price competitiveness. In addition, these two contrasting effects trigger multiplier mechanisms of different signs on the demand level and thus, with successive adjustments, will determine the dynamic of output and actual productivity of the economic system. Third, amongst the different price effects, variations in the price of labour as a consequence of higher productivity and disequilibrium in the labour market between supply and demand for labour are also considered. These variations in turn induce price changes and thus affect the domestic demand and the foreign competitiveness of domestic products. However, variations in the price of labour also affect the determination of total income and its distribution, triggering income effects wh ich modify the level and composition of aggregate demand. The relationship between wages and employment, then, is not an unidirectional or inverse one. On the one hand, reductions in wages lower production costs, by modifying labour costs, and stimulate output and em25 For a specific treatment of this employment function and an evaluation of the empirical evidence see Wilson (1980).

160

Paolo Pini

ployment growth through domestic price decreases which in turn stimulate demand and determine higher domestic product competitiveness on fareign markets and profit increases positively affecting investment demand. On the other hand, wage reductions reduce the disposable income of the social classes with a high er propensity to consume by reducing their demand far goods and services, with negative effects on output and employment. Finally, the model considers the functioning of technical progress effects mediated, not by variations of prices and nominal income, but by qualitative changes in supply products affecting the dynamic of domestic consumption and foreign demand.

Table 12

Decomposition of Percentage Differences Between the Reference Scenario Including Adjustments Induced by Diffusion of Information Technologies and the Scenario Without Adjustments, 1995 Adjustments Endogenous variables GDP Consumption Gross investment Exports Imports Balance of payments (% GDP) Disposable income Prices of consumption goods Nominal wage Employment ß volume (000) Unemployment ß volume (000)

A

0.5 - 0.6 0.0 2.1 0.6 0.5 - 1.4 - 4.5 - 4.7 - 2.4 - 568 1.2 353

B

C

1.9 1.7 9.9 2.1 3.2 -1.1 1.6 - 4.0 - 3.3 - 1.2 - 288 0.6 180

1.8 2.2 10.1 1.4 3.1 - 1.4 2.5 - 1.9 - 1.3 - 314 0.9 268

Notes: A indicates direct adjustments induced by the adoption of labour-saving technologies and indirect endogenous adjustments media ted by cost and price reductions stimulating domestic and foreign demand; B indicates all price and non-price adjustments, both endogenous and exogenous, such as those stimulating domestic and foreign demand introduced by means of (i) investment growth required by the production of new technologies, (ii) changes in consumer tastes, and (iii) non-price competitiveness of domestic products in foreign markets induced by process and product innovations; C indicates all adjustments considered in B with the exception of nominal wage rate flexibility. Source. WhitleyIWilson (1986), (1987).

Macroeconomic Analysis of the Employment Effects of Technological Change

161

Table 13 Percentage Differences Between the Reference Scenario Including Adjustments Induced by Diffusion of Information Technologies and the Scenario Without Adjustments, 1995 Sectors Agriculture Mining Manufacturing Construction Public utilities Services Public services' Total

Output

Productivity

1.1 1.9 2.3 1.6 1.4 2.5

Employment

1.2 2.0 4.5 0.6 1.3 2.7 > 0 3.2

2.4

- 0.1 - 0.2 - 2.2 0.9 0.0 - 0.2 - 2.6 -1.2

Notes: • this sector is considered differently from the others. It has growth in productivity and in investments attributed to it similar to that of professional services but without any effect on its market performance. Source: WhitleyIWilson (986), (987).

Table 14 Percentage Differences Between the Reference Scenario Including Adjustments Induced by Diffusion of Information Technologies in Manufacturing and Services and the Scenario Without Adjustments, 1995 Rapid Diffusion Endogenous variables GDP Consumption Gross investment Exports Imports Balance of payments (% GDP) Disposable income Prices of consumption goods Nominal wage Employment d volume (1000) Unemployment d volume (1000)

Manufacturing

Services

2.5 2.3 7.0 2.8 4.1 -1.1 3.0 - 1.5 - 0.7

- 0.6 - 0.6 2.9 - 0.7 -1.1 0.1 - 1.4 - 2.5 - 2.6

1.5 281 - 0.6 - 178

- 2.5 - 521 1.2 360

Notes: a) in manufacturing, a diffusion rhythm of microelectronic technologies is assumed which also affects the investments and performance of the branches involved; b) in services, the diffusion of information technologies implies a higher growth of investment in infrastructures, in particular in the communications sector , which positively affects the production sectors of these technologies as weil. Source: WhitleyIWilson (986), (987).

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Paolo Pini

Table 15

Percentage Differences Between the Reference Scenario Including Adjustments Induced by Diffusion of Information Technologies in Manufacturing and Services and the Scenario Without Adjustments, 1995 Sectors

Output

Productivity

Employment

1.3 2.7 3.9 4.2 2.0 2.7

1.3 1.5 3.1 1.4 1.6 1.1

0.0 1.2 0.8 2.8 '0.4 1.7

3.2

1.7

1.5

0.2 0.7 1.6 2.6 0.7 0.4

- 0.1 0.5 1.4 - 0.8 - 0.3 1.4 > 0

Diffusion in manufacturing Agriculture Mining Manufacturing Construction Public utilities Services Public services

Total

Diffusion in services Agriculture Mining Manufacturing Construction Public utilities Services Public services·

Total

-

- 1.1

1.5

-

0.1 1.3 2.9 1.8 0.3 1.9 2.6

- 2.5

Note: • this sector is considered differently from the others. It has growth in productivity and in investments attributed to it similar to that of professional services but without any effect on its market performance. Source: WhitleyIWilson (986), (987).

The simulations obtained by Whitley and Wilson show that the adoption of new microelectronic technologies determines 'an immediate direct effect of labour displacements, calculated by the impact on the input of labour per unit of output in specific industries adopting these technologies. In addition, there are aseries of effects contrasting with the initial displacement of labour (Tables 12-15). Though the results obtained are very sensitive to the values of the structural parameters of the model and of the exogenous variables, the following elements can be emphasized: 1) in general, the compensation effects contribute only partially to the re-

absorption of the unemployment initially induced by the adoption of new technologies; 2) the income effects induced by employment losses due to the diffusion of information technologies appear important, inducing a lower dynamic of consumption, investment and aggregate demand;

3) the price compensation effects appear to be extremely important in triggering multiplier effects acting both in domestic markets and foreign markets through higher price competitiveness of domestic products;

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4) the technology multiplier effects mediated by the adjustment of capital stock required by the adoption of new technologies also constitute an important compensation factor which, in addition, produces indirect multiplier effects on demand through the investment rate; 5) the importance of compensation effects mediated by international trade is confirmed by the fact that non-price competitiveness, too, represents a strong compensation factor; 6) the price compensation effects resulting from adjustments in the price of labour instead do not appear to be significant. Reductions in wages induced by market forces acting when productivity increases lower labour demand, on the one hand have positive effects, increasing the competitiveness of domestic products on foreign markets, but on the other they negatively affect domestic demand through income effects of a negative sign determining lower consumption growth; 7) in the determination of total and sectoral employment effects the specific sector in which a speed-up of the diffusion rhythm occurs is very important. If the innovative sector is manufacturing, positive employme nt effects will follow a speed-up of diffusion, while if the innovative sector is services, a quicker diffusion has negative effects on employme nt. In particular, in the manufacturing sectors an acceleration in the diffusion of microelectronic technologies increases: (i) price and nonprice competitiveness of domestic products in foreign markets, and (ii) investments within the sector. These effects bring about a general growth of income and thus employment both in the innovative sectors and in the service sectors devoted to production and consumption, with strong multiplier effects. An acceleration of diffusion in the service sectors instead involves a different pattern of employment. In this case the simulation model suggests strong direct and indirect employment effects: Ci) the initial impact in the adopting sectors determines a pervasive substitution of labour with new physical inputs of production; (iO the technology multiplier effects of new technologies mediated by the growth of investments and the production of new capital goods appear very weak, also because of the negative effects in the production of the capital goods replaced by new technologies; (iii) the price effects in the domestic and foreign markets are not very strong because the sectors involved in the innovative process generally offer non-tradeable services; (iv) high negative income effects emerge, caused by labour income decreases due to the dis placement of labour in service sectors, with multiplier effects on consumption demand and also on demand in other sectors. 5. Condusions Within aggregate and multisectoral models, I have identified some types of "macro-sectoral" model based on the integration between macro-eco-

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nomie behavioural relationships for some classes of agents and a conceptualization of the economie system as constituted by different interdependent production and final sectors. One advantage of these models is that they permit analysis of structural change in economie systems by attributing technologie al change not only to exogenous factors, such as the availability and adoption of new technologies indieating the emergence of a complete new technologieal trajectory Cmieroelectronies), but also to the response of single agents affected by this change in the trajectory. Finally, when using these models, the researcher does not merely register a passive adjustment of an economie system to the emergence, with supply shocks, of new technologies or new products devoted to intermediate or final sectors of the economy. The aim is instead to capture some of the interactions developing in the demand sphere through analysis of the economie behaviour of specific classes or categories of agents. These interactions, moreover, are not limited to the demand sphere, but they also involve the priee, distribution and quantity sphere through priee changes, capital stock changes and the modification of the relation between employment and wages. There are, of course, many important limitations to a research programme constituted by the "macro-sectoral" integrated models. They cannot be considered to be forecasting models, capable of responding positively to the needs of economic policy, because of their limited robustness and strength. Instead, they are simply "simulation models" whieh, given their specific structure estimated over a partieular historieal period, offer insights into the dynamies of an economie system when changes in some exogenous variables occur and under the assumption that these changes do not imply modifications in the parameters estimated in the behavioural relationships. They are therefore more restrieted in range than the traditional models used for forecasting in the recent past. However this is not a serious limitation: indeed, it can be considered to be part of a growing awareness of the difficulties of economie forecasting, and thus also a virtue. One limitation, however, is due to two related factors. On the one hand, there is the weak interpretative power of these models regarding the factors whieh can explain the effective dynamie characterizing industrial economie systems in recent years. For this purpose, more traditional retrospective models, aggregate as weil as multisectoral, can be used as analytieal tools Ceconometries in the first ca se and multisectoral decomposition analysis in the second) whieh have maintained and increased their interpretative capability. On the other hand, difficulties arise in the joint treatment of the factors whieh trigger structural change and the effects whieh sustain this change. In the models considered, technology has exogenous characteristies and the interactions between its changes, their economie impulses, and the consequent effects are not analysed. From this point of view, then, the many direct and indirect links between innovative process and joint

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changes in the demand and supply spheres remain generally obscure in macrosectoral simulation models. This, however, is also the case of several other approaches.

References Barker, T / Borooab, V. / van der Ploeg, R. / Winters, A.: The Cambridge Multisectoral Dynamies Model: An Instrument far National Economie Poliey Analysis, in: Journal of Policy Modeling, 2, 1980, 3, pp. 319-344 Bosi, P. / Golinelli, R. / Stagni, A.: Un modello a medio termine dell'economia italiana. Hermes - Italia, Bologna 1990 Bosi, P. / Stagni, A.: Domanda di fattori e sostituibilita nell'industria italiana: una verifica dell'ipotesi "putty-c1ay", in: Economia Politiea, 1984, 2, pp. 197-241; also in Bosi P. / Golinelli R. / Stagni A., Un modello a medio termine dell'economia italiana. Hermes - Italia, Bologna 1990, pp. 55-101 Boyer, R.: Formalizing Growth Regimes, in: Technieal Change and Economie Theory, G. Dosi, C. Freeman, R. Nelson, G. Silverberg and L. Soete eds., London 1988a, pp. 608-630 -

New Technology and Employment in the 1980s: From Science and Technology to Macroeconomic Modelling, in: Barriers to Full Employment, J. Kregel, E. Matzner and A. Roncaglia eds., London 1988b, pp. 233-268

-

/ Coriat, B.: Technieal Flexibility and Macro Stabilisation: Some Preliminary Steps, in: Rieerche Economiehe, XL, 1986, 4, pp. 771-835

-

/ Petit, P.: Progres technique, croissance et emploi: un modele d'inspiration kaldorienne pour six industries europeennes, in: Revue economique, 32, 1981, 6, pp. 1113-1153.

-

The Cumulative Growth Model Revisited, in: Politieal Economy, 4, 1988, 1, pp. 2344

Clark,].: A Vintage-Capital Simulation Model, in: Technieal Change and Full Employment, C. Freeman and L. Soete eds., London 1987, pp. 86-98 Ducbin, F.: Analysing Structural Change in the Economy, in: Input-Output Analysis. Current Developments, M. Ciaschini ed., London 1988, pp. 113-128 -

/ Szyld, D. B.: ADynamie Input-Output Model with Assured Positive Output, in: Metroeconomiea, XXXVII, 1985, 3, pp. 269-282

Faubry, E. / Moncomble,]. E. / Vidal, O. / Zagame, P.: Le Model HERMES-France, Economie et Prevision, 1984, 66 Franke, R. / Wegborst, W.: Complex Dynamies in a Simple Input-Output Model Without the Full Capacity Utilization Hypothesis, in: Metroeconomiea, XXXIX, February 1988a, pp. 1-29 -

On a Stabilizing but Chaos Generating Mechanism in Behavioural Functions: Observations in a Multiplier-Accelerator Model, in: Recent Approaches to Economie Dynamies, P. Flaschel and M. Kruger eds., Frankfurt a. Main 1988b, pp 31-46

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Gestenberger, W. / Golinelli, R. / Vogler-Ludwig, K.: Impacts of Information Technologies on Future Employment, Central Report (draft version), IFO, Munich, December 1990, mimeo Golinelli, R.: Study on the Impact of Information Technologies on Future Employment: The Macroeconomic Simulations with HERMES Models, Final HERMES Report, Prometeia Ca1colo, Bologna, December 1990, mimeo. / Pini, P.: Effetti macroeconomici delle tecnologie dell'informazione e dinamica dell'occupazione: un esercizio di simulazione al 2005 mediante il modello HERMES, in: Politiche dei Lavoro, 17, 1992 Italianer, A.: The Hermes Model, Complete Specification and First Estimation Results, Report EUR 10669 EN. [Commission of the European Communitiesl, Bruxelles 1986, mimeo. Kalmbacb, P. / Kurz, H. D.: Microe1ectronics and Employment. A Dynamic InputOutput Study of the West German Economy. Paper presented at the "Ninth International Conference on Input-Output Techniques", Keszthely, Hungary, 4-9 September 1989, mimeo, now in: Structural Change and Economic Dynamics, 1, 1990, 2, pp. 371-387 Leontiej, W. / Ducbin, F.: The Future Impact of Automation on Workers, Oxford 1986 Magun, 5.: The Effects of Technological Change on the Labour Market in Canada. Paper presented at the "Canada Employment and Immigration Commission", Ottawa, May 1984, mimeo Piacentini, P.: Why Rates of Growth of Employment Differ: A Quantitative Approach to an International Comparison, in: Labour, I, 1987, 2, pp. 93-105 Pini, P.: Cambiamento tecnologico e occupazione. Analisi di recenti modelli di disoccupazione tecnologica, University of Bologna, "Dipartimento di Organizzazione e Sistema Politico" and Universita Cattolica di Milano, Faculty of Political Science, "C.R.AN.Ec.", Bologna 1991a Recenti modelli di disoccupazione tecnologica. Una rassegna critica, in: Economia Politica, VIII, 1991b, 1, pp. 137-196

Skolka, J.: Input-Output Anatomy of Changes in Employment Structure in Austria between 1964 and 1976, in: Empirica. Austrian Economic Papers, 11, 1984, 2, pp. 205-233 Input-Output Structural Decomposition Analysis for Austria, in: Journal of Policy Modeling, 11, 1989, 1, pp. 45-66

Sylos Labini, P.: Nuove tecnologie e disoccupazione, Bari 1989 -

Technical Progress, Unemployment and Economic Dynamics, in: Structural Change and Economic Dynamics, 1, 1990, 1, pp. 41-55

Valette, P. / Zagame, P.: Hermes: A European System of Econometric Models, Amsterdam 1991 Van Der Putten, R.: Hermes Model for the U.K., Cambridge 1987, mimeo. Wbitley, J. D. / Wilson, R. A.: Information Technology and Employment: Quantifying the Impact Using a Macroeconomic Model, Research Report, Institute for Employment Reseach, Warwick 1986, pp. 46, mimeo

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Quantifying the Impact of Information Technology on Employment Using a Macroeconomic Model of the United Kingdom Economy, in: O.E.C.D., Information Technology and Economic Prospects, ICCP, Paris 1987, 12, pp. 176-220

Wilson, R. A.: Comparative Forecasting Performance of Disaggregated Employment Models, in: Applied Economics, 12, 1980, 1, pp. 85-102 Young, K. / Lawson, G.: What Fuels U.S. Growth? Changes in Technology and Demand on Employment across Industry, 1972-1984, Washington D.C., National Academy of Science, Committee on Technology and Employment, 1987, mimeo

The Impact of New Techttologies on Employment: The State of the Art and Perspectives for Research by Peter Kalmbach

Introduction (1) Nowadays, economics is considered to be an empirical science; the size of empirical investigation is impressive, and no less so is the variety and the stage of development of the methods adopted. We may therefore presume that, finally, a way has been found to answer all the controversial quest ions that have persisted ever since economics became a scientific discipline.

So far, however, these expectations have not been fulfilled. Although most economists agree that it is the empirical outcome that should ultimately decide wh ich hypothesis is accepted and which is rejected, to date empirical investigation has not taken on the role of arbitrator, because its results are often no less contradictory than the hypotheses. This paper's subject is a good example of the phenomenon. Both in public and in scientific discussion, the answers provided by economists to the problem of the impact of technological change on the level of employment differ. This is also tme as regards the consequences for employme nt of the application of a single new technology. Some economists have even had to change their opinions on the matter, the most prominent example being Ricardo 1 who added a chapter to the third edition of his "Principles". In this chapter, entitled "On Machinery", he revised his point of view that the establishment of new machinery benefits all dasses of society. Without challenging the usefulness of new and improved machinery, he nevertheless admitted that the introduction of new machinery could have a negative effect on the working dass because of a possible reduction in the level of employment. Leontief is arecent example of a changed assessment of the effects of technological change on the level of employment. In his research study on

Cf. Ricardo (1951).

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automation in the American economl, Leontief, together with Duchin, paints a rather optimistic picture of the impact of automation on employment. In other papers 3 , however, he raises the urgent problem of technological unemployment. (2) When the evaluation of a problem in the sodal sdences is evidently uncertain, the problem is presumably more than just complex. Moreover, we can assurne that there is no general consensus on the adequate methodical framework of the scientific discipline concerned with which to investigate the problem. However, differences in opinion do not only result from different conceptions of the appropriate methodical approach to the issue. Although responsible for some controversies, they cannot account for all dissenting opinions. Thus, it is frequently not different answers to the same problem that are the cause of dispute, but the fact that researchers attempt to answer quite different questions - a circumstance they do not always realise. I shall first address these differences, and then outline some suitable approaches for use in analysis of the problem, pointing out possibilities for their further development.

Different Dimensions of the Problem (3) First of all, it makes a major difference whether a study concentrates on the effects of technological change in general or on the effects emanating from a single, distinct technology. Of course, both points of view raise common problems. This is especially true of the question of imputation, i.e. whether changes in employment should be attributed to technological change or to a new technology. There are, however, important differences which should be stressed. In order to study the impact of technological change in general, one must decide wh ich are the appropriate indicators for technological change or innovation; terms wh ich are sometimes, but not always, used synonymously. Since the expression "technological change" is a generic one embracing different changes not always due to technology, economists tend to express "technological change" in terms of technologically unspecific indicators. Some economists make use of input-measures, such as expenditure on research and development (although they use rather different definitions); some apply so-called "throughput" measures such as the number of patent applications; other use various output measures, for example the number of new products or the growth rate of labour productivity. All 2

See Leontief/Duchin (986).

3

Leontief (1982), (1983).

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these indicators provoke considerable argument. Expenditure on research and development, for instance, cannot say very much about the techno logical changed triggered by this expenditure. In principle, high expenditure on research and development may signal rapid technological change, or, vice versa, that technological change' is deemed insufficient and that this situation is therefore confronted by means of increased expenditure on R&D. Patent applications tell us very liule about the economic importance and future success of new technology; a faster increase in labour productivity need not be due to technological change; and so forth. (4) The extremely questionable capacity of these technologically unspecific indicators to supply information about the intensity of technological change is only one side to the problem. The other is the object of this study. In the Federal Republic of Germany, investigations have been conducted (making use of several indicatars) on the performance of more or less innovative firms and especially on the question of whether innovative firms show a more favourable development in employment than those classified as non-innovative. An example of this kind of study has been published by the Ifo-Institute 4 . Using data from annual innovation tests carried out between the years 1979 and 1986, and assuming that inter-industry flows of commodities can be used as a reliable information basis about the interindustry flows of innovation, the !fo-Institute distinguishes between four different types of innovation (Table 1). Table 1

Types of Innovation Direct innovation expenditure

Indirect innovation expenditure high

low

high

type I

type 11

low

type III

type IV

Table 2 shows the relative changes in employment (and also in gross value added) of the different branches, each assigned to one of the four types. It can be seen that employment decreased in all four types as far as manufacturing industry was concerned, although with a considerably lower rate far type I. With regard to all sectors of the economy, type 11 shows definitely the most favourable development of employment. 4 PenzkoferlSchmalholz/Scholz (1989), as weil as Scholz/PenzkoferlSchmalholz (1989).

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Table 2

Relative Changes in Employment and Gross Value Added (GVA) between 1980 and 1986 for Sectors Belonging to Different Types of Innovation Branches belonging to type

11 III

IV Total

All branches

Manufacturing

Changes in employment

Changes in GVA

Changes in employment

Changes in GVA

-0.4 8.2 -3.8 -3.5 - 2.2

16.6 25.5 5.1 5.2 9.3

-0.6 -9.4 -12.1 -12.1 -8.1

20.7 -4.3 9.2 -2.7 5.6

Source: Scholz/PenzkoferlSchmalholz (1989), p. 171.

These findings lead to the conc1usion that a more intensive innovation activity or technological change favours the development of employment. Or, formulated in relation to types III and IV, that low innovation activity is related to a pronounced dec1ine in employment. (5) There are various methodological objections to this procedure. The use of innovation expenditure as an indicator of the intensity of innovative activity has been criticised, and the delimitation of innovation expenditures can also be disputed. Indirect spending in innovation is ascertained by means of questionable hypotheses, magnitudes referring to branches of the economy are too aggregate to yield meaningful results, and so on. In this context, the following point is more crucial. Investigation into the relative development of employment in branches with more or less innovative activities should not be confused with research concerned with whether technological change affects employment positively or negatively. Whatever empirical analysis may offer to studies of the first kind, it cannot provide an ade qua te answer to the problem of the net-employment effect. This latter deals with the sum of changes in employment in the various sectors of the economy consequent on technological change. This issue must be distinguished from that of wh ich branches (innovative or non-innovative) exhibit the most favourable development of employment due to technological change. To ascertain the net-employment effect of technological change we have to adopt a different approach by recording the different displacement and compensation effects caused by technological change wherever they may occur in the economy. (6) Opinions differ in the literature as to whether compensation effects can be expected to occur mainly in technologically dynamic branches of

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the economy or in those branches less accessible to technologieal change. A proponent of the latter thesis has been Fourastie (954) who identified the tertiary sector of the economy as that sec tor in whieh no relevant increase in the labour productivity is to be expected. On this basis, and because of the supposedly high income elasticity of serviees, this branch was the "great (employment) hope of the twentieth century", according to Fourastie. By contrast, other compensation arguments maintain that employment compensation effects operate in branches with rapid technological change. This holds tme both for expectations that strong innovation activities constantly cause considerable product innovation by opening up new outlets, and for the argument that additional export possibilities can arise from product and process innovation with employment effects counteracting, and in innovation-intensive branches possibly over-compensating, redundancy trends. This is not the appropriate place to examine the shortcomings of these arguments. I should, however, mention that optimistie views of compensation effects are not bound to the statement that compensation will take place in branches with strong technologieal change. Fourastie's compensati on optimism, whieh derives from the expectation of a large decrease in employment in these very branches, provides a clear example of this. Vieeversa, no information on the sign of the net-employment effect can be gained from comparison between innovating and non-innovating branches. The relative magnitudes of the displacement and compensation effects cannot be established by these means. (7) Before drawing so me conclusions, I shall investigate an alternative statement of the problem whieh is today at the centre of debate. This approach consists in focusing on a more or less well-defined single techno 1ogy and on the effects consequent on its applieation - an obvious alternative to a research programme whieh addresses the impact of technologieal change as a whole on the level of employment. The immense problems involved are obvious. The definition of a single technology appears to be most adequate when a relative1y narrow term is chosen and when a technical norm can be referred to, such as industrial robots, since this distinguishes them from similar machines, for example manipulators. Examination of a very partieular and narrowly-defined technology has the consequence that synergie effects are ignored. This is exemplified by industrial robots: combined with efficient sensors, the range of application of industrial robots is far more extensive than it is without, because the still labour-intensive branch of assembling will presumably only receive a shove towards mechanization from a combination of both developments. In other words, any realistic projection of the scope of application of industrial robots in the future is only possible if reliable forecasts about deve10pment in other technologies and about the integration ta king pI ace can be made simultaneously. Because the applieation of industrial robots can give rise to different employment effects when applied in assembly or in we1ding, the

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speed of complementary technologieal developments is not only crucial for the number of applications of a special technology (for example industrial robots) but also influences its areas of application. Since it is most probable that employment effects will diverge in different areas of application, the scope as weil as structure of the application of a special techno 1ogy depend on complementary technologieal developments. (8) The synergie effects mentioned above can be understood as a special case of a more general problem. When examining the effects of a particular technology the decision has to be taken whether or not to restriet analysis to the effects of the technology whieh is already known and used at least in the most progressive plants of the economy. A much more ambitious alternative to this procedure is to attempt to incorporate future technologieal trends into the analysis, i.e. to combine analysis with technological forecasts. Since technologieal projections have proved to be extremely unreliable in the pastS, most researchers do not take account of the (most probable) further development of a technology Cincluding the synergie effects whieh have not yet become significant). In this regard, it is at the least misleading to talk about the employment effects of "new technologies", since in fact this is a matter of appraising effects consequent on the diffusion of technologies not only weil known at the moments of analysis, but also sufficiently widespread. The more sec ure empirical foundation of the last-mentioned procedure has its price, however. Analysis is confined to the diffusion effects of definite technologies already applied in technologieally leading companies; the effects resulting from their further deve10pment are not considered. Any attempt to take them into consideration inevitably involves a lot of guesswork: and not only concerning the hypothesis if and when a technology hitherto at most tested in laboratory experiments is to be applied. Furthermore, information on labour organizing solutions - hardly predietable at the moment of analysis - would have to be available. It is not realistic to assume this, and far the time being it seems justifiable to focus on the diffusion effects of already known technologies. The restrictions ·of such pragmatie decision are openly acknowledged, however.

The Determination of the Net-Employment Effect (9) As stated above, an apparently identieal statement of the problem often conceals rather different problems. Of course, this is not to claim an ability to judge whieh questions are worth investigating and whieh are not. As long as the partieular interest of a research programme is clearly stated, S

Cf. Ulrich (1980).

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no objections can be made. A problem arises only when one seeks to answer a question for which the respective approach turns out to be inadequate. We are only interested in the problem of the net-employment effect resulting from the application of a specified new technology and with approaches dealing with this particular subject, and not with any other question. Because of the facts mentioned above, one has to accept a restriction: the effects consequent on a more or less plausible further development of this technology cannot be examined. Even if this development is probable, we will have to be conte nt with the analysis of the employment effects that ensue from the diffusion of already known technologies. Such analysis examines the employment effect that involves the economy as a whole, i.e. the net-employment effect. In this way the minimal methodological requirements for all analyses concerned with this statement of the problem are defined. Since the net-employment effect can only be determined if all the effects generated by the application of a new technology are considered, a partial point of view must be avoided. In particular, this me ans that insights gained by case studies must not be generalized hastily. Although we depend closely on microeconomic analyses, it is obvious that they cannot give reliable information on employment effects caused by the application of new technologies. The changes in employment triggered by the use of a new technology are not limited to its operational area. On the contrary, they exert an influence on the manufacturers of these new technologies, as weil as on those whose establishments have been previously utilized, the suppliers of intermediate goods, their workers,etc. In this respect, changes caused by the application of new technologies cannot be analysed adequately when the focus is solelyon the scene of action, Le. the enterprise applying the new technology. Hence case studies cannot be regarded as an appropriate method for ascertaining the net-employment effect. The same applies to microeconomic analyses which are not based on special case studies but claim a higher degree of representativeness by conducting inquiries in firms which belong to different sectors of the economy. Even representative micro-analytical studies share one crucial weakness with case studies: they are unable to grasp the possibly important indirect employment effects connected with the application of new technology. (10) Although micro-analyses by themselves do not suffice for realistic assessment of the net-employment effect, they cannot be dispensed with as a starting-point. The so-called "Metastudie" , for instance, which in the Federal Republic of Germany represents the most extensive attempt in recent years to ascertain the impact of new technologies on employment, is based on this view 6 . The basic methodology relies on a bottom-up approach, rejecting the alternative of a top-down procedure. The difficulties

6

For a survey see Matzner/Wagner (1990).

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that arose are most instructive and must dampen over-optimistic expectations of the possibilities of a bottom-up approach. Macro-economists view the results of microeconomic investigations as akin to raw material: necessary for the production (or research) process, but not of interest for their own sake. Useful for macro-economists' purposes are results as representative as possible of the various branches of trade which they can use as quasi-raw material for a suitable macroeconomic approach. Compared to this expectation of macro-economists the results micro-economists have to offer are rather disappointing: we are informed that fi.rms in one and the same sector of the economy might have very different production programmes, apply completely different techniques, and exhibit different degrees of mechanization, a different organization of labour, etc. But even if similar production techniques and organizational principles are applied, the representative firm is difficult to identify. Thus the research team responsible for microeconomic analyses within the ambit of the "Metastudie,,7 emphasizes the significance of the context in which the application of the technology takes place: "[Tlhe consequence of the application of technology follows roughly the logic of the situation in which the users of the technology are to be found, that is, the logic of the objective they pursue by introducing this technology"s. (11) Over-optimistic expectations of the bottom-up approach are certainly frustrated by such findings. Nevertheless, the ambiguous microeconomic results do not provide final evidence that a bottom-up approach has proved impracticable. In the case of indefinite findings, an effort can and should be made to ascertain the predominant tendencies, e.g. by means of expert-rating.

If one is reluctant to draw the rather nihilistic conclusion from the microeconomic results that the application of new technologies has no influence on its own, one must devote time to the problem of wh ich approach appears most able to integrate the microeconomic results and go beyond them by evaluating the secondary effects. It is evident that, on the other hand, the decision taken has consequences for the requisite microeconomic analyses: the "microeconomic raw material" needed for different macroeconomic approaches is not identical. . It is impossible to scrutinize here the strong points and the shortcomings of the different approaches. The German Institute for Economic Research (DIW)9, in this study, has supplied practicable alternatives, and their merits and drawbacks are worth discussing in more detail. I shall refrain from doing this, however, to provide instead abrief outline of the ex7

Ewers/Becker/Fritsch (1989).

S

Ewers/Becker/Fritsch (1990), p. 28, my translation.

9

See DIW (1989) and Blazejczak (1990).

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perience gained from an approach which we (a research team at the University of Bremen) have used to record the net-employment effect by employing a dynamic input-output model with partly endogenized final demand lO • (12) The use of an input-output model recommends itself because only a multi-sectoral approach enables assessment of the already-mentioned secondary effects; and input-output analysis unquestionably exhibits the most appropriate setting for ta king transmission effects into consideration. An advantage of the dynamic approach is that positive and negative employment effects can be spread over different periods of time. If we restrict ourselves to static comparative analysis of any two periods, we have to accept the fact that the outcome depends closely on the periods selected. In contrast, dynamic analysis allows us to pursue the development of output and of employment over time. Finally, endogenization of final demand is highly plausible, since the most important compensation effects discussed in the literature postulate a positive impetus resulting from the use of new technologies on one or another component of final demand. Since the bestknown dynamic input-output models acquire their "dynamics" from the endogenization of investment demand, by choosing a dynamic approach a decision is simultaneously made to focus chiefly on the development of capital goods demand under the influence of a more or less extensive diffusion of the technology in question. This permits exploration in particular of the empirical impact of the so-called "machinery construction argument", which for a long time has been firmly established among the compensation arguments. (13) Although most scholars would probably agree in principle that a dynamic input-output approach is desirable, its usefulness for empirical analyses is often questioned. Objections concern the mainly negative features which became apparent in traditional formulations of the model. This is especially the case of its "causal indeterminacy": the model produced trajectories which sooner or later led to negative outputs for some categories of goods. Further developments by Duchin/Szyld and Leontief/Duchin, however, have provided a method which avoids this problem. The disequilibrium approach developed no longer supposes full capacity utilization in every period, and ensures that outputs are positive. With this "new generation" of dynamic input-output models certainly not all problems can be solved, but a method has been set out with which they can be used in exploration of employment effects. Our investigation was particularly influenced by Leontief/Duchin's study.

It differed, however, in certain important respects: for example, in its formu-

lation of private investment behaviour. As to consumption and governmental demand a (lagged) dependence on real income is assumed, while endo10

Kalmbach et al. (1989); KalmbachiKurz (1990a), (1990b).

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genization of exports is not dealt with. It is beyond the scope of this paper to give more precise details of the characteristic features of the model. These are given in Kalmbach/Kurz, and I shall therefore restrict myself to a very few remarks: The purpose of the study was to ascertain the impact of microelectronicbased, new technologies on the composition and level of employment. Based on an evaluation of the empirical material of case studies, investigation of the branch level, etc., a "best practice technique" was sought. Taking into consideration the probable maximal level of penetration of the technology in the different sectors, labour-, intermediate input-, and capital-coefficients of the "best practice technique" were estimated. Here a "conservative" method was app!ied: in the case of vague or contradictory information, the coefficients of the "best practice technique" remained unchanged vis-a-vis the original coefficients. Regarding investment demand, a two-step process of decision is assumed. First, the extension of capacity is planned. This decision is orientated both to long-run tendencies (trend-rate of growth of sectoral output) and to short-run influences (expected sales); that is, we proceed from a weak and modified acceleration hypothesis. Second, entrepreneurs are assumed to decide how much of additional expected output is to be provided by means of the "new technique" and the "old technique", respectively. The ongoing pace of diffusion of the "new technique" is given as a scenario parameter, so that it is possible to plot the effects of higher or lower diffusion in different scenarios. The effect of the diffusion of new technology is determined by cumulating the deviation of the selected variables between the reference and the diffusion scenario and dividing it by the number of periods that have passed since the starting period (1980). The reference path is the hypothetical path of development in which no further change in the methods of production takes place. The development of labour supply is omitted. Hence, it is assumed that there exist no limitations on the side of labour supply and that it develops independently of the diffusion speed. (14) Although the !imitations of the approach and an insufficient empirical basis recommend caution in interpreting the results achieved, I shall mention some of them briefly. Table 3 shows the relative deviations of output and of employment that result from the assumption that there is a !inear increase in the diffusion parameter and that the diffusion is complete in the last period under consideration (t = 20). Although fifty-one commodity groups are distingushed, for greater c1arity they have been aggregated in the Table into six commodity groups. As Table 3 shows, after five years there is still a negative output deviation for the overall economy which then becomes positive, however, and amounts at the end of the period considered to a yearly average of 2.9 %

The Impact of New Technologies

179

(in the last period considered the difference is larger, i.e. 11.5 %). The output-stimulating effects of diffusion compared with the reference scenario are too weak to compensate for the negative employment effect specially induced by the predominantly declining labour coefficients.

Table 3 Deviations of Yearly Average Between SI and Reference Path (Six-Sector Aggregation Level) Deviations in yeady average out- Deviations in yeady average employment until period put until period t =5

t = 10

t = 15

t = 20

t =5

t = 10

t = 15

0.38

t = 20

Agriculture, forestry

- 0.19

- 4.1

0.67

0.85

- 0.21

0.62

- 0.79

Energy, water, mining

- 0.32

0.89

1.41

1.75

- 0.72 - 0.08 - 0.16

- 0.38

Manufacturing

1.96

2.19

- 0.18

9.16

11.17

12.28

10.94

11.96

Services

- 0.05

1.71

2.77

3.68

- 2.06 - 2.19 - 3.13

- 4.55

State

- 2.22

-2.80

- 2.37 - 1.61

- 3.82 - 5.72 - 6.74

- 7.65

Total econ- 0.18 omy

1.62

-1.72

- 3.01

2.24

2.67 - 1.03

- 0.54 - 1.74 - 2.80

0.29

Construction

2.91

- 0.26

9.01

- 1.26 - 2.04

(T = 15; uniform a) (T = 30; uniform a)

We have not only investigated the effects on employment in general. In a very rough classification, eight types of activities to which labour is allocated are distinguished. Only activities connected with electronic data-processing emerge as somewhat differentiated. This confirms a number of widely-held opinions. Data-processing activities gain in importance without being able entirely to compensate for the decrease in other activities, however. Table 4 shows the relative deviations for the activities distinguished in the last period under consideration (year 2000) - in which case, therefore, they do not refer to the average effects for the whole period under consideration. Moreover, we have decomposed this effect into different component effects. As the table shows, the negative difference of employed persons can be put down to labour coefficients which are decreasing in total. The final demand effect compensates for at least half of this effect; changes in input-coefficients give rise to only negligible (positive) effects.

Peter Kalmbach

180

Table 4 Components of Employment Effects (%), Reference Path and SI in t

=

Demand

A-matrix

Labour coefficient

Total

5.81

0.20

-6.56

-0.92

6.33

0.79

- 21.29

-15.65

Production Storage, transport, distribution Traditional office activities EDP-application Planning, construction OL and OR Disposition, R&D Other service activities

5.67

0.25

- 23.90

-19.38

6.17 6.74 5.99 5.87 3.67

0.78 1.63 0.96 0.53 -0.13

31.30 123.81 56.56 -2.22 -7.80

40.48 142.78 67.52 4.06 -4.55

Total

5.47

0.30

- 10.51

- 5.34

20

I shall have to dispense with presentation of the results obtained under other assumptions regarding diffusion. Comparing a linear pattern of diffusion revealed a somewhat unexpected feature: faster diffusion (complete diffusion after 15 years) is linked with a smaller negative employment difference, a lower speed of diffusion (30 years) at the end of the period considered (t = 20), a negative output effect on average and, correspondingly, a stronger negative employment effect (- 5.9 %). Conc1usions and Perspectives for Research (5) These last-mentioned results were obtained using the type of model developed by Leontief/Duchin to explore the effects of automation in the USA. As regards investigation of the effects of microelectronic-based new technologies on employment, the Austrian Institute for Economic Research has already done some pioneering work ll by using an (albeit static) inputoutput model with partly endogenized final demand. Parallel to our investigation in the Federal Republic the DIW has applied a dynamic input-output model in order to study the effects of the application of industrial robots 12 • Thus experience with such approaches still continues and is encouraging. In order to make reliable predictions about the impact of new technologies on the level and composition of employment, considerable further work is 11

See BMWF (981).

12

Cf. Meyer-Krahmer (989) and Edler (990).

The Impact of New Technologies

181

required, however. In conc1usion, I shall briefly outline areas for further research. The micro-macro link, on which the bottom-up approach depends, is hitherto still no more than a pontoon. Approaches like the dynamic input-output model interested in determination of the net-employment effect have to be conte nt with microeconomic results derived from investigations developed with other interests and thus from points of view other than those appropriate to the net-employment effect. When trying to "translate" microeconomic findings into the information relevant for input-output analysis, "guess-work" is inevitable. An improvement of this situation will only be possible if microeconomic analysts accept the information requirements of the model with which the net-employment effect is to be ascertained and inc1ude it in their analyses. If we wish to go beyond analysis of the effects of the diffusion of wellknown technologies and instead study the impact of new, and hence not yet entirely known, technologies within the period of investigation, we will have to take into account procedures which the econometrist, in particular, treats with suspicion. This is especially tme of expert-rating. In order not to commit the error of conceiving future developments as only a continuation of the past, we must be receptive to procedures of analysis which do not consider the future to be a simple extrapolation from past development. Mechanistic methods have to be treated warily; estimations (and even intelligent speculations) concerning the future ga in in significance. For economies which depend as much on foreign trade as that of the Federal Republic of Germany the impact of the use of new technologies on exports and imports should be paid particular attention. So far, attempts to assess this influence have not been particularly successful. Future research will have to concentrate on this problem. The question is under discussion if and to what extent the application of new technologies benefits a particular economy at the expense of others, or if it is a positive sum game. Finally, I should point out that the models applied so far in ascertaining the net-employment effect are pure quantity models. The compensation effects ascribed to price effects that play an important part in neoc1assical theory cannot be taken into consideration. If and to what extent they prove to be significant has not been explored so far.

182

Peler Kalmbach

References Blazejczak, J.: Evaluation of Long-Term-Effects of Technological Trend on the Structure of Employment, mimeo, 1990 BMWF, Bundesministerium für Wissenschaft und Forschung: Mikroelektronik, Anwendungen, Verbreitungen und Auswirkungen am Beispiel Österreichs, Wien/New York 1981 DIW, Deutsches Institut für Wirtschaftsforschung: Technischer Fortschritt und Arbeitsmarkt in Nordrhein-Westfalen, Berlin 1989 Duchin, F. / Szyld, D.: A Dynamic Input-Output Model with Assured Positive Output, in: Metroeconomica, 37, 1985 Edler, D.: Impact of Selected Technologies on Employment and its Occupational Composition: An Input-Output Approach, in: The Employment Impact of New Technology, E. Matzner and M. Wagner eds., Aldershot 1990 Ewers, H. J. / Becker, C. / Fritsch, M.: Der Kontext entscheidet: Wirkung des Einsatzes computergestützter Techniken in Industriebetrieben, in: Technologischer Wandel und Beschäftigung, R. Schettkat and M. Wagner eds., Berlin/New York 1989 -

Wirkungen des Einsatzes computergestützter Techniken in Industriebetrieben, Berlin/New York 1990

Fourastit?, J.: Die große Hoffnung des 20. Jahrhunderts, Köln 1954 Kalmbach, P. et al.: Mikroelektronik und Beschäftigung, Eine Untersuchung der Auswirkungen des Einsatzes programmgesteuerter Arbeitsmittel unter Verwendung eines dynamischen Input-Output-Modells, research report, Bremen 1989 -

/ Kurz, H. D.: Diffusion programmgesteuerter Arbeitsmittel und Beschäftigung: Eine dynamische Input-Output-Studie für die Bundesrepublik Deutschland, in: Wirtschaft und Politik, 16, 1990a, 1

-

Micro-Electronics and Employment: A Dynamic Input-Output Study of the West German Economy, in: Structural Change and Economic Dynamics, 1, 1990b, 2

Leontiej, W.: Werkzeuge, Maschinen, Computer, Roboter. Die Folgen für Arbeitsplätze und Einkommensverteilung, in: Spektrum der Wissenschaft, 11, 1982 -

Technological Advance, Economic Growth, and the Distribution of Income, in: Population and Development Review, 1983 - / Duchin, F.: The Future Impact of Automation on Workers, Oxford/New York 1986

Matzner, E. / Wagner, M. (eds.): The Employment Impact of New Technology, Aldershot 1990 Me.yer-Krahmer, F.: Sektorale und gesamtwirtschaftliche Beschäftigungswirkungen moderner Technologien, Berlin/New York 1989 Penzkojer, H. / Schmalholz, H. / Scholz, L.: Innovation, Wachstum und Beschäftigung, Berlin/New York 1989 Ricardo, D.: On the Principles of Political Economy and Taxation, in: The Works and Correspondence of David Ricardo, Vol. I, P. Sraffa ed., Cambridge 1951

The Impact of New Technologies

183

Scholz, L. / PenzkoJer, H. / Sehmalholz, H.: Innovation, Wachstum und Beschäftigung, in: Technologischer Wandel und Beschäftigung, R. Schettkat and M. Wagner eds., Berlin/New York 1989 Vlrieh, E.: Technikprognosen, in: Mitteilungen aus der Arbeitsmarkt- und Berufsforschung, 13, 1980, 3

Quantitative and Qualitative Effects of Technological Innovations: Issues, Empirical Evidence and Implications by Riccardo Leoni

1. Introduction Analysis of the role played by the processes of technological innovation is currently flourishing, thanks to the abundance and fertility of imaginative ideas on both a theoretical and empirical level!. The results of research work, however, still seem to lack homogeneity in that side by side with broad canvases of wide appeal there are contributions of an empirical nature which are sometimes limited in importance but effective because they he1p to settle controversial issues. The most significant aspect, however, is that despite this fervid activity, weak theoretical transitions still exist, as do alternative behavioural hypotheses and partial and conflicting visions. In fact, it would seem that a new theoretical and unifying paradigm is about to emerge; a paradigm based on flexibility and evolution as opposed to the neoclassical one based on the ca1culation of static optimization. Until it consolidates, I believe that rather than run the risk of applying models to fragile and unestablished bases, it is advisable to make our contribution in compliance with Koopmans' teaching to the effect that "until we succeed in specifying fruitful assumptions for the behaviour in an uncertain and changing economic environment, we shall continue to be groping for the proper tools of reasoning,,2. The aim of this paper is to discuss and supply empirical evidence on a nu mb er of controversial hypotheses regarding the direction and relevance of the effects of technological innovation processes in the industrial structure. These hypotheses concern:

Cf. Freeman/Soete (987), Cyert/Mowery (987), Dosi et al. (988), Dosi (988), Amendola/Gaffard (988), Sylos Labini (989), Morroni (990), Pini (991), and Antonelli (991), to mention some of the most re cent works. 2

See Koopmans (957), p. 183.

186

-

Riccardo Leoni

the job-killing and the job-raising effect of technological innovations on employment; the upgrading, downgrading and neutral effect of technological innovations on occupations; the different influence of technological innovations on men and women; the direction of the effects of "microelectronics", one of the components of technological innovation, on job structure and occupations.

In order to locate these theories appropriately within the framework of the principle theoretical positions, in Section 2 of this paper I shall summarize the main ideas involved, and in Section 3 I shall tackle the problem of the definition of skill. In Section 4 I shall deal with the empirical evidence mentioned above, while in Section 5 I shall consider alternative explanations for the problems analysed and draw some conclusions.

2. Issues The literature contains conflicting pro positions and positions on the effects of technical progress on both employment and occupations. On the one hand, there is the "optimistic" thesis according to which technological innovation has a positive effect on both jobs and the level of qualification required - with a consequent upgrading in the educational levels and professional training involved in new and old jobs alike. On the other hand, we have the "pessimistic" thesis which claims that technical progress destroys jobs and breaks professionality down into smaller components, thus downgrading the professional training required and consequently the educational levels. Between these two controversial positions we find the middleof-the-road position based on compensation effects. 2.1. The Optimistic Thesis With regard to quantitive aspects, this thesis is founded on the prevalence of Ondirect) compensation effects over the direct (or primary) ones, thanks above all to the multiplying factor associated with the processes of technological innovation. Whereas the direct effects (generally negative) are easily identifiable, particularly when the analysis is carried out in factories or firms, the same is not true of the indirect effect (generally positive). Let us consider, for example, the effect of an increase in sales following an innovation in production processes which improves productivity. Its subsequent beneficial effects may spill over into the dynamics of prices, salaries, profits or shorter working hours. Leaving this last component aside, the indirect effects of technical progress are translated - according to the model of neoclassical compensation based on an elastic demand to price and in-

Quantitative and Qualitative Effects of Technological Innovations

187

come and based on the replaceability of the factors - into some sort of stimulus to aggregate demand. In addition to the feedback involved, the effect re1ated to the technology multiplier should also be considered. By this I mean the net increase CLe. after sc rapping) of the investments per input unit Cand therefore of demand and employment) necessary to install new technology. A macro-approach, or a dynamic analysis of input-output, therefore becomes crucial in order to grasp and evaluate all the (quantitative) consequences of technical progress. Research work in this area has been conducted by, for example, Wilson/Whitley 3, Leontief/Duchin 4 and Edler et al. 5. Although innovation of process is examined in depth, innovation of product is ignored in most approaches of partial or general equilibrium. For an assessment of this one must conte nd with at least one partial effect of the replacement of old products with new: an expansion of markets can derive, in fact, only from new requirements and from fundamentally new demand. Another consequence of product innovation is the more rapid scrapping of long-lived consumer and capital goods. Important theoretical support for this proposition is provided by Katsoulacos' work, in which he demonstrates that - under the assumptions typical of neoclassical equilibrium analysis - the effect of the introduction of new products is much more favourable to employment than is the introduction of new production techniques. From this result one may infer that, in an open economy, the systems which are able to attain technological leadership in product innovation Cwhether incorporated into instrumental assets, consumer goods or services) can enjoy both favourable direct occupational effects and, to a greater extent, indirect ones. With regard to qualitative aspects, fundamental work has been carried out by Kerr/Dunlop/Harbison/Myers 6 , who claim that the logic of industrialization entails a labour division wh ich develops along the lines of increasingly marked differentiation and efficiency. Technological innovation increases productivity and entails a wider range and a higher average level of skills. Industrialization requires greater mobility, both professional and geographical, and an educational system capable of supplying more specialized skills, training and competence for the economic system. Automation tends to e1iminate repetitive and boring jobs and, at the same time, makes work more complex and interrelated, particularly in the high-tech sectors of industry7. Other authors Ce.g.

3

WilsonlWhidey (1986).

4

Leontief/Duchin (986).

5

Edler et al. (990).

6

Kerr/Dunlop/Harbison/Myers (964).

Other optimistic scenarios are described in Blauner's (964) and Davis/Taylor's (1976) analyses. 7

188

Riccardo Leoni

Piore/Sabel 8 , Sorge et a1. 9) stress that the productive process has been historically domina ted by methods of industrial production, with the impoverishment of the nature of work contribution to the production process. The advent of new micro-electronic technologies (such as CNC machines, robots, FMS, CAD-CAM, etc.) has restored "artisanship" to the worker and determined a tuming-point - towards skill-upgrading - in the historical process of de-skilling begun under Taylorism JO • Finally, other research work underlines further aspects connected with new technologies, such as the trend towards the development of preparatory activities and monitoring, making adjustments, and the capacity to respond rapidly to emergency situations - that is, more innovative thinking, improved planning skills and a greater capacity for teamwork ll . With the development of technical progress the percentage of managers, engineers and technicians is expected to increase and that of unskilled and semiskilled workers and craftsmen to decrease. All this implies the replacement of manual work by cognitive skills, i.e. a general upgrading of the industrial workforce.

2.2. The Pessimistic Thesis The view of technical progress as job-killing emerges above all from company and sectoral studies. These analyses have a higher degree of analyticity, meaning that they address aspects of the genesis and diffusion of technological innovations separate1y, making use of the fruitful distinction between product and process innovation. Despite this, however, they concentrate their attention on certain specific technologies (such as robotics) or on particular sectors (such as mechanicsY2 and are consequently prevented, because of the method employed (case-studies or partial analysis), from understanding and verifying the operation of those feedback mechanisms stressed by those who argue the opposite. Even when the methodological restrictions mentioned have been overcome, the conclusions remain the same in cases where other characteristics are emphasized, such as the permeation of the new technologies; the limPiore/Sabel (1984). Sorge et al. (1985). 10 According to Piore/Sabel (1984), p. 261 " ... The computer ... is an instrument that responds to and extends the productive capacities of the user ... The advent of computer restores human control over the production process; machinery again is subordinated to the operator." 11 The results of the research of Battelle Institute follow this trend: cf. von Gizycki/Weiler (1980). 12

This is the case, regarding Italy, of Cainarca et al. (1991).

Quantitative and Qualitative Effects of Technological Innovations

189

ited prospects for new product generation; the wide applicability of modern computer technology also in the service sector, wh ich today offers - though it will do so to a much lesser extent in the future - sufficiently strong compensation effects to counterbalance the loss of jobs due to direct effects; macroeconomic conditions (Le. growth rate and demand stimuli) and conditions relating to the flexibility and adaptability of the job market, relevant to the development of indirect (or compensatory) effects; the different speeds of generation and diffusion of new technologies in technologically advanced countries and technologically underdeveloped countries, with a lower technological multiplier in the latter (as a result of imports at a higher technological level) and - in view of international competitiveness with the possible transfer of jobs from the second to the first 13 . Studies reflecting this point of view indude Kaplinsky'sl4, which focuses on the probable future occupational effects of the application of microelectronics, Leontief/Duchin's book 15 which - with very sophisticated inputoutput techniques - projects the effects in the year 2000, Freeman/Soete's works 16 wh ich identify considerable negative effects on the majority of the production sectors, on the energy sector and on some areas of the service sector. With regard to qualitative aspects, the downgrading thesis finds its main supporters in Braverman 17 and Gordon/Edwards/Reich I8 • The central point is the degrading of job quality because of changes in the nature of the labour process, which is ultimately connected to the strategic use of technology beyond the logic of efficiency and productivity. The labour process refers to the web of the technical and social aspects of work and indudes the nature of work and implicit skill levels, considerations of authority relations between positions, and the social and dass structure in wh ich jobs are embedded. The pessimistic thesis is also supported by authors of non-Marxist persuasion. For instance, Rosenbrock 19 states that the negative consequences on employment due to technological innovations are to be found "in the view of the world held by those who are actively engaged in the scientific and technological development which now forms one undivided whole". 13 With regard to the Italian situation, confirmation of the phenomenon of "technological penetration" via exports (traditional products manufactured by means of advanced technologies imported from abroad) is provided by the studies of ContilSilvani (986) and Siniscalco/Giovannetti (986).

14

Kaplinsky (986).

15

LeontiefiDuchin (986).

16

Freeman/Soete (987).

17

Braverman (1974).

18

Gordon/Edwards/Reich (982).

19

See Rosenbrock (1984), p. 129.

190

Riccardo Leoni

According to Rosenbrock, technology can be developed in two alternative ways: the traditional way, where problem-solving activity leads to the replacement of human labour, and an alternative way where the technology produced assists and supports human activity in problem-solving, leading to a continuous up-grading in the skills of users of new technologies. The prevalence of the first form of production of science and technology Ühe negative form for employment and skills) depends, in Rosenbrock's view, only on the beliefs of many scientists and technologists.

2.]. The Neutral Thesis This position results from aseries of empirieal analyses rather than being the product of theoretieal work. From these analyses it appears that there is abasie equivalence between job gains and losses after the introduction of technologieal innovations. Brainard/Fullgrabe's survey20 of various studies carried out in different countries provides a good reference point for the thesis of neutrality 21. This survey also brings out aseries of converging patterns in the redistribution effects on jobs in terms of sector, territory and the jobs held by workers affected by the innovative processes, and whieh may thus be termed "stylized facts". On an empirieal level, two different trends emerge, namely: an increase in white-collar and a decline in blue-collar occupations; a growth in professional, scientific, technieal and higher management occupations relative to clerieal and sales workers, even though, generally speaking, there are those who claim that a critieal review would show that advanced technology "does not, by itself, raise, lower, or polarise skills required"22, where polarization means a division of the labour force into two groups, one comprising highly-skilled jobs and the other de-skilled jobs. The equivalence in terms of de-skilling and upskilling is rather problematie. It is still a moot point because skill change can occur and can be understood in two different ways: as a change in the work content of a given job and as a compositional shift, that is the creation or elimination of jobs of given skill and the distribution of persons among those jobS23 . 20

Brainard/Fullgrabe (986).

A similar result has been obtained by Russo (991) in her analysis of the production of ceramic tiles in Italy. For some remarks on this research work see footnote no. 17. 21

22 23

OTA-ITE (986).

Cf. Rumberger (981).

Quantitative and Qualitative Effects of Technological Innovations

191

Lastly, there is another position, one difficult to locate within our survey but which must be taken into consideration. This is the claim that skills are socially constructed, i.e. that they are the outcome of worker resistance and of the role played by trade unions in the negotiation of work reorganization. It follows that the criteria by which workers are differentiated and jobs defined are relatively independent of the real or 'technical' skill content of jobS 24 . This poses the question of wh ether certain workers or jobs are labelled as 'skilIed' even though the content of their work is largely unskilled. Two extreme vers ions of the argument are possible: "First, one might stress the way in which the labels attached to certain jobs are created or maintained by managements as a way of coping with worker resistance, ... Alternatively, labels might be seen as a direct result of workers' resistance or initiatives"25 in order to secure for themselves a higher level of wages normally or previously associated with lower levels of work qualification. According to this theoretical position, assessment of the upskilling and downskilling processes must also include a change in strategy and in the power relations between managers and workers, a change that is usually achieved only very slowly. I shall return to this approach in the final section of this paper. The above synopsis is intended to be an illustration of the different positions that have been taken up, not a complete survey. For more extensive coverage of these topics, see Spenner26 and AtteweW 7 .

3. The Definition of Skill Before exploring the relationship between skill changes in occupations and new technologies, it is necessary to define skill. Unfortunately, defining skill constitutes one of the major problems in research on the upgradingdowngrading question and the lack of clarity surrounding its use is widely acknowledged28 . The meaning of skill may in fact refer both to the job (as in job requirements) and to the worker (as in worker capabilities). It may include dimensions such as substantive complexity, autonomy-controI 29 , technical 24 For further information on this position, cf. Wood (982), Chap.1 and Rubery (987). 25 26 27 28

29

See Wood (982), p. 17. Spenner (983), (1985). Attewell (1987). Cf. Spenner (985); Russo (1991), Seetion 2.1. Cf. Spenner (985).

192

Riccardo Leoni

complexity, discretion 30 , etc. 31 . Unfortunately, there is no consensus on the criteria by which skills should be defined or measured. Also, indirect measures such as schooling or wage levels suffer from a number of limitations: for instance, workers' educational levels may be beneath or above the skill level of their work, and wage levels may reflect non-skill factors such as bargaining strength, hazards and tradition. Between direct and indirect measures of skill, preference should be given to the former. This does not imply that surveys based on direct measurement of occupational skill requirements - Le. a classification system of professions such as Istat or the American Dictionary of Occupational Titles (DOT) - are immune from the risk of confusing occupation-specific manifestations of skill and its fundamental dimensions. The advantage is that they allow more straightforward investigation as weil as more accurate comparison of changes within and ac ross studies. In the empirical analysis that follows I shall focus on the impact of new technologies on jobs, bearing in mind that workplaces and jobs are imperfect translators of human abilities and capacities into the realities of productivity, skills utilized and other indicators of performance. These seem more pertinent to the problem of human capital measures and labour supply potentialities than jobs, their characteristics and the requirements of labour in general. The definitions and contents of skills used in my questionnaire are the same as those used by Istat (Istituto Centrale di Statistica) in the 6th General Census of Industry and Services carried out in 1981. Firms were asked to classify their employment according to 13 levels of qualifications. Subsequently, company data was aggregated according to industry, firm size and technological content of output. The study therefore averages the skill change within each subgroup of firms and brings out the net changes (between 1981 and 1987) in single occupations. The aggregated approach followed has certain limitations, since it encapsulates work activities which are in fact sometimes different in uniform group; on the other hand, however, it allows the researcher to by-pass considerable difficulties, 30

Cf. Rolfe (1990).

31 An interesting suggestion has recently been put fOlward by Russo (991), p. 55, according to which the revel of skill required should be measured on the basis of the time spent learning the tasks that have been assigned to the worker. This criterion - as the proponent recognizes - is greatly affected by cultural and social conditions, which are crucial in forming people's theoretical and practical knowledge. In a dynamic perspective this criterion enables us to point out that the evolution of techniques may lead to a negative, positive or neutral impact on skill requirements (measured in terms of time of learning) according to whether the basic ingredients of skills O.e. cultural and social conditions) evolve faster or slower than technical progress or at the same rate. Russo concludes that "the two techniques [the one prevailing at the end of the 1960s and the one in use in the early 1980s1 differ more in their labour force requirements than in their skill requirements" (p. 58), which in other words means that "in this period the techniques introduced have not changed in any substantial way the level of skill of the individual task" (p. 61). This in the light of the above considerations is rather misleading.

Quantitative and Qualitative Effects of Technological Innovations

193

such as variations in definitions and components of skill (sometimes only nominally varying) from one firm to another.

4. Empirlcal Evidence Precise quantification of the effects on employment analysed in the previous section and associated with the processes of technological innovation becomes more difficult and complex, the greater the dis aggregation of the phenomena to be kept under contro!. The reasons for this are both the simultaneous movement of several company variables, and the difficulty of obtaining information on a sufficiently high number of periods (e.g. regarding production levels and the vector of occupation subdivided into qualifications) to form a data base which can be treated with modern econometric techniques. The da ta I refer to in this paper come from a survey on a sampie of manufacturing firms (approximately 200) located in one of the areas with the highest density of industrialization in Lombardy32. The fieldwork was carried out in 1987 using a highly complex questionnaire 33 . The size and structure of the sampie are such that it allows the application of typical procedures of statistical inference. For some variables, moreover, such as employment divided according to occupation and sex, information dating back to 1981 for the same units is available. In this way we can exploit the modern technique of longitudinal analysis which, particularly in the ca se of a closed sampie like ours, highlights structural aspects observable in the medium term. During the course of analysis I shall use three types of aggregation of data collected at establishment level: the first according to industry (with two digits), the second according to category size and the third according to technological group34.

4.1. Quantitative Aspects If comparison is made between the number of jobs in the 206 manufacturing establishments sampled at the time of the 1981 industrial census and of the survey Quly 1987) respectively, we have a loss of 8300 jobs, corresponding to 18.9% (Table 1). This is a loss across the board, Le. a loss re32 33 34

This area is the province of Bergamo. The results are given in Leoni (990).

The groups are formed on the basis of the technological contents of the output of the productive unit investigated, namely: group A = high technological content; group B = medium technological content; group C = low technological content. With reference to the methodology used in the c1assification of the production units cf. Leoni (989).

Riccardo Leoni

194

garding all three technological groups and almost all product sectors. In terms of size of company, positive results alternate with negative ones, but the job losses in the large companies stand out both in terms of absolute value and in terms of percentage. Table 1

Changes in Jobs according to Sex, Industry, Size Category and Technological Groups Size categories 10-49

50-99

Changes in jobs

100-499

0 > u". By assumption, the market clearing price p(q) satisfies p(q)

(1)

=

u'(q)

In order to simplify the following analysis we assurne a linear demand function given by q=K-p

(2)

where K is so me strictly positive constant. Note, however, that most of the arguments that follow do not depend on this particular specification of the demand function. Assurne further that there are two producers of this good, firm Hand firm F, and that each of them has a production process characterized by constant unit costs denoted as CH and CF respectively. Without loss of generality it is assumed that CH ~ cF. If the two firms engage in Bertrand competition, only firm F is active, and the equilibrium is the solution of the following optimization problem max TIF(CH,CF)

=

[p(q) - CF]qF - A[p - cH]

(3)

where Adenotes a Lagrange multiplier and TI (.) a firm's profit in a Bertrand-duopoly. A is associated with the constraint that states that the price of the incumbent firm cannot exceed the unit costs of the potential entrant. For later reference, the solution of (3) is denoted by qB(CH,CF). Under Cournot competition each firm maximizes its own profit by choosing its output quantity, ta king the quantity of its riyal as given, e.g. firm H solves max ltH(CF, cH)

(4)

=

[p(qH + qF) - CH]qH

qH

where lt denotes a firm's profit under Cournot competition. The other firm solves an analogous problem, and the equilibrium is obtained from the first order conditions 3 Clemenz (forth.). This model is in turn an extension of earlier ones, especially those developed by Dasgupta/Stiglitz.

4

Clemenz (990).

268

Gerhard Clemenz

(Sa)

p' (qH + qF) qH + p (qH + qF)

=

CH

(Sb)

p' (qH + qF) qF + p (qH + qF)

=

CF

Using the demand function (2), and assuming that the difference between the unit costs is sufficiently small to allow both firms to produce a positive quantity in equilibrium, yields the solution (6a)

qH

[K + cF - 2CH] / 3

(6b)

qF

[K + CH - 2cp] / 3

(6c)

q

qH + qF

(6d)

P

[K + CH + CF] / 3

=

[2K - CH - CF] / 3

It is useful for later reference to state the effects of a marginal change of CH on these equilibrium values 5 .

(7a)

aqH/aCH

- 2/3

Ob)

aqF/aCH

1/3

(7c)

aq/aCH

- 1/3

(7d)

ap/aCH

1/3

2.2. Returns to R&D An R&D project requires a fixed amount x, lasts for one period, and yields a new production process wh ich is characterized by the new unit costs c. The new process, if superior to the best that the firm currently knows, can be implemented without further costs at the beginning of the following period. The firm knows the (continuous) probability distribution F(c) over all possible unit costs that its R&D project may deliver, and it is assumed that F(O) = 0, and that there exists some Cmax < 00 with F(c max ) = 16 . It is further assumed that a firm can never imitate the processes found by its competitor. Now suppose that firm H has managed to develop a new production process which implies unit costs c < cH, whereas its rival is still producing 5 In a more general model one would have to use (Sa) and (Sb) for such comparative-static exercises. As is weil known, some restrictions have to be imposed in order to ensure that the signs of the partial derivatives are the same as in the special case presented in (7a) - (7b).

6 As has been shown by Clemenz (1990) and Clemenz (forth.) these assumptions can be relaxed in various ways (allowing variable project size, several projects simultaneously, dependence of F(c) on the currently known processes, etc.) without affecting the main conclusions of the analysis.

International R&D Competition

269

at unit costs CF :;:; CH. The increase in profit enjoyed by firm H depends crucially on the type of competition assumed. Consider first Bertrand competition as analysed in Clemenz7 . It is obvious from (3) that the firm obtains a positive profit if and only if c < cF. From the envelope theorem it follows that for c :;:; CF we obtain (8)

and consequently, the increase in firm H's profit due to a reduction in its unit costs to a level C < CF, denoted by MIH(CF; CH,C):

=

TIH(CF,C) - nH(CF, CH)

(with the last term equal to zero for CH

~

i

CF) can be written as

CF

~nH(CF; CH,C)

(9)

=

qB( CF ,c)dc

C

But C is a random variable with distribution F(c), and it has been shown8 that the expected value of ~nH(.) can be written as

J

CF

(10)

E~TIH(CF; CH,C)

=

qB( CF ,c)F(c)dc

o

One important implication of Bertrand competition is the following. Whether an R&D project is worth undertaking for the currently inferior firm depends exclusively on the unit cost level available to the incumbent firm, and not on its own unit costs. It is easily shown that there exists a unique unit cost level which has the property that no additional R&D project will be performed once a producer is in a position to produce at unit costs at or below this 'reservation level'. In addition, this reservation unit cost level is independent of the number of (potential) producers9 . A second, equally important, implication is that the social returns to an R&D project always exceed the private ones of the firm. Social net utility in one period is defined exclusive of R&D costs by

(11) and under Bertrand competition cH > cF implies qH = 0, qF = qB (CH, CF)· Suppose firm H achieves a reduction in its unit costs to a level c, which is still above CF. Obviously, this is of no help at all to firm H, since it is still 7

Clemenz (1990).

8

See appendix and Clemenz (1990) and (forth.).

9

Clemenz (forth.).

Gerhard Clemenz

270

inferior to the incumbent; but consumers benefit if c forces the incumbent to lower its price and increase its output. If firm H finds some c smaller than cF it makes a profit; but consumers also benefit, and the sum of both is the change of sodal net utilitylO. As a consequence, under Bertrand competition the potential entrant may ce ase its attempts to take over the market through successful R&D at a unit cost level of the incumbent wh ich is higher than desirable from a sodal point of view: a direct subsidy of R&D would be benefidal in this case. Consider next the increase in firm H's profit due to a reduction in its unit costs under Cournot competition. Suppose the original unit costs cH were suffidently dose to CF to allow both firms to produce a strictly positive quantity in equilibrium. The effect of a marginal reduction in cH 0 n 1tH(cF, CH) equals (12)

d1tH(ep, CH)/dcH

= -

qH(CF, CH)[l - p'(qH + qF)dqF/dCHl

One important difference from Bertrand competition concerns the effect on firm H's profit by firm F's reaction to the former's cost reduction. Firm H not only profits from produdng the same quantity at lower unit costs but is also able to increase its market share. From a theoretical point of view, it is not dear whether one should assurne that firm H takes this fully into account Cimplying it has 'consistent' or 'rational' expectations) or whether it is not aware of it at all ('Nash' expectations). By varying the degree to which a firm believes that its own actions evoke a response from its rivals, one may reach fairly different condusions regarding the effidency of competition; an approach known as 'conjectural variations' and analysed in depth by e.g. Eaton and GrossmannII. In this paper I shaII concentrate on rational expectations, but it should be obvious that conjectural variations can be introduced into the model. A second important difference with respect to Bertrand competition is that (12) holds also for CH > CF. This has some important implications that I shaII turn to in due course. Substituting from (2), (6a) and (7b) for pi, qH and dqF/dcH in (12) we obtain (13) As in the case of Bertrand competition, one can use (13) to express the profit increase of firm H due to a unit cost reduction from CH to C as (14)

~1tH(CF; CH,C)

-i j[ CH

=

4K + 4c F - 8c]cic

C

10

For rigorous proof of these properties see Clemenz (1990).

11

Cf. EatoniGrossmann (1986).

International R&D Competition

271

with the expected value (see appendix) (15)

E~ltH(CF;

eH

CH,C) =-%j[4K+4C F -SC]F(C)dC o

The decisive difference between E~nH as determined in (10) and E~ltH as given in (15) is, for oUf pUfposes, the fact that the latter depends not only on the rival's unit cost level cF but also on cH and is, as can be seen, increasing in cH. As a consequence, in contrast to Bertrand competition, there is no unique reservation unit cost level in a Cournot oligopoly, but rather a set of pairs (CH', CF') with the property that neither firm has an incentive to undertake an R&D project if cF = CF" and CH' ~ cH ~ CF". As will be shown below, this has consequences for the likelihood of socially beneficial autarky in an international context. However, let us first examine the social return to R&D in a Cournot duopoly. Differentiating W(CH, CF) with respect to cH gives (16)

dW IdCH = u'(q)dqldcH - qH - cHdqHldcH - cFdqFldcH

and substituting in (16) from (6a) and Ga) - (7c) yields, accounting for u' = p, (17)

dW IdCH = - (1/9)[4K - lICH + 7CFl

Now comparing (13) and (17) reveals that (1S)

- dW/dCH > - dltHldCH iff cF> cH

and it can be shown that this result does not depend on the particular linear demand function used in the above analysis. Under fairly general conditions a reduction in the unit costs of the inferior firm yields an increase in its profit which is larger than the total social welfare ga in if the new unit cost level remains above that of the competing firm. The intuition behind this result, which is in striking contrast with the situation under Bertrand competition, is fairly easy to understand: A reduction in cH to a level above CF implies that a larger fraction of total output than before is produced at the high er unit cost level, thus aggravating one of the reasons for the inefficiency of the Cournot equilibrium. At the same time, most of the profit increase enjoyed by firm H is merely a shift of firm F's profit, which does not increase W at all. In fact, for 4K/ll ~ CH ~ KfZ the sign of (17) would even be negative, meaning that a marginal reduction in the unit costs of the less efficient producer would result in a social loss. As a consequence, one easily finds pairs (CH, CF) and distribution functions F(c) with the property that it is profitable for firm H to invest in an R&D project which yields a soda1 return smaller than the cost of the R&D project (the easiest way is to set CF = 0). Hence, in a Cournot duopoly we do not find a general result on underinvestment in R&D as we do in Bertrand competition. Whether this affects the conclusions concerning international

Gerhard Clemenz

272

R&D competition reached in Clemenz 12 for Bertrand oligopolies is discussed in the next section.

3. International R&D Competition

3.1. International Duopolies In order to bring out the implications of the analysis conducted in the previous section for international R&D competition, suppose that the economy under consideration has been "carved up" into two separate economies with identical demand functions for the homogeneous good, but with firm H located in one country (call it the 'horne country'), and firm F located in the other (the 'foreign' country). If there is no trade between the two countries then each firm is a pure monopolist in a market half the size of that of the integrated economy, implying that each now faces the demand function qi

(19)

=

[K - pl/2,

i

=

H, F

with the equilibrium of a pure monopoly given by (20)

qM

=

[K - q]/4,

i

=

H, F

(21)

PM

=

[K + q]/4,

i

=

H, F

Now, the reason why temporary autarky may be better than free trade is the following 13 . Assurne that cF is smaller than the reservation unit cost level of the integrated economy under Bertrand competition, and that cH is large enough to satisfy two conditions: Ci) an R&D project would be profitable for firm H in autarky; (iO an R&D project of firm H in the integrated economy yields a sodal return for the horne country that is higher than its costs. If these conditions are met, it is benefidal for the horne country to delay free trade, thus stimulating R&D by its domestic producer. This situation is obviously possible, since in the integrated economy the challenger's expected gain from R&D depends only on the incumbent's unit costs, and the sodal return of R&D is always greater than the private one which accrues to the firm. As was shown in the previous section, however, neither of these properties holds in general if there is Cournot competition in the output market. The question is, therefore, whether the above argument remains valid also in this case. Fortunately, the answer is in the affirmative, though with some additional caveats. The reason is that in an international context in the case of a Cournot duopoly the sodal return to R&D exceeds its private one. In 12

CJemenz (990).

13

Ibid.

International R&D Competition

273

order to demonstrate this, I shall have to modify the definition of social utility for the horne country since that part of profit generated through sales in the horne country but enjoyed by firm F is now no longer part of the horne country's social net utility, denoted by WH. By assumption, in the integrated economy each country consumes half of total output, Le.· [qH + qpl/2. The resources used in the horne country equal the costs of producing qH plus the expenditures incurred by importing the difference between horne production and horne comsumption, Le. p[qp - qHl/2. Consequently, domestic social net utility for given unit costs can be written as (22)

WH(CH, cp)

=

U([qH + qpl/2) - cHqH - p(qH + qp)[qp - qHl/2

Differentiating WH with respect to cH yields aWH/aCH

=

u'(q)[aqH/acH + aqp/acHl/2 - qH - cH[aqH/acHl

- [aq/acHlp'(q)[qp - qHl/2 - p(q)[aqp/acH - aqH/acHl/2 (23)

=

p(q)[aqH/acHl - qH - cH[aqH/acHl - [aq/acHlp'(q)[qp - qHl/2

since u'(q) = p(q). Again using the linear demand function (2) and substituting in (23) from (6.) and (7.), equation (23) simplifies to (24)

aWH/aCH

= -

(/9)[9K + 9cH/2 + 15cp/21

and comparison between (3) and (24) immediately reveals that (25)

- aWH/aCH > - a1tH/aCH

as 9K + 9cH/2 + 15cp/2 > 4K + 4cp - 8CH. Again, the intuition behind this result is quite easy to understand: in contrast with a c10sed economy, a shift of profits from firm F to firm H always entails an increase in domestic welfare as defined in (22); and an increase in domestic production even at higher unit costs than necessary in the foreign country saves domestic resources because the world market price is higher than domestic unit costs. Consequently, condition (ii) that Bertrand competition required in order to make temporary autarky socially beneficial can also be fulfilled in a Cournot oligopoly, even for arbitrarily low levels of cp. But can we be sure that condition (i) can also be satisfied? Again, the answer is in the affirmative. Recall from Clemenz 14 (26)

a1tM/ac

= -

qM

= -

[K - c]/4

where 1tM denotes the profit of a pure monopolist and qM its profit maximizing output. The latter term has been obtained from (20). For a1tM/aCH to be larger in absolute terms than a1tH/aCH, it is necessary that (27)

23cH > 7K + 16cp

and, obviously, (27) is more likely to be satisfied for small values of cp. 14

Ibid.: Clemenz (forth.).

274

Gerhard Clemenz

Clearly, with, say, CF = 0 one can find a distribution function F(c) with sufficient prob ability weight in the interval [7K/23, CH) to ensure that condition (i) is also satisfied in a Cournot equilibrium. It is also obvious, however, that it is more difficult to find configurations satisfying (i) in a Cournot market than it is in Bertrand market, the reason being that increasing cH in the former makes R&D more profitable in the integrated economy as well, which is not the case under Bertrand competition. On the other hand, under Cournot competition there is an additional factor that increases the likelihood of satisfying (0, one wh ich is absent in a Bertrand oligopoly: the number of firms in the (more advanced) foreign country. It is to this point that I turn now.

3.2. Several Foreign Firms In Bertrand oligopoly the profitability of an R&D project only depends on the lowest currently known unit cost level, and not on the number of firms possessing the corresponding production process 15 . In a Cournot oligopoly, by contrast, the number of firms in the market is quite important in .terms of incentives to innovate (one of the few papers that tackle this problem, albeit in a slightly different context, is Delbono and Denicolo I6 ). Suppose that in our integrated economy there are three rather than only two firms, one with unit costs cH, and two with identical unit costs CF, cF< cH· Assume again that this economy is divided into two countries with identical demand functions, but with firm H in the 'home' country and the two other firms in the 'foreign' country. The assumption that both 'foreign' firms have identical unit costs is only made for analytical convenience, although it could be justified by assuming that ah innovation diffuses very quickly within a country but never across borders. It is straightforwardly shown that, with free trade, the quantities produced in each country are given by (28a)

[K + 2CF - 3cHl/4

(28b)

[2K + 2CH - 4cFl/4

(28c)

q

[3K - 2CF - cHl/4

It is evident that dqH/dcH = - 3/4, and dqF/dcH (13) it is straightforward to show (29)

=

1/2. In analogy with

d1tH/dcH = - qH - qH12 = - 3[K + 2cF - 3cHl/2

15

Ibid.; for related results see Sah/Stiglitz (1987).

16

See Delbono/Denicolo (1988).

International R&D Competition

275

and using (26) we obtain (30) Comparison between (27) and (30) reveals that the restrietion on K and cH - whieh ensures that the incentive to innovate is greater in the pure autarky monopoly than in the free trade Cournot oligopoly - is weaker with two foreign fi.rms rather than with only one. It is possible to construct examples where the profitability of R&D is decreasing in the number of competing firms, but this is not a general result. In any case, if the number of firms per capita differs in two otherwise identieal countries, there may be an additional reason for remaining in autarky for some time further, although in general it is not possible to determine the effect of the number of firms on the private profitability of R&D. To sum up this section, we may conclude that the possibility of a socially beneficial prolongment of autarky in order to promote R&D, which has been shown to exist under Bertrand competition, does not disappear in a Cournot oligopoly. On the other hand, Cournot competition leads to a rieher set of possibilities than Bertrand competition, with some consequences for policy making. These matters are briefly discussed in the next seetion.

4. Some Policy Issues As I have pointed out elsewhere 17 full treatment of poliey issues would have to take various aspects into account: restrietions imposed by international agreements, retaliation by the foreign country, principal-agent problems between the domestie government and domestie producers, and finally, various social costs and benefits of different poliey measures. It is beyond the scope of this paper to provide comprehensive analysis of this kind, and I shall concentrate on a few problems related to social costs. In partieular, I would like to point out the different implieations of Bertrand competition on the one hand and of Cournot eompetition on the other. 4.1. Gains From Trade

With Bertrand eompetition it is obvious that free trade is always beneficial for the horne country for given unit eosts eH > CF. The reason is that cH imposes an upper limit on the priee of the good, hence the total eosts of consuming a given quantity of the good eannot be larger in a free trade regime than in autarky. As is weil doeumented in the literature l8 , under 17

Clemenz (990).

18

E.g. Helpman/Krugman (985), chapter 5.

276

Gerhard Clemenz

Cournot competition gains from trade are not ensured in general. Clearly, if autarky were better than free trade even without a potential for innovation, then the above analysis would be somewhat superfluous, but as I shall now proceed to show it is easy to derive sufficient conditions for (one period) gains from trade in our simple model. Recall that, implicitly, we have defined u(q) = Kq - q 212. Calculation of social net utility for a pure monopoly in the horne country is straightforward. Using (20) one obtains (31) As mentioned earlier, the easiest way to construct a model in which temporary autarky is socially beneficial is to set cF = 0, as this ensures that no further R&D project is being performed in the foreign country. Using this as an assumption and substitutihg from (6a) - (6d) in (20) we get (32)

which implies together with (31) (33) wh ich is positive for K ~ 2CH, a condition wh ich must be satisfied to ensure domestic production of a positive quantity of the good in the free trade equilibrium. On the other hand, if K < 2CH, then domestic unit costs are higher than the monopoly price of the foreign producer, and thus free trade must give rise to a gain for the horne country. Consequently, T(CH, 0) > 0, and autarky imposes a welfare loss on the horne country which has to be set against the ga in from promoting R&D. 4.2. Subsidies

One of the conclusions reached by Clemenz 19 was that a direct subsidy to R&D is cheaper than prolonging autarky, since society as a whole would only incur the costs of R&D (which are unavoidable anyway), but the horne country would not suffer the disadvantage of forgoing T(CH, 0) for as many periods as would be required to make R&D profitable for the domestic producer. Clearly, this argument is valid in the present framework as weIl. A second conclusion was that subsidizing domestic production (and thus domestic exports) does not make sense under Bertrand competition, since it will only lead to inefficient domestic production as long as domestic unit costs remain high er than foreign ones, and to an unnecessary and costly subsidy of foreign consumers if the domestic producer finds a production process which allows it to take over the market in any case. Spencer and Brander20 , however, used a model rather similar to the present one to show 19

Clemenz (1990).

20

See Spencer/Brander (1983)

277

International R&D Competition

that export subsidies may result in a we1fare gain for the horne country (provided the foreign country does not retaliate), and that domestic R&D should be taxed rather than subsidized. Spencer and Brander's model differs from the present analysis in three respects: i) it does not account for uncertainty in R&D; ii) there is no domestic consumption, with the producers in the two countries competing in the market of a third country; iii) the amount invested in R&D is variable. The first point has an important bearing on the main problem discussed in this paper. Without uncertainty over the outcome of an R&D project there is no reason why one of two identical countries should ever fall behind technologically, and the question raised at the beginning of this paper would hardly ever arise. The third point is large1y irrelevant, since the main properties of the present model would be preserved after allowing for variable R&D project size 21 • It is the second point which makes all the difference, and far the following reason: without domestic consumption no domestic resources need be devoted to importing the good if the domestic firm produces at higher unit costs than the foreign one. In addition, for Spencer and Brander, a reduction in domestic unit costs only results in an increase in domestic profits; it does not affect consumer surplus. Therefore, the positive difference between social and private returns to R&D shown in section 3 disappears. Instead, more rather than less than the socially optimal amount is allocated to R&D. Hence the optimality of taxing R&D. On the other hand, subsidizing domestic production remains a potentially beneficial policy measure. And this is in striking contrast with the conclusions derived far Bertrand competition 22 • The optimal domestic subsidy (provided there is no foreign retaliation), denoted as S(CH, CF), can be derived from (20), after account has been taken of the fact that the unit costs for the domestic producer are now CH - s instead of cH. Thus WH can be written as A marginal change of s has the same effect on the equilibrium values of q, qH and p as a marginal change of cH, except for a change of the sign. Consequently, the first order condition for an optimal s is given by (35)

dWH/ds

=

[4K + CH + 3CF - 5sl/6

=

0

and, clearly, the optimal subsidy is strictly positive. As has already been argued, the main difference between an international Bertrand and an international Cournot oligopoly is, in this case, that in the former imports can 21

See Clemenz (forth.).

22

Clemenz (1990).

Gerhard Clemenz

278

never be more expensive than domestie production, whereas in the latter they are. Hence, replacing imports with domestie production saves domestie resüurces. In addition, the reason for beneficial production subsidies given by Spencer and Brander remains valid, of course. By reducing the unit costs of the domestie producer the government can shift its reaction curve and help itself to become, in effect, a Stackelberg leader. The optimal poliey mix seems to be the following. The government commits itself to paying the subsidy to production whieh is optimal for each pair (cH, CF). This increases the incentive for R&D as a side effect. If this is still insufficient, then the government should subsidize R&D directly, contrary to the conc1usion derived from the Spencer and Brander model. This policy mix is also suggested by a model with Bertrand competition, although in this case an import tax would replace the output subsidy23. Under both types of competition there may still be a more efficient way to increase domestie welfare: imposing a priee ceiling on the good equal to the lowest currently feasible unit costs. In fact, certain types of priee regulation could be designed in order to ensure socially optimal R&D efforts 24 • Unfortunately, in an international context this would require a degree of cooperation among different governments whieh seems unlikely in reality. However, the same goes for other policy measures as well, since retaliation quite often pays, and strategie trade policies need not lead to efficient equilibria. But, as mentioned earlier, these issues require much deeper analysis than can be provided in the present paper.

5. Conc1uding Remarks In this paper I have tried to do two things. On the one hand I have checked the robustness with respect to type of competition of earlier results regarding the possibility that prolonging autarky is socially beneficial. On the other hand I have specified the various implications of Cournüt and Bertrand competition for trade and R&D policies. It turns out that the rationale for prolonged autarky set out in my earlier artic1e does not depend crucially on the mode of competition. It remains true that prolonged autarky may be better than the imlnediate introduction of free trade in the presence of a potential for R&D in the technologically backward country. It also remains true that alternative policy measures exist whieh achieve the same at lower total social costs. However, the optimal policy mix is affected by the type of oligopolistic competition whieh prevails.

23

Ibid.

24

Clemenz (1991).

279

International R&D Competition

Future research should attempt to generalize the above analysis as far as possible. More important and more interesting, however, is fuller treatment of the strategie aspects of polieies designed to improve the outcome of international R&D competition.

Appendix (i) First we derive express ions (9) and (10):

(Al)

max IIH(CF, CH)

=

[p(q) - cHlqH - A. [p - CF),

and by the envelope theorem: dIIH(CF, CH)/dCH

= -

qB(ep, CH)

Now define (A2)

(with the last term equal to zero for CH

~

CF) whieh can be written as

f qB(CF, c)dc

CF

(A3)

6IIH(ep; CH,C)

=

C

(A4) Taking expectations of (A3) with respect to C and integrating by parts yields, using (A4)

f 6IIH(ep, cH, c)dF(c) f qB(ep, c)F(c)dc

CF

(A5)

E6IIH(ep; cH, c)

=

CF

=

o

0

whieh is precisely equation (0) in the main text. Equations (4) and OS) can be derived in exactly the same way.

References Cheng, L.: International Competition in R&D and Teehnological Leadership, in: Jour-

nal of International Eeonomies, 17, 1984, pp. 15-40

Clemenz, G.: International R&D Competition and Trade Poliey, in: Journal of Interna-

tional Eeonomics, 28, 1990, pp. 93-113

-

Optimal Price Cap Regulation, in: Journal of Industrial Eeonomics, 39, 1991, pp. 391-408

280

-

Gerhard Clemenz

Market Strueture and R&D Competition, in: European Eeonomic Review, fortheoming

Dasgupta, P. / Stiglitz,]. E.: Industrial Strueture and the Nature of Innovative Aetivity, in: Eeonomic Journal, 90, 1980, pp. 266-293 -

Uneertainty, Industrial Strueture and the Speed of R&D, in: Bell Journal of Eeonomies, II, 1980, pp. 1-28

Delbono, F. / Denicolo, V.: Ineentives to Innovate in a Cournot Oligopoly, Diseussion Paper No. 44, University of Bologna, 1988 Dixit, A.: A General Model of R&D Competition and Poliey, in: Rand Journal of Eeonomics, 19, 1988, pp. 317-326 -

International R&D Competition and Poliey, in: International Competitiveness, A. M. Spenee and H. A. Hazard eds., Cambridge, Mass. 1988

-

/ Norman, V.: Theory of International Trade, Cambridge 1980

Eaton,]. / Grossmann, G. M.: Optimal Trade and Industrial Poliey under Oligopoly, in: Quarterly Journal of Eeonomics, 101, 1986, pp. 383-406 Evenson, R. E. / Kislev, Y.: A Stoehastic Model of Applied Research, in: Journal of Political Eeonomy, 84, 1976, pp. 265-281 Helpman, E. / Krugman, P.: Market Strueture and Foreign Trade, Brighton 1985 Lee, T K.: A Nonsequential R&D Seareh Model, in: Management Scienee, 28, 1982, pp. 900-909 -

A Welfare Analysis of Monopolistie R&D, in: Eeonomie Letters, 12, 1983, pp. 361367

-

/ Wilde, L. L.: Market Strueture and Innovation: A Reformulation, in: Quarterly Journal of Eeonomics, 94, 1980, pp. 429-436

Loury, G.: Market Strueture and Innovation, in: Quarterly Journal of Eeonomics, 93, 1979, pp. 395-410 Neary, P.: Export Subsidies and National Welfare, in: Empirica, 15, 1988, pp. 243-261 Sah, R. K. / Stiglitz,]. F.: The Invarianee of Market Innovation to the Number of Firms, in: Rand Journal of Eeonomics, 18, 1987, pp. 98-108 Spencer, B.]. / Brander,]. A.: International R&D Rivalry and Industrial Strategy, in: Review of Eeonomic Studies, 50, 1983, pp. 707-722

Localized Learn~g and Comparative Advantage

Sp~overs,

by Francesco Pigliaru and Luisa Segnana·

1. Introduction

The literature on endogenous growth (EG) has revitalized the debate on the theory and the empirics of economic growth. Notwithstanding its shortcomingsI, research on EG has been successful in establishing the evidence on permanent cross-country differences in the growth rates of per-capita output and income as the most important feature that a theory of growth should address - a feature that, like most of Kaldor's other stylized facts on growth 2 , was either overlooked or neglected by the traditional neoclassical growth theory3. As for the explanation of what ultimately makes countries grow at different speeds, however, no consensus seems to exist. EG does yield a relatively simple and unified formal framework that makes it easier to think about several complex relationships governing growth 4 ; at the same time, the approach is characteristically unrestricted as regards the detection of factors and mechanisms capable of generating selfsustained growth. Of several existing strands of research, there is one that concerns itself with the influence that free trade may exert on the rate of growth of individual countries5 . This work represents an attempt to define a common ground betwe.en two rather distinct perspectives on the sources of competitive advantage. Part I (mainly on endogenous growth) can be attributed to Francesco Pigliaru (Universita di Cagliari), Part II (mainly on institutional economics) can be attributed to Luisa Segnana (Universita di Trento). Thanks are due to Gerhard Schwödiauer and to participants at the Conference for their useful comments and suggestions; to Marina Murat for several stimulating discussions on trade and endogenous growth. See Chiappori (989), Craft (991), Rebelo (991) and Stern (989). Kaldor (961). Cf. Romer (989). See Sala-i-Martin (990). As is weil known, cf. Helpman (988), an analysis of this relationship was beyond the reach of the neoclassical growth theory, so that it was generally neglected in spite of the existence of a number of important contributions available outside the

Francesco Pigliaru and Luisa Segnana

282

From the EG viewpoint, trade may affect growth in a number of ways6. In the present paper we try to further a line of research in which 7 : 0) historical time deepens any given pattern of comparative advantage, however small the initial difference may be; Cii) the trade-induced specialization may negatively affect the growth rate of the country specializing in the industry where no knowledge is produced, with the dynamic ga ins accruing to the other trade-partner8 . Clearly, from an individual country's point of view the acquisition of the "right" pattern of comparative advantage is, given points Ci) - Cii) above, the key to entering the high growth path. However, in this approach the characterization of how comparative advantage is acquired is in many respects oversimplified9 , and is therefore worth further investigation. Our contribution is twofold: First, since such characterization is achieved under the strong assumpti on of no international spillovers of knowledge, in Part 1 we seek to check whether it survives their presence. We begin by introducing a version of Lucas' simple model of trade and growth with learning-bydoing and no explicit investment in R&D activities lO • Then we show that initial conditions are gene rally what induces the final result even in the presence of international spillovers of knowledge, as long as they are not spread uniformly across national borders. However, when international spillovers are introduced, a more detailed description of how a pattern of comparative advantage can be acquired emerges, and consequently some conditions can be spelled out under wh ich technology policies -

mainstream literature; to name just a few: Graham (1923), even though in static form; Kaldor (1970). For a useful c1assification, see Romer (1990). The following results are based on several' key assumptions (see Part I for details). One is crucial: the production of "knowledge" (the engine of growth) is twice fully "Iocalized", both sectorally and spatially, because of the inherent characteristics of the process of production - that is, these characteristics are invariant with respect to the adopted trade regime; for an approach in which trade regimes affect the spillovers of knowledge, see Grossman/Helpman (1990c); Rivera-Batiz/Romer (990). 7

Lucas (1988); Young (991); Feenstra (1990); Grossman/Helpman 0990a); for a critical viewpoint, see Romer (990). For instance, the microeconomic mechanisms that determine the competitive position of the economy are only roughly sketched; also, the absence of international spillovers make it difficult to assess policies aimed at speeding up an inadequate local production of technology. Part 1 deals with the former problem; Part 2 with the latter. 10 In spite of their simplicity, models of this type share the key features of more complex and detailed models developed in the same area of research: Grossman/Helpmann 0990b).

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such as technology transfers and imitation - aimed at overturning an initially unfavourable comparative advantage may succeed. Second, in Part 2 we discuss the interrelationships between the engine of growth and the factors entering it,. as weil as the important role played by the extent and the geographical distribution of both (engine and factors). A common feature ofEG models is that, whatever factor drives the growth process, a key role is played by an external effect. However, especially in models based on pure external economies - such as the one used in Part 1 - not much insight can be gained about plausible microeconomic mechanisms capable of rationalizing such a "Iocalized" externality. As Ethier11 has shown, a more micro-rooted picture can be obtained by adopting a framework of analysis explicitly based on imperfect competition. Following this line, we give two examples of how further realism can be attained. The first is based on transaction cost considerations of the learning process, the second on its interactive features. The results show that the nature of learning processes and their nationspecific character can play an important role as determinants of an economy's competitive position. Part I

2. Uneven Growth and Comparative Advantage Lucas' main contribution to trade-induced uneven growth is built upon the existence of two goods that differ in the learning potential attached to their process of production l2 ; for a similar allocation of labour, productivity in the high-Iearning good grows faster than in the other good. Under some simple conditions applied on the demand side (the elasticity of substitution must be greater than one), countries specialize even under autarky. Wh ich good will be produced depends entirely on initial conditions describing the intersectoral relative allocation of labour. Under a free-trade regime, given the same assumptions describing the demand side, a country maximizes its growth rate of per-capita output by specializing in the high learning good. In Lucas' theoretical framework, therefore, growth rates may differ, but not necessarily or primarily because of trade. However, trade may play an important role in the explanation of uneven growth. Consider a country specializing in the high-Iearning good under autarky; assume, however, that it has a temporary comparative advantage in the other good when trade

11

See Ethier (1982).

12

See Lucas (1988).

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opens up: international specialization then lowers its growth rate, and trade represents the prime reason for this outcome. In wh at folIows, we take for granted this important part of Lucas' contribution, in order to concentrate on the problems of how the pattern of comparative advantage is established, and of how a country can act to position itself so that free-trade will enable it to specialize in the high learning good. In this respect Lucas' model, as it stands, is simplified to a point where little room is left for satisfactory discussion of the latter problem: comparative advantage is entirely determined by initial differences in relative productivities that afterwards may only increase along endogenously determined time-paths. The difficulty with this simple answer is twofold. First, initial advantages are obviously important in a context characterized by endogenous growth, but they cannot account for it entirely. Second, a key role in Lucas' determination of comparative advantage 13 is played by the "troublesome .,. assUrnption that the external benefits of a country's stock of human capital accrue entirely to producers within that country ... Ordinary experience suggests that while some external benefits ... are local, ... others are worldwide in scope"14. At this stage, it seems interesting to evaluate whether such a dose dependence on initial conditions still holds when the assumption of zero international spillovers is relaxed. The hope is that, when spillovers are introduced into the analysis, a more complex scenario may emerge, where "first movers" are not necessarily impossible to catch up with, and where, as a by-product, a number of poliey questions may be addressed: Does the existence of spillovers provide a country whose comparative advantage is "wrong" with a useful instrument to modify it? If yes, is such an instrument effective under both autarky and free-trade? These points are discussed below, mainly by me ans of a model first developed by Krugman 15 and on which much of Lucas' model is also based. The simultaneous presence of international spillovers and of localized learning intro duces a meaningful modification in the outcome, in that an established pattern of trade now seems, at least in principle, easier to revert to at each moment in time (even for countries whose domestie markets are 13 And also in Grossman/Helpman (1990a); in Feenstra (1990) and in Young (1991). 14

Lucas (1990), p. 94.

15 The main properties of Krugman are presented in the next seetion, with a few modifications designed to adjust it to the slightly different framework adopted in Lucas (988).

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relatively smalI). Moreover, since popular policies such as international technology co operation and transfers, as weil as "imitation", can be thought of as actions aimed at increasing the level of international spillovers, co mparative static exercises can be used to evaluate the effects of such actions on comparative advantage and, therefore, on the pattern of trade. The main conc1usion is that the introduction of spillovers, while substantially preserving the idea that initial conditions are very important for the determination of the pattern of comparative advantage, also demonstrates that much depends on whether the parameters describing direct and indirect learning activities differ significantly across national boundaries.

3. Production As in Lucas l6 , both goods are produced by means of labour, with no physical capital: Qi

(1)

=

HiuiL

where Qi is the quantity of good i produced in the "horne" country (variables referring to the foreign country are indentified by astar), Hj is the stock of experience (or human capital) available locally for the production of good i, and Uj is the fraction of the labour L allocated to producing good i. Labour productivity depends linearly upon H, which is accumulated through an "involuntary" process of learning-by-doing, where all effects are external to the individual firm. We want the dynamic process by wh ich H accumulates to be self-sustaining, and to depend upon the level of experience accumulated both through local production and - to a certain extent - through foreign production. This can be done by assuming that (2)

dH/dt

=

HjA.juj + OjH"jA.ju\, 0

:=:;;

0

:=:;;

1

where A.i is Lucas' learning coefficient, the value of which is determined by the "nature" of the goods (below we will assurne that 1..1 > 1.. 2 : good 1 is the high-technology good). Oj is a measure of the degree of international spillovers of knowledge; its level is exogenous and - for the time being identical in both countries 17 . As shown by Krugman, 0 plays an important role in determining longrun comparative advantage - a role enhanced by a context where productivity grows endogenously at a constant positive rate. To see this, consider first that from (1) and (2), with a constant allocation of labour, the horne 16

Ibid.

17

Thjs "symmetry" of 0 will be abandoned below.

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eountry proportional growth rate of per-eapita output of good i is qj

=

hj

=

OjUj + oj(H*/H*DAjU*j

where q == (dQ/dt)/Q, and similarly for h. Note the growth effeets attaehed to A and 0 in particular, as weil as to all parameters and variables appearing in the "aeeumulation equation" for H. Any poliey eapable of affeeting their values modifies the long-run growth rate of the relevant seetor l8 . Relative produetivity in sector i ean be studied by taking the ratio h/h*: h i _ u i +Oi(H'i 1 H)U'i ~ - U'i +Oi(H i 1 H'i)U i

(3)

Lueas' particular ease is easily deseribed by setting 0 = 0, so that h/h' = u/u*. In this simplified eontext, three important features emerge. First, in autarky no steady-state solution exists unless relative alloeations of labour are (or beeome) internationally identical (u = u*), so that in general the produetivity gap is ever-inereasing for any other given alloeation of labour. 5eeond, even if allocations be co me identical after some periods, a long-run productivity advantage aeerues to the eountry whose growth is higher during the period when the "balaneed growth" path (h/h* = 1) is approaehed. Third, specialization in one good entails that the gap in the other sector is neeessarily ever-inereasing over time (notice that in Lueas' model, where overall growth depends on specialization, uneven growth in per-ca pi ta ineome always implies uneven growth in the underlying produetivity gaps). Things change when loealized learning is partially offset by international spillovers. If we abandon Lueas' extreme hypo thesis and assume instead < 0 < 1, a major change is soon obtained: a that, more generally, "balaneed growth" path always exists for the two countries' labour produetivities within eaeh sector. More precisely, (3) eonverges to one, implying that a stable steady-state produetivity gap exists. To see this, note that (3) approaehes zero as (H/H'j) goes to infinite, and vice versa. Moreover,

°

50 the value of (H/H' D at wh ich (3) is equal to one represents a stationary point - a stable stationary point, as implied by the sign of the above derivative. In other words, a steady-state value of the gap does exist for any given relative allocations of labour u/u'j. A poliey implieation is straightforward: by relaxing Lueas' assumption of 0 = 0, the gap be comes independent of 18

Romer (1990).

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time (once the steady-state value has been reached), and reverting to a "wrong" pattern of comparative advantage now appears - at least in principIe - an easier task. However, to antieipate the argument set out below, much of Lucas' simplified determination of the pattern of comparative advantage withholds its validity even in the presence of high levels of international spillovers. Therefore, a "technology policy" aimed at increasing the spillover parameter may turn out to be insufficient in itself to achieve an overturn of the productivity gap. However, other cases are conceivable where anational poliey targeting 0 may allow a country to achieve a comparative advantage in the relevant good even when the country is not the first-mover. As will be seen presently, much depends on whether the value of 0 is unique in both countries, or whether it differs. Several steps are required before these points can be discussed in detail. First, we have to assess how the actual value of the above-mentioned stationary point (and the consequent comparative advantage) is determined; second, we have to evaluate the pattern of comparative advantage when allocations of labour are allowed to change over time in both countries; finally, we have to examine the effects of trade on the steady-state value of the gap. To simplify the analysis, in the next three sections it will be assumed that the same 0 applies to both countries. This crucial feature is then relaxed, and the consequences are discussed, in the section on Comparative Staties.

4. Comparative Advantage

Autarky We proceed as follows. Setting (hj/h'i) obtain

=

1 in (3) and rearranging, we

(4) Consider again a stable relative allocation of labour - that is, a constant u/u·. For all u/u' > 1, the stationary point (Hj/H'j)S must be > 1, i.e. the horne country enjoys a long-run productivity advantage in sector i; if u/u· = 1, (Hj/H*j)S = 1. Next consider that if Uj > u'j, then U2 = (1 - uD < (1 - u'D = U'2, so that the foreign country has a comparative advantage in the second good. With long-run comparative advantage now completely defined, it turns out that as long as national Os are identical - its pattern is entirely determined by the relative intersectoral allocation of labour, so that it corresponds to the pattern that would result under the assumption of 0 = O.

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Specialization in Autarky We have seen how comparative advantage is determined by the relative allocation of labour, when the latter is held constant. However, allocations do change under free-trade; moreover, as Lucas' paper shows, they change in a defined direction under autarky too; (recall that in Lucas' model, if the two commodities are good substitutes, complete specialization is very likely to occur even in autarky - an equilibrium with no specialization exists, but its stability requires cr < 1) 19. Therefore, we first check whether the process leading to "autarkie specialization" significantly affects the conclusion on comparative advantage determination yielded by the above analysis; then, in the next section, we turn to the consequences of trade-induced specialisation. Before proceeding with our analysis of autarky, recall that we are interested in the case where both countries show a tendency to specialize in the same good, so that for one of them autarkie and trade-induced specializations do not coincide, and trade is the primary source of uneven growth. Assurne therefore that initial conditions are such that, in autarky, both our countries would specialize in the high-Iearning good. If each country stays in autarky long enough, complete specialization will be reached. In this case, as already noted, u1 = U'l = 1 and H1/H'1 = 1: the steady-state solution implies that national productivity levels are equalized 20 . However, if the initial condition is u 1 > U'l, convergence of both allocations to one gene rally implies that U1t - U'lt is positive until u'l = 1. From this, and from the above analysis of steady states, we assurne that Hlt/H'lt > 1 as long as U'lt < 1. In other words, the relative initial allocation of labour determines a temporary comparative advantage that lasts until complete specialization in both countries is obtained 21 . The conclusion reached by means of a constant allocation of labour is now strongly qualified: its domain is no longer independent of time. However, as long as a comparative advantage does exist, its pattern must coincide with the one based on a constant allocation. Therefore, if trade opens up at any (U1, U'l), the horne country specializes in good 1 as long as the difference u1 - U'l remains positive, regardless of its actual absolute 19 See Lucas (988), p. 30. In other words, define q as the relative price of good 2 in tenns of good 1, and qs as the price allowing for the equilibrium with no specialization. Then, if initial conditions H1(0)/H'zC0) in a country are such as to imply q(O) > qS, specialization in good 1 will occur, and viceversa for q(O) < qS. 20 Compare this with Lucas' case, where u = u' = 1 with initial conditions u(O) > u'(O) implies a steady-state value H/H' >l. 21 Again, this outcome rests upon the existence of a common analysis of the case where o' and 0 may differ.

o. See below for

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value, since the latter has no effect on the temporary pattern of comparative advantage.

Trade So far, we have seen that the pattern of comparative advantage in autarky gene rally depends on the values of ui and U"i, regardless of the presence or the level of a common O. As for the effects of free-trade, first consider the range of possible steady-state productivity gaps: the right-hand side (RHS) of (4), increasing in HI/H"I, equals zero at Hl/H"l = 0, while it goes to infinite as H1/H"1 approaches 1/0. When trade opens up, the two countries specialize according to their temporary (statie) comparative advantage. Not surprisingly, stable stationary values still exist for 0 > 0, in spite of the fact that each country is not accumulating any direct experience in the production of the imported good. Let us assurne, as before, that the horne country enjoys a comparative advantage in good 1. When the trade-induced specialization is complete, we have Ul = 1, U"I = 0 (2); imposing hl/h"l = 1, we obtain (5)

Of course, given the feasible range of stationary points, HI/H"I is now at its maximum. As Krugman points out, trade gene rally deepens the autarkie productivity gap and, by doing so, locks in the pattern of specialization. However, this deepening is far smaller than it would be under Lucas' assumption of 0 = 0, in whieh case we would have hl = Al and h*l = O. These effects of free-trade on the long-run gaps have various implieations for the effectiveness of "technology policies" applied to acchieve comparative advantage, as will be seen be1ow.

5. Comparative Statles sp illo vers As we have seen, in general, the main role played by international spillovers is to create - through a feed-back effect - an upper ceiling on the growth over time of the endogenous gap of experience, the origin of whieh lies in some initial conditions. An important corollary is that the presence of spillovers makes it easier, at least in principle, to revert to an unfavourable pattern of trade. However, are international spillovers enough, by themselves, to counteract the longrun competitive outcome determined by the initial conditions?

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As anticipated, the answer depends on wh ether spillovers are internationally identieal or not. If they are identieal, the answer is clearly indieated by the discussion presented above: in spite of the presence of spillovers, the same pattern of comparative advantage that would emerge with entirely localized learning is generally obtained. Only if the countries' relative allocations of labour are (or become) identical, will this conclusion turn out to be invalid: in this case, no comparative advantage can be defined. To facilitate the following discussion of the perhaps more interesting ca se of country-specific Os, the "symmetrie"-o ca se can be summarized as folIows. Consider aga in the RHS of (4): sign aCRHS)/aOj

=

sign [(Hj/WD - CHj/Wj)-lj

Increases in a common 0 shift RHS to the left for HilH*j > 1 and to the right for Hj/H"j < 1 as in Figure 2. This shows that: (1) increases in 0 ne gatively affect the steady-state value of the gap; however, Cii) the competitive advantage remains entirely determined by the intersectoral allocation of labour in each country. Note that this conclusion applies equally weil to both autarky and free-trade - the difference being that under free-trade the new steady-state value simply corresponds to the new (lower) maximum feasible value (1/0' in Figure 1).

Asymmetrie Spillover Rates The above outcome does change in a significant way if we allow international spillovers of knowledge to be asymmetrie - that is, if we drop the assumption that the two countries share a common value of O. Assurne that the foreign country is capable of increasing its O' above the former common value, so that 0 now refers only to the horne country's spillover coefficient. Since, in general,

this derivate is equal to zero at Hj/H*j = Oj, and > 0 for CHj/H*j) > Oj. In partieular, note that u = u* now implies a stationary point Hj/H*j< 1, as depieted in Figure 2. An important new feature now emerges concerning the determination of comparative advantage in autarky. If 0* > 0, a favourable initial condition u(O) > u·(O) no longer guarantees that the horne country will gain a longrun competitive advantage over the foreign country in the production of good 1. Depending on the relative va lues of u/u' and of 0/0', the foreign country may end up enjoying a comparative advantage in good 1 even when the horne country allocates relatively more labour to the production of that good. Thus, in sharp contrast to the case of a common 0, comparative ad-

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vantage is no longer entirely determined by the initial relative allocation of labour. This contrast disappears, however, when we compare the two cases under free trade. The value of o' determines the upper limit of H/H·j. Giyen that the foreign country is not producing good 1, changes in o' have exactly the same effect as the changes in asymmetrie 0 analysed above - the Figure 1

1

o

o '{)'

1 1/8 1/0

H/

I/&< 1/0

H/

H·

Figure 2

1

o

H·

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Francesco Pigliaru and Luisa Segnana

steady-state gap diminishes to equal the lower value of 1/0* (see (3) above). The stationary point is determined solely by the coefficient of the "lagging" country, implying that (H/H*)S > 1 for all 0* < 1: hence assumptions conceming symmetry or asymmetry of spillovers have no influence on the outcome 22 .

Part II

6. Institutional and Organizational Aspects of Comparative Advantages Endogenous growth models can be generally described as comprising a first part which produces final goods, and a second part capable of generating the growth of a term H, which different models call 'stock of experience or knowledge"technological level', 'human capital>23. Output enters as an argument in the final goods production function. When output is a function of knowledge (interpreted as a form of capital good), and given the marginal product in knowledge, output exhibits increasing retums 24 • Emphasis on the separate importance of the level equation, the growth equation, and the different sources of extemalities, is only a 22 One more exercise could be carried out (with results similar to the ones developed in this paragraph) by considering the "direct" leaming coefficients A more carefully. As said, these reflect the "nature" of the goods - their technological content, for instance. However, note that A may be interpreted as a "maximum potential leaming" parameter attached to each good, the value of which can be reasonably assumed to be identical across countries. Actualleaming, however, need not coincide with its potential maximum, contrary to what we have implicitly assumed up to now; moreover, some national characteristics may affect the level of actual learning within a country's sector. To give but one example, consider the efficiencywage hypothesis in general, and its "fair-wage" version in particular, Akerlof/Yellen (988). Here, the effort yielded by each worker depends on the perceived "fairness" of the wage rate offered by the firm. Applications of this idea are generally set in a static framework. In a dynamic setting, the same idea allows us to identify one reason why potential and actual learning may diverge. In this context, the wage-effort function regulates the "effort" yielded by workers in the learning activity, since actuallearning does depend upon actions taken by workers on the job, who are in the position to single out problems and suggest solutions. Then nationspecific characteristics and institut ions of the labour market (industry-wide contracts, for instance) may influence the degree of "perceived fairness" among workers, and may therefore cause the potential-actual learning gap to differ across countries.

23

Respectively in Krugman (987); Romer (1990); Lucas (1988).

From the growth theory point of view the basic issue is the shift of externality from output to capital: the output level depends on the stock of capital, broadly interpreted to include human capital or knowledge, inputs in production with increasing marginal productivity. 24

Spillovers, Localized Learning and Comparative Advantage

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recent development 25 . It revives interest in the "engine of growth" and its extent, as well as interest in policies affecting levels ar growth. There are a number of interacting aspects to the utilization of these models in Part 1 to be focused on. The first is the nature of the engine of growth and its extent; the second is the factors affecting the engine and their geographical distribution (equal ar unequal, local or international); the third aspect is the channels, the specific channels, through which these factors are supposed to work. There is, however, a hypothesis common to all these aspects: whatever factor affects the engine of growth and whatever its extent, it is an external effect which cannot be taken into consideration by agents and suggests that the "... average skill level of a group of people is assumed to affect the productivity of each individual within the group"26. Whenever the question concerns the extent of factors affecting the engine of growth, the answer provided by EG models seems to add something of interest to the previous literature: it allows for an ordering of global and localized external effects. Thus the national ar international extent of externalities is crucial in terms of more than just the results set out above: far instance, as Romer has pointed out: "... The assumption of national increasing returns to scale and the resulting failure of a simple factor price equalization result was the solution that Lucas offered to his question of why flows of capital do not equalize wages across countries. The assumption that increasing returns to scale were national in scope was also the basis for my previous pessimism (1986) ab out cross country convergence in levels of income. The conclusions about convergence and factor price equalization, however, are completely reversed if the increasing returns are international rather than national in scope"27. But once the reason and the scope of external effects have been addressed it is clear that they cannot have a single correct characterization. First one should realise that what we may call "the external economies" approach is not the only approach to economies of scale. There is a second route, which trade theory has used to discuss both the source and the extent of externalities. This route is based on the notion of specialization refinement introduced by Ethier 28 : H is defined as a range of produced inputs that allows far the introduction of specialization in intermediate goods as a source of externalities.

25

26 27 28

Romer (990).

Lucas (988), p. 37. Romer (990), p. 8. See Ethier (982).

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Francesco Pigliaru and Luisa Segnana

Ethier's original purpose was to lay a better foundation for his earlier work on international trade, in wh ich he argued in favour of an external economy approach, but where the output level of an individual firm depends on the size of the world's industry rather than the industry of the country in which it is located. This he accomplished by constructing a model where there are differentiated intermediate inputs with which the final output is produced. These inputs are produced with economies of scale within a monopolistic market structure. Productivity in the final goods sector depends on the number of available middle products. Therefore the productivity level of a country's industry depends on the size of the world's industry when middle products are traded. This captured the notion that an increasing degree of specialization could generate technical efficiency returns. Since the fixed costs connected with component production are shared internationally, and since the economy's potential for augmenting the degree of specialization by developing new intermediate products is exploited, the sources of scale economies are therefore weil defined at the industrial level. Hence one should expect gains from increasing size of the market and therefore ga ins from trade. Given the role of industrial processes in creating new, differentiated producer goods, the central element is again the dependence of returns on th~ extent of international markets rather than on national output. It was pointed out that scale economies resulted from an increased division of labour rather than from, say, increased plant size, and depended - at an aggregate level - upon the size of the world market. This route has explained increasing efficiency by means of input-specialization 29 . Its utilization in endogenous growth models 30 creates room for cases where increasing returns are present in both equations 31 , although different mechanisms may lead to their exploitation and decentralization 32 : for instance, by imperfect competition in the goods sector (final and intermediate) and by knowledge spillovers in the growth sector. What is clear from comparison between the "external economy" approach and the "differentiated inputs" approach is that, in the first case, the 29 Industrial integration policies determine the degree of potential exploitation of input specialization. Trade policy, on the other hand, is a way of sharing or taking advantage of the increased specialization. 30 For instance, through specification of fixed costs of a monopolistic-type model as a cost of technology; Romer (1990); Grossman/Helpman 0990a). 31

Production equation and growth equation.

32 Romer (990), Grossman/He1pman 0990a). Economies of scale and noncompetitive market structures provide the point of departure for the study of trade dynamics with acquired comparative advantage.

Spillovers, Localized Learning and Comparative Advantage

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production function is still a 'black box'. The implicit accounting of external effects by the "differentiated inputs" approach adds some microspecifications (with a monopolistie market structure, and with fixed costs, as well as the number of intermediate inputs as the sources of increasing returns to sc ale) but it is also similar to the previous external effect. Output in both cases exhibits increasing returns with respect to H, and in both cases again, external effects and their nature are ascribed to exogenous mechanisms. Hence no great insight can be gained into the mechanisms capable of defining differences in localized externalities. The lack of an explicit account of external effects is partieularly awkward because of the many situations in which the nature of externality could depend on firm's conduct, market structure and agent's behaviour. For this reason, analysis is required of the contrast between the technologieal and involuntary nature of learning assumed in Part 1 and its institutional and organizational specifications. In both cases, the nation-specific organization of production or the increasing complexity of production organization can help to explain the asymmetrie distribution of learning processes, reinforcing the differences in 10calized externalities and questioning their sources. 7. Institutional and Organizational Aspects of Learning Processes Both the models underlying the specification in Part 1 capture wh at most economists have in mind when they refer to "external learning". The implications far trade follow from the fact that decisions on production only depend on the relative magnitudes of the input coefficients in different countries, regardless of the learning or growth coefficients. It may happen that the good for whieh a country has a cost advantage relative to a trading partner may be the good with the slower rate of learning. In this case, trade-induced specialization can render a country worse off than it would be in autarky. This "technological" nature of the models undoubtedly derives from their greater emphasis on the interaction of growth with trade than on the details of growth. Even though the set of theoretical issues relevant to growth is not a complex one, the aggregate hypothesis of dynamie external effects needs further specification; observations on the growth rates of individual firms and industrial organization are indeed relevant to any model with increasing returns or spillovers of information. Another characteristic of the models utilized in Part 1 is the "involuntary" nature of the process of learning. The learning coefficient is determined by the "nature" of the good, and when the spillover coefficient is zero, it summarizes the whole process by whieh H accumulates to become locally self-sustaining. Both the technologie al and the involuntary nature of the learning process reveal a well-known limitation of this kind of model: since learning ef-

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fects are assumed to be external, agents do not take them into account, otherwise they would allocate labour to the high learning-coefficient good in order to take advantage of its higher growth potential. Some minor complexities associated with learning can be introduced and contrasted, particularly the ways in which learning takes place with institutional and interacting features. Two examples are given wh ich show the contrast between the external nature of learning and its institutional and organizational interpretation. The first is based on transaction cost considerations and shows that, by allowing these into equation (2) of Part 1, they play exactly the same role as the "technological" or "direct" learning coefficients, but with a basic difference: the coefficients are no longer ascribed to the "nature" of the good but are given by different organizations of production. Learning coefficients indicate the degree of asset specificity, which plays a crucial role in transaction cost economics. The second example still maintains the character of the learning coefficient, but shows the difference between its interpretation as result of isolated learning and as a result of organizational learning. In both cases, organizational aspects of production are introduced by showing how they can enter the evolution of comparative advantages. This allows us to reconsider the strongly technological nature of the models utilized in Part 1, and also the problem of their micro-foundations, where individual agents cannot take learning effects into account. The examples suggest sources for this reconsideration by introducing features of the process drawn from observations of nation-specific characteristics and from decision-making in organ izations. They are he1pful in identifying the differences between the maximum potential learning parameter utilized in Part 1 and the actual learning parameter, and also in identifying the reasons why they may diverge: considerations on acquired comparative advantages may therefore arise 33 .

Learning and Specific Assets Differences in learning coefficients can be ascribed to a specific assets problem: the "human asset specificity that arises in a learning by doing fashion"34. They can be interpreted as measures of asset specificity which give rise to differences in governance structures. This inevitably introduces the micro-analytical level of analysis at which transaction costs economics operate, where one looks at the attributes of transactions and at the re1ated details of organizations. The difficulty in providing illustrative examples of this institutional approach to acquired comparative advantages is that 33 34

See, far instanee, Tomer (987) for an industrial poliey point of view.

Williamson (1989), p. 43; site specificity is another type of relevant specificity in this interpretation.

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social customs often decide the form taken by a transaction, the related costs and organizations. In this respect, cross-country comparison of institutional processes is a very fertile source of empirical examples. On the one hand, transactions supported by general purpose assets do not need special governance structures and the world of competition obtains. If assets are non-specific, there is no need far any sophisticated form of governance since complex long-term contracts are not required. Relationships can be governed by a sequence of short-term contracts, since competition will prevent individuals from ta king any form of advantage. On the other hand, transactions involving a high degree of asset specificity are the ones in which parties are effectively engaged when undertaking bilateral trade. Here, therefore, problems of governance structures and costs arise, and mare sophisticated forms now co me into play. In the static framework of transaction cost economics, two cases may arise. The first concerns a given optimal degree of asset specificity. Here market procurement has advantages over a range of slight asset specific values, and internal organization enjoys the advantages where asset specificity is substantia[35. Therefore, beyond the different asset specificity hypothesis (the previous learning parameters), there are two modes of supply (market and internal arganization), even in the case of identical production cost technology. Given the case Al > 1..2, the first sector may be characterized by internal organization, and the second by market procurement at a worldwide level. These differences apart, there are two types of organization because asset specificity generates differential governance costs to minimize. They do not produce the same level of output because the ranking of asset specificity moves in the same direction as the output level. The relevant choices thus come down to using an input combination under internal and market procurement. This first case is not a good fit. It would imply - far a given optimal degree of asset specificity - a labour allocation toward good 1 by both countries. The results are quite similar to interpretation of I.. as the maximum potential learning attached to each good, identical across countries and different in the two sectors, as in Part 1. The reason for this, however, is not the nature of the good but the organization of its production; even in the presence of a common production technology this organizational difference would genera te an ordering of optimal output in line with the degree of asset specificity. The second ca se arises from the fact that the optimal degree of asset specificity varies with arganizations. Therefore, if the maximum potential 35 These two alternative modes of supply arise because zero transaction costs do not belong to the feasible set.

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learning rate hypothesis is maintained as Al > 1..2, it may be the case that the actual learning rate is nation-specific, since Al F > A2 H . In other words, the potential-actual learning gap can differ across countries. When this is the case, good 1 is organized internally (by internal organization) in the foreign country and by market procurement in the horne country, and labour allocation necessarily follows actual learning rates, moving towards good 1 in the foreign country because internal organization implies a higher level of output. Thus nation-specific asset characteristics can play the same role as the differential learning parameter, and they may be a way to manage initial productivity conditions in order to acquire comparative advantages. Whenever a country knows how to increase its actual rate of asset specificity (actual learning), this can reverse an unfavourable competitive position.

Isolated and Organizational Learnings The se co nd characteristic of the example used in Part 1 is the "involuntary" nature of the process of learning by doing. The learning coefficient is determined by the nature of the good, and when the spillover coefficient is zero, it summari~es the whole process by which H accumulates to become locally self-sustaining. Some aspects associated with learning can now be introduced, particulady the ways in which learning occurs along interacting dimensions. These are intended to capture the ways that various groups interact in order to focus on the differences between the results and implications of the external effects of learning in models that go beyond those in Section 1, and on interaction within a group of people. Assuming that learning takes place on several dimensions, and given that any learner exists in an organization of other learners whose actions, goals and competences affect each other, light is shed on mechanisms that the external effect hypothesis cannot account for. Specific attention is drawn to the fact that when the average skill level of a group of people is assumed to affect the productivity of each individual within the group, this is a problem of decision-making in the organization. This means that we may remove the involuntary nature of the process of learning by doing and introduce the features of a voluntary process: for instance, we may picture it as a choice stemming from decision rules which adjust cumulatively on the basis of trial by trial monitoring of the success or failure associated with past adjustments36 . 36 Cf. Herriot/Levinthal/March (1985), for the following simultaneous and organizationalaspects of learning.

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Assurne a simple choice situation in which the amount of available resources L is allocated among several alternative, independent activities (the two goods i = 1, 2). Each activity achieves a performance that is proportional to the allocation and the learning of the system in that activity. If Ui,t is the fraction of L allocated to activity i at time t and Ai is the learning coefficient, performance at time t is given by the interaction of two elements (4.1)

Within this choice situation, trial by trial learning will increase allocation to activities where performance is relatively high, and decrease it for those where it is relatively low. In order to focus on the simultaneous dimensions of learning, both elements are taken into account: the choice underlying the decision to allocate the fraction of resources to sector i, and the learning characterizing the activity in sector i. Both elements are assumed to adjust to previous allocation, experience and disuse. Adjustments are made in two steps for the allocation of labour in sector i, ui; the first step requires a proposed allocation to each sector as folIows: (4.2)

UPi,t

=

ui, t -

1 +

bl (Ui,t - Ui,t - 1)

where the proposed allocation is determined by previous experience plus the difference between the probability of proposing an increase in ui and previous experience. The learning parameters bl affect the rate at which adjustments in allocations are made. Adjustment of previous variables from one trial to the next are then proportional to the difference between current values and the upper or lower limits of these variables. Learning is assumed to decrease with the passage of time and increase with allocation ui. Thus the learning process can be depicted as folIows:

(4.3)

Ai,t

=

Cl - b2)Ai,t -

1 +

ui, t - Ib3[1 -

(1 -

b2)Ai, t - 11

where b2 is the coefficient of decay, and the learning coefficent b3 controls the rate at which efficiency in sector iresponds to disuse and experience. Given these characteristics of learning processes, they can be applied to an organizational environment where learning from direct experience is supplemented by the process of diffusion of experience. If UPj, i, t is the proposed allocation of individual j to good i at time t, a natural extension of (4.2.) yields: (4.4)

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That is, allocations adapt to the me an allocation made by other actors, as weil as to direct experience. If Aj, i, t is the learning of individual j, in sector i at time t, a natural extension of (4.3.) yields: (4.5) Aj,i,t

=

(1- d 2 )[(1- b 3 )Aj,i,t-l +Uj,i,t-l b 4 [1-(1- b 3 )Aj,i,t-l ]]+ d 2 m~x Ah,i,t-l

That is, learning adapts to the highest level of learning exhibited within the population of actors. Therefore, the simultaneous dimensions of experiential knowledge become complicated when such knowledge is pooled among organizations through diffusion. The diffusion of experiential knowledge increases the sharing of experience; the average performance of organizations whieh share knowledge tends to be better than the knowledge of iso la ted learning organizations. When this is the case, both the increasing complexity of production organization and its interactive nature may affect the distribution of learning, whieh may take on strong nation-specific characteristics. The gap between potential and actual learning can now be ascribed to differential organizational processes: if experience is pooled, this may bring a comparative advantage such that the costs of non-cooperation are very high, even in terms of a potential pattern of specialization.

8. Policy Implications and Some Concluding Remarks The Krugman/Lucas approach to trade and growth has recently been assessed as follows: "This model has an obvious appeal at a time of increased tension over patterns of trade ... [it) is simple and effective for pointing out the potential confliet that is present if there are increasing returns, but it needs to be elaborated before it can address questions about issues like private savings and investment,,37. One readily agrees with this evaluation. However, the description of the confliet itself is somehow demanding, in that it leaves little room for discussion of crucial poliey questions as to how a country can avoid ending up with the wrong trade-induced specialization. In partieular, a whole set of polieies on technology transfers, technology cooperation and imitation cannot be explicitly discussed until a more detailed specification of comparative advantage is forthcoming. In this respect, one of the main limitations of the model in its original formulation derives from the extreme assumption of zero international 37

Romer (989).

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spillovers 38 . When this assumption is abandoned, and following Krugman 39 - international spillovers of various degree are considered, stable steady-state values of intra-industry productivity gaps exist even under free-trade, when complete specialization occurs. An established pattern of trade thus appears, at least in principle, easier to revert to at each moment in time. Within limits, the introduction of international spillovers allows the model to say something about "technology policies" aimed at achieving the "right" (growth-maximizing) comparative advantage, since such policies may be thought of as targeting the rate of international knowledge spillovers. It turns out that as long as spillovers are "symmetrie", any increase in their rate lowers the steady-state value of the gap, but c1early by itself this cannot allow the "lagging" country to catch up. Hence, Lucas conc1udes that initial conditions are very important for the determination of the pattern of comparative advantage generalized to a case where limited spillovers are present. The possibility for a lagging country to catch up through "spillover" polieies is allowed only if the rate of spillovers can differ across countries: in this case, an established comparative advantage may be reversed by means of a policy capable of achieving the required relative rate of spillovers. However, the contrast between the symmetrie and the asymmetrie cases only concerns the determination of the gap in autarky. Since trade implies "complementary" complete specialization, the stationary gap within each industry is determined solely by the coefficient of the "lagging" country, and the possibility of asymmetrie spillovers does not modify the outcome obtained under the assumption of symmetry (Le., the pattern of comparative advantage does not depend on the level of international spillovers). The whole analysis presented in Part 1 has been developed in a twocountry context. However, it should not be difficult to adjust for analysis of a "small country" case. Here, the position of a small lagging country should be defined by setting Ö = 0 for the "world economy" - consequently, the asymmetrie case turns out to be the relevant one. Despite the addition of international spillovers, the model discussed in Part 1 remains rather under-detailed in a number of important respects. For instance, since the process of learning is somehow "involuntary", and since its effects are entirely external to the firm, not much can be said about how firms would react to industrial polieies targeting private R&D activity. More generally, direct and indirect learning is governed by exogenous, and only roughly defined, magnitudes, with the obvious consequence that one can 38

Lucas (1990); Romer (1989).

39

See Krugman (1987).

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assess the effects of changes in their levels, but not the feasibility of such changes. In Part 2 we put forward two microeconomic mechanisms that might lie behind the determination of A and Ö. The first was based on trans action cost considerations of learning processes; the second on the interactive nature of the process of learning. The results show that the nature of learning processes and their nation-specific character can be important determinants of an economy's competitive position.

References Akerloj, G. / Yellen, j.: Fairness and Unemployment, in: American Eeonomic Review, 22, May 1988 Chiapporti, P.: Diseussion on Baldwin's Paper, in: Eeonomic Poliey, 9, 1989, pp. 270273 Craft, N.: Produetivity Growth Reeonsidered, mimeo, in: Eeonomic Poliey Panel, London 1991 Ethier, W: Internationall Deereasing Costs and World Trade, in: Journal of International Economics, 9, 1979, pp. 1-24 -

National and International Returns to Seale in the Modern Theory of International Trade, in: American Eeonomic Review, 72, 1982, 3, pp. 389-405

Feenstra, R.: Trade and Uneven Growth, NBER, Warking Paper no. 3276, Cambridge, Mass. 1990 Graham, F. D.: Some Aspeets of Proteetion Further Considered, in: Quarterly Journal of Eeonomics, 37, 1923, pp. 199-227 Grossman, G. M. / Helpman, E.: Hysteresis in the Pattern of Trade, NB ER wp no. 3526, 1990a -

Trade, Innovation, and Growth, in: Ameriean Eeonomic Review, 80, 1990b, pp. 8691

-

Trade, Knowledge Spillovers, and Growth, NBER wp no 3485, 1990e

Helpman, E.: Growth, Teehnological Progress, and Trade, NBER wp no. 2592, 1988 Herriot, S. / Levinthal, D. / March, j.: Learning from Experienee in Organizations, in: American Eeonomic Review, P&P, May 1985, pp. 298-302 Kaldor, N.: Capital Aeeumulation and Eeonomic Growth, in: The Theory of Capital, F. A. Lutz and D. C. Hague eds., New York 1961, pp. 177-222 -

The Case far Regional Poliey, in: Seottish Journal of Political Eeonomy, 17, 1970, pp. 337-348

Krugman, P.: The Narrow Moving Band, the Duteh Disease and the Competitive Consequenees of Mrs. Thateher. Notes on Trade in the Presenee of Dynamic Seale Eeonomies, in: Journal of Development Eeonomics, 27, Oetober 1987, pp. 41-55

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Krusell, P.: Dynamic Firm Specific Increasing Returns and the Long Run Performance of Growing Economies, mimeo, Institute for International Economic Studies, 1990 Lucas, R. E.: On the Mechanics of Economic Development, in: Journal of Monetary Economics, 22, July 1988, pp. 3-42 Lucas, R. E. jr.: Why Capital does not Flow to Poor Countries?, in: American Economic Review, 24, May 1990 Markusen, j. R.: Trade in Producer Services and in other Specialized Intermediate Inputs, in: American Economic Review, 79, 1989, 1, pp. 85-95 Pasinetti, L.: Technical Progress and International Trade, in: Empirica, 1, 1988, pp. 139-147 Rebelo, 5.: Growth in Open Economies, mimeo, 1991 Riviera-Batiz, L. A. / Romer, P. M.: Economic Integration and Endogenous Growth, in: Quarterly Journal of Economics, 106, 1991, pp. 531-556 Romer, P. M.: Capital Accumulation in the Theory of Long Run Growth, in: Modern Business Cycle Theory, R. J. Barro ed., Oxford 1989 -

Trade, Politics and Growth in a SmalI, Less DeveJoped Economy, mimeo, CEPR, 1990

Sala-i-Martin, 1990

x.:

Lecture Notes on Economic Growth

Cl) - (Il),

NBER wp no. 3563-4,

Stern, N.: The Economics of Development: A Survey, in: Economic Journal, 99, 1989, pp. 597-685 Tomer, j. F.: Developing Organizational Comparative Advantage via Industrial Policy, in: Journal of Post-Keynesian Economics, IX, 1987, 3, pp. 455-472 Wil!iamson, 0.: Transaction Cost Economics, in: Handbook of Industrial Organization, R. Schmalensee and R. D. Willig eds., Amsterdam, 1989, pp. 135-182 Young, A.: Learning by Doing and the Dynamic Effects of International Trade, in: Quarterly Journal of Economics, 106, 1991, pp. 369-406

IV. Technological Change and the Structure of the Economic System

Technological Change, Technological Systems, . Factors of Production by Gilberto Antonelli and Giovanni Pegoretti 1

1. Introduction

In this study, which is preliminary in character, we have set ourselves one main objective and two secondary ones. Our main objective is to examine the potential of models based on industrial interdependencies in the analysis of technological change, perhaps adopting a less reductive approach than that which seems to predominate in current debate. To this end, we shall pursue two main lines of analysis. The first seeks to gain a better understanding of some of the endogenous features of technological change by means of a careful redefinition of such base concepts as jactor oj production, technique, productive process, technological system. In particular, in section.s 2 to 4 we shall focus on the interaction among factors, means of production or materials, processes and products. The model set out in sections 5 to 11 analyses a production system in wh ich two non-durable means of production, produced using two different kinds of labour force, compete against each other to be used in an industry which produces one single consumption good. Our analysis will also try, albeit in very elementary fashion, to take account of an important 'stylized fact' in the history of technological diffusion: the so-called 'sailing ship effect'. Our second line of argument consists of an attempt to use the model (however elementary it may turn out to be) in order to get to grips with certain forms of endogenous conditioning which bring about progressive changes in the technological system within a given system. Of course, due to space constraints, we can only provide an outline analysis using the model set out in sections 5 to 11, which requires further development and enrichment.

The University of Verona and the University of Trento, respectively. Although this paper has been a joint undertaking, G. AntoneLIi is mainly responsible for sections 2-4, G. Pegoretti for sections 5-10. Translation by Adrian Belton.

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Interest in endogenous growth models has increased in recent years because of the problems raised by certain inherent contradictions in the theory of growth based on the production function. These contradictions are generated, in particular, by the hypothesis of decreasing returns from individual factors combined with the hypothesis of constant returns to scale. Under this hypothesis, in the neoc1assical model, the only possible steady state growth rate is zero 2 . In parallel, economic analysis of human resources, of technology and of natural and environmental resources has shown that, in order to relate these components to structural dynamics, one must go beyond mere consideration of the effects of exogenous changes in them 3. This research programme can be traced back to Adam Smith. According to his theory of the division of labour, technical change is an endogenous phenomenon, and in the long run increasing returns prevail. The division of labour can be considered the structural me ans by which returns to scale can be modified4 . The importance of a research programme of this kind has been, more recently, reinforced by the reflections of Kaldor, in an essay on the nature of long-period growth S, in which the author argues that in the long period the natural rate of growth becomes endogenous. Like population growth, he considers innovations and technical inventions to be: the result of 'social processes'; as much the consequence of as the condition for economic growth; an outcome of the social and economic environment; the product of forces endogenous to society and to the economic system. The first of our secondary objectives consists in stressing, in Section 2, that the scarcity of resources is a dynamic and non-unidirectional phenomenon. Such scarcity may, moreover, originate endogenously to the model and act as a focusing device for technological change. The second of our secondary objectives, which we address in the final sections of this paper, is to illustrate possible developments of our model for use in comparative dynamic analysis. As a general indication of the possible fields where such analysis may be relevant - although not at this stage applicable in the strict sense - we would argue that it can yield useful qualitative information for comparative examination of the evolution of different systems of production.

2

Sala-i-Martin (1990), p. 5.

3

Antonelli (1990).

4

De Liso (1992).

5

Kaldor (1954).

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2. A General Reference Framework In order to assess the economic and social impact of technological change 6 it seems advisable to concentrate our attention on three central aspects: (i) the role played by the scarcity and the variety of natural resources in the dynamics of economic systems; (ii) the way in which technological innovations help to ease the con-

straints on natural resource endowment through interdependent changes in processes, products and materials;

(iii) the specific nature of structural changes brought about by expanding technologies.

The first two aspects can be handled within a theoretical reference framework derived from Ricardian thought, although, of course, the contributions of other strands of economic enquiry are also relevant, especially in their interactions with such a framework 7 • In Ricardo's dynamic scheme the shortage of land (the prototype of natural resources) must be regarded as relative because technical progress is able to affect it. The principle of relative scarcity plays a crucial role: the natural resources constraint may slow growth down or even bring it to a halt in the absence of technical progress. In the Ricardian model of natural equilibrium, rent depends on the productivity of the land, wages are determined exogenously and profits are a residual share. Rent therefore arises and grows with scarcity, undergoing the effects of the dynamic interaction between this latter and technical progress. "The labour of nature is paid, not because she does much, but because she does little. In proportion as she becomes niggardly in her gifts, she exacts a greater price for her work. Where she is munificently beneficent, she always works gratis"s.

Scarcity has a profound influence on the distribution of total product, although it is not its only determinant. The prices of goods produced using natural resources also depend on their scarcity. This is true to the extent that scarcity entails the use of natural resources with gradually decreasing productivity, or the use of progressively more costly production methods using the same resource. Hence the prices of all produced goods are For various reasons, we use the terms 'technical progress' and 'technological change' synonymously. In fact, the latter seems mor general and more appropriate to our purposes, since it also gives importance to qualitative changes and enables us to escape from the rigid view of a regular, unidirectional and necessarily positive process. Quadrio Curzio/Antonelli (1988), pp. 1-8. As quoted by Sraffa (1951); Ricardo (1817).

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influeneed by the dynamic interaction between searcity and teehnical progress, given that all such goods direetly or indireetly use natural resources as their means of produetion. The organization of produetion processes eomplies with the eriterion of efficieney, aeeording to whieh natural resourees should be ardered and employed aeearding to their deereasing levels of quality and produetivity. This efficieney eriterion depends on teehnical progress. The interdependenee between basic materials, which are relatively intensive in natural resourees, and other produeed goods entails that the former are a eomponent in produetive processes which aets as a eonstraint. A eonstraint, this, which therefore derives from an interdependeney where the various me ans of produetion interaet and display limited substitutability. Human resourees playa similar role in this pattern if the subsistenee hypothesis is abandoned. If we foeus our attention on the eontribution of Rieardian theory to analysis of produetion and interseetarial interdependencies, it evidently highlights a general principle of antagonism-eoexistenee-synergy between the searcity of natural resourees, the searcity of human resourees and the producibility of goods.

Antagonism means that the effeets of searcity ean be counteracted and delayed by the main thrust to produetivity growth generated by teehnicaI progress. Coexistence means that the forees responsible for seareity and producibility are eonstantly in operation, and eombine to shape the organization of produetion processes and the nature of the connections between industries and sectors. Synergy means that searcity and producibility interaet dynamically and reinforce eaeh other, and that, although one of the main determinants of teehnical progress ean be identified in the seareh far new methods to inerease endowment of means of produetion, this does not bring searcity to an end but only eonstantly modifies it. Ricardo's underestimation of the potential of teehnieal progress led hirn to predict the advent of the stationary state. Neverthe1ess, although his sehe me did not make full use of the principle of antagonism-eoexistenee-synergy between searcity and producibility, it was substantially based on it and may be used in explanation of some of the principal eeonomie events that have followed the shoeks of the last twenty years. 2.1. Scarcity, Variety 0/ Natural Resources and Economic Systems Some of the most important eeonomic revolutions ean be regarded as ehanges indueed in the interdependencies between natural resourees, human resourees and the produeed means of production which embody

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teehnology. These ehanges alter the relations between two eoexisting produetion apparatuses - the 'transformation' apparatus and the 'strueture' apparatus - and increase the role of the latter eompared with the former9 . The transformation apparatus employs given production techniques and closely depends on the original produetion factors (land - natural and environmental resourees; labour - human resources). It is substantially oriented to the production of consumption goods. One may argue that it was this apparatus that eharaeterized the first stage of the industrialization process, and that it tends to predominate in (more or less developed) eeonomic systems with low rates of growth. Crueial to eeonomic systems based only on the transformation apparatus is the role and availability of natural and environmental resources. And it is rather difficult for sueh economic systems to overcome phases when these resourees are relatively scarce. Very different is the situation of economic systems where an industrial structure apparatus predominates. The structure apparatus consists chiefly of industries produeing means of production. Historically, it is preeisely these industries that seem to have comprised the eore of teehnical progress, while services and their interaction with the production of goods have recently come to play an inereasingly important role. The diffusion of technical progress has also been aceelerated by the close interdependeneies among industries produeing means of production. This apparatus has brought, at least within the span of speeific intervals of time or in the short period, increased autonomy of final demand for consumption goods from the endowment of natural and environmental resources, of basic materials and of human resources. The industrial structure apparatus is the system wh ich permits greater autonomy from natural resources, and has also allowed the transformation apparatus which coexists with it to achieve such autonomy. The empirical evidence seems to suggest that a profound change has taken plaee over the last twenty years in the strueture apparatus of the industrialized countries. This change can be viewed as a transition from systems of production based on the standardization of products and economies of seale to ones based on the differentiation of products and economies of scope. The transformation in base materials with exogenously given features and homogeneous labour, playa crueial role in systems of the former type, whereas the reeiproeal adjustment of processes, produets and materials is typical of systems of the second type 10. New materials with better performance and with charaeteristics determined at least partly endogenously, human resources with speeific features, and new quality control procedures

9 10

Quadrio Curzio/Scazzieri (1982), pp. 22-24. Cohendet/Ledoux/Zuscovitch (1988), pp. 2-6.

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seem to perform a crucial role in the latter. From this point of view, the economic change in progress tends: Ci) to reduce the importance of basic materials;

(H) to encourage economic activities which focus on the quality and variety of products and services, or even on the production of 'functions', understood as combinations of goods and services; (Hi) to assign a strategic role to information and knowledge and to advanced and improved materials; Gv) to increase differences among regions or countries according to the particular patterns of growth they have chosen.

2.2. Antagonism-Coexistence-Synergy Between Scarcity and Producibility The principle of relative scarcity seems to reflect the fact that in the real world constant antagonism-coexistence can be observed between, on the one hand, the scarcity of natural and environmental resources (and of the basic materials produced by means of them) and human resources, and the producibility of goods on the other. In many cases, the dynamics of present economic systems show that the scarcity of certain non-produced production means and of labour with specific characteristics has provided, after a phase of constrained growth, a formidable boost to technical progress, and that this has transformed antagonism into coexistence and even into synergy. Thus the scarcity of natural and environmental resources and of certain components of human resources has always existed; but because this scarcity has been relative it has never obstructed the long-term growth of an economy. There are numerous historical examples of this antagonismcoexistence-synergy between scarcity and producibility; examples wh ich can be better understood if we consider the notion of the industrial structure apparatus mentioned above. The base innovation during the Industrial Revolution was the steam engine - the fundamental component in the structure apparatus. The invention of the steam engine was the result not only of inventive genius and commercial acumen but also of England's scarcity of firewood and her relative abundance of coal. The continental blockade decreed by Napoleon in 1807 encouraged the growing of sugar-beet in Europe and its gradual supplanting of sugar-cane in Europe, while, simultaneously, the production apparatus of the food industry began to take shape. For most of the last century and almost until the beginning of the Second World War, agricultural development in the Uni ted States was based on extensive cultivation. The land-labour ratio was high, technical progress in the me ans of production was mechanical in form, and productivity per

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unit of labour increased at a faster rate than productivity per acre. Once the possibilities of extensive cultivation had been exploited to the full, the scarcity of land initiated a new era distinguished by innovative means of production designed far intensive farming: chemistry, biology and genetics gave renewed fertility to the land and enormously increased productivity per acre. The effects of the scarcity of oil and the constraints on the availability and use of human resources became manifest in the 1970s, and still today they exert powerful pressure on the productive structure and markets. Such scarcity, which is relative and recurrent in character, has brought profound changes - not only because of the energy and labour saving made possible by machines and greater efficiency, but also because of the exploitation of alternative energy sources, including those based on renewable sources and the creation of new labour tasks. At the same time, innovations in information science, as weil as in biotechnology and new materials, have had major economic effects. The new capabilities acquired by the structure apparatus are those provided by science, and they have transferred mental power and biological functions to machines.

2.3. Relative Scarcity and Focusing Devices The analysis so far shows the substantial role of relative scarcity in focusing individual and collective attention on specific nodes of structural change. As regards the 'broad factors', we may identify certain clas~es of phenomena able to induce endogenous change. In some cases, asymmetries in the endowment and production - single and joint - of the (specific or general) skills of human resources, and, in others, disequilibria in the endowment of undifferentiated manpower, may generate pressures and stimuli for change. Regarding natural and environmental resources, waste, scrap and pollution, as the joint products of productive activity, mayaIso be considered to be agents of endogenous change. Finally, as far as technology is concerned, the interaction among processes, products and materials, the circulation within the productive process of the intermediate and final product, the necessities arising from different procedures of quality control (performed by quality tests) also conform to this pattern.

3. Some Considerations on the Use of the Concept of System The Enciclopedia Filosofica gives the following basic definition of 'system'. "A 'system' is an arrangement where several elements are composed into a unitary whole. The sum of these elements, however, does not constitute the whole as if they were its simple parts. Each of them enters the system with a function

Gilberto Antonelli and Giovanni Pegoretti

314

coordinated with the functions of the others ... The objects united into a system may be sensible objects connected together by areal relationship, and thus one may speak of a real system or (less appropriately) an objective system. Or these may be mental objects connected together by ideal relationships, in which case one may talk of an ideal system. In aetual fact, however, the ideal and the real are two aspeets which tend to be conjoined in the definition of a system"ll.

This definition emphasises the role of the coordination principle 12 in the relationship between parts and the whole. Moreover, while discriminating between the material and immaterial elements of the system, it does not undervalue the value of the latter. Abbagnano 13 elaborates the definition of 'system' as folIows: " ... And the word 'system' has remained in philosophy mainly to indicate a deduetively organized discourse, that is, one constituting a whole the parts of which are left to derive themselves one from the other. ... Kant, in fact, conceived a system as 'the unity of multiple concepts collected together under a single idea'. He maintained that a system was a teleologically organized whole and was therefore articulated (articulatio) not amassed (coacervatio);it may grow from within (by intussusceptionem) but not from without Cby appositionem) and is therefore similar to the body of an animal, to which growth does not add limbs but, without altering the proportions of the whole, renders eaeh limb stronger and more suited to its purpose."

This second definition qualifies the principle of coordination and bases it on 'growth from within >i4. Neither of the definitions conceives of the whole as a simple sum of its parts; hence the rules that govern the functioning of the whole cannot be automatically deduced from some aggregation of the rules that apply within its individual components. If one moves from general philosphical definitions to more properly economic analysis, two principal lines of thought can be singled out. The first emphasises the lessons to be learned from economic analysis, the second those to be learned from economic history. To the first line of thought belongs the definition of 'system' offered by Ricossa 15: "Any whatever complex of things standing in a mutual relationship, any whatever organization that has its own purpose." Ricossa continues: "The term 'system' (or 'economic system') is today commonly used to 11

Guzzo-Mathieu (1967), pp. 1412-1414.

12 In the economic sphere, of course, coordination funetions external to the firm are performed by the market through opportunity cost ca1culation and by the state through the exercise of poliey and law, but also by technique, understood as a set of norms which regulate the actual performance of a manual or intellectual activity, and by teehnology, understood as knowledge of teehniques and their applications.

13

(1971), pp. 803-804.

14 In the context of this paper, one can talk of the self-propulsion of what we call the 'structure apparatus'.

15

(982), pp. 464-465.

Technological Change, Technological Systems, Factors of Production

315

refer to the organization of anational or international eeonomy, part of a global system eonstituted by 'political, social and eeonomie institutions, the organizational strueture, existing laws and norms (as well as the extent to which these are enforeed or are voluntarily observed), traditions, religious and non-religious beliefs, attitudes, values, taboos and the resulting systematie or stoehastic patterns of behaviour' (T. C. Koopmans and J. M. Montias). Put more briefly, S. Kuznets defines a system as 'a set of institutions (or ideas or aetivities) united by some regular pattern of interaetion or interdependenee'. Thus one has "the eapitalist system, the socialist system, the eommunist system, and all the innumerable mixed systems". This definition emphasises the principle of eoordination, the presenee of non-material elements and their interdependenee. It gives lesser importanee to the distinetion between the parts of a whole and the elements eonstitutive of a set, and negleets the self-propulsive eapacity of the system. As regards the seeond main line of thought, the notion of system to be found in Gille 16 seems particularly relevant to our purposes here. With referenee to the history of teehniques, Gille writes: " ... we reach the point where relationships are established [among techniquesl not only in a linear process but also backwards and crosswise. In this case each component in a technical set requires,.W order to function, one or more products of the set itself. This relation is evident in the field of materials ... generally speaking, all techniques are, to varying degrees, dependent on each other ... among them there must necessarily exist a certain coherence: the set of these coherences at various levels and among all the structures, all the sets and all the filieres constitute what may be called a technical system ... ,,17.

Gille eontinues: "The inner relationships that ensure the life of these tech'nical systems become more numerous the more time passes and the more the complexity of techniques increases. These relationships can only establish themselves and be co me efficient when the overall set of techniques has reached a common level, even though, marginally, the level of certain techniques more independent than the others lies above or below the general level ... Once it has attained equilibrium, the technical system is able to exist."

This more detailed definition of the notion of 'system' spells out and stresses a system's eonstitutive elements, its formation in historical time, 16

(1978), pp. 13-17.

According to Gille, a technique rarely consists of a single action. Therefore technical combinations of various kinds must be considered. At an elementary stage there are structures, i.e. single combinations (for example, percussion cutting, hot-air engines). At a second stage there are technical sets comprising confluent techniques "whose combination gives rise to a well-defined technical act" (for example, the production of cast iron). Gille describes a third stage with technical sequences (or filieres) comprising a "succession of technical sets designed to provide the desired product, the production of which is often carried out in several stages" (for example, the production of clogs, textiles production). 17

Gilberto Antonelli and Giovanni Pegoretti

316

and therefore its rigid, irreversible and non-decomposable properties. Gille also emphasises the role of the interdependencies and the retroactive effects on which the self-propulsive capacity of the system primarily depends. His reflections on the notion of technological system seem useful in general in order to provide more satisfactory analysis of technological change, and, in particular, in order to study its role and features in models based on technological interdependencies.

4. The Distinction Between Technological System and Production Techniques It seems to be generally recognized 18 that the greatest difficulties encountered by industrial interdependencies models when dealing with technological change and R&D activities are the following. (i) These models assume that all R&D activities are embodied in pro-

duced goods and they exclude other forms of technological transfer.

(ii) Embodied technical progress is assumed to be complete and instan-

taneous. The fact that some R&D activities generate delayed improvements is ignored.

(iii) Although input-output models are able to handle product diversification, they fail to explain technological diversification, although, especially in large firms, technological diversification tends to be broader and more widely distributed than diversification of produce 9 .

(iv) On an empirical level, the lack of input-output tables which include capital goods requirements integrated with those for intermediate goods is a major limitation. Here we shall not be dealing with limitation (iv) above, and we shall seek to show that the others are not as restrictive as they have been described. First of all, note that, in the light of our discussion in Section 3, a distinction needs to be drawn between techniques and technological systems. A given technological system is constituted by a certain set of technological opportunities and knowledge 20 , which are mutually interdependent and 18

On this see e.g. Marengo/Sterlacchini (990), pp. 105-127.

Ey technological diversification, in the broad sense, we mean the availability and the management of a portfolio of technologies, together with possible recourse to various substitution processes: among materials, among factors, among quantities and materials, among technologies in the strict sense. 19

20 Ey technological opportunities we mean the set of technological opportunities provided by the state of firms' technological knowledge about the possibilities of transforming factors and goods within a given technological system. According to Nelson/Winter (992), pp. 60-65, the boundaries of such knowledge are indefinite. Information about the methods and activities of other firms can be obtained in many

Technological Change, Technological Systems, Factors of Production

317

linked with specific 'social capabilities'. These latter, which originate within the socio-economic system, consist of both technical skills (which correlate with levels of schooling, the quality of education and vocational training, and experienee) and political, industrial and financial institutions (eonneeted with the experienee of ereation and management eomplex produetive and financial systems). With a technologieal system of this kind it is possible to aehieve different levels of potential produetivity, which depe nd on the dynamic of aggregate demand. Within a given teehnological system, several teehniques deve10p which differ from each other in terms of teehnical and eeonomic efficieney. A historical example of different and eompeting teehnological systems is that of the rivalry between 'sail' and 'steam'. A more reeent example is provided by the systems that eentre either on traditional materials or on new eomposite materials. It may take a very long time for a new system to reaeh its maximum levels of produetivity. In the meantime the 'old' system eontinues to be improved by the implementation of new techniques, and this delays its replaeement. Moreover, as various authors have stressed, innovation in eertain industries provokes 'vigorous' and 'ereative' responses from others produeing direetly substitutable goods beeause their profit margins are threatened 21 • ways: purchasing and examining their products; hiring their ex-employees; consulting professional journals, reports written by financial analysts, administrative documents; recruiting consultants who also work for other firms; analysing these firms' patents and publications by their researchers; through purchases or direct exchanges; through industrial espionage. Although these methods are not so cheap or effective that absolute transparency of knowledge is plausible, they are nevertheless not so costly or ineffective as to entail complete isolation. Knowledge of a society as a whole can be obtained from R&D, from suppliers and customers, from participation in public research studies, from takeovers and mergers. On the other hand, opportunities and technological knowledge mayaiso originate from outside an economic system, in countries belonging to the economic system or in competition with it. 21 In other words, the so-called "sailing-ship effect" studied by Rosenberg (972), pp. 205-6 manifests itself. For purely explanatory purposes, we may use the following scheme, adapted to our present analysis and relative to an innovation able to penetrate an economic system and diffuse itself. Let us suppose that, in phase 1, a certain mature technology is diffused within a dominant technological system Ce.g. sailing-ships, steel, aluminium). In parallel, a new isolated technology emerges, one external to the dominant technological system Ce.g. steam engines, composite materials). In phase 2 aseries of incremental improvements occur in the mature technology which are induced by competition with the new technology. The prototype of this latter improves slowly and costs remain high, but above a11 problems of compatibility with the dominant technological system arise. Its diffusion therefore slackens. In phase 3 improvements, even substantial ones, continue to be made to the individual mature technology, but the overall dominant technological system does not evolve. An alternative technological system gradua11y forms, with characteristics induced in part by interaction with the original technological system; characteristics which

Gilberto Antonelli and Giovanni Pegoretti

318

This line of argument, suitably modified, leads to the conclusion that different economies may evolve from the same technological system into very diverse configurations. Indeed these economies may change technological system through a gradual and cumulative sequence of choices regarding the factor combinations to be adopted. The distinction between techniques and technological systems reveals that the technique employed and the inputoutput flows which characterize it may be seen as a specific stage of evolution within a given technological system. Moroever, it enables us to: assign a role to relatively scarce factors like human resources in the process of technological diffusion; give a physiological specification to delays in technical improvements, delays not necessarily due to the implementation of techniques, but rather to the system's effective ability to use them; introduce sources of differentiation of techniques according to the relative scarcity of the factors. The notion of technological system is a useful one in that a) it provides a criterion with which to decompose input-output flows, and b) it enables study of the features of the productive process which differ from these flows, Le. the structuring of tasks in the productive process; the coordination of productive agents; processes of material transformation 22 In this regard, optimal task assignment and comparative costs 23 seem to provide a useful interpretation of how task combinations may be selected in the presence of interacting processes, products and materials. Leaving aside fixed capital, the production technique may be expressed as the structure of the potential tasks to be performed in the productive process. X = min {Tl ,T2 al a2

, ••• ,

Ti ,... , Tn }

aj

an

where: X = output of a given quality; Ti

=

an independent task, Le. a specific production stage of i-th type;

ai

=

the amount of tasks of i-th type per unit of output;

T

-1.. =

aj

quantity of output allowed by the availability of Tj.

are therefore partly endogenous. In phase 4 the original technological system is superseded, and the individual technology is relegated to a niehe. In parallel, the new technological system takes over. 22 Landesmann/Scazzieri (990). 23

Rosen (978).

Technological Change, Technological Systems, Factors of Production

319

If, in order to perform a given amount of the i-th task, the firm employs a quantity of labour lij and a quantity of circulating capital mik, we may write:

where: =

1, 2, ... , n

i=

1, 2, ... ,0

k

1, 2, ... , p;

i

=

and where: bj = the fixed amount of the i-th type of labour required to produce a unit of the i-th task; gk = the fixed amount of the k-th type of circulating capital required to produce one unit of the i-th task;

~ bj

=

amount of the i-th task allowed by the availability of i-th type

labour. mik = quantity of the i-th task allowed by the availability of k-th type gk circulating capital. tijk therefore defines the maximum amount of the i-th task obtained using a i-th type worker and a unit of k-th circulating capital. Comparing the two types of circulating capital (h, s), we may argue that circulating capital h has a comparative advantage in the i-th task relative to another task r, given the i-th type of labour, if: t ijh

t ijs

trjh

trjs

->We must assume that the principle of comparative advantage holds for each task/circulating capital pair. Our problem therefore reduces to that of the allocation of workers and circulating capital to the various productive tasks in order to maximize output. Thus we have a two-stage solution: in the first calculation is made of all the possible assignments which maximize ac-

320

Gilberto Antonelli and Giovanni Pegoretti

tivity levels for a given set of circulating capitals and a given work force; in the second output within the efficient set is maximized. The optimal combination of tasks is the result of adecision taken within the economic sphere.

5. A Simplified Model Our aim in the following sections is to show, on the basis of an analytical example, the working in the economic systems of mechanisms which condition the introduction and diffusion of new technologies. These, generally speaking, may consist of physically limiting factors (such as the endowment of the necessary resources), or restrictive practices on the market, or a lack of synchronism between the technological and the socioeconomic systems which reveals the inadequacy of certain 'social capabilities' Our attention will focus in particular on this latter mechanism. An important element in the analysis is the interdependencies whereby the situation of the individual sector is reflected at the aggregate level. The simple model described below represents a production system with circulating capital where only one final consumption good is produced employing an intermediate production good and labour force. Available to the technological system are the knowledge and the factors, as weil as the specific 'social capabilities' (relative, in particular, to the training and upgrading of the labour force), necessary for the application of two distinct techniques. Each of these techniques involves the use of a different production good and the differentiated use of a skilled labour force (henceforth SLF) or of an unskilled one (henceforth ULF). Labour is the only scarce means of production. The available labour force is divided between these two categories by mechanisms specified in the model. Finally, for simplicity's sake, we assume that fixed capital is neither used nor produced 24 . The alternative ways of producing the simple goods are referred to as alternative 'processes' , while 'technique' will denote the r~lations among productive factors and goods produced by means of a set of production processes chosen among the available combinations. Each technique thei-efore corresponds to a choice of production processes for alt the industries in the system. Accordingly, the stylized system will comprise the following three productive sectors or industries:

Industry 1 produces a non-durable means 0/ production utilized in industry 3 (technique 1). This good is produced using a certain quantity of the same good and of ULF. 24 The possible advantages of introducing fixed capital will be looked at below, without, however, any detailed analysis.

Technological Change, Technological Systems, Factors of Production

321

Industry 2 produces a non-durable means 0/ production utilized in industry 3 (technique 11). This good is produced using a certain quantity of the same good and SLF. Industry 3 produces a consumption good with two distinct processes available: process I, which utilizes the means of production produced in industry 1 and VLF; process II, which utilizes the means of production produced in industry 2, VLF and SLF. The available techniques can therefore be described with the material input matrix A and the labour input matrix L:

where:

I~j represents the quantity of VLF employed in the k-th process of the i-th industry; I ~j represents the quantity of SLF employed in the k-th process of the i-th industry; at represents the quantity of the i-th good required to produce one unit of the i-th good with the k-th technique (the absence of this latter suffix indicates that only one technique is available). Therefore, in our simplified model there are two possible techniques, corresponding to the choice between the processes availfble to industry 3, the others being fixed (the two techniques mayaiso be used simultanously, as we shall see below). We can hypothesize the first technique as "organic" to the prevailing technologized system, while the second contains some elements of differentiation with respect to it. The "novelty" of the second technique relates to the working if industry 2, which is part of a technological system in formation, but less diffused than the prevailing one.

322

xr

Gilberto Antonelli and Giovanni Pegoretti

Let represent the k-th process intensity in the j-th industry, defined in terms of output. If LI and L2 are the available quantities of ULF and SLF respectively, while L denotes the totallabour force 25 , defined 2

11

I I = ~)ljXj+ LI~3X~ =llIxI +1~3x~+I~I3x~ j=1 k=I 2

11

12 = LI 2jx j + LI~3X~ = 122 x 2 +1~3x~ j=1 k=I then the following constraints apply: II

:0::;

LI

12

:0::;

L2

LI +L 2 :O::;L Let us give a "disjointed" representation of the two techniques: {AI ,LI} ,{All ,LII } where AI =[

a~1 a~31 All =[ a~2

LI =[

Ln =[ 0 I~I 1~31 o 122

ll a 23 ] 0 In13 ] In23

(Note that the numbering of the elements of AI and All corresponds to that of the elements of A, shifted in order to respect the interdependence relations among the industries). As we know26 , the relative profitability of different techniques depends on the price-distribution system. Adopting a simplifying hypothesis in order to concentrate momentarily on the system of quantities, we may assurne that technique II dominates technique I in terms of economic efficiency for a sufficiently wide range in the rate of profie 7 . The scenario depicted by our model comprises (under conditions wh ich will be specified below): a) an initial situation where the available labour force is solely of type ULF; b) the progressive increase (from the stock 25 The time evolution of the labour force in relation to the dynamics of population is dealt with in Section 7, infra. 26

See Sraffa (1960), Pasinetti (977).

27

A similar hypothesis is adopted by Kurz (987).

Technological Change, Technological Systems, Factors of Production

323

available at a given moment of time) in the quantity of the available SLF which enables the introduction and diffusion of technique II. The creation and increase of the SLF depend, in turn, on the same process of introduction and diffusion of technique II, and the two processes condition each other reciprocally. It is therefore important to c1arify at the outset the material conditions of production, beginning with the system's productive capacity - in terms of the quantity of good 328 - using the two techniques and the different kinds of labour force. We shall therefore calculate the maximum quantities of good 3 producible using the two techniques, given the constraints on the availability of resources. To do so, we first identify the (direct and indirect) absorption of resources necessary to produce one unit of good 3 - which, since it is not used as a means of production, is available in its entirety for final uses. We begin with the case where only technique I is used, and calculate the levels of activation of productive processes at wh ich one unit of the final good can be obtained: (I - AI)x

=

y

(where x and y represent the process intensity vector and the net output vector respectively)

hence

More generally, if matrix AI comprises n-1 intermediate productive processes and one process (the last) with which to produce the consumption good, one has, setting [I - AI]-l = [aijl:

28 It is assumed that good 3 is the only one destined for final consumption. Also, as can be seen from the representation of the technique, good 3 is not used as a means of production.

324

Gilberto Antonelli and Giovanni Pegoretti

Given the activity levels, the absorption of manpower (in this case of type ULF) will be

I'1 -- Illa~3 + I'13 I-all

Using only technique I, and given LI as the quantity available of ULF, the maximum producible quantity of the consumption good is , _ LI qmax - [I I

We follow the same procedure to ca1culate the maximum quantity producible using only technique 11, q!ax' given LI and L2 (quantity available of SLF). Thus:

(I -A")X= Y

[1-a 22 -a~3][X2]=[0]

°

hence

x ] [ x~ 2

=

1

x~

1

1_ ~l 1-;22 I-t22 [0]1 = [~l I-t22

[ __

In this case technique 11 requires that both ULF and SLF must be used. Thus we have: I"I -- I"13

I 1"2 - 1-22 aa"2322 +1"23

hence

If

.s.:#=.!2., a proportion of the labour force I~'

I~

will remain idle.

We now analyse the joint utilization of the two techniques. The material balance of production is described by the following relations:

° °q

Technological Change, Technological Systems, Factors of Production

325

The problem of determining q:;:~x Ühe maximum quantity of the consumption good producible with the joint use of the two techniques) is simplified by the fact that technique 11 is the most profitable. It will therefore be used to the maximum of its capacity - that is, until the available quantity of ULF or SLF has been exhausted. We therefore divide the problem into two cases.

1) min{

LI~I ,LI;} = LI~ 1 I I

2

I

In this case, technique 11 first exhausts the stock of ULF. Since technique I cannot use SLF, the residual of this latter is left idle and we obtain 1,11

_

11

_

qmax - qmax -

L2 JiI 2

In this case, technique 11 first exhausts the SLF, leaving a residual of ULF to be used by technique I. This may be calculated bearing in mind that 11

qmax

L

=JiI2 2

We thus have the absorption of ULF by technique 11:

the residual of ULF

and the quantity of the consumption good producible with this residual using technique I

Therefore, the total quantity producible using the two techniques, assuming that technique 11 is employed to its maximum capacity, is I II

q'

L2

=JiI+ 2

11 11 LI - 113qmax II

I

326

Gilberto Antonelli and Giovanni Pegoretti

Cases 1) and 2) exhaust the range of possibilities only if technique II, as weil as being less costly than I, is also less 'intensive' in its use of the scarce resource (in our simplified system, this comparison can obviously only concern VLF, given that technique I does not use SLF). Otherwise, under pressure from demand, technique II will not be fully utilized but will give way, at least to some extent, to technique I. Accordingly, given that the competition between the two techniques only concerns VLF, we compare the absorptions of VLF per unit of final product, Le. I a' I '-~+I' 113 I-all

Now, since technique II is assumed to be more 'advanced' (and also requiring the use of a new means of production, Le. good 229) and using SLF as weil as VLF, it is not unrealistic to hypothesise that .• . l I1 > I II1 l I13 > I II13 , whlch Imphes

This latter hypo thesis also prompts the consideration that if technique II first exhausts the resource VLF (which, as we shall see in the next section, is orily possible in an advanced stage of its diffusion) and if final demand is not fully satisfied, room will be created for the introduction of a new technique III, which is more costly than technique II and able to utilize the residual of SLF still available 30 , perhaps competing with technique II over use of the stock of VLF (should technique III be less 'VLF intensive' than technique 11).

The less costly technique is bound to maintain or acquire a dominant position if it is also less 'intensive' in the use of the scarce resource; if not, it will be gradually replaced by the other technique as final demand increases.

29 Also in other analytical frameworks, technical progress brings about the introduction of new intermediate goods, and not only a simple reduction in input coefficients. An example of this - though evidently far from our analytical context - is represented by the models with 'endogenous technological change'; see, for instance, Romer (1990) and, for a review, Verspagen (1990). 30 In the presence of 'residuals' of scarce means of production, which can be utilized by alternative techniques, the system's dynamics can become rather complex, and influence the effects of technical progress on the degree of efficiency of techniques through the compatibility relations which are created among the different available techniques. On this, with reference to non-reproducible means of production, see Quadrio Curzio (1986).

Technological Change, Technological Systems, Factors of Production

327

6. Incomes, Final Demand and Activity Levels The net product of the economic system (the consumption good) is divided into three shares, pertaining respectively to employed unskilled workers, employed skilled workers, and capitalists:

q

=

Wl + Wz + P.

We now use qI and qII to denote the quantities of the consumption good produced using the two techniques (obviously, qI = x~ ,q[[ = x~). Given q=qI+qII, if we use Wl and W2 to denote the unitary (real) wage paid to the two categories of workers, and 1tj for the profit (real and inclusive of profit in sectors 'upstream' from the final sector) per unit of product obtained using the j-th technique, the division of the overall net product yields q = q I + q [[ = q I( w1 II1 + 1t 1 ) + q [[( w11[[1 + w21[[2 + 1t 2) As regards final demand, we consider an autonomous part of it CO, and apart which depends on income and which is in turn divided into three shares:

where

1[[ q [[) C W2 =Y2 ( w22

In the absence of fixed capital and therefore of investments (and also leaving stocks out of consideration), the autonomous part of demand will comprise public grants for income support and exports; we suppose that to these latter correspond imports (not considered here) of different consumption goods. Matching real saving out of distributed incomes, therefore, there is consumption of other imported goods or by non-earning subjects. Formalizing demand D = Co + qI( Yl wll~ + Y1t 1t l) + +q [[( YI W I1[[1 +Y2 W 21[[2 +Y1t 1t 2) one may now express the equality between demand and supply

Gilberto Antonelli and Giovanni Pegoretti

328

W1 111 + W21112 + 1t 2) = q 1(11 W1 1 + 1t 1 ) + q 11 (1 = Co +ql(YIWII~

+y,,1tI)+qll(YIWII~1 +Y2W21~

+y,,1t 2)

which may be written: Co = ql[ (1- YI )wII~ + (1- Y,,)1td +

+qll [(1- Y1 )wll ~I + (1- Y2)w21~ + (1- Y,,)1t 2 ] Having fixed the activity level of a technique, the last relation yields the level of activity of the other technique which allows demand to be satisfied. Setting:

1. 1 =(l-YI)wII~ +(l-y,,)1t 1 1. 2 =(l-YI)WII~I +(1-Y2)w21~ +(1-y,,)1t 2 we maywrite

7. The Dynamies of the System We now analyse the dynamic behaviour of the system, where a crucial role, given the characteristics of the model, is played by the growth of the labour force. A first hypothesis concerns the rate of population growth, wh ich is assumed to be equal to gn and constant: N ( t ) = N ( t - 1)(1 + g n ) = N ( 0)( 1 + g n ) t gn:?: 0

where N(t) is the amount of population in the period of time

t.

This increase is initially reflected in an increase in the available ULF. A portion of this, however, will be converted into SLF by the educationaltraining process. We must therefore specify how the SLF is formed once technique 11 has been introduced ioto the system and once its diffusion has begun to exercise appreciable effects on demand factors 31 .

31 Apart from the initial moment when the new technique is introduced, it is presumed that the possibility of importing SLF is very limited and would be more costly than training.

Technological Change, Technological Systems, Factors of Production

329

The transformation of ULF into SLF follows two paths: one internal to firms and which works through direct training; the other external to the firm and working through the training-educational system. The first share depends on the levels of activity of technique 11; the second contains an autonomous component ßO (its development having been stimulated by the introduction of the new technique) and a component correlated with demand for SLF and therefore aga in with the activity level of technique 11. We therefore have

i.e., setting ß

=

ßl + ß2 Lz(t) = Lz(t -1)+ ßI~qII(t -1)+ ßo

With reference to this latter relation, for simplicity's sake we shall assume that the creation of the SLF is instantaneous and that the SLF thus formed is available at the beginning 32 of period t. Under these hypotheses, we may now describe the dynamics of the ULF: L1(t) = L1(t -1)+

z[ N(t)- N(t -1)]-

-ßI~qII (t -1) - ßo

where 0 < Z < 1 is the proportion (assumed to be constant) of the population increase which joins the ULF. Summing up, the system dynamics (with unitary incomes in real terms assumed to be constant) may therefore be described by the following relations:

1.. 1 =(1-ydW11~ +(1-Ylt)1t 1 1.. 2 = (1-Y1)W11~1 +(1-Y2)w21~ +(1-Ylt)1t 2 L1(t) = L1(t -1)+ Z[N(t)- N(t -l)]-ßI~qII(t -1)- ßo L2(t) = L2(t-1)+ßo +ßI~qII(t -1),

ßI~qII (t -1)+ ßo ~ L1(t -1)+ Z[N(t)- N(t -1)] 32 Otherwise during a lapse of time part of the labour force, both as ULF and SLF, would be unavailable.

330

Gilberto Antonelli and Giovanni Pegoretti

11( t) = I ~ g I ( t ) + I ~I g II ( t ) 12 (t) = l~gII(t)

11(t)~ L1(t)

12 (t) ~ L2 (t) U 1(t)= L1(t)-1 1(t) U 2 (t) = L2 (t)-1 2 (t) g(t)= gI(t)+gII(t) where li(t), Ui(t), i=I,2, represent the employment and the unemployment of ULF and SLF respectively. Note that the autonomous component of consumption also evolves over time - an evolution assumed to be determined externally to the model, although there are a number of links wh ich we mention below. One may suppose, for example, that Co grows at a faster rate than the population, and thus displays a progressive increase in primary needs. Like the evolution of COCr), also the evolution of NCr) is not subject to the model's economic variables. As regards the determination of the other variables, under the hypothesis that technigue II is more economically efficient and is therefore utilized to the maximum level allowed by the factor endowment, it follows that gIlCr) is determined by 2 II ()_ . {~ gmax t - mm II' L II(t)}

11

12

On the other hand, there is no simultaneous influence of gIl(t) on LI (t) and L2(t). In fact, LI (t) depends on N(t) and on gIl(t-I), while L2Cr) depends on gIl(t-I) (as weil as on LI Cr-I) and NCr) as regards the maximum ceiling). For a given CO(t) and having established gIlet), then the model determines gICr), within a maximum amount that depends on LI (t). In fact, it must hold that l~gI(t)+ I~IgII(t) ~ L1(t)

Finally, 11 (t) depends on gI(t) and gIl(t), 12(t) dcepends on gIl(t); having determined Ll(t), 11(t), L2(t), 12(t), then also Ul(t) and U2(t) follow.

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As regards overall production of the consumption good, q(t), wh ich also constitutes the net product of the economy, this is obviously given by the sum of qI(r) and qIl(t). It is thus possible, given oUf initial hypotheses and conditions, to trace the system's evolution over time in terms of: net product; the activity levels of techniques; the training and composition of the labour force; employment and unemployment by skill; incomes from work by skill, and incomes from capital.

This evolution may be studied in various stages. We first consider the state in which only technique I is available. We have: Co(O) = [(l-Yl)Wll~ +(1-YIt)1t 1 ]qI(O) ql(O)=

C10(0)

(1 - Y1 )w111 + (1 - YIt )1t 1 11 (0) = l~qI(O) L1 (0)=zN(0)

U 1 (0)= L1 (0)-1 1 (0) q(O)=qI(O) For the system to be self-sufficient, the following condition must be respected

Le. nCo(t) ( ) (l-Yj)wjl Ij + (l-YIt)1t j ~zNO Note that the denominator of this last expression derives from a linear combination of the workers' and capitalists' propensities to save (in fact, wll~ is the share of wages over product; 1tl the share of profits) Possible excess demand for ULF can, in this model, be resolved in three different ways: by importing ULF; by reducing the propensity to consume of at least one category;

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by means of an inflationary process which only increases nominal incomes, leaving real incomes at the maximum level allowed by the factor endowment. To avoid complicating matters, however, we shall assume that there is, initially, no excess demand for ULF.

8. Introduction of the New Technique In a se co nd phase, whieh we label 'period 1', the new technique is introduced (together with the initially required endowment of SLF33). If the ULF was fully utilized by technique I, in the new situation this technique must be partially deactivated in order to release the ULF required by technique 11 - unless new ULF is produced in sufficient quantities (whieh seems improbable since it depends chiefly on the demographie variable), or imported. These possibilities apart, technique 11 must supply sufficient product to offset the partial disactivation of technique I. Moreover, the introduction of better-paid skilled labour and increased profits (relative to technique II) will increase the share of demand re la ted to incomes 34 whieh the new technique will have to satisfy. We therefore have:

_ L2(1) qII(1) --1-112

(assuming that the SLF is initially scarcer than ULF);

ql(l)=: [C o(1)- A2q II(1)]= C~(l) _ ~2 LI21~1) 1

1

1

2

I (l)=II[C o(l) _~ L2(1)]+llI qll (1) 1

1

A1

A1 1112

12(1) = qll(l)l~

1

= L2(1)

L1 (1) = L1 (O)+ Z[N(l)- N(O)] = ZN(l) 33 SLF could have been imported, or created by the mechanisms described above, which could be differently specified to operate also in perspective, before the introduction of the new technique.

34 In the case of imported SLF the autonomous component of demand also increases.

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333

L2 (1) = L2 VI (l)=L I (l)-II(l)

V2 (1)=0 Rewriting the determination of the share of employed VLF:

The latter relation gives some interesting insights into the dynamics of VLF employment. The first term of the right-hand side of the expression to the right corresponds to the amount of VFL absorbed in period 0, increased according to the growth of the autonomous component of demand. In practice, this represents the quantity that has to be produced using technique I, multiplied by the unitary absorption of VLF, should technique 11 not be activated. This term is obviously subject to variations in COCr). If we continue with the hypothesis adopted above - that CO(t) grows at a faster rate than the population - there is an expansive effect on the demand for VLF. As for the second term, its sign depends on the difference

III_IIA 2 I I 1. I

which is

~ 0.

Or, depending on whether,

~~~ I~


1 (this being the quantity of the labour force autonomously transformed into SLF). Moreover, for evident demographie reasons, one has zgn < 1. In this situation, the denominator of the ratio will increase more rapidly than the numerator and after a certain point, the parameters and demand remaining the same, it will surpass it. Suppose, therefore, that from period monwards technique n's level of activity will be constrained by the availability of ULF. Hence q

I1( ) _ m -

L1(m) 11 I1

In order for the system to be in equilibrium on the goods market, it must be the case that

and since qI(m) one obtains

=

0 (because the ULF is entirely absorbed by technique 11), Co(m) = A2qI1(m) qI1(m) = Co(m)

A2

As will be seen, it is only by chance that the condition requiring the complete absorption of ULF and the condition of equilibrium on the goods

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market are simultaneously satisfied. This is a critical juncture, first of all for the goods market, because the condition to be satisfied concerns not only Co but the unskilled labour force as weil. The skills-upgrading mechanisms are no longer utilizable as instruments to bring the system to equilibrium. Nevertheless, it is possible to influence parameter z by adopting specific policies designed to alter 'participation rates'. This manoeuvre, however, is obviously very limited in its range; hence policies designed to influence Co and A2 would probably be more effective. As regards the SLF, the available stock is determined thus:

On the other hand, the usable stock is given by

While the supply of SLF increases more rapidly than the supply of ULF, demand for it increases at the rate of growth of qII, which is constrained by the availability of ULF. For this reason, as we have already seen, unemployment of SLF is generated within the system by the scarcity of ULF. In this case, corrective measures should be applied to the training mechanisms in order to slow down the creation of skilled manpower. Given that, at this stage, social aspirations linked with upgraded skills are likely to have been triggered within the system, it will probably more practicable to import ULF (which, it should be pointed out, will alter the parameters of the system).

10. The Price-Distribution System We have so far avoided any explicit consideration of prices, even though these have been by no means assumed to be constant: the only hypothesis in this regard has been that technique II is more profitable for a given range of the profit rate. Although all magnitudes in the system are treated as real, the limitations of a model wh ich fails to provide explicit treatment of the price/distribution system are evident. One may consider a system such as the one described in the following graph (where r represents the profit rate and w the unitary wage, both supposed to be uniform36 ) plotted on the basis of a system of 'prices of production'.

36 This hypothesis, here adopted for simplicity's sake, is c1early simpler than the model's one.

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w

II

a~----------------~------~~~----~

If we remove the above restriction on the profitability of techniques, we can examine the general case where the relative profitability of the two techniques may change, even several times, within the relevant interval of r. The return of technique I to the 'frontier' is due to changes in distribution reflected to varying extents in the production costs of the two techniques, which use differing proportions of the various factors - DLF and SLF in particular. In any case, the presence of a scarce factor may mean that the technique's 'frontier' is not as described by the external envelope of the two curves. A restriction in the supply of SLF, for example, may make it necessary to adopt technique I even in the range (ra, rl), while technique 11 is assigned a marginal role. It is evident - and here we come to our second point - that the greater profitability of technique 11 will trigger aseries of competitive mechanisms: a) the effort required to step up the supply of the scarce factor in order to increase technique II's level of activation; b) the pressure on firms using technique I (therefore producers of the final good using the same technique and the producers of intermediate goods and the basic materials) to improve its competitiveness by innovation.

Despite the fact that the differing advantageousness of the two techniques is based on diverse proportions among the various production me ans employed, it is unlikely that competitive pressure will induce an attempt to re-equilibrate these proportions. Put otherwise, with reference to our simplified system, if technique I were, by hypothesis, more profitable in a given configuration of the price/distribution system, this would not induce firms using technique 11 to modify it in order to employ a larger proportion of DLF. Instead, innovative efforts will be directed towards interme-

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diate goods, materials, production organization, and so on. The result, even if this is not the explicit intention, will be to redistribute the weight of the original factors among the various sectors involved and among the various stages of production. Finally, mention should be made of the effects exercised by the scarcity of a production factor on the incomes derived from it, with the potential rent phenomena associated with such scarcity. Such phenomena should be analysed both with reference to the pressures they are able to exercise on the system37 , and in terms of the effects of the incomes dynamies on demand - a topie whieh has only been touched on in our model. These aspects, like those mentioned in the previous section, are not investigated here. They are, however, part of the 'natural' development of the present study.

11. Comparison Between Economic Systems The foregoing analysis points to the use of our model in comparative dynamic analysis. This application, however, can only be described in outline form here. Let us assurne that there exist two economies with the same technologieal knowledge, but with different production factor proportions, especially the two kinds of labour force, and with different 'social capabilities', whieh here we synthesise into the capacity to create SLF. Under particular conditions generated by outside events - for example, a loss of co mpetitiveness due to an increase in the cost of raw materials, which we do not consider here but whose effects can be simulated by a fall in exports and therefore in Co - the two economies may react in very different ways. Economy A, characterized by a higher proportion between SLF and ULF and by a greater capacity to create SLF, may stake everything on accelerating the creation of SLF and maximizing the diffusion of more competitive technique 11. In these circumstances (because of the fall in Co combined with a possible decline in the overall absorption of ULF) an excess supply of ULF may occur, whieh the system might try to expel if part of it derives from immigration. Economy B, on the other hand, wh ich has a lower ratio between SLF and ULF and therefore, presumably, a higher share of national ULF, may respond to the new conditions with policies in support of technique land with social shock-absorbers to sustain incomes and demand. After a certain period of time, a gap may open up between the two systems (which were initially quite similar) in terms of productivity, income, productive structure 37 These may derive from the attempt by various groups - the holders or users of searee resourees - to ga in eontrol over these rents. On this topie, in connection with the use üf non-reproducible resüurees, see G. Pegoretti (990).

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and competitiveness. The above is only abrief outline intended to illustrate the analytical potential of a model which certainly requires further refinement. As regards the relations among physical magnitudes, one might consider (with some degree of analytical complexity but no excessive difficulty) other restrictions in the factor endowment, like raw materials and fixed capital. Introducing this latter would also help to highlight investments as the chief autonomous component in demand. This and other refinements like those mentioned above we shall give detailed treatment in a future study.

12. Some Reflections on Possible Uses of the Model Purely for the purpose of illustrating a possible application of the model, and in order to assess its usefulness, we shall make brief comparison between the German and Italian productive systems. Although, historically, these two productive systems were always in dose contact and although they have displayed similar structural characteristics in their postwar development38 , they adjusted to the shocks of the 1970s in somewhat different ways. According to Neri 39 , Germany was able to start processes of structural adjustment (wh ich were favoured by the expulsion of immigrant labour). Here, in our view, one may speak of 'modernization'. In other words, this was a process where the economic and technological systems adapted to changes in the demand and supply of basic, intermediate and final goods, but where certain distinctive structural features remained unaltered: the endowment of basic resources, historically developed social capabilities, firm size, commitment to a transformation economy. In the modernization process, the structure conditions strategy, and interpreting and forecasting the behaviour of the economic system is still an important component. Italy, by contrast, gave priority to forms of conjunctural adjustment where a major role was played by the Cassa Integrazione redundancy fund, early retirement, and the informal economy. It is probably true to say that Italy's re action cannot be described as a balanced process of transformation. Very strong and rapid technical progress in certain large firms and in some leading sectors (technical progress wh ich , however, lagged behind that of other industrialized countries) was accompanied by a more sluggish reaction by the rest of the productive apparatus which had to deal with organizationally more complex objectives, requirements and processes of transformation - a sluggishness which was also due to smallness of scale, 38

Quadrio Curzio/Fortis (986).

39

Neri (1991).

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Gilberto Antonelli and Giovanni Pegoretti

'black' work, and the use of backward services. Thus the transformation drive was first diffused from small and medium-sized firms to large-scale firms and dominant sectors in search of greater flexibility, and then, in a second phase, from the large firms and from dominant sectors to small and medium-sized firms and to other sectors in search of new automation. All this followed a sequential pattern; it was neither instantaneous nor interdependent, and it seems to have given even greater importance to the specific features of individual producers and of the structure - even negatively, as witness the poor performance by the public administration. Italy therefore seems to have undertaken aglobai process of transformation, of which, however, it was only able to implement certain components compatible with its structure. This too was a process of modernization, but less coordinated and more conditioned than Germany's. On a more abstract level, one may conceive of countries operating in the same technological system, but with significantly differences in the proportions of heterogeneous productive factors available to them (skilIed manpower, for example) rather than differences in the quality peaks of such factors or in macroeconomic policies. However, the cleavage of the 1970s seems to have created a situation where Germany tended increasingly to diverge from Italy, also because of her expulsion of unskilled (and foreign) workers and the immigration of skilled ones (mainly East German). Italy, in fact, first maintained a relatively high share of unskilled (Italian) workers and then experienced large-scale migratory flows of unskilled man power. Thus the two countries' paths tended to diverge and to assurne configurations which, although different, were both gradually shaped by endogenous technological change based on a common technological system. On the other hand, a mechanism of this kind may operate even in the case of two economies which have evolved along different technological paths and which find themselves in competition with each other. The case of the economies of Eastern Europe and their relationships with the Western market is extremely significant in this regard. Here, the development of the weaker economy requires, amongst other things, the importing of more competitive technology; but to be utilizable this technology requires a whole series of social capabilities - ranging from vocational training to managerial skills, to the organization of the public administration, to domestic purchasing capacity, to name only the most important - which may not be present to an adequate degree. Some conclusions see m therefore in order. First, analysis of the technological system alone provides incomplete information on the capacity of the economic system to adopt and exploit advanced productive techniques. On the other hand, such analysis is nevertheless indispensable to studies see king to identify the linkages between the microeconomic level and the macroeconomic level of growth and change. The method adopted in the

Technological Change, Technological Systems, Factors of Production

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present work has attempted to focus on certain mechanisms and points in this system which will be inevitably subjected to intense pressure by the forces of change. These are not solely physical constraints on growth, but elements in the system which depend on decisions past and present. Understanding where these are crucial will undoubtedly make a useful contribution to more detailed analysis.

References Abbagnano, N: entry "Sistema" in: Dizionario di filosofia, 2nd ed., Torino 1971, pp.

803-805

Amendola, G.: The Diffusion of Synthetic Materials in the Automobile Industry: To-

wards a Major Breakthrough, in: Research Policy, 19, 1990, 6, pp. 485-500

Antonelli, G.: Lavoro, tecnologia, ambiente nella dinamica economica strutturale, in:

Sui momenti costitutivi dell'economia politica, A. Quadrio Curzio and R. Scazzieri eds., 1990, pp. 183-202

-

/ Quadrio Curzio, A. (eds.): The Agro-Technological System Towards 2000. A

European Perspective, Amsterdam 1988

Cohendet, P. / Ledoux, M. j. / Zuscovitch, E.: New Advanced Materials. Economic

Dynamics and European Strategy, Berlin 1988

De Liso, N: The Work Process and the Division of Labour, Quaderni IDSE/CNR no. 2, 1992 Gille, B.: Histoire des techniques, Paris 1988 Guzzo, A. / Mathieu,

v.:

1967, pp. 1412-1415

entry "Sistema" in: Enciclopedia filosofica, Vol. 5, Firenze

Kaldor, N: The Relation of Economic Growth and Cyclical Fluctuations, in: Economic

Journal, March 1954; reprinted in: Kaldor N.: Essays on Economic Stability and Growth, London 1980, pp. 213-232

Kurz, H. D.: Technological Change and Employment: an Outline of the Theoretical

Approach Used by the Bremen Research Unit "Technologischer Wandel und Beschäftigung", Working Papers of the Research Group on Technological Change and Employment, Universität Bremen, 12, 1987

Landesmann, M. / Scazzieri, R.: The Production Process: Description and Analysis,

SPES WP, 1, 1990

Marengo, L. / Sterlacchini, A.: Intersectoral Technology Flows, Methodological Aspects

and Empirical Applications, in: Metroeconomica, 41, 1990, 1, pp.19-39

Nelson, R. N / Winter, S. G.:

bridge, Mass. 1982

An Evolutionary Theory of Economic Change, Cam-

Neri, F.: L'ltalia tra Est e Sud, paper presented at the Conference "Underdevelop-

ment and Migration", Verona, February 1991

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Pasinetti, 1. L.: Lectures in the Theory of Production, London 1977 Pegoretti, G.: Offerta di risorse non riproducibili, scelta della tecnica e struttura produttiva, in: Dinamica economica strutturale, A. Quadrio Curzio and R. Scazzieri eds., Bologna 1990 Quadrio Curzio, A.: Technological Scarcity: An Essay on Production and Structural Change, in: Foundations of Economics, M. Baranzini and R. Scazzieri eds., Oxford 1986 / Antonelli, G.: The Development of an Agro-Technological System between Market Pulls and Structural Pushes, in: The Agro-Technological System Towards 2000. A European Perspective, G. Antonelli and A. Quadrio Curzio eds., Amsterdam 1988, pp. 1-16 / Fortis, M.: Industrial Row Materials. A Multi-Country, Multi-Commodity Analysis 0971-1983), in: Studies in Banking and Finance, 4, 1986, pp. 99-107 /Scazzieri, R.: Sui momenti costitutivi dell'economia politica, Bologna 1983 Ricardo, D.: Principles of Political Economy and Taxation, London 1817 Ricossa, 5.: entry "Sistema" in: Dizionario di economia, Torino 1982, pp. 464-465 Romer, P. M.: Endogenous Technological Change, in: Journal of Political Economy, 98, 1990, 5, pp. 71-102 Rosen, 5.: Substitution and Division of Labour, in: Economica, 45, August 1978, pp. 235-250 Rosen berg, N.: Factors Affecting the Diffusion of Technology, in: Explorations in Economic History, Fall 1972; reprinted. in: Rosenberg N.: Perspectives on Technology, Cambridge 1976, pp.189-210 Sala-i-Martin, x.: Lecture Notes on Economic Growth CO: Introduction to the Literature and Neoclassical Models, NBER, WP no. 3563, 1990 Sraffa, P.: Produzione di merci a mezzo di merci, Torino 1960 Vercelli, A.: Technological Flexibility, Financial Fragility and the Recent Revival of Schumpeterian Entrepreneurship, in: Recherches Economiques de Louvain 54, 1988, 1, pp. 105-112 Verspagen, B.: 'New' Neo-Classical Growth Models and their Relation to Evolutionary Theories of Economic Growth: An Interpretative Survey of some Recent Literature, in: Merit Research Memorandum, Maastricht 1990

Detecting Structural Change: A Scheme for the Comparison of Austria and ltaly in the Seventies and Eighties' by Bernhard Böhm and Lionello F. Punzo

1. Austria and Italy: Some Stylized Facts

On average, Austria and Italy exhibit the same long-term pattern of national income growth: their average growth rates are almost equal. Regarding business cycles, Italy shows stronger fluctuation - troughs are deeper and boom periods stronger than in Austria (cf. Figure 1). These facts reflect institution al differences as weil as differences in the way national economie policies cope with outside shocks. Austria pursued a policy oriented towards stabilizing employment at a high level during the seventies. Its method was based on Keynesian ideas of demand management, coupled with a foreign exchange regime wh ich established strong links with Germany, and cushioned by a system of social partnership exercising wage and priee controls. This poliey steered Austria through the periods of external shocks, maintaining moderate growth, moderate inflation and also moderate unemployment, but accumulating government debts. These debts enforced reconsideration of Austrian Keynesianism and led to measures for improving government finances, cuts in expenditures and shifts towards indirect taxation. As regards sectoral development, the Austrian economy also exhibits the internationally evident increasing importance of the tertiary sec tor at the cost of the industrial and primary sectors, despite the fact that the share of industry in its GDP is larger than the OECD average. Because of the lack of data on investment in non-industrial sectors, we concentrate on issues related to structural change in industry. Here the basie sectors (mining, steel, aluminium, paper) and the traditional consumer goods sectors (food, beverages, textiles) are still dominant, compared with the international average. On the other hand, the contributions of sectors with fast technologieal development like chemieals and machinery are be This paper reports results of research work by the two authors carried out as a part of a joint project involving members of the Department of Economics of the University of Siena (financed by the Italian CNR), the University of Technology and the Institute for Advanced Studies of Vienna.

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Bernhard Böhm and Lionello F. Punzo

low the average. From an international perspective we know that the growth of R&D intensive branches is above the average. The international competitiveness of other branches depends mainly on their ability to apply new basic technology (microelectronics, biotechnology), with increased interrelations between the activities, to the service sector. In this context the view is advanced 1 that there seems to be no evidence that structural change has been slower in Austria than in other Western industrialized countries. Also, no evidence for a relatively low flexibility of production in Austria is forthcoming. However, the proportionally high use of low qualified workers, of real capital, and predominantly of raw materials is weil above the average among the industrialized countries. One presumes that there is a deficit in future-oriented activities: the share of enterprise-re1ated services is low; there is still re1ative1y low expenditure and effort in R&D despite some recent increases; the impulses stemming from domestic demand for the development of new products and pro ces ses are weak. Furthermore, in view of a long tradition of protection, the cost of the sheltered sectors seems to hamper the competitiveness of internationally exposed branches. Let us turn to the other economy. Certain processes of change in the Italian economy du ring the sixties and early seventies provide the background for our research, wh ich began with investigations of that time period 2 . As regards the seventies and the eighties, certain stylized facts emerge (with strong supporting evidence) which can be condensed around the following themes: Dualism lost its traditional geographical features (North/Centre versus South). On the other hand, dualism was shown to be, not a distortion but the shape itself of Italian development. Thus, the mobility of the borders of Italian dualism became evident. The dramatic change in the economic performance of sectors usually denominated "traditional" or "backward" was revealed by a variety of productivity indices. This fact calls for aredefinition of well-established categories of industrial analysis. Regional and/or sectoral strong diversifications emerged: an increased drive towards flexibility (due to general economic conditions) determined investment behaviour. There may have been an interruption (or at least the crisis) in the compact pattern of accumulation of postwar development, with aredefinition of the role of (gross) investment relative to general innovative behaviour. On the whole, increased systemic heterogeneity appears to be the chief, and perhaps most startling, feature of the mobilized economic panorama Cf. Beirat (988). 2

See e.g. Cipolletta (986), Amendola/Baratta (1978).

Detecting Structural Change

349

which Haly exhibited at the beginning of the seventies, Le. at the onset of the first oil crisis. In the following two decades this shock and those that followed combined with different socio-economic forces endogenous to the Italian economy. A similar story can be told for Austria, though the forces at work are different. Finally, if we look back over this time span from its temporary end (987), we note the relevance of a fourth issue: what are the long-term tendencies in these economic structures? Each of the above stylized facts has simultaneously three dimensions: geographical, sectoral and temporal. In order to handle these various dimensions, a properly manipulated input-output framework seems the most promising tool, and international comparative analysis may provide a broad perspective.

2. Preliminaries Before giving detailed description of our approach (and an outline of its results), some general points need making. First, we choose to consider structural change as a phenomenon pertaining to the evolution of the productive industrial structure of an economy, Le. as a qualitative alteration in the activity of producing the economy's basket of goods (as weil as the latter's composition). In describing this production structure we use an input-output format where "commodities" are produced by generalized sectors called "industries" wh ich are interrelated among themselves via a multiple exchange relation of intermediate goods. In the literature, this multidimensional relation is described by the matrix of input coefficients (or else by the pair of make-absorption matrices in a more sophisticated way). We accept the input-output notion of specialized sectors (and of a finite number of them, equal to the number of final commodities). However, in order to obtain a description of "change", we examine, not the input matrix coefficients, but the column of final demand (specifically its gross investment component) and the row of value added. We try to obtain information about the time evolution of the structure of the chosen system by comparing the (properties of) dated columns of final demand with the (properties of likewise dated) rows of value added. In contrast to traditional input-output methodology, we look at a set of dated matrices of input-output (physical) coefficients. In a dynamic model, the time series of final demand and of value added are treated as impulse functions in an adjustment process. This will also be our viewpoint (and will justify our terminology). The narrowing of focus on an economic system to its production structure raises the following issue. Traditionally, the evolution of a production

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Bernhard Böhm and Lionello F. Punzo

structure is evaluated against some criterion of progress, which may be revealed by some measure of Cclosely physical) productivity. While not denying the Cobvious) value of this way of addressing the problem, we wish, however, to stress that the phenomenon of structural change does not exhaust itself in this. There is a qualitative aspect to the problem that cannot be handled by traditional means and which calls for a new approach. In recent years, the mathematical theory of dynamic systems has developed the tools with which to handle broad, qualitative issues. It is natural that we should turn to such theory Ca nd its implicit jargon), beginning with the notion of "robustness". We can now shift our attention to more traditi on al notions of economic debate.

3. Two Viewpoints on Technical Change and Accumulation In the traditional view of technical progress, investment is the "cause", or driving force, of changes in (labour) productivity. On the other hand, from the innovative viewpoint of the neo-Schumpeterian school, it is the change in productivity that accompanies (jf not "causes") a change in the investment pattern. The functional dependence of the latter on the former is due to the fact that a cost pressure induces certain kinds of innovative investment CLe. those designed to restructure the production scheme). When examining the two views, it seems that there is something hidden behind both profiles of the process of change. When we cannot distinguish the "cause" from the "result", we have to abandon the causal one-dimensional model for a two-dimensional one wh ich allows for reciprocal causation. The formal treatment we shall introduce here is one way Cperhaps a very simple one) in wh ich such a translation between the two explanatory models can be realized. In this paper we apply an approach that is different from, though co mplementary to, more traditional ones 3 . We inspect a set of data which reflect "impulse structures" as defined above, and their reciprocal relations, on the assumption that the dynamic interaction among different impulse processes and characteristics will in principle alter the system's response behaviour and thus, for all practical purposes, alter its inner structure. Our choice of impulses comprises investment, value added, and employment da ta at various levels of disaggregation. Simple exercises in comparison among the properties of their time series for 1970-1987 yields a manifold of "typical cases". Most of these cases can be classified according to wellknown (classicalor neoclassical) criteria; the "residual set" is the real target of our approach, since it seems to defy interpretation within established theories. It is our contention that without understanding this set of "dyna3

For a critical view, see Goodwin/Punzo (987) and Punzo (985).

Detecting Structural Change

351

mic states", there can be no insight into systemic behaviours. We specify the naturally corresponding notion of structural change and test some common theses, such as those which maintain that the economic developme nt of the last twenty years has been driven by the twofold objective of increased flexibility and a more even diffusion pattern of industrialization. Our choice of data was not simply dictated by the fact that, in input-output analysis, investment, value added and employment are conventionally treated as impulses, since these series of da ta are used in the literature to support (or criticize) basic tenets of standard theory. We will focus on the dynamic process of change rather than on onestroke changes, as is often in the case with adjustments to individual shocks. We shall try to bring out the qualitative features of this dynamic process. The choice of rates of change as our variable therefore seems a natural one. The static nature of the standard macroeconomic model is mirrored in the fact that its variables are point values or levels (of inputs, of outputs, of final demand). Dynamic models work instead with rates of changes. The setting thus becomes one of growth dynamics (and of a growth business cyde, in its medium or short-term version). We need not restrict our description to two- or at most three-dimensional settings. Dimension will be determined by the degree of disaggregation that is considered appropriate. On the other hand, at the preliminary stage where we try simply to interpret raw data, we can postpone dealing with the mathematical and conceptual difficulties involved in modelling an underlying structure. At least at this stage, the purpose of our exercise is fundamentally heuristic, its limitation being to so me extent justified by the fact that, by assumption, we are working with an unknown underlying structure. This is, however, often the case in practice.

4. The Terminology and Data of the "Model" A "system" is the chosen unit of description (which in our case will be, in turn, Italy, Austria, North and South Haly, the steel industry in one of the regions, etc.); "date t" is a time reference unit based upon a conventionally chosen calendar. There can be different "calendars" as weil as many different systems, one sometimes being induded in the other or obtained via distinct partitions/aggregations of the same number of members of a given set. (They will be called "countries", "sectors".) Accordingly, at a given date t, the state of the system is a point in a kdimensional manifold endowed with axes named after growth rates. In the aggregate models in dimension no greater than 2, dynamic behaviour is analysed as it is determined by a given constellation of parameter values and functional forms. Sometimes, a crucial parameter is selected and sensitivity analysis of qualitative behaviour carried out, but parameter behaviour

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is exogenous. Since its dynamics are not embodied in the model, this bifurcational approach does not attempt to the endogenous dynamics of change. Structural change is not exhibited, even when it takes place. To represent the structure of a given system at a given date in order to emphasize the direction of its time evolution, one can make use of a (vector 00 growth rates. The cardinality of the vector k can be anything, and the larger the betteL However, the longer the coordinate-vector for each state, the greater will be the level of complication in handling several states. We reproduce the "simplicity" but also the c1arity of traditional aggregative macromodels if we associate vectors of dimension k = 2 with each system state. We shall name the two axes in our state manifold after the rate of growth of value added per capita: v = d(VA/E)dt • E/VA, (the horizontal axis) and the rate of growth of investment per capita i = d(I/E)/dt • Eil, Ühe vertical axis) where E stands for the level of employment in the chosen system at the given date. Each axis therefore condenses two dimensions. Our choice of variables is supported by the following argument. The pace of capital accumulation can only be monitored through the time se ries of two flows, namely I and VA, and their properties, for instance the respective rates of growth. Given the difficulties in evaluating re pI aceme nt investment, it is practically impossible to obtain figures for net investment, and one therefore has to work with gross investment. For the same (and other reasons) a measure of capital stock is itself largely guesswork. One can work better with the notion of investment per unit employed, wh ich is also the relevant one in the analysis of embodied technical progress. On the other hand, the pace of productivity change can be monitored by the rate of change of value added per employed. Take the vertical axis. This is areal line, where real numbers represent (possible and/or realized) values of i. At i = 0, we have steady state dynamic behaviour with time-invariant investment/employment ratios, just as in a Harrodian model. All constant I/E paths will pile up in i = O. Harrod's own steady state path will also belong to it, provided also K!E remains constant. This can only be the ca se here if gross and net investment coincide, wirh, therefore, no replacement investment. Otherwise, all paths in the Harrod set are characterized by varying K!E ratios, with constant I/E. Again this seems adequate for analysis of embodied technical progress. Since, at each point along the i-axis to the right of the Harrodian set, the rate of growth of investment per capita is positive and the level of investment (per capita) is increasing, we have a "continuing process of capital deepening". The i-axis is the axis of technical progress (regress) which plays a central role in the theory of technical change. In this theory, technical progress is essentially linked with the embodiment of the latest technology in the most recent machinery. Increases in productivity (as a measure of the rate of

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embodiment of exogenous technological advances in the economy) are associated with sustained capital accumulation. A faster pace of capital accumulation would imply a faster rate of absorption of new technologies, and therefore a faster pace of productivity increase. Therefore we must expect a positive (negative) correlation between the process of increasing investment intensity and (the process of) productivity increase. Investment time series, rather than capital stock time series, is relevant here. Take now the axis of the variable v. At any point to the right of the origin of the axis, value added grows steadily at a positive rate; to the left, it decreases steadily. We have a productivity growth process, since unit costs are being continuously reduced (given sale prices) through process innovation; and/or, at possibly constant unit costs, (relative) sale prices keep increasing as a result of product innovation. In contrast to technical progress analysis, there is no clear cut, unique expected weak causal relation between innovations and investment behaviour. In recent literature favouring a neoSchumpeterian viewpoint, "causaI" arguments have been abandoned. This seems justified if the v-axis is referred to as the innovation axis. 5. AState Space Framework Usually, only one of the axes des~ribed above is exploited, depending upon the theory preferred4 . We put the two axes together. In the two-dimensional space enclosed by the axes of innovation and technological progress, astate is a path characterized by two velocities: a rate of change On the direction) of productivity and a rate of change (in the direction) of investment per capita. In traditional analysis of embodied technical change the system's behaviour is unidimensionally represented by a single variable i (or better, 1), and described as a unidirectional process from lower to higher capital intensities. Symmetrically, this is also the extremist position taken by neo-Schumpeterian analysis based on the independent notion of innovation where only the v-axis is exploited. Because it is indexed by two coordinates instead of one, we can claim that in our framework information on the system state is structural in nature: for lack of access to "inside" information, the rates of change (of growth) exhibit or rather monitor the endogenous capabilities of a given system undergoing qualitative change. Any state with at least one non-zero cOdrdinate cannot "stay put" as it undergoes a progress of change in some direction over the time span selected. The origin of the set of two axes is the unique state that, if ever occupied and never disturbed, would not change in any direction for endoge4 See Camagni/Cappellin (1984); Camagni/Malfi (1986); Calcagnini (1986); Heimler/Milana (1984); Cipolletta (1986).

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nous causes. It is knife-edged, like Harrod's own path. A system with all coordinates along the v-axis will undergo only innovation processes, where previously non-existent production functions appear s. Likewise, a system whose preferred direction is along (or sufficiently dose to) the i-axis will behave "traditionally", Le. it will move along a given production function or shift between known production functions. As a general principle, it is hard to find a system that keeps to one axis for any relevant time span: the actual dynamics will be a varying mixture of movements along the two axes, with changing weights for the two co ordinate components. "Equilibria" are, likewise, also rarely observed. As said, the origin of the set ofaxes corresponds in this context to the steady state or balanced growth path of Harrod/von Neumann. Growth paths differing by the values of their index of investment intensities will all be mapped into the origin of the v-i axes, because once the system is on a given path it will not alter its course, as monitored by its parameter I/E. The essential characteristics of the origin of the dynamic manifold is that 0 = v = L The traditional steady state is interpreted as reflecting the absence of both innovative activity and of changes in investment intensity. In the v-i axes, it is natural to generalize this notion to the 45-degree line through the first and third quadrants where v = i is preserved. Thus a steady state is a situation where innovative and traditional behaviours compensate each other: i = v. Note that a traditional steady state is an equilibrium, and vice versa. This is no longer necessarily true in the present framework, the two notions being logically distinct. It is in fact appropriate to define equilibria over a time span between two dates (t, t + z) as those states (paths) such that

Kt, t + z) - v(t, t + z)

=

constant

where i C.) is the average of the rates of growth for investment per capita between period t and t + z, and z is a non-zero integer. This definition emphasizes the repetitiveness of the system's dynamic behaviour. Thus a steady state is not necessarily an equilibrium: steady states refer to the Propriety of certain system proportions (between traditional and innovative patterns) at a given date. Hence we require i(t) - v(t)

=

0

which is obviously a particular ca se of the former. A steady state can be an equilibrium only it if lasts for some period z > O. An equilibrium need not be a steady state. Given a time interval [t, t + zl, a given system is either in equilibrium or it is moving from one state to another (something like a traverse in dynamic terms). Either state would be an equilibrium, should it 5

Cf. Nelson/Winter (1982); Amendola/Gaffard (1988).

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persist: the initial one is dearly no longer such astate, the final one will reveal its nature only on consideration of the time span beginning at (t + z + 1).

Even simple inspection of our data shows that equilibria are "rare"; systems are normally seen to be moving from one path to another (an old Harrodian idea of instability).

6. Development Patterns and Structural Change With reference to the coordinate axes and the steady state line, we can introduce a taxonomy in the state space (hereafter R2). Exduding the origin of the axes, we have four quadrants that come in pairs. The pair (A, A') is characterized by the fact that the signs of both variables are the same; by contrast, in regions Band B' a plus is paired with a minus (and vice versa). We shall call A' and B' the polar regions of A and B respectively. The pair (A, A') is the pair of growth and contraction respectively; the pair (B, B') is the pair of development (and of its opposite, for which we have no better name). The qualitative difference between the two pairs is that one cannot stay (for a historically significant period) "forever" in the states in the development pair, while it can grow or contract for a long time span. For this reason, traditional long-run analysis confined itself to states in (A, A'). Geometrically, the origin does not belong properly to either of the two pairs. However, if interpreted as the zoomed-in Harrodian set, it falls into (A, A'). Regime is defined by using the notion of steady state already introduced. Earlier, a steady state was a kind of generalized Harrodian path. We have pointed out that, as a one-dimensional submanifold while k = 2, dynamic behaviour along the steady state as preferred direction can only be considered to be reference behaviour of theoretical interest. In practical terms, a system can be sufficiently dose to it for some dates. Thus it is natural to consider the steady state behaviour as a corridor: a band around it that is not practically distinguishable from its mid-path. The steady state corridor goes through A and A', as described in the literature. Inside the corridor the two tendencies towards traditional and innovative behaviours compensate each other at least approximately. We shall call systems whose "equilibrium behaviour" is in the corridor, mature systems. As a consequence of the above observations, mature systems are rare. The steady state corridor induces a partition in areas above and below it characterized by the fact that Ci - v) is larger or smaller than zero, respectively. Moreover, it cuts the A, A' pair in two. We use these two properties to introduce a partition into regimes. A regime is a partition of the state space

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(i.e. a connected set of states) induced by a certain property. (It relies therefore on the notion of equivalence of some sort.) We distinguish six regimes, in addition to the steady state corridor and the unique Harrodian set (which have been c1assified as belonging to a bifurcation set). The partition is induced by the two properties: compensation between i and v, and negative/positive. Regimes I and IV (regimes VI and III) are the mirror image of each other; and they likewise mirror each other in the development pair. With each regime we associate one and only one "model" of the system's dynamic behaviour. The analysis of embodied technical progress channelled by capital accumulation has been restricted to (or at least privileged) the two regimes VI and III. Analysis of innovation has' focused on regimes I and IV. Typically, they have left aside analysis of regimes 11 and V, the long-term perspective. As a consequence, adopting the technical progress viewpoint, we obtain a poor definition based upon the distinction of industries between traditional and modern, the former in I, the latter in VI. This contrasts with the definition implied by the competing innovative viewpoint: modern ("innovative") sectors would belong to the I regime; traditional ones to the IV regime. Neither of them considers regimes 11 or V, although they appear empirically relevant. Naturally, structural change (as a change of model) is monitored as a change of regime: geometrically, as a "jump" from one to another of the six canonical regions, plus the two rare states. A development pattern is a set of states that may or may not be described by the same model. Thus it is a general notion, since it may or may not entail structural change. Given a system, by plotting its states at different dates we obtain its dynamic evolution. Given a date, by plotting different states associated with distinct systems (taking advantage of the common numerical scale) we obtain a horizontal analysis of diversifications among sectors. Given a date, we can plot countries against each other and obtain geographical differentiation. We can make use of three coordinate variable n for countries, k for sector, and t for calendar date - to obtain the degree and the perspective of analysis we desire. We turn finally to illustration of some empirical results.

7. Overall Development Patterns of Italy and Austria In the practical implementation of the methodological approach outlined above, we choose to represent average growth rates of investment intensity (i) and labour productivity (v) on the two axes of a two-dimensional

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diagram. We take a "date" to be a time interval (or "subperiod"): there will be four dates. For each of the four subperiods, simple arithmetical means of the annual growth rates are computed and represented by a point in the 0, v) plane. Our selection of subperiods isbased on the overall economic deve1opment of Austria and Italy as measured by the growth rate of real GDP. Starting from 1970 the first subperiod extends until 1974, the first year to experience the increase in oil prices and a problematic one for economic policy in view of the impending inflation which materialized in the second subperiod 1974 to 1980. Including the crisis year of 1975 and the experience of different types of political management of the national economies, this period is characterized by heterogeneous growth, as revealed by the corresponding behaviours of the GDP growth rates. 1980 to 1984 marks a recession period which, world-wide, ended in 1984 and in which only special (tax) policy effects prevented Austria from joining the upward trend in growth. The final period considered is from 1984 until the last period for which data are available (1987). This subperiod can be regarded as a time of recovery. As the basic set of data for Austria and Italy is somewhat heterogeneous, we refer the reader to the appendix for all necessary details. During the first two subperiods, Austria shows a cluster around the steady state corridor. Exceptions are energy production (4), basic metals (37) and, possibly, mining (2). In the early eighties, most sectors reduced investment/employment and maintained small productivity increases. The exception here is the paper industry (34) with anticyclical investment deepening at the highest average productivity growth. The mid-eighties saw Austria's major industrial sectors engaged in revived investment activitiesj the traditional sectors of food production and construction followed a steady state expansion. After the overall investment slump during the recession years of the early eighties and the rise in unemployment soon after, accompanied by attempts to restructure the nationalized industries, Austria entered a phase of strong investment with the emphasis on rationalization. Thus, over the whole period, Austria, on average, moved from a more steady state-like movement through a phase of restructuring into the rather traditional regime of increased dependence on known technology. Observing that rates of productivity increases have not changed much, with the consequence that the overall picture of deve10pment patterns is dominated by movements along the investment growth axis, we may well conclude that innovative activities have been rather moderate on the whole. Similarly, flexibility does not see m to predominate, since reactions to inflation in the seventies or to the slump of the early eighties only concentrated on variation in the pace of investment. Traditional branches also show the traditional movement in the neighbourhood of the steady state corridor. With only the textiles industry showing major changes in invest-

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me nt rates (in the first and last subperiod), it is evident that character and attitudes in those branches have changed very little. In the seventies the Italian economy showed itself to be, on average, an expansionary restructuring economy. The problem sectors were basic metals (13) and energy production (06). The latter began a motion of decreasing productivity with the onset of the oil crisis, the former moved from a situation in the early seventies of high investment growth in the opposite direction for the subsequent decade. For Italy, the early eighties were dominated by a regime of restructuring with higher productivity growth than Austria on average. This was followed by expansion along the steady state path with some sectors involved in accelerated capital deepening. In comparing the two countries we may note that Austria was, overall, the more "protected" of them, especially during the seventies. In the early eighties both countries behaved similarly, but Austria's restructuring started rather late. The Austro-Keynesian policy approach stabilized the structure by substituting for deficiencies of private demand, particularly in aperiod when larger changes in structure were called for Ce.g. in the post oil-crisis years). The crisis in this policy began in the eighties when budget limitations became stringent and restructuring could not be postponed any longer. This gave rise to massive lay-offs, in the state-owned industries too, and raised issues of privatization wh ich play a major role today. Thus, on the whole, it seems that short-term policies have inhibited structural change from adjusting to exogenous shocks. Italy seems to be, perhaps, the better balanced country as a result of its inability to protect the economy against such shocks. The consequences for the development of both economies in relation to a larger Europe seem obvious and will not be elaborated here. We shall finally look at the distinct development of the North and the South of Italy. The Italian structure diversified dramatically and underwent a long period of shock adjustments. The behaviour of the North/Centre in many ways mirrors that of Italy as a whole. This is a consequence of the large share of the North/Centre in the industrial sectors. The South maintains a scattered structure over all periods. The distance in development between the North and the South has increased because the North has shown astronger innovative and adjustment capa city compared with the South. This will become c1earer if we look at individual sectors more c1osely. The South shares with Austria in the seventies a freeze in its structure. However, changes took place in Austria in the eighties that contrast with the Italian South.

8. The Development Patterns of Industrial Sectors The following graphs give a picture of the dynamic behaviour of each sector and also allow comparison of this development across countries.

Detecting Structural Change

359

Brief inspection shows that patterns can be found wh ich resemble those typical of business cyeles. This result reflects the choice of subperiods based on GDP cyelic features. Industrial sectors can be discussed in the order of their contribution to total value added (in real terms):there is a rough similarity here between the two countries. The main contribution among the industrial sectors comes from metal production and machinery, followed by chemical products and food, beverages and tobacco. The construction sector and energy production is considered next. Finally, the remaining industrial sectors will be reviewed. Regarding the graphs for metal and machinery production (24), one observes that Italy (dominated by deve10pments in the North/Centre regions) was in an expansionary restructuring stage in the seventies and finally moved to a steady state situation after a phase with slower capital accumulation. By contrast, Austria started with rather traditional development elose to the steady state corridor in the first two subperiods and moved into a restructing phase in the early eighties. The Austrian mideighties are characterized by a dramatic increase in the investment per capita growth rate attended by an almost unchanged productivity growth rate. Thus increases in investment intensity in this sector, which also incorporates means of transport, tend to imply purchases of new technology, especially for the increasingly important branch of suppliers to the automobile industry. Inspection of sector 28 (vehieles) of the Italian economy, which is available in a separate evaluation, indicates that this also happened in Italy du ring this period. Hence, considering the commodity composition, the pattern of development in both countries seems to be fairly similar. Both found themse1ves near the steady state early on and began a process of an increased deepening of investment towards the end of our period. Both underwent temporary restructuring with maintained productivity growth, therefore supporting the hypothesis that they are among the innovative branches. They te nd towards the role of mature sectors. When considering the Italian divide between North/Centre and South one observes striking differences. The South remained in a situation of decreasing investment rates but kept up productivity growth, while the North/Centre - with one exceptio na I period - remained in an expansionary restructuring movement. In vehieles production, the South even shows a phase, during the second half of the eighties, of deepening investment with decreasing productivity - certainly a critical phase, therefore. The North/Centre on the other hand mirrored the above-mentioned development of Italy as a whole and provided the larger share in the regional distribution of Italy in this sector. The sector of the chemical and pharmaceutical industries (17) is dominated by large and extreme movements. The South of Italy, in particular,

360

Bernhard Böhm and Lionello F. Punzo

shows extreme shifts between "regimes". Moderately increasing investment and relatively large productivity rates in the early seventies were followed by a sharp fall in investment intensity with few consequences for productivity growth. In the early eighties investment intensity remained almost unchanged with productivity growth of some 20% which later fell to almost zero with a 10% increase in real investment. Development in the North and Centre was somewhat steadier during the seventies: increases in productivity growth accompanied by slightly falling investment rates. The eighties show dece1erating productivity growth with acce1erating capital deepening. The deve10pment of Italy as a whole follows the North/Centre pattern, except for subperiod 2, where the large negative growth rate of investment of the South exerts its influence. A high volatility of investment intensity growth characterizes the development of the Austrian chemical industries. Productivity growth rates remain moderate and quite similar throughout. One observes exceptionally high investment growth in the last subperiod. This may indicate the influence of environmental factors or even the need for increased investment effort in an industry which, for most of the past, must be considered a centre of innovative activity. Our evidence points in the direction of the embodiment hypothesis rather than towards innovative behaviour. The food, beverages, and tobacco industries (36) might be regarded as rather traditional. This impression is to some extent supported by the graph of its structural development. Except for the South of Italy, movements tend to be in the neighbourhood of the steady-state corridor. All countries show a temporary mild restructuring phase after the oil shock. The South, however, moves between processes of strongly increasing and decreasing (or stagnant) investment rates. Changes in productivity growth are generally more pronounced in Italy than in Austria. Having discussed the results for the major industrial sectors, we now turn to the construction sector and energy production. The development pattern for construction (53) follows a relatively dear line, which could be regarded as approximating an almost linear technical progress function. Movements along this line over the business cyde affect both countries alike, since each underwent some restructuring in the early eighties and moved back to steady state later. The energy production sector (which in Austria also indudes water supply) may typically be characterized as one where large investment projects with long duration are the rule rather than the exception. From this point of view, it should be no surprise to encounter phases of high investment growth coupled with decreasing output or productivity. Inspection of the graph yields a bewildering variety of process states. A common feature may be discerned in subperiod 3 (the early eighties) where decreasing productivity rates were linked with positive investment growth rates, though not very high ones. For Italy, this situation had already occurred in the late seventies,

Detecting Structural Change

361

but to a different extent in the North/Centre (with large investment rates) and the South (with large negative ones). Quite the opposite situation existed in the early seventies. In Austria a rather critical phase of energy policy began in the early eighties (with cancellation of an atomic power plant and the hydropower plant on the Danube) and energy production was still in a restructuring regime. Finally, we shall rapidly review the results concerning the remaining industrial sectors, which comprise a smaller share of the composition of output. The textiles industry (42) - usually regarded as traditional - has very different features in Italy and in Austria. In the latter country we notice an up and down movement along the investment growth axis with slightly lower productivity growth rates, whereas the Italian case is domina ted by a strong move towards innovation. It is only in the first subperiod that relatively high investment rates are encountered. Since the mid-seventies, both the North and the South have moved into a restructuring phase dominated by productivity growth changes rather than changes in investment. Although the deviations from the steady state corridor are not large which is as it should be for a traditional industry - we note that innovative elements have been at work in Italy for more than a decade. Paper, printing, and publishing (47) underwent a critical phase with the introduction of electronic publishing, on the one hand, and the increasing awareness of environmental issues on the other. The graphs show typical movements for each country, considering the relative share of the components of this sector. In Austria, paper production is dominant, followed by printing. The exceptional investment rates in the early eighties may be explained by the efforts to install pollution-reducing equipment; all other periods show a steady state development. Italy remains dose to the steady state path until the mid-eighties, when - after some restructuring in the South - investment rates picked up, possibly reflecting increased computerization. For sector (50), comprising wood, rubber and other products, one observes heterogeneity across countries inc1uding areas of Italy. The Italian South stepped up investment intensity, largely maintaining its productivity growth. Restructuring in the seventies brought about this drive. The North which dominates the result for Italy overall - started from a path in regime land settled in regime VI after some restructuring during the early eighties. Austria's data only relate to wood processing and indicate some attempts at innovation, especially during the eighties. The two sectors of basic minerals and metals (13, 15) present a similar picture for Austria - investment cydes at slowly decreasing productivity growth rates. Innovative phases in these state-dominated sectors are therefore called for, in particular after the reduction of controlling influence by the government. In Italy, sector (1~) exhibits movements along the steady state corridor wh ich deviate somewhat in the early eighties. The paths fol-

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Bernhard Böhm and Lionello F. Punzo

lowed by the southern regions of Italy, however, indicate same degree of innovative activity. Sector (13), on the contrary, presents movements from a highly capital intensive - low productivity - growth regime (V) in the early seventies towards a decade of restructuring wh ich ended with high investment growth in the North/Centre. This sector is aga in a good example of a forceful dynamic motion out of problematic regimes into phases of maintained productivity growth rates with or without investment deepening.

References Amendola, M. / Baratta, P.: Investimenti industriali e Sviluppo Dualistico, a cura di Svimez - Ass. per 10 sviluppo dell'industria nel mezzogiorno, Milano 1978 Amendola, M. / Gaffard,j.-L.: The Innovative Choice, Oxford 1988 Beirat für Wirtschafts- und Sozialjragen: Wachstumsorientierte Strukturpolitik, Wien 1988 Calcagnini, G.: I Principali Parametri dell'Industria Italiana, in: Struttura Industriale e Politiche Macro-economiche in Italia, Cipolletta 1. ed., Bologna 1986 Camagni, R. / Cappellin, R.: Cambiamento Strutturale e Dinamica della Produttivitil nelle Regioni Europee, in: Cambiamento Technologico e Diffusione Territoriale, R. Camagni, R. Cappellin and G. Garofoli eds., Milano 1984 Camagni, R. / Malfi, L.: Innovazione e Sviluppo nelle Regioni Mature, Milano 1986 Cipolletta, I: Struttura Industriale e Politiche Macro-economiche in Italia, Bologna 1986 Goodwin, R. M. / Punzo, L. F.: The Dynamics of a Capitalist Economy. A Multi-Sectoral Approach, Cambridge/Boulder, Co. 1987 Heimler, A. / Milana, c.: Prezzi Relativi, Ristrutturazione e Produttivitil. Le trasformazioni dell'Industria italiana, Bologna 1984 Hicks,].: Capital and Time, Oxford 1973 Nelson, R. R. / Winter, S. G.: An Evolutionary Theory of Economic Change, Cambridge, Mass. 1982 Punzo, L. F.: Issues in Multisectoral Modelling (Lecture Notes), Institutsarbeit Nr. 224, Institut für Höhere Studien, Wien, February 1985

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Appendix 1. The Data

Since there have been changes in the compilation of data, we have been forced to work with two different sets for Italy, the first of which covers observations from 1970 to 1980 and the second the years from 1980 to 1987. While data on investment and value added were already available in real terms for the latter period, we had to use national deflators for the former one. This fact is not likely to bias the data used in this study as we are concentrating only on two large regions of Italy (the North/Centre and the South) as weIl as Italy as a total. The deflation may, however, somewhat distort data relevant for more disaggregated analysis pursued elsewhere. Italian data for the period 1970 to 1980 are taken from the ISTAT publications "Annuario contabilita nationale" Vol. 2, Tables 1.7 ff for investment, value added and employment data. Figures in constant prices were calculated using deflators for the total economy based on 1980 = 100. For the period 1980 to 1987, all data are obtained from the ISTAT data bank: investment and value added at 1980 constant prices. The deflators for the sectors of the North/Centre and South of Italy (1970-1980) were estimated on the basis of implicit sectoral price deflators from the UN National Accounts for Italy. Data for Austria are from the National Accounts Statistics "Österreichs Volkseinkommen 1988, Tables 6, 6a, 8, and 25" and earlier volumes. Sectoral investment deflators were constructed from deflators according to the type of capital good. Since investment data for the service sectors as weIl as agriculture were not readily accessible, the data set covers only the manufacturing sector, energy production and construction. For Austria there are no regional subaggregates available. The sectoral breakdown does not conform to the Italian one in general. Furthermore, as there are no reliable figures for the investment of service sectors, comparison between the two countries had to be restricted to the ten manufacturing sectors only. Major differences between the c1assification of sectors concern the following: Production of machinery and metal products also inc1udes vehic1es, wh ich are separately covered in Italian sector 28. Mining is inc1uded among the relevant industrial sectors in Italy, although it is aseparate sector in Austria. This seems to be important in the assessment of sector 15 (It) and 36 (Au). Sector 50 of Italy comprises wood processing (to a minor extent) together with rubber and other products, whereas the corresponding Austrian sector (33) only contains wood processing. The relative share of certain products could be substantially different in both countries, reflecting different resources endowment as weIl as diffe-

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Bernhard Böhm and Lionello F. Punzo

rences in tastes. This fact suggests a cautious interpretation of the empirical evidence. 2. The Sectoral Classiftcation

Classijication 0/ the Relevant Sectors (National Income Accounts)

0/ the Austrian National Economy

3 total manufacturing 31 food, beverages, tobacco 32 textiles and leather 33 wood processing 34 paper, printing, publishing 35 chemical industries 36 production of stone- and glassware 37 basic metal industry 38 metal processing 4 energy and water suppply 5 construction

Sectoral Classijication 01 06 13 15 17 24 28 36 42 47 50 53 58 60 69 74 86

0/ the Italian Economy

agriculture, forestry, fishing energy supply basic metal industries non-metal mineral products chemicals and pharmaceuticals metal products and machines vehicles food, beverages, tobacco production textiles, leather, furs, shoes paper, printing, publishing wood, rubber, and other industrial products construction trade, hotels transport and communication finance and insurance other marketable services non-marketable services

The Italian sector numbers are used in all graphs containing both countries. Far purposes of comparison, we list the sector numbers which may be considered to be roughly equivalent: Austria 31 32 33 34 35 36 37 38

Italy 36 42 50 47 17

5

53

4

15

13 24 06

365

Detecting Structural Change

Figure 1

Real GDP Growth co ~

0

1\ 1 \

lD

~

0

/

I

~

0

Italy

\

I

/

N

~

I \

I

"OS=O for m > C then (6) becomes (8)

In (8) r increases as m increases, diminishes as C increases, and increases as Tk diminishes. The use of the functional form proposed here immediate1y reveals the effects of various kinds of innovation with respect to constraints due to scarce resources. Specifically, the introduction of technical progress which increases productivity per unit of time without increasing regeneration costs (for example, using technologies able to process small-diameter wood) increases the interest rate which remunerates the invested capital while respecting the principle of intergenerational equity. However, respect for this principle me ans that such remuneration is only a share of the productivity increase due to technical progress. One mayaiso state that this share decreases as the quantities of technical progress employed increase. It is also possible to find an indicator of stability in the domain of interest rate variation corresponding to the optimal rotation such that any increase in it also increases the stability of the system, and its decrease renders the system more fragile. It goes without saying that these indicators can be used for comparison among alternative scenarios by altering the various elements that make up the production function considered. At the same time it is possible to hypothesise balanced changes in the various factors such as to keep the overall system constantly stable.

v. The use of alternative functional forms has often been neglected in economic research. Differentiable functional forms are usually preferred, and the choice among the various alternatives is based on analysis of goodness 9 As we have already seen, the variables eonsidered are not invariant with respeet to their order of magnitude. Therefore all eomparisons should be made in real terms.

Innovations Constrained by Scarce Resources

381

of fit wh ich underestimates their coherence with specific theories. This paper has shown that the use of a functional form wh ich presupposes the existence of a limiting factor gives interesting insights into the effect of innovations. These first results indicate that further study along these lines would prove fruitful.

References AA. W., Nuove metodologie nella elaborazione dei piani di assestamento dei bosehi, I.S.A.A., Bologna 1985

Akello-Oguto, C. / Paris, Q. / Williams, W.: Testing a von Liebig Crop Response Punetion against Polynomial Specifieation, in: American Journal of Agricultural Eeonomies, 67, 1985, pp. 873-880 Bowes, M. D. / Krutilla, j. v.: Multiple Use Management of Publie Forestland, in: Handbook of Natural Resourees and Energy Eeonomics, A. V. Knees and J. L. Sweeney eds., Vol. II, Amsterdam 1985

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List of Speakers Alberto Quadrio Curzio, Milano Alessandro Foti, Milano Bernhard Böhm, Wien Fausta Pellizzari, Milano Ferdinando Meacci, Padova Ferdinando Targetti, Trento Francesco Pigliaru, Cagliari Frank Englmann, Stuttgart Geremia Gios, Trento Gerhard Clemenz, Wien Gerhard Schwödiauer, Bielefeld Gilberto Antonelli, Verona Giovanni Pegoretti, Trento Harald Hagemann, Hohenheim Kurt Hornschild, Berlin Lionello F. Punzo, Siena Lothar Scholz, München Luisa Segnana, Trento Luitpold Uhlmann, München Onorio Clauser, Trento Paolo Piacentini, Roma Paolo Pini, Milano Patrizio Bianchi, Bologna Peter Kalmbach, Bremen Raffaele Paci, Cagliari Riccardo Leoni, Trieste Roberta Raffaelli, Trento Werner Clement, Wien Wilhelmine Goldmann, Wien