SOCI 235 Lecture Notes - Lecture 5: Kodak, Xerography, Creative Destruction
8 Jun 2018
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SOCI 235 – Technology and Society
Generation of New Technology 1.0: Risk, cost, destruction and organization of R&D– Sept 18th
Innovation
• Innovation; requires ideas and involves costs
• Two types of costs:
o Time of the inventor(s)
o Capital costs – materials for prototypes, experiments, etc.
• Need to have a set of incentives and resources
Competitive markets are conducive to innovation
• They provide an incentive to innovate
• But if an innovation diffuses rapidly the person or firm that generated the innovation
may not profit much from the innovation, that lack of profit would reduce the incentive
to incur the costs of innovation
• Competitive markets also provide a problem → the solution = patents
Intellectual property rights – patents, copyright, and trademarks – serve to protect
investments in innovation – to ensure that the return are large enough to provide an incentive
to incur the costs of innovating
How can innovation be funded?
• Firms may find innovation out of profits/revenues
• Collaboration (firms fund innovations together)
• Venture capitalists or venture capital firms might provide the resources
• Governments might fund innovation through their own research laboratories, through
university research, through contracts with innovating firms or through favourable tax
treatment of innovation expenses
Incentives to spend on innovation for individual firms, groups of firms, or venture capitalists
most obviously come from markets within particular industries
The more the competition, the more the innovation
• Ex. Prices of chemicals fell much more rapidly than industrial prices in general
o Germany – end of 19th century, important industrial nation – particularly
excelled in organic chemicals
o Small number of large producers in each segment of the industry
o The price of basic chemicals declined rapidly, this was because innovations
reduced costs and cost reductions were turned into lower prices to consumers
o Price falls corresponds to an enormous increase in productivity in an industry
where there was limited competition
▪ Considerable product differentiation
▪ Small number of large producers, which had significant monopoly power
o Absence of a market provided spectacular productivity growth
find more resources at oneclass.com
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o Incentives to innovate: if there was a monopoly, why did prices fall?
▪ 1. The threat of substitutes, other producers could create a similar
product for less that had the same effect
▪ 2. Danger of profits: harder for firms to make a new entrance in the
industry
• Monopoly power is consistent with innovation – chemical
industry at the time illustrates this
o Prices were higher than they would have been in a competitive market, but
there was still a strong enough incentive to innovate – said innovation resulted
in falling prices and productivity growth
Risk, cost and the gale of created destruction
Joseph Schumpeter – argued that not only is innovation and productivity growth consistent
with monopoly but, monopoly was necessary to important innovation
• Distinguished 2 kinds of innovation and technological change
o 1. Adaptive – means making small changes in production process and at the
margin so you get incremental improvements in the overall process
▪ represents sequential modifications to technology
▪ you want conditions that raise adaptive change – eause thats hat
really matters
o 2. Qualitative and discontinuous change matters most– you can make small
iproeets to desig, ut it ot hage thigs if you itrodue a oplete
railroad system
▪ Examples: a new good, a wholly new method of production, opening of a
new market, discovery of new materials, etc.
▪ Requires large resources
▪ Development of railroad systems transformed transportation, the
alternative before was transportation by rivers, the sea, etc.
▪ Qualitative and discontinuous changes have effects that may reduce the
likelihood that firms risk it, it unleashes a gale of reated destrutio
• In order to provide buffering, investment firms require:
o 1. Substantial resources – i.e. monopoly power, large firms to provide resources
to support research and to exploit economies of scale in research
o 2. Something that makes risk taking possible for the entrepreneur, monopoly
power to reduce risk
Adaptive vs. qualitative and discontinuous innovation considered
Schumpeter argues:
1. Qualitative and discontinuous innovation is the most important
2. It requires that firms be large, in order to cover the cost and have monopoly power, so
that they a oth ride out the gale of reatie destrutio that is the ai feature of
qualitative and discontinuous change and have large enough revenues to survive
investments in R&D that do not lead to useful innovations
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Generation of new technology 1. 0: risk, cost, destruction and organization of r&d sept 18th. Innovation; requires ideas and involves costs: two types of costs, time of the inventor(s, capital costs materials for prototypes, experiments, etc, need to have a set of incentives and resources. Intellectual property rights patents, copyright, and trademarks serve to protect investments in innovation to ensure that the return are large enough to provide an incentive to incur the costs of innovating. Incentives to spend on innovation for individual firms, groups of firms, or venture capitalists most obviously come from markets within particular industries. The more the competition, the more the innovation: ex. Incentives to innovate: if there was a monopoly, why did prices fall: 1. The threat of substitutes, other producers could create a similar product for less that had the same effect: 2. Risk, cost and the gale of created destruction.
