THE ECONOMICS OF PERSISTENT INNOVATION: AN EVOLUTIONARY VIEW

Economics of Science, Technology and Innovation VOLUME 31

Series Editors Cristiano Antonelli, University of Torino, Italy Bo Carlsson, Case Western Reserve University, U.S.A.

Editorial Board: Steven Klepper, Carnegie Mellon University, U.S.A. Richard Langlois, University of Connecticut, U.S.A. J.S. Metcalfe, University of Manchester, U.K. David Mowery, University of California, Berkeley, U.S.A. Pascal Petit, CEPREMAP, France Luc Soete, Maastricht University, The Netherlands

The titles published in this series are listed at the end of this volume. Economics of Science, Technology and Innovation

THE ECONOMICS OF PERSISTENT INNOVATION: AN EVOLUTIONARY VIEW

edited by

William R. Latham University of Delaware

and

Christian Le Bas Institut des Sciences de l'Homme

Springer

Library of Congress Control Number: 2005933467 ISBN-10:0-387-28872-4 e-ISBN 0-387-29245-4 ISBN-13:978-0387-28872-7

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CONTENTS

List of Figures ......................................................................................................................... vii

List of Tables ............................................................................................................................ ix

List of Contributors ............................................................................................................... xiii

PREFACE AND ACKNOWLEDGEMENTS By Christian Le Bas ............................................................................................................. xv

INTRODUCTION By William Latham and Christian Le Bas ......................................................................... xix

CHAPTER 1. PERSISTENCE IN INNOVATION: DEFINITIONS AND CURRENT DEVELOPMENT OF THE FIELD

By Christian Le Bas and William Latham .............................................................................. 1

CHAPTER 2. DETERMINANTS OF PERSISTENCE IN INNOVATION: A STUDY OF FRENCH PATENTING.

By Alexandre Cabagnols, Claudine Gay and Christian Le Bas ......................................... 19

CHAPTER 3. FACTORS OF ENTRY AND PERSISTENCE IN INNOVATION: A COMPETENCE-BASED APPROACH

By Alexandre Cabagnols ...................................................................................................... 41

CHAPTER 4. CHARACTERISTICS OF PERSISTENT INVENTORS AS REVEALED IN PATENT DATA

By William Latham, Christian Le Bas and Karim Touach ................................................. 101

CHAPTER 5. COMPARING INNOVATIVE PERSISTENCE ACROSS COUNTRIES" A COX-MODEL OF PATENTING IN THE UK AND FRANCE

By Alexandre Cabagnols .................................................................................................... 119

CHAPTER 6. PERSISTENT ADOPTION OF TIME-SAVING PROCESS INNOVATIONS

By Nilotpal Das and James G. Mulligan ........................................................................... 167

CHAPTER 7. TOWARDS AN EVOLUTIONARY THEORY OF PERSISTENCE IN INNOVATION

By Christian Le Bas and William Latham .......................................................................... 209

CHAPTER 8. PRINCIPAL FINDINGS, POLICY IMPLICATIONS AND RESEARCH AGENDA ............................................................................................................................... 233

By Christian Le Bas and William Latham

INDEX ...................................................................................................................... 245

LIST OF FIGURES

CHAPTER 1 Figure 1. Firm Innovative Behavior in Two Periods: Four Cases .............................. 2 Figure 2. Firm Innovative Behavior in Two Periods in Technological Field j: Four Cases ........................................................................................................................... 4

CHAPTER 2 Figure 1. Kaplan-Meier survival estimates .............................................................. 28 Figure 2. Kaplan-Meier survival estimates, by nbvdp ............................................. 29

CHAPTER 3 Figure 1: Illustration of the inter-industrial heterogeneity of opportunity conditions and competences ....................................................................................................... 55

CHAPTER 7 Figure 1 : The determinants of firm competitive performance .............................. 216 Figure 2. Illustration of Equilibria with Weak Learning in Innovative Activities. 223 Figure 3. Illustration of Equilibria with Strong Learning in Innovative Activities. 224

LIST OF TABLES

CHAPTER 2 Table 1. Distribution of patenting spell lengths and maximum spell lengths by firm for 3347 firms, 1969-85 .............................................................................................. 23 Table 2. Descriptive statistics for 3902 patenting spells in 3347 firms, 1969-198 .................................................................................................................................. 24 Table 3. A taxonomy of regimes of patenting behavior .......................................................... 27 Table 4. Results of Weibull regressions of patenting spells ..................................................... 33

CHAPTER 3 Table 1: Classification of the Competences Depending on Their Impact on the Probability of Entry and Persistence in Innovation ........................................... 43 Table 2: Transition Matrix Between Innovative Behaviors ..................................................... 45 Table 3: Transition Matrix Between Innovative Behaviors with Distinction Between Profiles of Product, Process and Product & Process Innovators ................................................................ 46 Table 4: Distribution of the Firms by Type of Innovative Behavior in Different Surveys ....... 49 Table 5 : Transition Matrix Between Types of Technological Behaviors in [1994-1996] and [ 1998-2000] ............................................................................................................................ 49 Table 6: Distribution of the Firms by Type of Transition (Entry/Exit/Persistence) ................. 50 Table 7: Interpretation of the 15 Principal Components .......................................................... 54 Table 8: Results From the Estimation of Model 1 with the Initial Variables .................................................................................................................................. 57 Table 9: Results From the Estimation of Model 1 with Variables Transformed by PCA .............................................................................................................. 59 Table 10: Results From the Estimation of Model 2-A with the Initial Variables Centered By Sectoral Means ................................................................................... 64 Table 11: Results From the Estimation of Model 2-A with Variables Transformed By PCA. 66 Table 12: Results From the Estimation of Model 2-B with the Initial Variables Centered by Sectoral Means .......................................................................... 72 Table 13: Results From the Estimation of Model 2-B with Variables Transformed by PCA .. 74 Table 14: Classification of the Competences Depending on their Delayed Impact on the Probability of Entry and Persistence in Innovation ............................. 76 Table 15: Classification of the Competences Depending on Their Delayed Impact on the Probability of Entry and Persistence in Innovation ............................................................................................................................ 78 Table 16: Proportion of Firms That Exit Innovation in 6 French Surveys Over the Period [ 1986-2000] ..................................................................................... 84

Table 17: Types of Innovative Behaviors and Mean Level of Competence In Different Industrial Sectors (NES Level 2) in the Competence Survey over the Period [1994-98] ........................................................................................... 89

Table 18: Mean Levels of Competence of External Interface in Different Industrial Sectors (NES Level 2) in the Competence Survey Over the Period [1994-98] .................................... 90 Table 19: Mean Levels of Absorptive Capacity in Different Industrial Sectors (NES Level 2) in the Competence Survey Over the Period [1994-98] ...................................................................................................................... 91 Table 20: Mean Levels of Competence of External Interface In Different Industrial Sectors (NES Level 2) In The Competence Survey Over The Period [1994-98] ...................................................................................................... 92

x Le Bas and Latham

Table 21: Eigenvalues Of The Correlation Matrix ................................................................... 94 Table 22: Coordinate Of The Competences On Each Principal Component ............................................................................................................................... 95 Table 23: Contribution Of The Competences To Each Principal Component ............................................................................................................................... 96 Table 24: Cos 2 Of The Competences On Each Principal Component ...................................... 97

CHAPTER 4 Table 1. Percentage Distribution Of Inventors By Number Of Patents By Country ............................................................................................................... 105 Table 2. Number And Proportion Of Patents Including A Prolific Inventor By Country ............................................................................................................. 105

Table 3. Variables Used In The Regression ......................................................................... 106 Table 4a. Estimation Results: Equation Statistics .................................................................. 109 Table 4b. Estimation Results: Equation Statistics .................................................................. 110 Table 5. Distribution Of Patenting Spell Lengths And Maximum Spell Lengths For 337 Inventors ................................................................................................................................ 111

CHAPTER 5 Table 1: Main Characteristics Of The Dataset Used To Compare France And UK ...................................................................................................................... 128 Table 2: Kaplan-Meier Estimate Of The Survival Functions In France And UK (Spell Interruption After One Year Exactly Or More Without Patent; Lag_~ 1) ........................................................................................... 129 Table 3: Separate Estimations Of The Spell Length In France And UK ...................................................................................................................... 133 Table 4: Log Likelihood Of The Model 1 Depending On The Value of 6 ............................................................................................................................... 141 Table 5: Results From The Estimation Of A Cox Model With Time Varying Covariates (Model 1) ...................................................................................... 143 Table 6: Results From The Estimation Of A Cox Model With Time Varying Covariates (Model 2) .................................................................................... 144 Table 7a. Kaplan-Meier Estimates Of The Survivor Function For Different Values Of The Number Of Patents At The Start Of The

Spell In The UK: One Patent Exactly At The Start Of The Spell (Patl)* .................................................................................................................. 153 Table 7b. Kaplan-Meier Estimates Of The Survivor Function For Different Values Of The Number Of Patents At The Start Of The Spell In The UK: Two Patents Exactly At The Start Of The Spell (Pat2)* .................................................................................................................. 153 Table 7c. Kaplan-Meier Estimates Of The Survivor Function For Different Values Of The Number Of Patents At The Start Of The Spell In The UK: Three Patents Exactly At The Start Of The Spell (Pat3)* ......................................................................................................................... 154

Table 7d. Kaplan-Meier Estimates Of The Survivor Function For Different Values Of The Number Of Patents At The Start Of The

Spell In The UK: Four Patents Exactly At The Start Of The Spell (Pat4)* ........................................................................................................................ 154 Table 7e. Kaplan-Meier Estimates Of The Survivor Function For Different Values Of The Number Of Patents At The Start Of The Spell In The UK: Five Patents Exactly At The Start Of The Spell (Pat5)* .................................... 155 Table 8a. Evolution Of Kt During Spells Of Length 1- 5 ...................................................... 156 Table 8b. Evolution Of Kt During Spells Of Length 6- 10 .................................................... 157

The Economics of Persistent Innovation: An Evolutionary View xi

Table 8c. Evolution Of Kt During Spells Of Length 11-14 .................................................... 158 Table 9: Results From The Estimation Of A Cox Model With Time Varying Covariates And Stratification By Main Field Of Technological Activity (France Only) ......................................................................................................... 159 Table 10: Distribution Of The Spells By Rank .................................................................... 160 Table 11: Estimation Of The Model 1 For Different Rank Of The Spell ................................................................................................................................ 161 Table 12: Test Of The Impact Of The Rank Of The Spell On The Estimated Coefficients .................................................................................................. 162

CHAPTER 6 Table 1. Ski Areas With High-Speed Chairlifts By State ................................................... 192 Table 2: Cross-Tabulation Of High-Speed Quads And Six-Pack. *High-Speed Six-Packs 193 Table 3: Proportion Of High-Speed Chairlifts By Region ................................................... 194 Table 4: Number Of Chair-Weighted Lifts Per Ski Resort By Region ................................ 196 Table 5: Ols Regression With And Without Year Of First Adoption (Dependent Variable: Proportion Of High-Speed Chairlifts) .................................................................................. 197 Table 6: Ols Regressions (Proportion Of High-Speed Chairlifts As Dependent Variable) ....................................................................................................... 199

LIST OF CONTRIBUTORS

Alexandre Cabagnols Assistant Professor, Clermont-Ferrand University and University of Lyon 2 Laboratoire d'6conomie de la firme et des insitutions, 14, avenue Berthelot, F-69363 LYON c6dex 07 alexandre.cabagnols @univ-bpclermont.fr

Nilotpal Das Statistician, Futures, LLC 409 Executive Drive, Langhorne, Pennsylvania, 19047 USA n_das 167 @ yahoo.corn

Claudine Gay Professor, Catholic University of Lyon and University of Lyon 2 Laboratoire d'6conomie de la firme et des insitutions, 14, avenue Berthelot, F-69363 LYON c6dex 07 cgay @univ-lyon2.fr

William Latham Associate Professor of Economics, University of Delaware Department of Economics, Newark, Delaware 19711 USA latham@udel.edu

Christian Le Bas Professor of Economics, University of Lyon 2 Laboratoire d'6conomie de la firme et des insitutions, 14, avenue Berthelot, F-69363 LYON c6dex 07 lebas @univ-lyon2.fr

James Mulligan Professor of Economics, University of Delaware Department of Economics, Newark, Delaware 19711 USA mulligaj @lerner.udel.edu

Karim Touach Researcher, University of Lyon 2 Laboratoire d'6conomie de la firme et des insitutions, 14, avenue Berthelot, F-69363 LYON c6dex 07 Karim.Touach @univ-lyon2.fr

PREFACE AND A CKNOWLEDGEMENTS

Christian Le Bas

The idea of studying the persistence of firm innovative behavior emerged gradually over the period during which I directed the Economy and Applied Statistics Laboratory 1 at the University Lumi~re Lyon 2 in the middle 1990s. Definitive studies were carried out from the very beginning by enthusiastic and productive young researchers. First Alexandre Cabagnols dealt with persistence as a substantial part of his PhD thesis. Then Claudine Gay identified the crucial roles of consistent and persistent inventors in the collective process of knowledge growth. Subsequently, with the assistance of Karim Touach, Claudine and I have undertaken new empirical research on persistent inventors as relatively unknown figures in inventive structures. This nascent enterprise received an intellectual and logistical boost several years ago with the collaborations of William Latham and James Mulligan, my colleagues from University of Delaware (USA). The completion of this book owes much to their efforts and especially to the productive links I have forged with William Latham, the co-editor, my co-author and my friend. We are indebted to the highly successful cooperative exchange program between the University of Delaware and the University Lumi~re Lyon 2 which encouraged the development of the professional contacts that led to our collaboration. While it is hopeless to try to acknowledge all of those whose comments, remarks and criticisms have enriched our work, I must make special mention of Paolo Saviotti whose salient comments contributed so vitally to Chapter 7.

This project was accomplished with precious, and mostly persistent, support from a variety of sources including the funding for two different research groups by the University Lumi~re Lyon 2 (first the Economy and Applied Statistics Laboratory and then the Economics of the Firm and Institutions Laboratory 2 and grants from the French National Center for Scientific Research 3 program, "Economic Issues in Innovation. ''4 I cannot forget the Catholic University of Lyon's program (GEMO-ESDES) which provided me with the time for writing a significant part of this book. Finally I

xvi Le Bas

wish to thank the editors and publishers of the collection at Springer for accepting the risk of publishing the manuscript.

I dedicate this book first, to the memory of Ehud Zuscovitch, with whom I shared both a passion for evolutionary economics and a friendship and, second, to Keith Pavitt, a true intellectual leader in the field of the economics of innovation.

Preface and Acknowledgements xvii

1 Laboratoire d'l~conomie et de Statistiques Appliqu6es (LESA)

2 Laboratoire d'Economie de la Firme et des Institutions

3 Centre National de la Recherche Scientifique

4 Les enjeux 6conomiques de l'innovation."

INTRODUCTION

William Latham Christian Le Bas

Persistence of firm innovative behavior became an important topic in applied industrial organization with the publication of the seminal empirical work of P. Geroski and his colleagues (1997). Evidence that firms innovate persistently has led previous studies to focus on the determinants of innovation persistence and on its heterogeneity across industries, technologies and countries. The aims of this book are: (1) to illumine the scale and scope of the phenomenon of persistence in innovation, and (2) to account for the principal factors that explain why some firms innovates persistently and others do not.

Because this book deals intensively and extensively with the subject of firm innovation persistence, which is not, as yet, a well-known term, we need to provide a nontrivial definition of it that encompasses the full range topics we want to address and aids our understanding of how they are related to each other. We begin with a careful identification of "innovation." Our first definition is drawn from K. Pavitt (2003), "innovation processes involve the exploration and exploitation of opportunities for a new or improved product, process or service, based either on an advance in technical practice or a change in market demand, or a combination of the two." While this definition is clear, and conforms well to both our empirical and theoretical perspectives, some elaboration may help to clarify the concept. For example, in empirical quantitative studies, including those of this book, the choice of a measurable indicator of innovation brings additional nuances to the definition. Pavitt (2003) argues that a simple improvement of an existing product ought to be included as an innovation. This means that innovation is not necessarily "radical" or "architectural" but, often, very often indeed, merely "incremental. ''~ However, while innovation occurs at the level of the individual firm it is not a "firm-in-isolation" phenomenon: what is new for only a single firm within an industry, cannot be considered to be an innovation for the industry or the economy as a whole.

Our view of the appropriate definition of innovation has implications for the economic analysis of innovation. Nelson and Winter (1982) distinguished

x x Latham and Le Bas

three strategies for firm technological development: innovation, imitation and "no change." It is clear to us that a large number of previous studies addressing innovation persistence have combined innovation and imitation as a single strategy as the alternative to "no change" (see, for instance, Saviotti, 2003). Our own definition of innovation is obviously similar to the one implicitly accepted by the community of researchers in economic studies of innovation persistence.

The second part of the term that identifies our subject of interest in this book, "innovative persistence" is persistence. We need also to define what we mean by persistence. Fortunately common usage accords well with our usage of the term in this case. By persistence we mean, in part, "continuing to occur over time." We also mean, as will be further explained by Das and Mulligan in Chapter 6, "continuing to occur over space." Generalizing the concept we will recognize as persistent any behavior initiated at one point and subsequently observed at related points. The nature of the relationship may be purely temporal, temporal and spatial, or across other spaces in which firms operate including industrial and technological space.

Until relatively recently little empirical evidence on the innovative persistence phenomenon had been assembled and, in addition, no systematic theoretical framework has yet been suggested for understanding persistence in innovation. This book aims to fulfill this dual gap. We present new empirical evidence that the contributing authors have assembled and suggest a coherent theoretical framework. We will present arguments in favor of an evolutionary competence/capability approach to the phenomenon of persistence in innovation. The authors who support such an evolutionary theory of innovation, either explicitly or tacitly, utililize a vision of the firm rooted in behavioral theory (Metcalfe, 1995). In behavioral theory firms have the capacity for learning and exhibit adaptive behaviors. In general, firms do not maximize any objective function in particular, because economic information is difficult to gather and to analyze. In the technological arena, there is an additional reason for optimizing conduct not to be the dominant mode: creativity, and especially technological creativity, is fundamentally an uncertain process. Creativity and innovation are connected to diversity across firms as well. Each firm uses its own particular visions and routines to explore the technological and economic opportunities it meets, and exploits them in its own particular ways. Economists have attempted for some time to find regularities within the innovation process in order to understand this diversity among firms. Pavitt's (1984) well-known taxonomy of sectoral technological trajectories is among the best attempts, though it is still tentative, for explaining this diversity. It is based on the simple idea that firms from different sectors develop innovation differently. The rates and the directions of technical change experienced by a firm depend on three firm characteristics:

Introduction xxi

the sources and the nature of the firm's technological opportunities, the nature of the firm' s technological requirements, and the possibilities for innovating firms to appropriate the benefits of their

innovating activities. The last feature is required if firms are to have incentives to invest

resources in research and other innovative activities such as design (Dosi et al. (1990, pp 90ff)). Pavitt identifies four general sectoral technological trajectories:

(a) science-based sectors (electronics, chemicals), (b) scale-intensive sectors (automobiles, consumer durables), (c) specialized-supplier sectors (machinery, instruments), and (d) supplier-dominated sectors (private services, traditional

manufacturing), in which firms buy innovation through their capital goods.

Table 1 illustrates some salient sectoral characteristics of the technological trajectories in terms of

(i) firms' sources of new knowledge, (ii) firms' price and/or performance sensitivity, (iii) firms' means of protecting innovations, (iv) firms' sources of process technology, and (v) types of innovation (product versus process). Regarding the last of these, Von Tunzelman (1995) asserts that the

measure of an organization's technological effectiveness is its success in transforming knowledge about technologies (processes) into knowledge about products.

A continuing theme of this book is that the study of innovative persistence must explicitly consider the specific features of the relevant innovative trajectories. Thus in Chapter 3 Alexandre Cabagnols shows how the idea of sectoral innovative trajectories can be applied and provides insightful commentary. Nilotpal Das and James G. Mulligan in Chapter 6 explicitly focus their analysis on the adoption of process innovation of a sort that is typical in a "supplier-dominated" trajectory.

xxii Latham and Le Bas

Table 1" Innovation characteristics of four sectoral technological trajectories

Sectoral Characteristi

cs

Source of New

Knowledge

Price or Performance

Sensitive

Means of Appropriatio

n

Sources of Technology

Innovation Type:

Product Versus Process

Innovative Trajectory Sectors

Science-based

R&D and Public Science

Mixed

Patents

In-house + Suppliers

Mixed

Scale- intensive

Product Engin- eering

Price Sensitive

Trade secrets

In-house

Process

Specialized- supplier

Design and Development

Performance Sensitive

Design know- h o w

In-house + Customers

Product

Supplier- dominated

Suppliers and Large Users

Price Sensitive

Non-technical

Suppliers

Process

Adapted from Dosi et al. (1990)

The book is structured as follows. Chapter 1 elaborates important basic themes and definitions and presents a brief survey of the previous literature. In Chapter 2 we provide a first empirical analysis of the principal determinants of innovation persistence following the lines opened by of Geroski et al. (1997). The data are for French industrial firms patenting in the US. The results emphasize the importance of firm size and the existence of a minimum threshold of innovative activity. In Chapter 3 Alexandre Cabagnols uses several French innovation surveys to evaluate firm competences that promote innovation (entry) and those that maintain the firm in a dynamic of persistence in innovation. He shows it may be that the two sets of competences are not identical.

In Chapter 4 a fascinating new perspective on innovative persistence is presented: the role of persistent individual inventors. Persistent inventors are individual inventors for whom we find large numbers of French, German, British and Japanese patents in the National Bureau of Economic Research's U.S. patent database. The presence of such inventors, who are consistently inventing, is used to explain and predict some mechanisms underlying general

Introduction xxiii

patent activity. In Chapter 5 Alexandre Cabagnols explores the impact of the level of technological accumulation of French and UK firms on their ability to persist in innovation over longer periods of time (1969-84). Cabagnols estimates a Cox model in which the stock of technological knowledge enters as a time varying covariate. In particular he observes that the impact of past patenting activity on the development of subsequent innovations decreases very quickly in both countries (he finds a depreciation rate of 60%). Both the French and the UK samples lead to qualitatively similar results. In Chapter 6 Nilotpal Das and James G. Mulligan analyze evidence concerning persistence in the adoption of innovations by firms that do not create innovations themselves. Until recently the economic literature has ignored persistence in the adoption of subsequent vintages of technologies by adopting firms. The Chapter contains original empirical work extending recent results to account for the persistence of adoption across vintages of ski-lift technology. They find for example, that firms that adopted the earliest vintages were most likely to adopt newer versions of the technology. This is counter to the possibility that firms might delay adoption in anticipation of a newer version appearing in the future. The authors argue that persistence in this case is due to the firm's incentive to differentiate the quality of its service from that of its competitors. Chapter 7 sets out an evolutionary approach to persistence in innovation. We first identify the foundation of evolutionary principles upon which a non-formal analysis of innovation persistence can be built. Then we propose a more formal model incorporating important features of the evolutionary tradition. The model is shown to be capable of accounting for a number of real-world observations and of facilitating some interesting insights regarding the nature of innovative persistence. In the Chapter 8 we discuss the main findings set out in this book, suggest new future research agenda and draw some implications in terms of public policy.

xxiv Latham and Le Bas

ENDNOTES

1 For additional definitions of innovation see Tushman and Anderson, 2004

Introduction xxv

REFERENCES

Dosi, G., Pavitt, K., Soete L., (1990), The Economics of Technological Change and International Trade, Brighton: Wheatsheaf, and New York: New York University Press.

Geroski, P., Van Reenen, J., Walters C.F., (1997), "How persistently do firms innovate?" Research Policy, vol. 26, pp. 33-48.

Metcalfe, J.S., (1995), "The Economic Foundations of Technology Policy: Equilibrium and Evolutionary Perspectives," in: P. Stoneman, (ed.), Handbook of the Economics of Innovation and Technological Change, B lackwell, pp. 409-512.

Nelson, R. R., Winter, S. G., (1982), An Evolutionary Theory of Economic Change, London: The Belknap Press of Harvard University Press.

Pavitt, K., (1984), "Sectoral patterns of technological change: Towards a taxonomy and theory," Research Policy, vol. 13, pp. 343-374.

Pavitt, K., (2003), "The Process of Innovation," SPRU Electronic Working Paper Series, n ~ 89, August.

Tushman, M., Anderson, P., (2004), Managing Strategic Innovation and Change, A Collection of Readings, 2nd, Oxford: Oxford University Press