Technological Innovation Review and Analysis

Technological innovation has been known for having a major impact on society today, economically and socially. It has been discussed that innovation is a key factor for growth and that technological innovation is a driver for competitive success. Technological change stems from the industrial revolution and has completely changed the approach towards the development of technological innovation through the rise of research and development (R&D). Many factors have influenced technological change, including economic thought, government policies and societal demand.

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As stated before, innovation is a key factor for economic growth. Governments both in developed and less-developed countries aim to promote economic developments and the well-being of their citizens by trying to encourage innovation. The concept of innovation adds the idea of successful introduction to the market. Firms invest large amounts of money in R&D. Both science and technology have had a significant contribution towards innovation.

It’s important to highlight the meaning of science and technology. Science is considered as a collection of facts about the universe, or a set of concepts, theories and laws in order to gain understanding about the universe. Technology “can be thought of in a narrow sense as tools” (Rip A, Kemp, R 1997). It is the application of new knowledge through science to some practical problem. “Technological change is the rate at which new knowledge is diffused and put into use in the economy” (Audretsch et al 2002). It should be seen as a body of knowledge which interacts with science but is not wholly dependent on science. It has advanced through trial and error, but also the majority of new technologies have been built on existing technological knowledge – mechanical knowledge for example. Science weakly contributes – the steam engine was made without the knowledge of thermodynamics.

On the other hand, when science has been involved in technology, it has made an immense impact on technological innovation. According to Brooks (1994) science has provided new knowledge, a new source of ideas for new technological possibilities. Another example is research instrumentation and analytical methods that can contribute to industrial practice. Bush highlighted that “Basic science served as the pacemaker of technological progress” (Krige 2006). For Bush, it was seen as “innovation was science-led and technology was a little more than applied science”. However, technology has also influenced science. It provides a source of novel scientific questions and helps justify the allocation of resources needed to address these questions, which extend the agenda of science. It is clear that the science-technology relationship is interrelated (Gibbons, M. 1984)

Between the 18^th and 19^th centuries, the outlook on technological innovation has changed. Especially in Britain since the Industrial Revolution. The Revolution that began in the UK was based on new ways of doing things, such as new techniques and new ways of organising production. The early industrial society depended for technological improvements on individuals ‘tinkering’, which means to improve a product or process using knowledge that is based on experience. Corporate R&D has touched the technology world today, such as the growth in the knowledge intensity of technology (Lerner, J. Wulf, J. 2007). Technology becomes more dependent on formal knowledge as well as scientific or formalised engineering knowledge. Furthermore, since the Industrial Revolution there was a growing complexity of technology and production, including flow and mass production (Arora, A. Gambardella, A. 1994).

A general trend towards division of labour in firms as they get larger and strive to remain efficient became more popular as this in manufacturing “facilitated the use of new machines and accumulation of specialised skills on the part of the operatives” (Freeman C, Soete L, 1997). Division of labour and new inventions or improvements in the workplace enabled an increase in productivity (Huergo, E. Jaumandreu, J. 2004). So, in the 19^th century, there was a transformation in the chemicals industry. A number of innovator-entrepreneurs began to extend the scope of the industry by adopting new processes to make different gases and dyes, which essentially modernised the chemical industry (Sullivan, R.J 1990). With flow production becoming the more dominant method of production, this surpassed the capabilities of singular innovator-entrepreneurs, and therefore this had to be taken care of by corporate firms.

Technological change has been compelling towards economic growth. Over the many years, economic views have changed. For example, in the classical view, Adam Smith and Karl Marx both saw improvements in technology as an integral component in the development of capitalism. However, most classical economists, whilst acknowledging the important role of technology change, were content to treat it as originating outside the economic system. Arguably, this reflected the dominant role of individual inventors and entrepreneurs at the time. Technological change was considered to be exogenous, something unaffected by economic factors.

Neoclassical economists have formalised many of the assumptions of the classical economists into more explicit theories and models. For example, with Theory of Production, it explores relationships between inputs and outputs in the production process. This theory makes a series of simplifying assumptions in order to model these relationships, and these assumptions refer to the nature of firms and markets. The firm produces a single standard product and is a ‘price taker’, where it cannot affect the prices of inputs and outputs by its actions. Demand and supply of the product are in equilibrium, the firm is owner-managed and makes decisions with the aim of maximising its profit by generating inputs and outputs – labour and capital. With regards to technology, there is a given level of technology which determines the range of techniques available for production. Therefore, the technology available determines the maximum level of output available from a given level of inputs. The firm will select this technique in order to minimise total production costs (Aigner, S.A. and Chu, S. F. 1968).  Figure 1 presents how the production function works with the equation of Q=f(K,L), Q being the output, K being the capital and L representing Labour.

Figure 1.

In Figure 1, the range of techniques available under the current level of technology is represented by the isoquant. So, the curve represents the different possible combinations of capital and labour that can be combined to produce the same level of output under that level of technology for a given level of technology. Any point on the isoquant curve represents the most technologically advanced level of production. Finally, the isocost line represents the ratio of the prices of capital and labour. The point where the isocost meets the isoquant curve represents the most economically effective technique.

There are some disadvantages and fundamental criticisms regarding this theory. It only considers two factors of production – capital and labour. Another disadvantage is that the assumption that an infinite range of techniques exists which are freely available to each firm seems unrealistic. Furthermore, the theory only allows for changes in process technology, which fails to help one understand technical change in final products or services. The modern firm structure and activity is more complex, with multiple functions and specialisation organised to produce multiple products. (Cavalcante, S. Kesting, P. Ulhøi, J. 2019). In reality, firms and managers often seem to have asymmetric information and exhibit bounded rationality. Relating to this point, firms themselves may affect the conditions through their own behaviour (Malerba, F. 2002). An example is influencing prices, but also through developing new technology. To conclude, the theory of production produces a static vision of markets, rather than a volatile one.

Orthodox economics accepts technological change as a major driver of economic development, and whilst these economists have focused mainly on fixing growth theory, heterodox economists have focused on understanding the roles of firm structure and size, as well as market dynamism, the role of market demand and the supply of technology and the role of product, service and organisational innovations.

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Schumpeter (1934) had a contrast view to orthodox economics, where he highlighted the key role of product innovation in economic growth. He proposes that technological innovation provides dynamics to capitalist economies through “creative destruction” (Baldwin, W.M. Scott, J.T. 1987). It explained how radical new products create new markets that discard old ones. In his later work in 1943, he acknowledged that innovation is increasingly endogenous with the institutionalisation of innovation through R&D. He emphasises the role of monopoly as an incentive for innovation; “Economic growth has primarily resulted from technological progress; and the factors most conducive to technological innovation are the expectation of monopolistic quasi-rents and favourable market structures” (Moore, Frederick, 1984). Nonetheless, it is stated that an evolutionary approach regarding economics is “important above all in the study of technical change” (Freeman C, Soete L, 1997). The scholars point out that almost all economists agree that it is one of the main sources of the “dynamism of capitalist economies, of their growth, and of their instability”. Technical innovation contributes to the constant uncertainty and evolutionary anxiety, which represents the characteristics of capitalism (Metcalfe, J.S. 1994). Technological change is overall viewed a factor towards the increase of productivity (Gopalakrishnan S, Damanpour S, 1997). Figure 2 below exemplifies how technology has affected the economy.

Figure 2.

Source: Evangelista R, Vezzani A, (2010)

Regarding what influences technological innovation, it can be discussed that the government (public policy) and societal demand influence the world of technology today (Osborne, S.P. Brown L, 2011). Starting with the government, the public sector is a significant economic arena in its own right. Public expenditure accounts for around 40% of GDP in OECD nations. Governments typically spend major sums on science, technology and innovation activities to promote economic growth and well-being and support public goals in healthcare and defence. However, governments also regulate the economy and regulate industries to protect citizens from risks.

Overall, policy provides the contexts for which all business activity can take place, and can adapt to the technological demand from the government. “Environmental, health, and safety regulations affecting the chemical-using or chemical-producing industry include controls on air quality, water quality, solid and hazardous waste, pesticides, food additives, pharmaceuticals, toxic substances, workplace health and safety, and consumer product safety” (Ashford, 1993), (Mourad, D. Clercq, D.D 2004). Ashford states how these affect development and production, which change over time and are “technology forcing”, therefore designers of regulations should consider that the impact on technological change will vary among regulations that require demonstration of product safety before marketing, such as pharmaceuticals, regulations that require demonstration of the efficacy of products before marketing as well as proof of safety or the control of product use after marketing. Such examples can be chemicals existing under the Toxic Substances Control Act, worker protection and consumer products. The internal structure of regulations may affect the general climate for technological innovation. This includes “the form of the regulation, the mode, the time for compliance, the uncertainty, the stringency of the requirements and the existence of other economic incentives that complement the regulatory signal”. This all affects technological change, since if there is regulatory uncertainty it can be beneficial, however if there is too much regulatory uncertainty, this has a negative impact in a way that it can cause industrial inaction. 

In a survey of more than 1000 firms and 125 federations the results showed that “over 50% of respondents indicated that new requirements and demand are the main source of innovations, while new technological developments within companies are the major driver for innovations in only 12% of firms (BDL, 2003)” (Edler J, Geroghiou L, 2007). This also includes the interaction between supply and demand that has an impact on the dynamics regarding innovation. For instance, a vast amount of studies concluded that “a major task for systemic innovation policy is the organisation of a discourse between users, consumers and others affected by innovations in order to articulate and communicate preferences and demand to the market”. Moreover, the scale and nature of demand in a given location have been identified as major determinants of the “competitiveness of locations and their innovation dynamic”. Suggesting, that societal demand encourages competition between markets, and scope for inventing new technologies.

To conclude, technological innovation has had a great impact on the economy, society and business firms, including on economic thought and structures of firms regarding future inventions and uncertainty. Science and technology are interrelated and both need to be present in order for successful technological innovation. The Industrial Revolution has completely altered the outlook on technological innovation, where today productivity has increased with the structures of division of labour and flow production. Additionally, the works of corporate R&D has intensified the knowledge of technology today. Finally, the government and the society are interrelated regarding the influence on technological change – demand is one of the main motivators for innovation and government policy is “technology forcing”.

References:

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