International economics and innovation

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Table of Contents
QUESTION 1..................................................................................................................................2

QUESTION 2..................................................................................................................................4

QUESTION 3..................................................................................................................................7

QUESTION 4................................................................................................................................10

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QUESTION 1

1. a) Describe what is the difference between innovation and invention.

Invention: the creation of a new idea or concept

Innovation: to introduce innovation with some economic and commercial effects (perhaps get a
reward and remuneration for that)

"Invention" in its purest sense can be defined for the first time as creating or introducing a
product. In the other hand, innovation happens if someone enhances the same product, process or
service, or makes a substantial contribution to it. And countries which use innovation and
entrepreneurship as drivers for new growth sources are more likely to withdraw from recession
and remain.

1. b) Describe the different types of innovation usually identified by economic and business
studies.
One of the first economists to research invention was Joseph Schumpeter (1883 – 1950). He
listed creativity of various types:

 The launch of a new product (product innovation)

 A new way to produce a commodity (process innovation)
 A modern supply source
 New consumer manipulation
 A modern business organisation

Initially, Economics based on the first forms of innovation (the first being optimistic and the
second being blurred), but then also on organizational reform.

The importance of a specific innovation: Radical innovation and Incremental innovation.

Radical innovation: the implementation of a new product or method that alters game rules,
industry-level norms and economic dynamics (cars versus horse-power transportation).

Innovation, which has important repercussions on a market and business activities on that
market, is a radical or disruptive innovation. The emphasis of this term is on the effect rather

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than novelty of inventions. For example, innovation may change the market structure, create new
markets or make existing products obsolete.

Incremental innovation: Efficiency enhancements for a certain product or procedure with

micro-changes.

The predominant form of innovation is incremental innovation. Radical innovation is typically a

difficult, lengthy and dangerous method rather than a discrete case. In implementing disruptive
innovation, small companies or new market participants may play an important role.

1. c) Innovation has been frequently described in formal mathematical models as a linear

process. Do you agree with this view? Articulate your answer by considering the major
properties of the innovation process as discussed during the ECON1165 module.
It is often easier to differentiate a complex phenomenon by making it clear what it is NOT.
Stephen Kline and Nathan Rosenberg did this precisely when they characterized a common yet
incorrect understanding of innovation in a 1986 fluential article, "the linear model." In essence,
"the linear model" is meant to be a science applied innovation. It is "linear," because inventions
are supposed to pass through a well-defined series of phases. first, then the growth, and the
production and marketing of finally come from research (science). Since first is researched, this
can be readily understood as important.

Therefore, this viewpoint, which is also linked to the programmatic statements of Vannevar Bush
on the organisation of US research systems, is well adapted to protect the interests of researchers
and scientists and the organizations they work with. Kline and Rosenberg point out that the
issues with this model are dual. Next, the chain of cause generalizes, and only includes a few
inventions. Although certain major advances originate from scientific achievements, this is not
true much of the time. Companies usually innovate because they think they have a business need
and they often start by examining and integrating established expertise. They claim that
companies only consider investing in research if this works not (science). In reality, user
interface, not research, is considered the key source of innovation in many countries. Second, the
"linear model" ignores the numerous feedback and loops between the various "stages" of the
process. Failures and deficiencies in different phases will result in a reconsideration of previous
steps and ultimately lead to completely new developments.

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QUESTION 2

2.a) Provide a definition of “technological capability” and “social capability”, and describe
the differences between them. Why can we say that innovation has a “systemic” nature?
Technological capability: "The capacity to use technical information effectively for the efforts to
assimilate, use, adapt and transformation of existing technology," which implies "the potential to
commercially search for, develop and use knowledge."

Social capability: "Private and public institutions are capable of doing this, and the wider social
and cultural factors underline this," Abramovitz says (ex: honesty, trust in people).

“systemic” nature - The emphasis of this form of research was on examining the technical
dynamics of innovation, the different phases and how it affects the broader social, institutional
and economic context. The other important approach in the literature on innovation systems was
to focus on spatial level and to differentiate between different systems by using national or
regional boundaries. For example, the terms "global innovation system" were used by Lundvall
and Nelson to describe structural interdependence within the country, while the concept of
"regional innovation systems' has been similarly used by Braczyk.

2.b) Financial development, social capital, favourable business regulation, trade openness
are different aspects of “social capability” influencing innovation processes and (therefore)
economic development. Make a ranking of these factors according to their observed degree
of importance for economic development. Explain why “inclusiveness” and “equality in
opportunities” can strengthen the innovation capability of an economy.
1) Development and Social capability: business regulation

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 Fig 1- GDP per capita and business regulation over 2000-2004

2) Development and social capability: social capital

Fig 2- GDP per capita and social capital over 2000-2004

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3) Development and social capability: finance

Finance seems to be comparatively lower than other dimensions. A large number of highly
financed developing countries (outliers) (South Africa and Malaysia) have not made much
progress with too much finance.

Fig 3- GDP per capita and financial system over 2000-2004

“inclusiveness” and “equality in opportunities” can strengthen the innovation capability of an

economy -This measurement focuses on the fact that a broader approach than one based on
economic growth is only important in the evaluation of the well-being of people. In addition, on
the basis of a trend analysis of the three dimensions underlying inclusiveness (economic, social
and environmental), policies that have helped to improve inclusiveness of growth are identified,
namely policies that would allow more even spread of economic growth benefits within
countries. Expanding and broadening equal opportunities, including access to public goods,
health and education. Accomplishing those social goals should lead to increased well-being of
people, which is the ultimate goal of all society. Economic and social inclusivity is discussed in
the following paragraphs before considering the more wide-ranging concept of environmental
inclusiveness.

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2.c) Figure 1 below shows the cross-country correlation between the development of the
education system and the level of economic development. Analyse Figure 1 by arguing
about the importance of the education system for economic development in low, emerging,
and developed countries (9 points).
Education at a low level of development is necessary but not sufficient to ensure development.
Since competition on the technical boundary becomes more important. The focus of this project
was on explaning such differences in economic growth across countries at various levels of
development, which led to a long series inputs, often called 'Technological Lap' or 'North-South'
model. This is probably also what you would expect from the Schumpeterian viewpoint, where
creativity is supposed to be an omnipresent phenomenon. Three factors influencing differing
growth rates across countries have been established at Fagerberg: Innovation, imitation and
additional efforts in the field of commercial technology exploitation. The study indicated that the
major factor behind the enormous gap in success between Asian and Latin American NIC
countries in the 1970s and early 1980s was superior creative intervention. The continuing rapid
growth of the Asian NICs compared to other country groups in the ensuing ten years was also the
main result of Fagerberg and Verspagen's rapid growth in the region's innovations. In addition, it
has been demonstrated that while imitation is becoming more demanding over time, innovation
has progressively increased to account for differences in economic growth in countries.

QUESTION 3

3.a) Developing countries are usually described as followers, with respect to developed
ones, in the accumulation of technological knowledge. Describe which are the main
channels through which developing countries and their firms can accumulate and transfer
technological knowledge and innovation capabilities from abroad.
The theory of growth in the 1950s and 1960s was based on a simplistic view of "public good"
technology. Technology clearly has certain public good features, i.e. that more than one
company can use the same knowledge simultaneously (non-rival), and once knowledge is
available, it is difficult to exclude certain companies from using it (non-excludability). This view
in its extreme form leads to the conclusion that all information can be gained externally as

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"common knowledge" and that companies should not have to create their own knowledge.
However, it is a private and not a public good from other essential aspects of technology. No
special initiative or expertise are required on the consumer's side or on the recipient's side for
pure public benefit. Obviously, technical experience is not the case. Even if it comes from the
public domain, the use of technical expertise involves significant awareness and effort on the
part of the recipient. This is because information is strongly cumulative and sometimes tacit.
Every new knowledge builds on previous knowledge to a large degree, And the application of
knowledge means that the old knowledge from which new knowledge develops must be under
the control.

3.b) Describe the different forms of technological learning process companies in

emerging/developing countries may benefit of by taking part to Global Value Chains
(GVC).
The forms of technological activity and innovation in developing countries vary from those in
the developed:

Developed countries: closer to the technical boundary and more emphasis on radical innovation
(discovery of something not previously existing) and therefore basic science.

Developing countries: concentrate more on absorbing outside technical expertise and adapting
something existing to local contexts -> progressive innovation related to the improvement of
standards, testing and efficiency.

GVC with market-type governance

The type of information between companies linked to and trading in the value chain is clear. The
(mediate) exchange of commodity and service data can be codified easily (i.e., they are well-
known and easy to ascertain). There are a wide variety of potential suppliers with sufficient
knowledge of how to do stuff.

So: Connections are primarily carried out by market transactions of poor lengths. Not a leading
company's learning. It happens through the transfer and imitation of information

Ex: Brazilian Schuh Industry (buying design from outside)

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GVC with modular governance

The scope of the "included" details in the product or service is even more complicated than
before. The suppliers are fully responsible for supplying products and services that meet all the
"technical" specifications.

So: Lead companies as external incentives for local manufacturers, but without direct
involvement and direction in the learning process international standards. Technological learning
powered by suppliers: I own capital investment in technology accumulation; (ii) cooperation
with quality-certifying institutions.

eg: Brazil, Argentina or Mexico suppliers for the automotive sector.

GVC with relational governance

In contrast to previous cases, the specification of products and services is scarcely codified and
are mostly based on individual needs of consumers (leading companies). Suppliers and
consumers perform additional tasks and "switching prices" are very high (changing supplier
might be very disruptive). Mutual relationship between companies teaching. Information
exchange and tacit awareness between companies: spatial proximity significance (emerge of
clusters).

Ex: Computer industry in Taiwan

GVC with captive governance

The important aspect here is that suppliers do not have adequate technical expertise and are not
competent.

Leading businesses direct and monitor provider learning: DTD (restricted to unique tasks
performed by suppliers) from the lead company to suppliers;

The quality management and reporting roles of lead companies

Ex: outsourcing of basic functions to reduce costs

GVC with vertical integration

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Although the skills of suppliers are lacking, (mid-term) products and services are not easily
codified and therefore "outside" the business can be easily understandable. The leading business
will then decide to take direct control of the value chain stages and to incorporate the stages
vertically with complete chain control.

Leading businesses are directly interested in learning:

 Transfer professional managers and employees

 Proposal section preparation

QUESTION 4

4.a) Imagine you are the manager of a new company and you want to stimulate innovation.
Argue which type of leadership “model” is preferable in the management of innovative
processes. Which type of challenges is this type of leaderships supposed to address?
In my view, organizational learning influences innovation more directly than transformative
leadership directly influences innovation. It is therefore possible to say that organizational
learning and transformative leadership have a bearing on innovation and that organizational
learning has a more direct impact on innovation than the direct influence of transformative
learning on innovation. Aragon-Correa says that transformative leadership has a positive impact
on organizational learning. Transformative leadership has a significant indirect impact on
innovation, with less direct impact on innovation, through organizational learning. Risk are the
creative organization's competitive weakness identified.

4.b) Now imagine that your company is involved in a complex production network spread
around the world. From a strategic point of view, which is the most preferable form of
GVC governance you would like to develop with your own partners? Which is the one it is
better to move away from given its reduced opportunities for technological learning? Make
a comparison between them.
From a strategic point of view, Market is the most preferable form of GVC governance you
would like to develop with my own partners, because, Market governance requires relatively
easy transactions, product specifications information is easily transmitted and manufacturers can
manufacture goods with minimal buyers feedback. These transactions with a long length of

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weapons need little to no formal cooperation among participants and cost for manufacturers and
buyers to turn to new partners is low. The consumer has little control interest in production in
this case, sets few, if any, requirements and offers manufacturers little to no knowledge on what
the market needs and how it is to be made. Here, only at its point in the chain are the criteria
specified by each company and the central governance mechanism is a price instead of a
powerful lead company. An example is a trader when buying or selling goods at a farm door or
on a wholesale market.

Modular is the one it is better to move away from given its reduced opportunities for
technological learning, because This is the chain governance patterns most market-like.
Providers in modular value chains typically produce products or provide consumer specifications
for services. Suppliers in modular value chains are responsible for process technology and often
employ generic machinerical devices which spread investment across a wide range of customers.
This keeps transaction-specific investments low and restricts transaction costs even though the
relationships buyer-supplier may be very complex. The high volume of information flowing
through the interface (or relationship), which means that the connections (or relationships) are
more extensive than on a single market, but coding schemes can also avoid highly complicated
and difficult interactions between value chain partners.

Markets are GVC governance's simplest type. Market-based GVCs include companies and
people who buy and sell items with little contact other than exchange for cash. The main
mechanism of governance is price. The links between value chain activities are not too "thick,"
as the information to be shared and the knowledge to be shared are relatively simple. On the
other hand, this is the most market-like of the GVC governance patterns of three networks.
Providers in modular value chains typically produce products or provide consumer specifications
for services. Suppliers in modular value chains are responsible for process technology and often
employ generic machinerical devices which spread investment across a wide range of customers.
This keeps transaction-specific investments low and restricts transaction costs even though the
relationships buyer-supplier may be very complex.

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