Modeling the role of non-financial constraints in the development and adoption of new technologies

Janne M. Korhonen (primary and corresponding author, responsible for background, theory, analyzing the results of simulations and writing the article) janne.m.korhonen@aalto.fi Mikito Takada (responsible for coding the simulations) mikito.takada@aalto.fi Suggested key words: Technology adoption; Innovation; Constraints; Environmental innovation; Agent-based models; NK models; Copper mining Earlier versions of this paper have been presented at PREBEM 2011 conference in Rotterdam and accepted for presentation at Organization Science Winter Conference 2012 preconference event in Colorado Springs.

Abstract
This paper studies the effects of non-financial constraints (e.g. resource scarcities) on the development and adoption of technologies. We build a simulation model of technology development and adoption under constraints, and compare it to a case study from copper mining industry. Rather than focusing on jury-rigged temporary solutions, we are interested in innovations that remain in use even after the constraint has been lifted. The results suggest that unexpected constraints only rarely lead to lasting innovations as such, but they drive firms to adopt previously developed, more efficient technologies and accelerate convergence to a dominant design. The effects are moderated mostly by competitive intensity and the complexity of technologies. The results help to reconcile two opposing viewpoints on the role of constraints and have public policy implications in e.g. the success measures of green growth initiatives.

Introduction
Does necessity give birth to new, improved technologies? A burst of recent research suggests that under certain circumstances, innovations (defined in this paper as the implementation of ideas, procedures and structures that are novel to the organization; e.g. Amabile et al., 1996) can be facilitated by introduction of constraints (Garud and Karnoe, 2003; Gibbert and Scranton, 2009; Gibbert and Vlikangas, 2004; Gibbert et al. 2007; Goldenberg et al., 2001; Hoegl et al. 2008, 2010; Moreau and Dahl, 2005; Peck et al. 2010; Popp et al., 2011; Srinivas and Sutz, 2005; Starr and MacMillan, 1990; Vlikangas and Gibbert, 2005, Weiss et al., 2011). The conclusions of these studies broadly agree that constraints (discontinuities that force firms to unexpectedly change its accustomed working practices, e.g. tightening regulation, pollution limits, and resource shortages) may facilitate innovation in some but not all conditions. For example, economic historians Rosenberg (1976) and Hughes (1983) have argued that innovations tend to be made in response to bottlenecks or technological reverse salients, and research on environmental innovation has found that regulatory constraints are the primary driver of innovation (Popp, 2006; Popp et al., 2011). Although meeting tightening regulatory and other challenges will clearly require firms to adopt new technologies, the question whether constraints, as a rule, either

benefit or hinder technological development remains open. If we define technological development as a process towards increasingly efficient-for-purpose solutions to a given problem, do constraints lead to less or more efficient solutions? In addition, studies on the role of constraints potentially suffer from a selection bias, as only successful developments tend to survive to be studied. In fact, examples of innovation that have been clearly motivated by constraints but have remained in use afterwards remain relatively scarce. In many cases where an invention seems to have originated from a specific constraint, an argument can be made that (a) its origins may be in development work done prior to constraint, even if the constraint was unexpected (see e.g. Arthur, 2009; Schoenmakers and Duysters, 2010) and (b) its continuous use may have been dependent on subsequent improvements and modifications that would have not been possible under conditions of original constraints. Arguably, some constraints can open previously blocked development paths and lead to overall higher performance. Equally arguably, other constraints may result to paths that lead to lower performance. This paper is positioned to extend the existing research on the role of constraints in innovation (e.g. Hoegl et al., 2008, 2010; Gibbert and Scranton, 2009; Gibbert and Vlikangas, 2004; Gibbert et al. 2007; Weiss et al., 2011), on the origins of radical innovations (e.g. Schoenmakers and Duysters, 2010), and on regulation-driven innovation (e.g. Popp, 2006; Popp et al., 2011). The main contribution of this paper is in developing a model for assessing whether constraints as a rule tend to have positive or negative influences on the development and adoption of novel technologies. The focus of this paper is on the most interesting cases of constrained innovation: those where the innovation remains in use even after the constraint is removed. A linked contribution is the assessment of the role of constraints in the emergence of new technological paradigms (Dosi, 1982). In addition, the micro-level dynamics of technology development and adoption as a result of constraints are not clear. If constraints spur innovation, the effect of constraints should be to increase the variety of technologies in use, at least temporarily. The evolutionary model of technical change (e.g. Dosi, 1984; Nelson and Winter, 1982; Sahal, 1981) suggests that as old path dependencies are loosened and dominant designs suffer from discontinuities, the resulting era of ferment should bring about a period of technological experimentation (e.g. Van de Ven and Garud, 1993; Abernathy, 1978; Basalla, 1989). Research so far has attributed this variety creation either to exogenous stochastic technological advances that extend the space of possible solutions (Dosi, 1982; see also Kaplan and Tripsas, 2008) or to differences in cognition guiding actors framing and interpretation of the technology (Kaplan and Tripsas, 2008). The role of exogenous limiting discontinuities, i.e. constraints, is less studied. On the other hand, the extent of technological experimentation should be moderated by the companies need to quickly adopt workable solutions to their pressing problems. Therefore, this paper attempts to model the interaction of these effects and determine which of the two opposing forces - the variety-increasing fermentation or the variety-decreasing competitive pressure tend to be dominant in a discontinuity caused by the introduction of constraints. The paper is structured as follows: first, we discuss prior research into the nature of constraints and innovation. Second, we introduce a case study from copper manufacturing industry. This study serves as a context and as an example for a simulation model of the effects of constraints on innovation. We then compare the assumptions and the results in the simulation to empirical observations. Finally, a discussion and conclusions is provided.

The Nature of Constraints: some prior explorations

The role of constraints in innovation has been acknowledged for long in maxims such as necessity is the mother of innovation, but research remains surprisingly rare. Constraints are usually lumped together with other exogenous events that alter the environment where firms operate. Explicit research on constraints has divided to two streams of research. The resource slack research, focusing mostly on financial constraints, tends to either see constraints as negative, limiting factors that bound individual and organizational performance and limit exploration (e.g. Amabile, 1996; Ancona, 1990; Camison-Zornoza et al. 2004; Damanpour, 1991; Gassman and von Zedtwitz, 2003; Nohria and Gulati, 1996). This research stream makes an argument that innovators access to financial resources resource slack - is a key determinant of its performance. The breaking the barriers research stream, on the other hand, sees constraints as focusing devices (Bradshaw, 1992; Frenken, 2006) that help individuals and organizations focus their attention and cognitive resources to overcome technological bottlenecks (Rosenberg, 1976) or reverse salients (Hughes, 1983) that hold up technological progress. According to this view, constraints force otherwise complacent firms to rethink traditional practices and adopt new ways of working (Arthur, 2009; Gibbert and Scranton, 2009; Gibbert and Vlikangas, 2004; Hoegl et al., 2008, 2010; Katila and Shane, 2005; Mone et al., 1998; Nonaka and Kenney, 1991; Srinivas and Sutz, 2005; Vlikangas and Gibbert, 2005; Weiss et al., 2011). In support of this view, research on environmental innovation has noted that regulatory constraints are the key drivers of innovation in many industries (Popp, 2006; Popp et al., 2011). However, the research findings are far from conclusive: for example, empirical evidence suggests that abundant financial resources can also lead to unhealthy complacency and favor incremental adaptation and exploitation instead of exploration (Mishina et al., 2004; Tan and Peng, 2003). Similarly, the beneficial effect is tempered by e.g. increased complexities introduced by additional design requirements (Arthur, 2009). The diverging views have caused commentators to explain that innovations can happen because of or despite constraints (Gibbert and Scranton, 2009; see also Weiss et al., 2011 and Hoegl et al., 2010). A careful reading of literature suggests that these two, superficially incompatible views can be reconciled. Constraints come in different forms, and while exogenous non-financial constraints may very well cause eras of ferment that spur innovation, financial constraints may make exploitation of these explorations difficult. Much of the rest of this paper will explore the assumption, focusing on the non-financial constraints and competitive dynamics.

Historical case study: resource constraints and the development of autogenous copper smelting
In the first half of the 1900s, copper smelters used energy from coal, oil, gas or electricity to smelt the ore. To improve the efficiency of the process, experiments in utilizing the latent energy of sulfurous metal ores had been carried out since the 1870s, with first patents being awarded in 1897 (Inco, 1955). In theory, by burning sulfur one might dispense with external energy altogether. Some pilot plants with simple sulfur-burning or autogenous furnaces were in fact built in the early 1900s (Newton and Wilson, 1942; Srkikoski, 1999; Inco, 1955) but the technologys limitations, uncertainties over recouping high fixed costs inherent in industrial-scale trials, and a general lack of concern for energy efficiency prevented the technology from taking root in the industry. Largely for these reasons, technological progress within copper smelters was limited to minor improvements on existing furnaces.

Birth of flash smelting

When research resumed after the interruption of the Second World War, autogenous smelting was discovered again. In Canada, mining giant Inco pursued increased productivity for its huge smelters (Saddington et al., 1966). Building on its pre-war research, it quickly homed on newly available oxygen generators. Incos solution was essentially an incremental improvement to its existing reverberatory furnaces: instead of fossil fuels, tonnage oxygen was injected to ignite sulfur in pulverized ore concentrate. This almost completely eliminated the need for fossil fuels, increased productivity, and reduced emissions (Queneau and Marcuson, 1996). The resulting Inco flash furnace was demonstrated on commercial scale in January 1952 (Queneau and Marcuson, 1996). As one of the largest mining companies in the world, having essentially inexhaustible resources and operating in a country untouched by bombings, Inco faced few to no constraints in R&D. In contrast, a small, state-owned Finnish copper company Outokumpu was in dire straits. Just before the war, Outokumpu had invested heavily in electric furnaces, completing the worlds largest electric copper smelter in 1936. Unfortunately, one of the demands of the 1945 peace treaty stipulated that two large hydropower plants had to be ceded to the Soviet Union. The resulting electricity shortage was an existential threat to Outokumpu (Srkikoski, 1999; Habashi, 1993), The crisis gave precious little time to conduct extensive research; furthermore, Outokumpus access to advanced technology was severely curtailed by post-war disruptions and currency limitations. These effectively precluded foreign technology purchases (Srkikoski, 1999; Habashi, 1993; Bryk et al., 1958). Fortunately, familiarity with pre-war research and practice provided them with components necessary for a novel innovation. Developed in just about three months in late 1945, Outokumpu flash furnace integrated a pre-existing idea - burning pulverized ore concentrate - with components and know-how from coal power plants and sulfur-extracting roasting furnaces (Srkikoski, 1999). Instead of unavailable, electricity-dependent oxygen generators, Outokumpus furnace design used waste heat from outgoing flue gases to preheat incoming air. Sulfurous ore could then be injected to the hot air and ignited. Outokumpus flash furnace was demonstrated in commercial scale in February 1947. Ironically, the electricity rationing that had inspired Outokumpus development efforts was lifted just three months before the first flash furnace went operational.

Spread of flash smelting: emission controls and the 1973 energy crisis
The first licensee for Outokumpu was the modernized Ashio smelter in Japan, which contracted for a complete turnkey delivery in 1954. After this initial reference, two major constraints facilitated the spread of Outokumpus technology. The first constraint became apparent in the early 1960s, as copper industry was increasingly put to account for its harmful emissions. Starting from Japan, many copper producers concluded that modifying their existing furnaces to comply with tightening emission controls would be uneconomical. Outokumpus solution provided easier emission control, and as a bonus, would increase energy efficiency as well. This resulted to sales to nine smelters (see Figure 1). The second major constraint was the 1973 energy crisis. While environmental regulations were tightening as well, this time the key driver was energy efficiency. Combined, these two reasons caused ten additional smelters to adopt Outokumpu furnaces between 1973 and 1990 (Srkikoski, 1999). At the same time, the old mainstays (reverberatory, blast and electric furnaces) became uneconomical for energy and environmental reasons. This led to a consolidation of industry and left Outokumpus furnace the dominant design in newer, larger copper smelters.

Figure 1. Technologies used at major copper smelters, 1930-1990. Data from Biswas and Davenport (1976), Davenport et al. (2002), and U.S. Bureau of Mines Minerals Yearbooks, 1933-1990. (Note: As furnace sizes vary and a smelter may operate more than one furnace, the graph shows smelters using particular furnace technology, rather of the total number of furnaces.) In contrast, Inco was never particularly interested in technology sales. In fact, for the first 25 years Inco did not license its technology to anyone. This was largely due to a potential threat for Incos mainstay nickel business, as the furnace type was particularly economical for nickel smelting as well (Brundenius, 2003). Another likely factor was that income from technology sales would have been barely visible on giant Incos balance sheet; for example, the contract with Ashio smelter was worth only $156 000, or around $1.3 million in 2011 money (Srkikoski, 1999). It is worth noting, though, that Incos method did remain technically superior up until to the 1970s, with lower overall energy consumption and higher productivity (Biswas and Davenport, 1976). However, when Outokumpu introduced oxygen injection in the 1970s, the technological gap nearly disappeared (Figure 2).

Figure 2. Efficiency and productivity developments in copper furnaces (Biswas and Davenport, 1976; Bryk et al., 1958; Davenport et al., 2002; Saddington et al., 1966). Why, then, other manufacturers failed to develop flash technologies? Based on the evidence, the most probable reason seems to be that they lacked a compelling reason to do so. In a commodity business where investment costs are high and competition intense, developing or adopting untested processes represents a substantial risk for the operator. As previous research (e.g. Popp, 2006; Popp et al., 2011) has shown, regulatory or other constraints were usually needed to persuade producers to develop or adopt new technologies. It is very likely that Outokumpu itself wouldnt have taken the gamble without the constraint imposed by the post-war energy shortage. In fact, it is uncertain whether it would have even adopted the technology, had the electricity rationing simply been lifted before the first flash furnace was completed. A comparison can be made to Boliden, in many ways a similar copper company in neighboring Sweden. When Boliden redesigned its Rnnskr smelter in 1948, it simply adopted tried and tested electric furnaces supplied with abundant electricity from Swedish hydropower plants (Herneryd et al., 1954).

Modeling constraints with an NK framework

Although the case study strongly suggests that constraints can advance technological change, the evidence on the overall effects of constraints is inconclusive. Developing proper case studies is hampered by the lack of reliable accounts describing the birth of constraintinduced innovations. What studies there are tend to focus on success stories, raising a question of selection bias. Furthermore, when studying the effects of constraints on the evolution of technology, the theoretical focus is on longitudinal and nonlinear dynamics. These conditions make simulations an attractive methodology (Davis et al., 2007, p. 481) To experiment with history, we have created a simplified model of innovation and disruptions caused by introduction of constraints. The model is based on NK fitness landscapes, originally introduced by Anderson (1983; 1985) and famously adapted by Kauffman (1993) to the study of evolutionary biology. The NK model has been previously used in important work in strategy and organizational literature (Levinthal, 1997; Levinthal and Warglien, 1999; Rivkin, 2000; Rivkin and Siggelkow, 2002). The model has also been

previously used to study innovations in a manner very similar to this present work (e.g. Almirall and Casadesus-Masanell, 2010; Ethiraj and Levinthal, 2004; Frenken et al., 1999; Frenken, 2006). Although simulation studies of innovation are becoming more common, we do not know of prior efforts to simulate explicitly the effects constraints have on innovation.

Modeling the effects of constraints

In order to study the effects of disruptions due to constraints in as simple model as possible, we consider technologies that utilize N components. These components represent the decisions and trade-offs that the designer needs to take account when designing a technology, e.g. different materials, differing energy sources, different subsystems, different requirements, or different ways of organizing a group of people. Although a more general model (e.g. Valente, 2008) would allow for more than two states per component, the common binary (0/1) assumption results to the simplest and most tractable model without undue loss of generality. Therefore, in our model, the simulated organizations have to make decisions concerning N components, with each decision having two options. Each combination of N options is assumed to lead to a different performance of the technology. In other words, there is a mapping between the design of a technology and its performance. We consider performance to be an abstract value that denotes the goodness or fitness of the technology, for example, its productivity. As is the convention in the literature utilizing NK models, for reasons of simplicity most parameters can be considered exogenous and fixed for the duration of each simulation run, without detracting from the simulations usefulness (see e.g. Sorenson, 2002).

Representing technology and its performance in the NK model

Formally, a technology is represented in the NK model by a string R of N components (r1, r2, rN), where each ri represents a choice of {0, 1}. These realized choices contribute to the overall fitness, or performance, W of the technology so that each possible choice configuration Ri has an individual Wi. The complexity of the technology is modeled with a variable K, which determines the interconnectedness of the components. Thus, the contribution wi of each resource ri depends on K other components. For each of 2K possible combinations, a value is drawn from a uniform distribution over the unit interval [0, 1]. The overall performance W of each individual technology string is the average over N value contributions, and each individual technology string has a specific performance W.
N

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In the equation, rij j = (1, , K) are the combinations of the K components that are interconnected with the component ri. As is the norm in the literature, in absence of specific knowledge, we assume that interdependencies are determined randomly.

Search strategies: incremental (local) and radical (long jumps)

In short, the model represents a possibility space where individual firms search for the best possible technology among 2N possible resource configurations. In practice, the search proceeds by the firms varying the configuration of one resource at a time. There are various search strategies the firms could possibly use in this landscape, but we assume that firms look at the alternatives that are one step away from their current position, and then select the first alternative that increases the technologys performance. If the firm cannot alter any

configuration without decreasing the performance, the search will stop. This local search is the simplest search heuristic that captures the idea that firms cannot know in advance which combinations of features would eventually provide the best overall performance. Although most literature assumes that firms look at all the alternatives and select the best one (socalled greedy search; see e.g. Frenken, 2006), we feel that our assumption captures slightly better the incremental, somewhat unplanned and uncertain nature of technological development and technological path dependency (e.g. Dosi, 1982; in addition, Ward, 1994 proposed a path of least resistance model of creativity which leads to the same conclusion). Because this local search stops once there is no more room for improvement, it is prone to get trapped into local maxima when the mapping is complex. This represents the effects of path dependency and the difficulties firms have in switching the horse due to financial and psychological reasons. As an example drawn from the case study, several authors (e.g. Srkikoski, 1999; Biswas and Davenport, 1976) have noted that copper smelters have historically been reluctant to radically alter their operations before the need becomes compelling. We have also modeled an alternative to local search, called long jumps. These represent radical innovations, and are initiated if a firm finds its technologys performance to be less than a predetermined percentage of industry average. As usual in the literature, radical innovations are represented by the firm randomly drawing a new string r + R. The length of new string r is varied in different simulations so that 1 r R, i.e. r components are changed simultaneously and (R r) components are retained. This variable length of the new string represents different search distances, and can be conceptualized as the breadth of ideas designers can use when trying to design around the constraint. If the new strings performance is an improvement to old string, it is adopted.

Modifications to the basic NK model: competition and constraints

We have added two modifications to this general NK framework to model the dynamics of firms competing in the same marketplace and effects of constraints. First, to model the competitive dynamics affecting the development of technologies, we allow betterperforming technologies to be imitated. The imitation is initiated similarly to long jumps. If a firms technology lags sufficiently behind the industry average in performance, it chooses randomly between long jump and imitation. As is customary in the literature (e.g. Kauffman et al., 2000; Ethiraj and Levinthal, 2004; Almirall and Casadesus-Masanell, 2010), the imitating firm chooses a better-performing technology at random, with the likelihood of a particular technology being chosen being proportional to its performance. In other words, better technologies have a better chance to be copied and thus they spread in the marketplace. It is worth noting that our model is equivalent to a model where firms whose performance is sufficiently poor exit the market and are replaced by new entrants either adopting a best available technology or developing new technologies. Second, the effect of constraint is modeled by forcing the firms to set the configuration of one (or more) component to 1 for the variable duration of the constraint. This represents a sudden lack of some critical component, introduced by some exogenous supply shock such as material shortage, war, or changing regulation. As long as the constraint is in force, imitation and long jumps are limited to strings that comply with the constraint. Otherwise, firms are free to long jump and copy any string that fits the criteria outlined above. This simple model corresponds to an absolute resource constraint, where a particular component (i.e. configuration 0) is no longer available at any price. Although many reallife constraints are not absolute, and instead only increase the price of a component, we believe our abstraction captures the essence of constraints impact - that a firm needs to

develop an alternative - in a simple yet effective way. In the view of example case presented above, we think this simplification is defensible. Finally, we are especially interested in the performance of novel technologies once the original constraint has been lifted. To this end, the constraints last only a variable number of turns, after which the firms are free to change the constrained components configuration.

Simulation mechanics
For this paper, we have set N = 16. We completed multiple series of simulation sequences with varying parameters for imitation propensity, long jump search length, and complexity K of the technology. Each simulation sequence contains 50 individual simulation runs for each K = 015. The performance landscape and starting technologies for 100 individual firms are determined randomly for each run. During runs, firms search the landscape for the technology that offers the highest performance (local maxima), measured by fitness W. The constraint is introduced at turn 15, when all firms have already found their local maxima. The constraint forces all the firms to alter the state of one predetermined component to 1. In these simulations, the constraint lasted five turns and was lifted at turn 20. All the simulation runs had found a new, stable local maximum by turn 30. Each simulation sequence therefore includes 800 simulation runs, 50 for each K value. Simulation series consist of multiple sequences, where other parameters are altered. The main parameters altered between simulation series are represented in Table 1. We also explored the simulations robustness to parameter changes and possible hidden nonlinearities. These robustness checks included testing with variable constraint durations, variable number of organizations (10, 50, 100, 150 and 200), and with more than one components configuration constrained. We also tested the simulations behavior when the search dynamic was replaced with random mutations. In addition, the simulations behavior at close to extreme values of imitation/long jump threshold (1% and 99%) was tested. The simulations behavior appears linear and the results are broadly robust to these changes. The exception is that random mutation search produced a slightly different performance bias. This difference will be discussed below.

Table 1. Simulation parameters.

Simulation series Imitation/long jump threshold* Long jumps enabled Long jump search distance Simulations sequences

1. Varying imitation threshold 0-100%, 5% increments No 21

2. Long allowed 75% Yes 1-16 16

jumps

* = Imitation/long jump threshold is the percentage of average performance that triggers either imitation of more successful technology or a long jump. If long jumps are enabled, the firm has an equal probability either to imitate or long jump.

The simulation was build by extending a freely available Sendero NK model (Padget et al., 2009) in RePast/J environment. Source code and the data can be obtained from the authors.

Simulation results
As the core interest of this paper is to examine how unexpected constraints affect the evolution of technology, we begin by comparing the effects of constraint on average performance achieved over multiple simulation runs. We then describe how changes in parameters affect the odds of positive or negative change as a result of a constraint. We also study the role of constraints in the emergence of novel technologies. Finally, using entropy statistics, we analyze the effects constraints have on the variety of technologies in use. Due to large number of individual simulation sequences and relative robustness of the results, this paper concentrates on six representative simulations. The simulations and their parameters are described on Table 2 below.
Table 2. Summary of parameters of representative simulations.

Simulation name a) No imitation allowed b) Imitation threshold at 75 % c) Always imitate d) Radical innovation, short search e) Radical innovation, medium search f) Radical innovation, distant search

Imitation threshold 0.75 1.00 0.75 0.75 0.75

Long jumps No No No Yes Yes Yes

Long jump length N/8 (2) N/2 (8) N (16)

The effects of constraints on average performance

For all individual simulated firms in each run, we calculated the difference AFT BEF, where AFT denotes the firms technologys average performance after the constraint (at turn 30) and BEF the average performance before the constraint (at turn 14). This results to a dataset of 5000 observations per K value for each simulation setting. To determine whether constraints generally are beneficial or harmful, we calculated the average and standard error of these observations for each K value. The results for six representative simulation sequences are plotted in Figure 3. The left-hand vertical axis marks the change in average performance AFT BEF as a percentage of average performance before constraint. The horizontal axis represents the K value. Error bars indicate standard errors of the mean, black dotted lines indicate one standard deviation from the mean, and the red horizontal lines mark the level of zero change. Finally, thick red solid line and right-hand vertical axis measure average performance after constraint. As can be seen, on average, constraints have a very slight but positive effect to the performance of simulated technologies. However, the changes are only rarely statistically significant. In addition, variability as indicated by the dotted line marking one standard deviation from the mean is relatively high for all but the simplest technologies (low K values). The interpretation is that constraints have a nearly equal likelihood of either helping or hindering technological progress, but they come with a slight positive bias. The finding is consistent with the dichotomous nature of previous literature on the effects of constraints (e.g. Hoegl et al., 2008; Gibbert et al., 2007; Vlikangas and Gibbert, 2005; Weiss et al., 2011). The results are very robust over a wide range of simulation parameters. Changing the search dynamics to random search produces essentially the same result, although the bias then becomes slightly negative and variance increases. The only notable anomaly observable in the results is that both the largest losses and greatest gains in average performance were seen in the simulations where competition was most intense (imitation threshold near or at 100%). Three factors account for this difference: first, more homogenous industries have less

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variety to start with. When a constraint is imposed, lack of variety means lack of options that could act as platforms for further development. Second, more intense competition does not give time for technologies to fully develop. Even a promising technology path is likely to be abandoned, if it doesnt provide clear and immediate benefits. As a result, breaking the path dependency and developing truly novel alternatives becomes difficult. Thirdly, however, intense competition also ensures that if the constraint leads to a performance breakthrough, it is speedily adopted throughout the industry.
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Figure 3. Mean change (thin line with error bars) and average performance (thick line) after constraint. Error bars indicate standard error, dotted line one standard deviation.

Odds of change: how likely are the improvements?

To gain more detail about the effects of constraints, we plotted the likelihood a constraint would spur an individual firm to improve its technology. The odds of change were determined by calculating the number of observations exhibiting positive, negative or no change when comparing performance before and after the constraint. The results, cumulatively plotted to two tables, are presented in Figure 4 below.

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In each plot, the area below lower lines represents the percentage chance of constraint to result to performance decreases. The area above upper lines represents the chance for the constraint to increase performance. The area between two sets of lines represents the chance that constraint has no effect in performance. The dashed horizontal line denotes 50% chance. The plots reveal that the probability for both positive and negative change increases as complexity K increases. Increasing the imitation intensity parameter above 80% (imitation threshold) produces results that differ most from the overall trend. In all cases, the most probable outcome is no performance change. Allowing firms to search farther for radical innovations does not have an appreciable impact on the probabilities. As can be seen from the near-identical plots, the odds are largely determined by imitation threshold (set to 75% in radical innovation simulations). In short, more options may not translate to better odds, and as Figure 3 above shows, there is little to no direct performance benefit either.

Figure 4. Odds of change. Left panel with varying imitation thresholds, right with varying radical innovation search lengths. Variance on left panel is exclusively from high imitation threshold (>70%) simulations.

The influence of constraints on the emergence of novel technologies

In many simulations, the technologies that were ultimately used to go around the constraint were not developed as a response to the constraint: often, simulated firms had used them even before the constraint was introduced. To determine the extent to which preexisting designs were used and the likelihood of novel technologies emerging as a result of constraint breaking the technological path dependency, we compared the technologies in use before the constraint to technologies being used at the end of the simulation. The results of this comparison, along with average performance achieved, are plotted on Figure 5 below. In the plots, black line represents the percentage of pre-existing technologies out of all technologies in use at the end of the simulation (i.e. 100% indicates that all technologies in use at the end were in existence before the constraint). Error bars indicate standard errors of the mean, and dotted black line marks one standard deviation.

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a) No imitation allowed
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Figure 5. Share of pre-existing technologies out of all technologies in use after a constraint. Error bars indicate standard error, dotted line one standard deviation. The results indicate that in general, well over half of the technologies used at the end of the simulation existed before the constraint. In environments where imitation is intense, over 80% of technologies may be pre-existing, although variability tends to be very high: cases where no technologies were in use before constraint are relatively common, as well. As explained previously, the dynamics of intense competition can produce both results, and thus help explain the dichotomous nature of previous explorations. As was the case with performance, allowing radical innovation does not greatly influence the results. It is also worth noting that the results are statistically more robust than the results on average performance. Interestingly, the results are robust to the number of organizations (i.e. initial starting positions). The figures only include technologies that were identical to those existing before the constraint. This further underestimates the importance of pre-existing technologies, as observations of individual simulations suggest that firms may copy an existing constraint immune technology at the beginning of the constraint, and then develop it into a novel

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technology. However, measuring this effect and differentiating between imitation and independent but convergent development was not feasible with the current data set. These findings suggest that constraints are more likely to cause firms to adopt existing technologies than to spur them to develop radically new technologies.

The effect of constraints on technological variety

A positive change in average technological performance can result from either firms developing new, superior technologies, or from imitating existing (or recently developed) technologies from other firms. The intensity of imitation can be analyzed by calculating the entropy statistics for the technologies in use before and after the introduction of constraint (Frenken, 2001). Entropy statistics applied to frequency distributions of individual designs (16-bit strings) can describe the evolution of a technology in terms of the changes in the degree and nature of product variety (Frenken, 2001:138). The entropy of the distribution of designs indicates the extent to which the designs within an industry (individual simulation) are characterized by dominant designs. Maximum entropy corresponds to the case in which all designs occur at the same frequency, and minimum entropy (zero) to the case in which there is only a single design that is used by all firms in the simulation. We calculate the entropy H of an N-dimensional distribution (Theil, 1972: 116, 155) as follows:

where ijw are individual components and pijw is the frequency at which a design with components ijw occurs. The entropy H is measured in bits. The results for representative simulations are displayed in Figure 6 below. The figures plot mean entropy during simulation runs for five component interdependency settings (K = 0, 4, 8, 12 and 15). Hatched area indicates the period during which constraint is applied (turns 1520). Standard errors of the mean are too small to be visible. The plots show that no-interdependence technologies (K = 0) reach quickly the global optima, i.e. single optimum configuration, where entropy is zero. As interdependence K between components increases from zero, the variety of feasible designs increases as well. Applying the constraint reduces the variety of feasible designs. In simulations where imitation is allowed, constraints also create an incentive to copy better-performing technologies, further reducing variety. Panel c) in Figure 6 illustrates what happens when competition is extremely intense: only a few designs, at most, survive even before the constraint, and fewer still after. In short, constraints lead to a marked decrease in the technological variety, especially when competition is intense (high imitation trigger value).

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Figure 6. Mean entropy (average variety of technologies in use) in representative simulations. Hatched rectangles indicate turns when constraint is in force.

Robustness and limitations: comparison with the case study

The robustness, validity and generalizability of simulation studies should always be assessed carefully. We believe that the basic assumptions (technological development as a myopic process, path dependency, the role of constraints, and competition) made in this study hold relatively well for many real-life contexts. In the following, we first compare the assumptions made in the simulations to observed historical dynamics. We then compare the results of the simulations to observed realities.

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Comparison of simulation assumptions to historical dynamics

The comparison of assumptions made in the simulation model with the dynamics observed in reality shows that the assumptions seem to match reality relatively well. Based on technical literature (Biswas and Davenport, 1976; Davenport et al., 2002; Kojo and Storch, 2006; Kojo et al., 1999; Queneau and Marcuson, 1996; Saddington et al., 1966) and interviews with copper metallurgists, copper furnaces can be conceptualized as a technology with approximately 16 important design dimensions, or components (N), with 2-3 alternatives and roughly 3-5 important interdependencies (K) between components. The dimensions on Table 3 below can define all the copper smelting technologies used between 1930 and 1990. For the most part, technological search in the copper industry was local and concentrated on incremental improvements of existing technologies. Investments in existing technologies and high capital costs meant that firms had to have considerable incentive before changing their technologies. The performance of competing solutions was relatively straightforward to measure, for example as tons of processed concentrate per day or as cost of copper produced. Firms whose technologies were not performing did license or copy better technologies. Although the imitation threshold level that corresponds to the historical case is impossible to quantify exactly, we feel that a plausible case can be made for a realistic threshold level being in the 75-95% range for the most of the time period under study. Finally, real-life constraints clearly had uneven effects on technologies used.
Table 3. Copper furnace design dimensions. Approximate N 16, K 4.

Design dimension Furnace direction Furnace shape Smelting reaction type Energy source Gas blow Blast preheat Oxygen injection Ore granularity requirements Ore moisture requirements Waste heat recovery Sulfur dioxide (SO2) recovery Offgas SO2 concentration SO2 leaks Dust evolution Cooling Time between refurbishments

Primary alternatives Horizontal, vertical Rectangular, round Bath reactions, suspension reactions Fossil fuels, electricity, autogenous Not used, burners/tuyeres/lances Not used, used None, enrichment, significant None, fine ore required None, dry ore required Not used, used No concern, necessary Dilute, concentrated No concern, should be minimized No concern, should be minimized Convection, watercooled Less than 1 year, up to 2 years, longer

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Comparison to simulation results

The case briefly outlined above can be thought to represent three consecutive resource constraints post-war energy scarcity, introduction of emission control regime, and the 1973 energy crisis. The dynamics represent one relatively typical outcome observed in simulations where imitation threshold is moderate to high (over 70%). In these simulations, it is common for one or two superior technologies to emerge before the constraint. However, most firms lack an incentive to adopt these immediately. Only firms unable to cope with their existing technology, like the Ashio smelter in the case study, adopt it. Constraints can often change the situation. In simulations where a superior technology exists and remains unaffected by the constraint, there is a high likelihood that firms will try to imitate it. In these cases, it is typical for average performance to increase. Furthermore, this new technology may offer new opportunities for further development, which increase the performance even further. The parallels to the case study above are obvious. The validity of the simulation seems to be enhanced by the fact that parallels to all three consecutive real-life constraints and their dynamics can be found from the simulations. For just one example, see Figure 7 below. It details a simulation run where resource constraint resulted to the abandonment of old technologies, and to the emergence of improved technology. The parallel to the Outokumpu case would be even more evident if simulated firms had not been able to license technology 2, and had instead turned to technology 1.

Figure 7. Example of simulation dynamics: constraint eliminates one technology, damages another, which then improves to become the best-performing technology.

Limitations of the study

Based on the above comparisons, we feel that our simulation captures the essential dynamics of many process industries (e.g. mining, metals manufacturing and energy generation), where the performance of a technology is relatively straightforward to measure (e.g. processing capacity) and high capital costs hinder technological experimentation. However, the results may not be generalizable to industries where experimentation is easier and/or performance measurements are more ambiguous. In addition, the simulations assume that the need must be fulfilled by some technology. It is entirely conceivable that a resource constraint causes a broader realignment and a reconsideration of what is needed and how the need can be alternatively satisfied. In those cases, the dynamics might differ.

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Discussion, conclusions, and implications for future research

The motivation driving this research was the paucity of empirical studies on the effects nonfinancial constraints have on the development of technology and technological change. As e.g. Gibbert and Scranton (2009) and Hoegl et al. (2010) have already proposed, the simulations suggest that constraints themselves are largely a neutral force: they are nearly equally likely to lead to the development and adoption of superior or inferior technologies. They are not very likely to lead to adoption of completely new technologies; in most cases, adopted technologies had existed prior to the constraint. The outcome is surprisingly resistant to changes in parameter values, remaining even if radical innovation is allowed to break the path dependency. These results are in line with research by e.g. Schoenmakers and Duysters (2010), who concluded that radical innovations re-used existing technologies to a large extent. Nevertheless, the study also shows that constraints can lead to development and adoption of superior technologies. The dichotomous nature of previous work on resource slack on the one hand (e.g. Amabile, 1996; Ancona, 1990; Camison-Zornoza et al. 2004; Damanpour, 1991; Gassman and von Zedtwitz, 2003; Nohria and Gulati, 1996) and the breaking the barriers on the other (e.g. Arthur, 2009; Gibbert and Scranton, 2009; Gibbert and Vlikangas, 2004; Hoegl et al., 2008, 2010; Katila and Shane, 2005; Mone et al., 1998; Nonaka and Kenney, 1991; Srinivas and Sutz, 2005; Vlikangas and Gibbert, 2005; Weiss et al., 2011) on the nature of constraints could thus be explained: both views that constraints impoverish and that they facilitate seem to be correct and can be justified. However, the case may be that constraints do not tend as a rule to produce significant technological breakthroughs, and research based on success stories may be somewhat biased. If the simplified dynamics used in these simulations hold even approximately, this paper could explain why there are only a few success stories whose origin can be traced to a constraint. All other things being equal, instead of spurring new technological advances, constraints seem to play a more limited role by forcing companies to adopt new technologies. Previous research (e.g. Popp, 2006; Popp et al., 2011) has concluded that regulatory constraints are the primary driver of innovation. A more nuanced reading might be that constraints are an important driver for adoption of innovations, not so much for developing them. A sudden need that makes existing technologies perform poorly at the task a constraint directs the search more towards existing instead of novel solutions. In particular, firms operating in intensely competitive environments may be faced with a need to quickly find a satisfactory technology, by copying or otherwise, or exit the market. The end result for this intense competition may be that variety of technologies used will decrease, better technologies cannot be developed, and industries become more vulnerable to future constraints, as a monoculture of dominant designs takes over the industry1. These results are of interest to the evolution of technology research stream. Previous research (e.g. Dosi, 1982; Kaplan and Tripsas, 2008) does not usually distinguish between different kinds of discontinuities. The results presented suggest that the effects of different exogenous discontinuities may not be symmetrical, and further research towards prying open the impact different discontinuities have might be worthwhile.

Although constraints were introduced only once for each simulation, the difference between before and after states in simulations with high imitation intensity is only that the variety of technologies in use has decreased even further. Should such an industry suffer another constraint, it is very likely that its performance would decline even more.
1

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Overall, the research adds to the literature on innovation and technology adoption by providing a plausible explanation for the conflicting views on the role of constraints in the evolution of technology, and point towards further, empirical research to validate the patterns detected in the simulations. For example, are technological advances discontinuities that explicitly improve the performance of technologies, or are the dynamics more complex than that? Future research might also try to establish whether a success bias exists in previous research on constrained innovation, and to what extent constraints act as drivers for adoption of previously developed technologies. Further research would also be beneficial to verify the conclusions of this study and to identify factors that influence whether constraint impoverish or facilitate. In addition to theoretical interest, the results presented here have at least two implications for public policy. First, as Popp et al. (2011) point out, innovation and efficiency are not the same things. As this paper illustrates, although constraints such as changes in regulatory regime may very well drive development and adoption of new technologies, there is no guarantee that they will also drive improvements in technology. Policy-makers and interest groups in many countries have claimed that tightening regulation for example, CO2 emission standards will drive innovation, and hence increase prosperity while decreasing harmful side effects. While this is a possibility, our findings warn against overreliance on the number of innovations or patents as a measure of efficacy for such schemes. Tightening regulations will probably spur the development and, in particular, adoption of new technologies, but the net impact cannot be quantified simply as a number of patents or with some similar measure. A need for further research on better indicators is obvious. Second, this paper highlights the prevalence of adopting existing technologies as a response to constraints; as argued above, many constraint-induced innovations can in reality be adaptations of already existing technologies. The role of constraint would then be to actualize the need for these technologies or provide a stimulus for actually funding them. Once investments are made and the industry has converged on a single dominant design, breaking the path dependence will be difficult. An important implication would be that constraints such as energy and material shortages or regulatory changes will be come as you are crises: there will be little opportunity to wait for developing technologies, as individual users will adopt (and be locked into) best available existing technologies whatever those may be. If true, the likely effects of such shortages could be largely assessed in advance. Or, as science fiction author William Gibson put it succinctly, the future is already here its just not very evenly distributed.

Acknowledgements
This research was supported in part by generous grants from the Foundation for Economic Education and Jenny and Antti Wihuri Foundation. The authors would like to thank professor Liisa Vlikangas, professor Jaakko Aspara, Matthias Weiss and Matthew R. Karlsen for their valuable comments and suggestions.

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