Lecture 1

AN ECONOMIC VIEW ON
INNOVATION AND INVENTION
Week 1

Lecturers: Ngoc Q. PHAM, Huy Nguyen, Van T. Bui

Tutors: Trong Nguyen, Huong Tran, Van T. Bui
Structure of lecture 1
1. Invention, Innovation and Diffusion

2. Demand Pull or Technology Push

3. Technology as a Public Good : The IBM vs Apple

case (tutor)
INVENTION, INNOVATION
AND DIFFUSION
 Major innovations, 1764-1835
Innovation Year Innovation Year
Spinning machine 1764 Isolated conduction 1820
Steam engine 1775 Rolled wire 1820
Automatic band loom 1780 Cartwright's loom 1820
Sliding carriage 1794 Steam locomotive 1824
Blast furnace 1796 Cement 1824
Steam ship 1809 Puddling furnace 1824
Whitney's method 1810 Pharma fabrication 1827
Crucible steel 1811 Calciumchlorate 1831
Street lighting (gas) 1814 Telegraphy 1833
Mechanical printing press 1814 Urban gas 1833
Lead chamber process 1819 Rolled rails 1835
Quinine 1820
Source: Verspagen, 2001
Street lighting by means of gas, 1814
Jan Pieter Minckelersborn in Maastricht (in
what later became the Netherlands) in 1748.

Minckelers is now honoured in Maastricht

with a statue on the market (see photo).

In 1781, he invented what was called

‘inflammable air’ by crushing charcoal. This
gas was used in 1783 to fly a balloon over a
distance of about 25 kilometres. Later on,
Minckelers started to use the gas to lighten
the lecture hall in which he gave his lectures
as a university professor in Leuven.

Jan Pieter Minkelers’ statue in Maastricht

Major Inventions – The Steam engine
• Invented by James Watt (1775), Watt’s engine greatly
improved the possibilities for application of steam as a
universal power source in the emerging manufacturing
industry (Industrial Revolution, water wheels remained the
dominant source of power)  his invention is classified as
a major innovation.
• This greatly improved upon a design of a steam engine by
Newcomen (1712). The Newcomen engine was useful for
pumping water out of mines, but due to certain flaws in its
design, it could not be employed as a source of power in
other industries.
Minor Inventions – The Steam engine
• Relatively ‘minor inventions’, linked to the further refinement
and development of the basic innovations.
• The standard set by Watt’s engine was hardly the best
attainable in steam power.
• Alessandro Nuvolari, following on work by Donald Cardwell,
has assembled evidence on this for the region of Cornwall
during the early 19th century.
• In 30 years, the performance of steam engines increased
two- to threefold. It were relatively minor, or incremental
changes to the engines’ crucial parts, such as boiler and
cylinders, that were responsible for the rapid increase in
performance, rather than a revolutionary change of the
underlying technology.
Steam engine by Newcomen (1712)
1. The steam engine by James Watt (1775)
2. The steam ship (1809) and
3. The steam locomotive (1824)

 Technology as a system of inventions that logically

follow from each other.
Invention - Innovation – Diffusion
• Stages in the life time of an innovation: invention -
innovation – diffusion (by Joseph Schumpeter, Austrian
economist) (will be discussed).
• Invention refers purely to the technological domain. It
denotes the process during which a new technological
artifact is constructed, usually with some idea of its
usefulness in the economy or society.
• The invention turns into an innovation when it is put onto the
market by an entrepreneur: new product that is being sold
by the innovator, or a new process that is being used to
produce existing products.
• Diffusion refers to the process that spreads the innovation
through the economy at large.
Invention - Innovation – Diffusion (cont.’)
• Invention - Innovation Stages are concentrated in private
firms, although universities and (semi-) public research
institutes also play an important role.
• Diffusion occurs when the innovation leaves the firm in
which it was conceived, and gets adopted by customers
as well as imitated by competitors.
• Eg.: diffusion of a the steam engine (major innovation) is
often associated with incremental innovations of the basic
design, and these are often put on the market by firms
that compete with (try to imitate) the original innovating
firm. Thus innovation, often incremental innovation, is an
essential part of diffusion.
 ‘technological
paradigms’ (Dosi,
1982)

1. Dosi refers to a “model and pattern of solution of selected

technological problems, based on selected principles from the
natural science and on selected material technologies”. The term
is borrowed from Kuhn’s philosophy of science, which posits that
the normal development path of scientific knowledge is heavily
selective in terms of a dominant framework jointly adhered to by
the leading scientists in the field.
2. From all the possible directions scientific, technological
development may take, only a small portion (defined by the
paradigm) gets realized.
‘technological trajectories’ (Dosi, 1982)

• Small number of basic innovations sets out a

technological paradigm that may dominate techno-
economic developments for a long time.
• Along the paradigm, the basic design of the innovation is
constantly altered by incremental innovations, but the
basic directions in which technology develops has already
been limited by the choice of paradigm.
• Still, there is some room for choices along the paradigm,
and these choices are governed by the specific
circumstances in which the technology develops. This
development is termed a ‘technological trajectory’
Technological trajectory: The case of the steam
engines
1. The engines were employed in copper and tin mines. This
means that the coal needed to operate the engines needed to
be brought into the mines, and this made it relatively
expensive to operate an engine. Hence, the main aim for
engineers in the business of designing engines for Cornish
miners set out to get as much power as they could per bushel
of coal, and this goal dominated their designing efforts.
2. Steam engines operating in locomotives used for transport,
designers (such as George and Robert Stephenson) had to
work with a completely different aim, namely to get as much
power as possible while keeping the engine small so that it
fitted on wheels and be moved.
3. One may imagine that again a completely different set of
engineering aims may apply to the case of a steam ship.
Steam engines operating in locomotives
What matters for success of a new paradigm
• The success of the paradigm, and hence of the basic
innovation, depends crucially on how well incremental
innovation is able to adapt the paradigm to local
circumstances:
1. The skills and capabilities of the workforce that has to work with
new machinery,
2. Cultural aspects of the society in which the paradigm develops.
• A new paradigm might emerge and start to compete with
the first paradigm. Such a competition process will be
decided both on the ground of the pure technological
merit of the two technologies and on the question which of
the two paradigms is better adapted to local
circumstances.
Steam ship vs. Sailing ship
A case of the steam ship
• Introduction of the steam ship in fact led to a whole series of
incremental innovations in sailing ship technology introduced
by shipbuilders who wanted to keep up with the competition
from the new source of power. Certainly also, the expertise
of the sailors employed for years on sailing ships on the
ships argued in favour of the old technology.
• But ultimately, the technological superiority of a power
source that was independent of the winds of the oceans
could not be stopped by the vested interests in sailing ships.
• This effect of incremental innovation in an old paradigm
induced by competition from a new paradigm, has been
observed in other cases as well, and has been termed the
‘sailing ship effect’.
DEMAND PULL OR
TECHNOLOGY PUSH
The willingness of the firms
• Technological development depends on entrepreneurs
who are willing to make efforts to develop the technology.
• The willingness to do this clearly depends on how much
profit can be expected from an innovation.
• This two-way interaction raises the question as to what
determines what: does technology determine economic
development or vice versa?
Demand Pull or Technology Push
• The technology push hypothesis that states that
technology comes first and determines economics,
• The demand pull hypothesis that argues that economics
(demand) comes first, and technological development
reacts to this.
• The debate between the two camps advocating these
hypotheses can be stylized as the question as to whether
the innovative process starts in the marketing department
or the R&D department of the firm.
Demand Pull
• The demand pull hypothesis starts from the notion that
the innovating firm gets the idea for an innovation from
the market (discuss: on which channels?)
• The firm recognizes a specific problem that consumers
face, and sets out to develop a product that solves this
problem.
• E.g.: Microsoft recognizing that users of its old MSDOS operating
system are limited in their efficient use of computers by the low
level of user-friendliness of this product. Market research
consumers really want  The marketing department  R&D
department Windows and all its sequels.
The innovation in horseshoes in US: demand pull
case study by Schmookler

• The horse was obviously the major form of transportation

in the early days of the United States

• Schmookler clearly shows how the increased use of

horses in transportation (among others for the west-ward
expansion of the United States) led to a wave of
(incremental) patented inventions in the design and
manufacturing of horseshoes.

• Source: Schmookler, J. (1966). Invention and Economic Growth. Cambridge MA,

Harvard University Press.
Demand Pull: critique
• Difference between needs and demand: obviously, any
successful innovation can, with hindsight, be shown to fulfil
some need, otherwise it would not have been successful.
• This, however, does not establish that at the time of
invention (or even innovation), this need was more than a
latent need, or, in other words, whether demand was
present at the time the innovation was developed.
• Many needs are only recognized once it becomes possible
to fulfil them, i.e., once the innovations starts to diffuse
through the market. (discuss!!)
• Obviously, such a latent need does not provide a strong
case for the demand pull hypothesis.
Technology Push
• The technology push hypothesis starts at the other end of the
marketing-R&D interaction. Here it is the engineer who
recognizes that a specific piece of new technological
knowledge may result in a product. It is then up to the
marketing department to try to find a market for such a product.
• Now one may imagine the engineer coming up with (in her
eyes) a sophisticated piece of new technological ingenuity for
which the marketing department does not see any market.
• E.g.: the British-French aircraft Concorde is mentioned as an example of
such a product. The Concorde is obviously a beautiful piece of aircraft
engineering, and it is still the quickest passenger airplane in the world.
But despite its technological sophistication, a large market for Concorde
flights never emerged (due to the high price of tickets as a result of fuel
inefficiency).
(Basic) science Push
• (Basic) science on the push side of the technology-economy
relation. Basic science, as contrasted to applied science is
defined as being carried out without a specific use in mind.
• It originates purely from the curiosity of the scientist
undertaking the research. Because there is little or no direct
use in basic science, it is viewed as something that is not
very attractive to firms, and hence mainly the province of
universities and governmental research laboratories.
• Using the same definitions, firms ‘specialize’ in applied
research, which is aimed at finding applications for scientific
knowledge, or even so-called development work, which
consists of designing, prototyping and tuning up of specific
products.
On the relationship between
science and technology.
• Does science have a strong impact on technology, and
how has the relationship been changing over time?
• Mowery and Rosenberg have used the history of
steelmaking to illustrate that relationship.
• Steel is an alloy of iron and carbon, and is much harder
than pig iron. Its uses therefore include a much larger
range of products and processes than pig iron. For
example, the art of bridge building received a strong
impetus from the development of steel, and this, in turn,
greatly facilitated the operation of railroads. Other
industries that benefited greatly from steel were food
processing (tin cans), weaponry and machinery.
On the relationship between
science and technology.
• Mowery and Rosenberg study on steel making also shows:
technology has caught up on scientific development, and
has used up ‘old’ scientific knowledge so it must now rely
on closely interacting with the scientific frontier.
• Recent developments in high-tech electronics (e.g., chip
making), pharmaceuticals or bio-engineering seem to
underline such a conclusion. Based on data on scientific
publications originating from the research laboratories of
firms, some scholars have even concluded that nowadays
firms play a significant role in the development of science.
• Source: Mowery, D. C. and N. Rosenberg (1989). Technology and the Pursuit of
Economic Growth. Cambridge, Cambridge University Press.
The chain-linked model: demand pull or
technological push?

Source: Verspagen, 2001

Technology as a Public Good

• The IBM vs Apple case (tutor)