Archived — Occasional Paper Number 12: The Technology and the Economy: A Review of some Critical Relationships

by Michael Gibbons, University of Sussex, under contract to Industry Canada as part of the Science & Technology Review, December 1995


Summary

In the text, the role of technological activities in economic growth is treated in terms of the importance of appreciative versus formal economic theorizing, and of the central role played by firms in knowledge generation. Competition takes place among firms, not nations. Therefore, each firm needs to make its own way in its chosen economic environment and not to be overly concerned by scare tactics about globalization and competition among nations.

The new "growth theory" attempts to take a fresh look at the ways in which new technology is generated. In this it has been much influenced by advances in our understanding of how firms behave, that is, of how they innovate. It is increasingly accepted that the role of science and technology in innovation, as in the economy as a whole, is complex and evolving. Theory needs to be informed by research coming out of science policy studies and studies of the innovative process, whether in terms of management practices, theories of the firm or organization theory.

Not only markets but also institutions are crucial to sound economic performance. Firms behave differently; therefore, diversity rather than convergence in terms of performance is to be expected. This is evidently true of firms, but differences between firms are reflected in differences in national economic performance. The evidence presented in the report supports divergence rather than convergence of trends in the international economy.

Variety is the natural outcome of growing competitiveness, and this has characterized the international economy over at least the last decade. Variety is bound to come about once the cumulative, path-dependent nature of technical change is appreciated. As firms innovate, they continue to learn. Much of the learning takes place locally. Local linkages — for example, user-producer ones — have been identified as important to successful innovation.

Learning is crucial, but much of the knowledge generated is tacit rather than codified. To "capture" that tacit knowledge in a sequence of innovations is the principal challenge facing most firms. In relation to this, we have noted the crucial role of the rate of development in information, computer and telecommunications technology (ICT) in the future innovation. The rate of ICT innovation is now seen to be a key factor governing the rate of innovation in many industrial and business sectors.

The general shift to information and knowledge focuses attention on the historical, cultural and institutional context of each country. This complexity is meant to be captured in the notion of national innovation systems. If it is partly because of their history that national systems of innovation differ in their effectiveness and in their learning profiles, then policy must move, initially at least, within the constraints of the local institutional environment to try to improve its "connectivity."

Firms operate within different financial systems. The evidence from the most recent Organization for Economic Co-operation and Development (OECD) analyses suggests that existing financial institutions are not sophisticated enough to deal with the different types of risk and uncertainty which accompany the innovation process at different stages. Current thinking about the reform of financial institutions is less about their capability to provide "patient" money and more to do with managing risk in the economy.

Unemployment continues to be problematic within OECD member countries. Whether it is chronic or structural, or a mixture of the two, is still the subject of debate. The reason seems to be that the notion of full employment is losing its meaning as is full-time employment. The structure of work is changing: jobs are being replaced by a range of occupations which may be more or less full time. The pattern is being complicated by the growth of services, and of a better idea of the economic importance of services and of what productivity in services might mean. The evidence presented here leans toward a structural interpretation rather than to the conventional economic interpretation in terms of imbalances or rigidities in labour markets.

Data, information, knowledge and learning are now seen as a key source of competitive advantage in the innovation process. For a firm this means developing strategies which make it possible to enhance their existing knowledge base through a carefully selected set of collaborative arrangements. This in turn, requires the development of national policies as well as strategies for firms to help manage the transition from collaboration to competition.

For governments, the centrality of information has once again raised questions about the role of state-funded research and raises, in an acute form, the problem of drawing national advantage out of research which is increasingly carried out internationally and on a collaborative basis. This has deep implications for those national institutions with a mandate for knowledge generation. In some countries, innovation policy has shifted to a concern with diffusion — less of products and process produced than of the knowledge on which they are based. This is exemplified in the attempt to classify national systems of innovation in terms of their distribution power. The policy aim here is to increase this power and to make existing knowledge available to those who need it at the time that they need it.

We begin this paper with a brief discussion of the Solow Paradox, that despite the fact that over the last 20 years there have been large-scale investments in technology, productivity growth has not risen. This paper argues that this paradox may be more apparent than real and arises from an oversight of the differences in terms of investment impact between incremental and radical innovation. Many advanced economies are going through a period of significant structural change, and because of this, nations are failing to capture the full benefits of research and development investment.

There seems little argument that the interrelated technologies which are leading this development are the new information, computer and telecommunication technologies. For governments, this means more than heavy investment in hardware development. Many advanced economies are in transition from policies focused on the generation of knowledge, to policies focused on the distribution of knowledge. This has deep implications for the knowledge-producing institutions that, in each country, make up the national innovation system and for the policies that will guide them.

The notion of globalization is undergoing a re-examination. Finance is currently the most globalized sector in the sense that existing computer and communication technologies now make it possible to carry out transactions to and from any place in the world. Globalization is also evident in the markets for some standard commodities. In manufacturing, generally, there is still considerable evidence to suggest that the most sensitive research and development is still carried out locally, though its global sourcing seems to be increasing. We have argued that the diffusion of variety in methods of production may describe more precisely what is distinctive about globalization.

New science and technology indicators are being developed in several places, notably the OECD and the European Union (EU). In these, there is a greater concentration on inter-country and inter-sectoral comparisons and a general shift to more and better output indicators. We also note the beginning of data assembly for the countries of Eastern Europe and the former Soviet Union. In science indicators, specifically, we have noted the development of techniques which allow countries to identify nation-specific sectoral patterns which highlight the connectivity of the knowledge-producing institutions in national systems.

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