Innovation Policy and the Economy, Volume 2

Originally published in 2002 in The Business Economist, volume 33, issue 2. The original publication day is unrecorded.

Adam B Jaffe, Josh Lerner and Scott Stern, (eds), National Bureau of Economic Research, MIT Press, 2002, xiii + 184 pages, £39.95 (hardback), £16.95 (paperback). Markets for Technology: The Economics of Innovation and Corporate Strategy Ashish Arora, Andrea Fosfuri and Alfonso Gambardella, MIT Press, 2001, xi + 339 pages, £23.95.

From The Business Economist, volume 33, issue 2 (2002).

These two books emphasise different aspects of technological change in different areas of the world. The National Bureau of Economic Research (NBER) volume collects the papers presented to their Innovation Policy and the Economy group in April 2001, some being clearly work in progress. David Evans and Richard Schmalensee provide an excellent and succinct survey of the antitrust issues in industries that are undergoing rapid technological change in which competition focuses on investment in intellectual property (IP) and has Schumpeterian characteristics. “In many of these industries, firms engage in dynamic competition for the market - usually through research-and-development (R&D) competition to develop the ‘ killer’ product, service, or feature that will confer market leadership and thus diminish or eliminate actual or potential rivals. Static price/output competition on the margin in the market is less important.” (p 1)

New-economy industries have several of the following characteristics.

The authors argue that antitrust regulation in new-economy industries should take account of the vulnerability to drastic innovation market leaders face. Market share at a particular time might not be a good indication of sustainable market power. Analysis of market power requires consideration of actual and potential innovative threats to leading firms. Using several compelling examples from computer software to pharmaceuticals, the authors argue that conventional tests for predation do not discriminate between practices that increase and those that decrease consumer welfare. The authors discuss the welfare effects of tying or bundling at length. They note, “Economists have long argued that the [US] law’s hostility to this practice does not serve consumers well.” (p 28)

Nancy Gallini and Suzanne Scotchmer review the literature on Intellectual Property and incentives. In particular, they discuss sequential innovations, when generations of innovations are linked to one another. If innovation is a cumulative process in this way, too broad protection given to one innovator may discourage followers. Manuel Trajtenberg examines the Israeli policy of systematic and substantial support for commercial R&D. Timothy Bresnahan returns to the network effects of information technology (IT) emphasising that many of the benefits of IT are only realised if co-invention occurs: complementary innovation by the users of technology. Co-invention often involves investment in business and organisational change by the users if IT applications are to be successful. Because of the importance of co-invention, Bresnahan suggests that more policy attention should be addressed to the incentives and resources available to co-inventors as well as initial innovators.

Bradford DeLong argues that the surge in US productivity growth in the second half of the 1990s is caused by technological change and is sustainable. The improvement in productivity growth may also have reduced the non-accelerating-inflation rate of unemployment. IT may be partly responsible for a reduction in inventories. Against these positive structural changes, the new economy and IT may be responsible for increased volatility in the stock market.

Arora, Fosuri and Gambardella argue that “Over the last ten to fifteen years, there has been rapid growth in a variety of arrangements for the exchange of technologies or technological services, ranging from R&D joint ventures and partnerships, to licensing and cross-licensing agreements, to contracted R&D.” (p 2) These are the markets for technology of the title. The study examines a wealth of historical material, case studies as well as other forms of qualitative discussion or evidence and systematic statistical analysis. The industries included in the study have several of the characteristics of Evans and Schmalensee’s new-economy industries.

The authors have written the book to be accessible to a wider audience than economists. An experienced business economist may find the prose style meanders somewhat. On the positive side, they do define some of the fairly arcane terminology associated with advanced technology. Business economists with some knowledge about the innovation literature are advised to read chapters seven (on licensing) and eight (on technology transfer to developing countries) first. Then read the three concluding chapters. If more arguments and evidence are required for the conclusions, there are references to earlier chapters.

The focus of the book is diffusion of innovation. It is an ambitious attempt “…to answer the following question: Under what conditions will technology itself resemble a tradable asset, and, if it does, what will be the consequences for the generation and use of new technologies, for the diffusion of technology, and for public policy and business strategy?” (p 292) It includes transactions

It excludes mergers and acquisitions, the movement of people and standard software licences.

Linda Hesselman University College, London

Archived source: 2002-08-30 website capture.