Table of Contents
The System Dynamics Modeling of Firm’s Technological Competence
and capital accumulation
Xu Qingrui, Zhao Xiaoging, Shen Shougin
School of Management, Dept. of Finance
Zhejiang University, Zhejiang University,
Hangzhou, China, 310027 Hangzhou, China,310027
E-mail: sbaxugr@dial.zju.educn E-mail: reid@cma.zju.edu.cn
Abstract: In this paper, the system dynamics model of technological competence of the firms
and capital accumulation was set up. By computer simulation and policy analysis of this model,
the interaction and dynamic development of technological competence and capital accumulation
was worked out. Furthermore, the optimal ratio between importing and indigenous R&D
expenditure as well as optimal rate of capital accumulation was obtained.
Key words: System Dynamics, Technological Competence, Computer Simulation, Capital
Accumulation, Optimal R&D Ratio
During the past decades, Chinese industry has made great progress in technological
innovation. It is complex results of the changing political and technological environments. The
critical factors of successful innovation are that Chinese industry has paid much attention to the
acquisition and absorption of foreign advanced technology until 1980s. Since late 1980s, many
Chinese firms began to innovate with portfolio view. This new pattern of innovation greatly
enforced the competitiveness of their products. Up to late 1990s, a lot of Chinese firms had built
strong technological competence and innovative capabilities. So they began to deepen their
innovation management by managing internal and external technological and organizational
knowledge, and by building their innovative network.
Many Chinese firms rested deeply on using importing technologies, but did not
commit themselves to assimilate the importing technologies. Thus made them
relapsed into the vicious circle that is:
Import-----lag behind----- import again----- lag behind again.
According to our surveys to 22 firms, the expenditure rate used in technology
assimilation was only 10.2% of the total amount used in technology importation.
Comparing the statistical data of Chinese firms in 1986 and the data of Japanese firms
in 60s also indicate this view (see table 1). In such low expenditure on technology
assimilation, it is impossible for firms to innovate sustained and get competitive
strength.
We analyze West Lake Electronic Co (WLE)’s capital assignment in the process of switching
from technological importing to intemal R&D. From the results of table 2, we know when the
ratio between internal R&D and technological importing investment is 3.6 : 1, the increase rate of
tech. competence is maximal. When the investment ratio on intemal R&D is between 3.8% and
5.7%, the investment ratio on technology importing is between 0.7% and 2.6%, the increase rate
of tech. competence is more. So WLE may improve its investment ratio to increase accumulation
rate of tech. competence.
Table 1 The expenditure ratio of technology importation
and assimilation in China and Japan
Nation | Machine} Chenical Electrical Total in-
- engi neer | Metallurgy) industry average
bui | din} industry
g
i ndustr
y
Gina | 5.43:1 185. 2:1 7.12:1 11. 78:1 | 10. 79: 19 1986]
Japan | 14:1 1:81 1:11 1:10 1: 4.99 19639
(] Ref erencef] the data of Chinese firns cone fromRef erence 1 and 21]
Table 2 Simulation results of increase rate of Tech. competence
The capital |The capital | Increase Increase Increase Increase
ratio (%) on | ratio (%) on | rate(%) of | rate(%) of | rate(%) of | rate (%) of
intemal technologic | Tech. Tech. Tech. Tech.
R&D al importing | competence | competence | competence | competence
(1995) (1996) (1997) (1998)
64 0.0 4.05 4.95 3.09 7.37
5.7 0.7 5.16 6.12 5.34 9.38
5.0 14 7.03 7.97 6.99 11.23
4.3 2.1 6.54 7.33 6.76 10.46
3.8 (actual) | 2.6 5.28 6.80 6.00 9.86
3.1 3.3 4.67 5.65 5.46 8.17
2.4 4.0 4.34 5.43 5.55 6.92
1.7 4.7 3.55 4.77 4.98 5.78
1.0 5.4 4.23 4.96 5.67 5.99
0.0 6.4 3.09 3.78 4.76 4.93
1]) The structure of SD model
The accumulation of technological competence is a complex process, there are
many factors which affect its evolution and change. Here, we mainly analyze the
impact of capital accumulation rate on technological competence process.
The SD model can be separated into four subsystems: technological competence,
finance subsystem, market subsystem, and capital distribution subsystem (as shown in
figure 1). There are multi-feedback interaction among these four subsystems, which
determine the interaction advance of technological competence and the capital
accumulation.
In this system, the gap of TC (technological competence) will be figured out first
according to its existing technological capabilities and its anticipant technological
capabilities, then select the accumulation path of TC according to its financial ability
and industrial-technological dynamics.
The devotion to accumulation of TC breeds knowledge learning and knowledge
creating, then knowledge learning and knowledge creating enforces technological
capabilities, marketing competence and organizational capabilities. Moreover, this
improves the effectiveness of accumulation path selection of Tech. competence. The
accumulation of Tech. competence brings two feedback, it affects the accumulation
path selection of Tech. competence through reducing the gap of Tech. competence on
the one hand; on the other hand it affects the accumulation path selection of Tech.
competence through improving the firm’s performance and enhancing financial
ability. The main causal- effect of accumulation of is shown as figure 2.
. <+—_________» Capital
Finance Distributio
Technologi Market
<—____________>|
cal
Figure 1 The structure of SD model
debt financing »interst expense dividend ———™*t Profit
L/ \
retained tax rate
investment teghnology dynamic
capital accumulated rate “oe Le a a
tech.competence goal
| \e dynamic
debt limilation
stock financing
tech. inveatment—t» other <A
om a 4
extemal Loa intemal R&D um
Pa market competence org Sh
“™ cS
aw -_—
gap of TC
surface TC SS a
TC added
A
Figure 2. Simple illustration of causal-effect relation on accumulation of TC
In Figure 2: KAis know edge assi nhl ation; KMis know edge fuse; KI
is know edge internalization; KS is know edge sharing.
2. Validity test of SD model
We simulate the development of Eastem Telecommunication Ltd.Co.(EASTCOM) by using
the SD model. We take the data of sale and profit in 1993 as the initial value of level variable of
dynamic model, the results of simulating are shown as figure 3.
The data in table 3 shows that the errors between simulation resultataon results and valuation
results belongs to the region (-4.2, 4.2). re small, which validated the effectiveness of the system
dynamic model.
129
100
80
60
40
20
0
199 199 199 199 199 199 199 200
salef] current a hundred million
6
5
4
3
2
1
0
1993 1994 1995 1996 1997 1998 1999 2000
profit current
a hundred million
Figure 3 The simulation result of EASTCOM
Table 3 Comparing the results of simulation and the results of valuation
(Unit: hundred million)
1993 1994 1995 1996 1997 1998 1999 2000
sale{] real value] 15 21.3 28.5 40.7 471 59.5 81.4 102.8
Sale 1) simulating | 15 20.8 29.4 39.1 49 61.8 78.2 98.5
value]
Error in % 0 -2.3% | 3.1% -3.9% | 4% 3.8% -3.9% | -4.2%
profit] real value{] | 0.31 1.22 3.21 2.87 3.15 3.31 4.58 5.17
profit [] simulating | 0.31 1.19 3.12 2.98 3.27 3.45 4.39 5.24
value{]
Error % 0 -24% | -2.8% | 3.8% 3.8% 42% -4.1% | 1.3%
3Q] The policy analysis
Today, capital scarcity is the major problem in most Chinese firms. It’s necessary
to speed up the capital accumulation. So we mainly analyze the influence of different
capital accumulation rate acting on firm development. By this, it is necessary to make
estimation on the rate of capital accumulation.
We choose the increase rate of sale and technological competence index as
analysis quotas. In this SD model, technological competence is defined as the
weighted integrated value of four kinds of capabilities, that is: technological assets,
technological organization, external technological network, and technological strategy.
In figure 4, the variety of sale’s increase rate and technological competence were
shown, while capital accumulation rate were 20%, 30%, 35%, 40%, and 50%.
From the simulated results of SD model, the Tech. competence index is in an
obvious increasing trend as the capital accumulation rate varies from 25% to 40%.
The higher the rate is, the faster Tech. competence leverage.
Furthermore, we study the condition that capital accumulation rate varies from
20% to 25%. The simulated results of SD model (as shown in figure 5) indicate that
20~22% is the lowest capital accumulation rate which can ensure Tech. competence
increasing. So it’s necessary for Chinese firms to keep the capital accumulation rate
no lower than 20~22% .
On the other hand, when capital accumulation rate goes up to 35%, firm’s Tech.
competence rise obviously. When capital accumulation rate is 40%, the firm’s Tech.
competence and the increase rate of sale rise obviously (as shown in the figure) before
1997, but after 1997, the increase rate of sale began to decrease and Tech. competence
almost didn’t rise. If we study the change of Tech. competence further when the
capital accumulation rate falls into the range between 35% and 40%. The simulating
result in figure 6 indicates that around the 37% is best capital accumulation rate in this
special case.
o8 0.8
0.6 0.6
0.4 o4 —
02 0.2
i -—+—
° °
1992 1993 1994 1995 1996 1997 1998 1999 2000 1992 1993 1994 1995 1996 1997 1998 1999 2000
Accumulation rate=20% Accumulation rate =25%
0.8 0.8
0.6 0.6
. = < _
0.4 = oe
=
=
0.2 [=> 02
° °
1992 1993 1994 1995 1996 1997 1998 1999 2000 1992 1993 1994 1995 1996 1997 1998 1999 2000
Accumulation rate =30% Accumulation rate =35%
o8 _, 08
0.6 0.6
os [og 0.4
0.2 0.2
° o
1992 1993 1994 1995 1996 1997 1998 1999 2000 1992 1993 1994 1995 1996 1997 1998 1999 2000
Accumulation rate =40% Accumulation rate =50%
TcO
Increase rate of sale(]
Fi gure 4 the inpact of capital accunul ati on rate on fi rmdevel opnent
40%
30%
20%
10% i
22%,
0%
21%
25% 28% = -30%
- 10% i
30% a Gincrease rate
20% 4 of TC
30% 36% 38% 40%
Fiaure 5 The breakina point of TC
4. Brief Conclusion
1) Firms must do themselves capital accumulation, then they have enough capital
for indigenous R&D;
2) The impact of capital accumulation on tech. Competence is the result of
interaction of many factors, so it is necessary to use SD simulating and modeling
technique in order to find better rate of capital accumulation.
References
1 Mansfield E, Schwartz M and Wagner S. Imitation costs and patents: An
empirical study, The Economic Journal, Dec,1981.
2 Bowonder,B., R&D Spending Pattems of Global Firms, Research and Technology
Management, September- October, 2000.
3 R.SJonash, Strategic Technology Leveraging: Making Outsourcing work for you,
IEEE EMR, Summer,1997, 90-96.
4 R.Veugelers, Intenal R&D expenditures and external technology sourcing,
Research Policy,26(1997),303-315.
5 Xu Qingrui, Guo Bing and Chen Jin, Managing Innovation Portfolio: Experiences
and Lesson in China, IEMC 96 Proceedings of International Conferences on
Engineering and Technology Management, Canada, 1996.
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