Table of Contents
INNOVATION AND ECONOMIC DEVELOPMENT:
Toward a system dynamics perspective
Diego Gomez and Isaac Dyner
Institute of systems and decision sciences
Universidad Nacional de Colombia.
ABSTRACT
This paper revises the theoretical approaches regarding the dynamics of
innovation intending to understand whether or not they can explain the
process of quick growth and stagnation of countries. It is contended that
system thinking approaches might complement some of classic ones,
which we analyze under a system dynamics framework, facilitating
exploration and simulation, in order to asses how the dynamics innovation
might accelerate the process of growth and development of societies.
It is though that the current approaches to the innovation discussion do not
clearly explain what has happened to the countries with a quick growth
and they do not propose frameworks that allow us to study the effects of
possible driving forces that might reflect those same dynamics in countries
in development stages. We argue that a systems approach supported by
systems dynamics models allow us to better study and evaluate the
dynamics of innovation, by considering what effects might have feedback
and delays over growth.
KEY WORDS: Innovation, Development, Development Economic,
New Theory of Growth, Technological Change, Evolutionist Theory,
System Dynamics
1. Introduction
From the initial discussions about the wealth of nations and their
development, innovation and technology have been central arguments. In
a general way the accepted general conclusion could be summarized by
two of the more recognized experts on the topic in their book: “The
technological advance is a powerful instrument for the human progress”
(Nelson & Winter 1977). But we are standing amid the paradoxes
presented by North: "How can we explain the persistence of the poverty
amid abundance? If we know the sources of the abundance why the poor
countries are not limited to adopt the politicians that contribute to it? We
should create incentives so that people invest in a technology but efficient,
have a better preparation and organize markets more efficient. These
incentives are embodied in the institutions.” DOUGLAS C. North, 2000,
mentioned in page 1 (World Bank 2002) .
It seems that we have neither resolved the matter of “... the sources of the
abundance....” as North suggests that the technological advance in itself it
is not the key, nor the means embodied in institutions.
In fact, large numbers of countries seem to be seeking development by
following a trend of institutional character which indicates the formalization
and support of their national systems of innovation and their science and
technology systems. The path reported is instituting state agencies and
prioritizing science and the technology. This is the policy presented in
speeches but without a doubt there are key elements, bounded within
innovation, that have not been elucidated.
A contribution to this respect can be found in the work of Richard Nelson
and Howard Pack for the World Bank: The Asian Miracle and the modern
Growth Theory as proposed: “The Asian miracle is explained by the
undertakings in innovation and the underlying learning processes. These
are the significant factors for the quick growth of the Asian tigers. p1.”
(Nelson & Pack 1998).
In this paper it is pretended to deepen this discussion, making a revision of
the theoretical approaches on the innovation dynamics and examining
whether they are able or not to explain the process of quick growth as well
as the stagnation or incipient development of countries. It is intended a
systems approach which leans on systems dynamics which allow us to
simulate, discuss, explain and learn the effects of the innovation dynamics
in the processes of growth and development of societies.
2. Technology, innovation and development.
Since the early 90s there has been increasing interest in the economic
study of the innovation process, largely as consequence of the result of
diverse studies which demonstrate that competitiveness of companies,
economic growth and quality of life are closely related with the capacity of
introducing successfully technological innovations. (Landau Ralph 1991)
(Bank Mundial2002; ECLAC 2002; Freeman 1998; Gomez 2002a)
The discussion with respect to innovation and technical change has had
two defined influences. On the one hand, the neoclassical trend initiated
by Solow (1956, 1994) that explains technological change as the residual
obtained in the econometric regressions of production factors and product
growth. And, on the other hand, the current that has its origins in
Schumpeter (1983), that explains the effect of innovation over
development. For the first one, change is exogenous and, for second one,
the origins of the process are considered at a micro-economic level, with
the articulation of the “innovative manager.”
Resent contributions, at the beginning of the nineties, started by
considering the power of the technology over economic growth and its
effects on the competitiveness of companies; these are known as models
of endogenous growth (Romer, 1990).
In this discussion it is important the work by Nelson and Pack (1998) for
the World Bank: The Miracle and the modern Seized Growth Theory. They
discuss the concept of the new theory of the growth. In the document, the
Asian miracle is explained in terms of innovation and the learning. They
outline the theories about the Asian miracle that can be divided in two
groups. On the one hand, we have the "accumulative" theories (inscribed
in the neoclassical tradition and the macroeconomic approaches of the
current of Solow) that emphasize the rules of the capital investments and
their effects in the function of production of these countries. If countries
make investments and they get the resources, development will emerge.
And, on the other hand, we got the "assimilative” theories (clearly of the
Schumpeterian line) that emphasize the undertakings in innovation and
learning. These theories understand that investments in both physical and
human capital are essential but insufficient if there is not a process of
assimilation.
A useful approach which integrates the different perspectives is the
systems theory of growth that explains quick growth in terms of the rules of
innovation, their undertakings and the capacity of assimilation (from the
assimilation proposal). There is an attempt in this direction by Gémez
(2002a, 2002b, 2002c).
Although, suggested by the different authors mentioned above, a more
detailed discussion is required to understand the preponderancy of
innovation over development, trying to elucidate some important factors
that might drive growth and development as well as the relevant
interrelations and feedbacks that might exist among them.
3. The theoretical approaches to the innovation dynamics:
Demand pull & Technology Push
An element that has not been incorporated in this discussion is the one
about the origin and the inciter of the innovative process. Initially the
theoretical proposals intended to explain that innovation and technological
change were given by the existence of appropriate technological
conditions - under these settings, “there would be a push” in technological
change and innovation. Some authors even argue that the Schumpeterian
proposals, in essence of “push” character, provide the conditions for the
emergence of management undertakings.
A second current sustains that innovation exists as soon as the market
demands it and that this is a driving force for the emergence, dynamics
and consolidation of technology change and innovation. Equally they
argue that the development of markets were fundamental for impelling the
automobile, electronic and software industries. Freeman (1998) argues
that one of the main and long lasting controversies of the economic
analysis of innovation is the debate between technology push and
technology pull of demand (demand pull).
How can these approaches explain the processes of quick growth or
stagnation of the countries? Initially the countries do not have an
appropriate technological base. The proposal of the “technology push”
suggests investing in the scientific and technological base of the countries.
The approach of “demand pull’, however, suggests actions from the
potential demands for products and the existent capacities. Why not
integrating both approaches in a systemic framework? This is what this
paper intends to do in the following sections.
4. The Empiric Evidence in the Processes of Quick Growth and of
Stagnation.
Innovation has a relative meaning (OECD 1993; OECD 1997). For a
country or a society, something is said to be new when it does not
possess it, or it does not make it. Here we understand innovation as the
introduction of something new in the economy of a country - for example,
new products or services that were not produced before in that society.
And productivity, in its wider sense, is understood as the capacity of
generation value by the individuals of a nation and is expressed in terms
of GDP (Gross Domestic Product) per person.
In a series of works, the effect of innovation over growth has been
examined for a number of countries (Gomez2002b; Gomez2002c):
Germany, Singapore, Japan, Ireland, Spain, United States, Russia, Korea,
Taiwan, Hong Kong, Hungary, Bulgaria, Vietnam, Chile, Mexico, Brazil
and Colombia; with the intention to understand the role of productivity and
the innovation in economic development.
It was found that the countries that had processes of fast growth in some
period of their history had achieved significant improvements in innovation
terms — technical advances which include technological progress, and the
introduction of new products. These countries also attained continuous
improvements in productivity, a notable increase and diversification of their
exports as well as significant increase in discharge rates of economic
growth. Those discharges rates that are reflected in the improvement of
incomes per capita have meant higher consumption rates. And in a
systematic way, this whole process led to an important social
transformation.
It was observed that the assimilation of innovation is a fundamental
determinant in productivity growth in the long-term. Its effect depends not
only on its incidence over productivity by the introduction of new
technologies but also in the capacity of management to incorporate the
advances in knowledge, to absorb technical progress and adapt it to the
productive processes, the administration of the human resources and
corporate strategy."
Japan and the so called Asian tigers, have had successful development
processes, with very significant results in terms of growth, diversification of
exports, and social benefits. The largest economic growth registered by
Japan took place after the Second World War and lasted until the late 70s,
when the economy expanded 55 times. Singapore on the other hand,
experienced discharges rates of growth some time later in the 1960s,
which in 1991 reached 8.25% average yearly; during the same period, the
growth in GDP per capita was faster than in Singapore (6.25%) and than
any other Asian countries, with exception of South Korea. Singapore and
Japan are economies at the edge of innovation on the technological
frontier. Nevertheless, Japan presents during the recent years a period of
stagnation, in comparison with Singapore, United States and several
countries of Europe, in what has to do with the technology of the
information.
As Japan and Singapore, the Irish economy is approaching the status of a
“miracle”, and we may soon call this country the “Celtic tiger.” Although
Ireland undertook a late industrialization processes in comparison with the
European average, Japan and Singapore, turned in one decade from an
economy based in natural resources (agriculture) to an economy intensive
in technology and knowledge, with a strong exportation base. Between
1987 and the year 2000, the Irish economy grew at an average rate of 7%
yearly, and between 1995 and 2001 it grew at a rate exceeding 10% and it
reached growth rates up to 11.5% (See Figure 1). For the four countries
of Latin America, the decade of the nineties was one of deep reformations
and no significant growth took place.
The differences in the development, shown so far, can be appreciated in
the Figure 1. In terms of the GDP per capita, a wide breach exists among
the Latin American countries, and the two Asian ones. But this was not
always the case. In the year 1970, as can be appreciated in Figure 1, the
difference in GDP between the Latin American countries and the Asian
ones were fairly small - US$ 372 to US$ 1.953 (values corresponding to
Colombia and Japan) — but in 1998 this difference became much larger —
US$ 2.523 to US$ 29.956.
" Informe Anual 2001. Banco de Espaiia.
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SCHL EFS EH EFELEEE EES
a chie “> Colonbia se Espaia__ —e—Etados Unidos]
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Figure 1
Compared evolution of the GDP per capita
Source: The authors with information of Monthly Bulletin of On-line Statistics. United
Nations
The orientation to exports of all the countries as a strategy for growth,
needed deep transformations in the productive apparatus, for which there
were necessary strategies towards increases the productivity, and
improvements in innovation. All those strategies were supported in
industrial policies that gave an answer to the necessities and challenges of
each phase of the development.
Productivity and innovation are factors that have been present in the
process of the quick growth experienced in successful economies (Japan,
Singapore and Ireland). From the first phases of their industrialization
processes, that is to say, from those moments in which the
industrialization was guided toward intensive activities in manpower, the
governments from Japan and Singapore were conscious of the importance
of the improvements in productivity, and directed policies to promote it, as
it is observed in Figures 2 and 3.
In this direction, these governments invested more in education with the
purpose of improving access and quality, and they also promoted the
technological modernization of the economy. An element to highlight in
this sense is that the efforts of technological modernization were linked to
the existent domestic resources: for example in Japan and Singapore, as
in the first development phase the abundant factor in the economy was
manpower, the strategy consisted in gaining access to new technological
knowledge for the improvement of competitiveness. Nevertheless, part of
the new technology was also guided to the development of new sectors, in
which you could exploit the technological breach.
The innovation pattern of “technology push” is insufficient to explain the
processes of quick growth, as it has not shown very useful in the Latin
American countries. In this part of the world, after decades of insisting in
policies of science and technological, based on investments in education
and in science and technology aiming to crate a scientific and
technological base, this does not seem to have had a significant effect on
growth and social development.
GDP per per
‘Unit: US Dollars, nominals) 24914
7857
Stable economic growth. To
transform into the base of the
manufacturing industries and of
‘Sophistication of the industries. services of Asia,
Expansion of the sector of
services
Promotion of the
industrialization
1970 1980 1990 es
Tndusires that prompt | Light industries Cexiles, |= Intensive processes in |» —Eleclronve industries
the economy toward etc.) industries of high * — Technologies of the
the future. «Human resources technology information industry:
Intensive industries = Financial industries
‘apital relation —
incremental Product =
Rate of investment/ 4.3.(1970-1979) 4.8 (1980-1 989, ex. 1985,1986) 4.5 (1990-1 997)
Rate of increment
> To adopt an industries = Topromote the change = Toaim transform into the
promotion politics oriented: from intensive industries in central financier and
to the exports. work oriented to the commercial of Asia
= Topromote the technology
Economic and introduction of foreign * Toestablish the goal of
industrial policies capitals which the manufacturing
‘sector reaches a
participation in the GDP of
(25% or more
Figure 2
Process of Transformation of the Economy of Singapore
Source: Singapore Productivity Center, Adapted for the authors
A 4 yr
Attached value ae
high
specialization
Heavy electric
cngincering Advanced
y WY” Engineering of Air special
. precision Biotechnology
Heavy Bearings Computer
industries Tool machines science
Technology of
Aluminum Consumption the information
Chemical products: Medium
substances electronics:
Coal Accessories New materials
Rubber Cameras Robotics
Ceramic Naval Cus
Dress constuction
Cutlery Steel Electronic
Fibers products
Footwear Consumption Medications
Paper products Semiconductor
Toys
Bicycle
Motoreyele
>
1950s 19603 1970s 1980s
Figure 3
Process of Transformation of the Economy of Japan
Source: El Caballo de Troya Japonés. Barrie James. Adapted by the authors
For Japan and Singapore the processes seem better explained by a
systems integration of “demand pull” with processes of “technology push”
nested into their strategy. The action was directed to the potential demand
for new products that incorporate more value and they invested in the
necessary technology to introduce the necessary innovations in society.
The strategy was directed to capture markets that were attractive and
actions were defined depending on the phases of maturity of these
markets. Development was built upon the products that involved more
value additions and complexity.
5 - The Dynamics of Innovation and Development.
Innovation is understood as the entrance of new products or services that
were not produced previously in a society. As an example let us examine
what happened when the television industry appeared. On one hand, as
demand for a new item was generated - the television - new services
emerged - entertainment and audiovisual information. On the other hand,
new companies were constituted for the provision of those new goods and
services. The economy was transformed in some measure and new jobs
were created and new flows of money were generated. The innovation
process produced an expanding dynamics in the economy.
We understand technological change as the introduction of a new
production line that allows improvements in productivity. For example, the
introduction of machines for numeric control to the metal-mechanical
industry allowed to manufacturing more complex and more exact pieces in
less time. This reduced the number of people required at the work place.
In this sense, technological change can produce a contraction in the
economy.
The dynamics that induce the innovation and technological change are
represented in the causal diagram presented in Figure 4. Innovation will
expand the external and intern sales, providing more resources for
investment, allowing capacity expansion to support demand growth.
Additional employment is generated reinforcing demand and investment.
Technological change increases productivity which will allow generating
more goods with the same resources, reinforcing innovation, contributing
to increases in the population's income.
A model was built and applied to the Colombian economy. Simulation
show the effects of that long-term increases in productivity and innovation
have over economic growth, see Figure 6. This model has more than
eight thousands equations. Its parameters are more than one thousand
six hundred economics variables taken from national statistics department.
The model was calibrated for the period 1995-2000.
Basic simulations are shown in Figures 5 and 6. It is observed that in
presence of an endogenous process of innovation, technology change
allows the system to enter in an expansive dynamics, reducing
unemployment, increasing output and exports, which bears an increment
of income per capita.
External sale
Innovation € projection
zi
Profits +
hS- Domestic International
sales
Ext sales
ts exp
Homes cons exp
Production a Domestic sale projection
+ +
a
Increase of productive Demand by investment
capacity
ie
Increase by productivity Enduring demand variation
/ + \
Investment decision / Semen oN re reduction
\ Period investmen
+
ss
Tech change
Figure 4
Induced dynamics for the Innovation and the Technological Change
Figure 5
Behavior of the economy of Colombia without introduction of innovations and
with a level of incipient technological change
Figure 6
Behavior of the economy of Colombia with introduction of innovations and with a
level of half technological change.
Simulations show that innovation induces a dynamic process of economic
growth and expansion. Technology changes for improving productivity are
necessary to make possible the process of growth.
These simulations suggest that with a virtuous dynamics can generate
quick and sustainable growth and can explain the processes of growth
which have been achieved by some countries.
6. Conclusions.
The approaches to the innovation dynamics suggested by the “demand
pull” and the “technology push” do not explain in an integral way the
processes of quick growth which has been achieved by some countries.
There is not evidence that each of these approaches alone would induce
similar dynamics, to the ones experienced in Singapore and Japan, in
countries that are seeking development. It has been observed in
simulations, based on induced technology processes within virtuous
dynamics, that quick and sustainable growth is possible.
The systemic approach, supported by system dynamics allows us to study
and to evaluate the dynamics of innovation in such way that we can
explain and simulate system behaviors and feedbacks in them.
In the model that was developed other considerations are given away
which are fundamental. The main idea is that a central concern of the
economy should be an effective integration of individuals to the generation
of well-being in society; associated to the search and construction of the
social outlines directed to link the individuals to the processes of
generation of goods and services.
The authors believe that the theoretical discussion that has been started
and that is ingrained in the model might support the proposal of a “new
theory of the growth” if further research is conducted in the direction
presented in this paper.
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