SYSTEM MODELLING ON ANALYSIS OF RESOURCE ALLOCATION
OF TECHNOLOGICAL INNOVATION
Qingrui Xu Jin Chen
Dept. of Industrial Eng. /Management
Zhejiang University, Hangzhou, PRC
Zhiping Wang
Hangzhou Federation of Industry
and Commerce, External Liaison Office
Zhengcheng Lee
Shenzhen Seg Electronics Group
ABSTRACT
Technological innovation is a decisive element with high value in modern
economic society, and the. effect-of technological innovation has a great
bearing on enterprise's performance. Over recent years evidence has been
accumulated to demonstrate that for a enterprise it is necessary to take
on a strategic plan, allocating the enterprise's limited resource to R&D to
promote technological innovation and monitoring the coordination among the new
& existing products under the certain R&D expenditure. The issue is that
management traditionally employs the static. and experimental. method. to
determine the input of R&D in terms of the ratio to sales. In China there
existed a tendency of underestimating-the role of technological innovation
giving impact to the growth of the firm, .e.g. in high-tech industry take only
1-2% or less R&D on sales into tech inno activity, and fixed to almost. all
kinds of industry with:the same ratio of input.
In this paper, two system models are developed to solve such problems, which
results in the conclusion of individual ratio is required. for different
industries.
I, INTRODUCTION
Technological innovation is a decisive element with high value in modern
economic society. From the point of view of microeconomics, it makes
enterprise to develop more stably and perseveringly, to foster the ability to
render a service for self-development of enterprise. and social-economic
construction.
The efforts. of tech inno. in enterprise have a great bearing on the
enterprise's .behavior. The growth rate of productivity is, in the sense of
statistics, of great concern to the intensity of expenditure on erterprise's
innovation activity. What is called "intensity of expenditure" refers to the
“ratio of. tech inno expenditure to main economic output index, for example,
sale.
The ability for enterprise to. innovate concerns to. expenditure on
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Page 682 System Dynamics '91
technological innovation. Furthermore, productivity does so, too. There
exists, however, that whether this particilar relation is inevitable to every
enterprise. This problem can be transfered to another one: How to promote
technological innovation in enterprise? What is the appropriate range over
the ratio ( R&D expenditure / sale ) for the reqmnotag ical innovation activity
in different industries?
In the meanwhile, under the decided total R&D expenditure, it is necessary to
coordinate the new products through technological innovation with the existing
products, balancing the portfolio of the existing products to improve the
performance of the enterprise better. To analyzing this problem, all of the
products of a enterprise are divided into four kinds according to theory of
the product life cycle (here, "A" stands for the products of infancy, "B"
stands for the existing products in the stage of development, and "C" and "D"
for the maturity and decline correspondingly ). Optimal combination of these
four kinds of products the formulate another problem.
In a word, it is necessary to reach a conclusion of appropriate expenditure
ratio to R&D and technological innovation inthe light of reality in China. We
hold that ‘the research and its results in-this paper may establish the: new
field in problem of optimum RED, expenditure.
eG Establishing expenditure policy-making ‘systems
1b. Total R&D resource ‘allocation model
Every ‘innovative'activity, in every enterprise and every development stage,
indicates three types of’ inputs: ‘capital, researchers and expenditure on R&D
to promote technological innovation. Generally speaking, the advancement of
technological innovation is, in a great extent, affected by some indeterminate
factors, which formulate one of the important features to innovation activity
and are’ related ‘to the probability of expenditure-on R&D. To solve such
problem, total R&D resource allocation model (TRDRAM) is developed.
First, general framework of TRDRAM is provided as Fig. 1 shows. In fact,
technological innovation in enterprise has more and more widespread and
profound influences on economy. In a general sense, technological innovation
not only offers economic benefits, but also gives long-term benefits to
heighten technology level, establish innovation ability and exert a strategic
influences on transfering potential ‘strength to real one.
The scale and structure of technological innovation affect the growth rate,
direction and type of economic growth. From the point of view of economy,
technological innovation is an actual input which can take place of labor and
capital, and becomes the first key factor, though scale of economy is another
inneglectible one. There are points for attention that total investment
is an intermediate and support to increase of productivity. Most innovation
results require investment on production, without that ‘there's-no. effective
results from innovation’on economic growth. Similarly, scale of —economiy
depends on investment, too. In a word, the most common and active element for
productivity inctease is the effect of innovation.
When we further study the structurés and relations’ concerning enterprise's
economic growth and technological innovation, we have the general cause and
System Dynamics '91 Page 683
PRODUCTION
* Productive Capability
* New Products
% Output
* Sales
F EXPENDITURE / CAPITAL
Expendure/ aN * Profit
* Investment on Fixed Assets
*R & D Expendure
Profit/Tax
d * Cash Flow
TECHNOLOGY ‘
* R & D Cpability
* Tech Inno Activity Expenditure/Investment
* Technology
Fig. 1
effect diagram as Fig. 2. In this diagram, workforce ( labor ), fixed assets
and technological innovation level constitute independent variables
determining thé output.
In fact, loop.1 (output-investment on fixed assets ) is a positive feedback.
On the other side, loop.2 is a negative one because capital ( materialized
labor ) will gradually substitute for labor ( workforce ) in virtue of the
innovation effects, and finally restrains growth rate of output and increase
of fixed assets as well.
If we make detailed research into structure of innovation in Fig.2, we'll find
that technological innovation activity itself can be regarded as a subsystem.
From a systematical view, technological innovation exerts structural pressure
on economic system and is absolutely not a "remainder" of economic activity.
From this view point, technological innovation forcefully depends both on
special economic condition and on evolution of technological. system itself.
1) basic behavior of TRDRAM
In TRDRAM, we are aimed to obtain the optimum range of expenditure on R&D,
from which we can better understand the features of technological innovation.
The several curves from S.D. model are presented as followings:
From the results‘( curves in. Fig. 3 ) above, it is ckear for us ‘that the
proportion of expenditure on R&D from sale increases and ‘gradually. stablizes.
The proportion of contribution from technological innovation, fixed assets,
and labor for enterprise's growth rate, over time reach the stable limit ( see
Fig. 4°), that isthe dynamic equilibrium of: technology change and scale
Page 684 System Dynamics '91
level, of
ae Tech. Inno.
Potential. \ Satisfactory
t
Capability Inno. Deere: Ep ‘
Contribut'n of
Inno.
Sales
JZ Potential Progress :
ech
=0
‘D,O=T TIT
R, P=!
PAGE-1
Fig. 3
economy. In the early development, for the enterprise, . the contribution © of
fixed assets is larger than that of technological innovation, but, several
years later, the level of technological innovation increases very fast, . the
contribution of technological innovation plays the dominant role.’
The return on investment in technological innovation, as the basic run
behavior shows, declines and stablizes at a constant, for the accumulation of
output of . technological. innovation and the improvement of the level of
System Dynamics '91 Page 685
technological innovation, the ability of settle the technological problem is
more stronger than that of tranferring the output of technological innovation
to commidities. (see Fig. 4 )
aamanood
‘ Potential of Tech Inno!
anf!
gggcggg crete
3 Fig. 4
R1=1,R2=2,R3=3,R4=4,R5#5,R6=6,R7=0
PAGE-1
2) Policy test
In the policy tests, we will analyse what the suitable range of expenditure on
R&D from the sale is, and the different characteristics of different
industries on technological innovation.
(1) Control policies of R&D expénditure,* the case of machine~building
industry S ‘i
The main characteristics of machine-building industry lies in the fact that
tech development is in the state of maturity and the high rate of
technological innovation. The simulation shows the bahavior when we set up 1%
of sales to promote technological innovation as followings: (compared with the
situation of 3% investment on R&D )
In the early development stage, the sales decreases 5.5%, so does the
profit with the number of 8%. The reason for such conclusion is that the
insufficient investment on R&D will cause the inadequate push force for
technological innovation, and the total tech level declines 14.7% or so.
But at the same time, the innovation focuses on the profit in the near
future, the actual application rate of the output of ' technological
innovation goes up, and the proportion of new products only declines 1%.
In the late of development, the insufficient investment on R&D becomes
very obvious, the sales, compared with the situation in 3% investment,
increseas 10.1%, but the profit do decline 21%, the productivity follows
the the profit and declines 18.5%.
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In short, from the total process of development, 1% investment on R&D takes
a negative effect in short time, let alone in the far future. .Though the
output of technological innovation are suitable for short-term effecttiveness,
this policy is unsuitable for tech intensed industries, especially for
machine-building industry.
Table. 1 summarizes the integrated simulation results for machine-building
industry.
(2) Control policies of the R&D expenditure, the case of silk industry:
Unlike the machine-building industry, the silk industry is characterized by
its labor-intensive and capital-intensive type. The difficult of average
innovation of silk industry is smaller than that of machine-building. Similar
to the analysie in 1), with the same inputs and tech level, the simulation
results are presented as followings ( see Table 2 ).
RATIO 1% 2% 3% 4.5%
INDEX S$ M L Ss M L S M L s M OL
SALES
(x1E5) 1.69 1.87°3.46 1.89 2.02 3.16 1.79 2.86 3.19 1.86 1.99 2.67
PROFIT ‘
PRODUCTIVITY
0.69 0.78 1.43 0.77 0.92:1.53 0.79 0.96.1.76 0.81 0.89 1.44
(1E4/Per Capita)
Table 1. R&D expenditure policy analysis
in machine~building industry
(Notes: S--- short-term; M--- middle-term; L--- long-term )
RATIO 0.35% 0.5% 0.7% 1.0%
INDEX S M L Ss M L s M L Ss M L
SALES.
(x1E5)2.82 3.27 4.79 2.82 3.16 4.22 2.82 3.16 4.43 2.97 3.15 3.02
PROFIT
(x1E5)0.31 0.33 0.42 0.31 0.35 0.45 0.31 0.35 0.48 0.31 0.34 0.40
PRODUCTIVITY
‘ 2.12 2.22 3.16 2.23 2.35 3.44 2.00 2.23 2.52 3.79 2.23 2.34
(1E4/Per Capita)
Table 2. R&D expenditure policy analysis
of silk industry
System Dynamics ‘91 Page 687
As productivity is a very important factor for enterprises as. well as for our
nation, we will analysis the proper range of R&D expenditure which can improve
the productivity. Here, according to the policy test, 2-3% R&D expenditure to
sales, is the best choice for machine-building industry. For silk industry,
0.5-0.7% is the candidate. :
2. Coordinated allcation model to new & existing. products (CAMNE)
With the help of a dynamic analysis, another system dynamic model (CAMNE) is
constructed, focusing on the coordination of the existing products under the
certain total R&D expenditure. This model is composed of three subsystems,
including the finance, existing products and new products R&D. Fig. 5
describes the general skeleton of CAMNE.
R&D Elimination
\ Zz.
Products "A" prsascestiyt
ae - 7K
r Total site|
va J =~ N
Products "B" | = Products C
Notes; --—- 7 » . Investment
————*_ Contribution to Sales
===> Product Development Route
Fig. 5
Vnder a set of assumption and control policies, the basic behavior of CAMNE in
200 months is simulated as follows: ( See Fig. 6)
According to the simulation in Fig. 6, we will see that under the 3% of total
R&D expenditure ,with existing products proportion of 2:4:2:2, the ratio of
investment in the new products to enterprise’ sales will reach the upper limit
(alout 9.0) during the time prior to month 100, so the profit increase
gralually with 11 percent growth rate. But the return on investment decreases
( from 2.5 to 1.8 ) because too much investment in products A.
System Dynamics '91
Page 688
the
shows the dynamic behavior of the new & existing products under
20" 00000°
0°S79 0°0
000S0° 00000°
00s2"0 0000°0
= 00s*z 000°0
ded‘ t=0'Z=0' Cod ‘NeV
decided total R&D expenditure (3%).
Fig.
Fig. 7
System Dynamics '91 Page 689
III. Conclusion
No matter how the enterprises inside condition or outside environment is,
there always exist many recognized or unknown factors more or less affecting
the economic development and tech advancement. As a development country,
enterprises in China must make a rational policies to promote the
technological innovation, maintaining homogeneous relationship between
economic development and tech advancement, keeping a suitable proportion’
expenditure on R&D to promote technological. innovation.
Under the existing condition of economy and science & technology in China, the
general process of enterprise's development and tech advancement abides by
the "s" type discipline. According to the simulation, in the early stage, slow
speed of innovation exists because of the lag. of tech level and the
insufficient capital for technological innovation. Afterwhile, with the
relaxation of these two restraint factors, innovation will grow’ fast, and
enters the stable state because of the limitation of tech level itself.
So, for enterprises in China, either high or low expenditure on R&D to promote
technological innovation is unsuitable, for machine-building industry, as the
simulation shows, 2%-3% is advised as a proprotion of expenditure on R&D from
sales, and for silk industry, takes 0.5%-0.7%. The different results is due to
the different industries, which we must know while making the -expenditure
policy for R&D.
Under the definite R&D expenditure to promote technological innovation, it is
better to pay special attention for the rational new & existing products
structure for the better performance of the enterprise. 2.5:4.0:1.0:0.5, which
through many tests, is advised as proper investment ratio for the four kinds
of new & existing products, such has been the case when the percent of R&D
expenditure to total sales is 2.5 for the medicine industry.
REFERENCES:
Foxall, G.R. 1984. Corporate Innovation: Marketing and Strategy. Croom Helm.
Qingrui Xu. 1986. R&D Management. Beijing: High Education Publication House.
Steven Muller. 1984. Technological innovation in the 80's. Columbia
University.
Dean, S. B. & Goldhar, J.L. 1980. Management of Research and Innovation.
North-Holland Publishing Company.
Fischer, W.A. 1983. The Structure and Organization of Chinese Industry R&D
Avtivities. R&D Management. 13(2):62-81.
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