The process of technological change

The preceding two chapters provided a literature review on the diffusion of new technologies and their impli-cations. This section intends to highlight a number of parallels between these two research directions and to show how they jointly contribute to a consistent, market-based view of technological progress.

Figure 3 shows a flowchart that gives a simplified illustration of the process of technological change. Techno-logical change, meaning changes in the goods or services produced and the means by which they are produced, can be broken down into four main stages:

1. Invention of a new product or process: This can be the result of coincidence or purposeful R&D ac-tivities. A new product or service might also arise as a by-product of an investment into a new tech-nology which is introduced to a company.

2. Market entry: Once the new product or service has been invented, it is introduced to the market. Po-tential customers of the invention can be either private consumers and households or other firms.⁷ Once the invention gains practical use in a market or process, it turns into an innovation.

3. Diffusion: A new product is adopted by consumers and / or firms over time until it reaches its market potential. Alternatively, it can also fail if neither consumers nor firms are willing to purchase the in-vention. If firms invest into the new product, their gain from it is usually not direct but requires an implementation process which can either trigger a new product or service offer by the adopting com-pany, or / and a process innovation within the adopting company. Alternatively, the implementation can also fail, usually ending in a write-off of the investment.

4. Market adjustments: Finally, numerous market adjustments can occur as a consequence of the diffu-sion process. In the case of the successful diffudiffu-sion of a new consumer product or service, the pur-chasing habits of consumers changes, possibly affecting the demand on markets for products that are substitutes or complements to the innovation. This can trigger further complex adjustment processes ___________

7 A process invention is usually not offered to a market for sale, but directly implemented in the company it was invented in. In case the company decides to sell the knowledge about the new process to other companies, it becomes a product or ser-vice invention.

on the supply side of these related markets, possibly also affecting the labor market. In the case of a successfully introduced process innovation, the adopting company expands its production⁸, which leads to total output growth⁹, a decrease in prices¹⁰ and changes in market shares¹¹.

This very simplified illustration leaves out important elements that also contribute in important ways to tech-nological change. For example, the role of entrepreneurship and new firm foundation is not explicitly consid-ered, although it does have a crucial role in the process of technological advance. However, this price was paid for the purpose of clarity and for investigating the role of technology diffusion in the process of technological change, which is the main objective of this study.

Figure 3 – Simplified process of technological change

Action Actor Event

∨ _“or” ∀ “exclusive or” ∧“and”

Legend to Figure 3

Interestingly, the literature cited in chapters 2 and 3 points out that the four stages of the process of techno-logical change mentioned above are closely related. In particular, firm’s expectations of the market adjustments succeeding the successful introduction of a new product or process provide an incentive for investing into new products or processes, either via R&D efforts or through the investment into a new technology sold by someone else. Also, the realization of profits from such investments is inseparably connected with the market adjustments outlined above. Table 3 summarizes the incentives that drive the decision of firms and customers to invest into innovative activities, products or services.

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8 Lower production costs lead to higher optimal production quantities, ceteris paribus.

9 Provided that demand is somewhat price-elastic.

10 Because the demand curve slopes downward.

11 Provided that not all companies serving the same product market adopt the new process at the same time.

Table 3 – Incentive scheme to Figure 3

Incentives I - Opportunities for profitable investment - Opportunity to gain strategic advantage

- Capturing market shares from rivals via production cost advan-tages or market entry

- Achieving (temporary) monopoly position via entry to a new mar-ket

Incentives II - Opportunities for profitable investment - Opportunity to gain strategic advantage

- Capturing market shares from rivals via production cost advan-tages or market entry

- Achieving (temporary) monopoly position via entry to a new mar-ket

Incentives III - Utility gains from consumption

Remarkably, it appears that the selfish motives of consumers and companies seem to be the engine that drives technological progress and hence spurs the creation of wealth and economic growth. These selfish motives seem to unfold their creative and productive impacts particularly well in free-market societies where firms are en-gaged in fierce competition, as recently pointed out by William Baumol (2002):

“What differentiates the prototype capitalist economy most sharply from all other economic systems is free-market pressures that force firms into a continuing process of innovation, because it becomes a matter of life and death for many of them… Firms cannot afford to leave innovation to chance. Rather, managements are forced by market pressures to support innovative activity systematically and substantially, and success of the efforts of any one business firm forces its rivals to step up their own efforts. The result is a ferocious arms race among the firms in the most rapidly evolving sectors of the economy, with innovation as the prime weapon.” (p. viii-ix)

In the context of this study, it becomes obvious that investments into new technologies are an essential part of this “ferocious arms race” that spurs economic growth, creates prosperity and enables firms to gain competitive advantages. Table 4 summarizes the connections between the four main steps of technological progress and the various theories that were discussed in the preceding two chapters.

Table 4 – Theories relating to technological change Process step Theories Chapter Invention and

R&D Patent races, market structure and innovation incentives, appropriabil-ity problems

2.2, 2.3.4, 2.3.6

Market entry Patent races, market structure and innovation incentives

2.3.4, 2.3.6 Diffusion Epidemic-, rank-, stock- and order

effects, risk and uncertainty, multiple related technologies, Roger’s criteria

3.2, 3.4, 3.5

Market adjustment Innovation and market structure, pat-ent races, economies of scale and scope, network effects, employment effects, productivity and growth, stock- and order effects

2.3.1, 2.3.2, 2.3.3, 2.3.5, 2.3.6, 2.4, 2.6, 3.2.3, 3.2.4

This concludes Part I of this study, which aimed to provide an overview of what we currently know about how new technologies gain increasing usage among firms and how innovation diffusion is embedded in the more general process of technological progress. Chapter 2 emphasized that the diffusion of new technologies can have far reaching consequences for the competitiveness of individual firms, the organization of production processes and market structures, the demand for labor and certain types of qualifications, and for productivity growth and the creation of prosperity and wealth. In particular, the strategic relevance of technology adoption

decisions was stressed. Chapter 3 provided an overview of the current literature on technology diffusion. The primary objective of this research is to rationalize and to explain the puzzling observation that new technologies – even if they promise clear benefits and are objectively superior to old technologies – are not immediately adopted by all firms that could possibly profit from them. Rather, diffusion appears to be a dynamic process that often takes surprisingly long until the new technologies have gained saturation levels in usage. Different theories have been suggested to explain this phenomena. Some of these theories complement each other (e.g. the rank ef-fects theory and the majority of the management literature on technology diffusion), while others are based on conflicting assumptions to explain the same phenomena (e.g. epidemic effects versus stock effect models). In particular, we found that some of the most interesting and challenging effects occur when firms’ investment de-cisions are observed as a dynamic sequence, i.e. when past investment dede-cisions influence the probability and the payoff of future investment decisions, which can lead to non-linear dynamics, lock-in effects and path-dependent developments. Also, the existing literature suggests that such non-linear dynamics are especially likely to occur if firms are faced with a new technological paradigm that offers various, related investment op-portunities instead of just one stand-alone technological solution that is independent from any other technology the firm uses or could purchase in the future. However, there is still a gap in the literature analyzing explicitly how such dynamic interdependencies influence the adoption behavior of firms and also a clear lack of empirical evidence for such dynamics. In addition, there is still only very few empirical work on the diffusion of e-business technologies and on the relationship of e-e-business usage with firm performance¹².

Part II continues with original research that is carried out to address these gaps in the literature and to empiri-cally test the hypotheses that were developed in Part I. The estimation results will be indicative about which of the above identified theories abides the test of the data and which particular factor has the strongest and most dominant influence on the diffusion dynamics of e-business technologies. In addition, the analysis of the interre-lationship of e-business usage, innovative activities and firm performance yields interesting and new insights into the strategic relevance of ICT. Last but not least, a number of implications can be derived based on the em-pirical evidence.

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12 Primarily because this technological paradigm is still relatively new and firm level data that is adequate and useful for academic purposes is still rare.

PART II