NOT FOR QUOTATION WITHOUT PERMISSION
OF THE AUTHOR
INNOVATION, PRODUCTIVITY GROWTH, AND
SlTUClWRALCHANGE
Harry Maier
July 1984 CP-84-3 1
Collaborative Papers report work which has not been performed solely a t the International Institute for Applied Systems Analysis and which has received only limited review. &ews or opinions expressed herein do not necessarily represent those of t h e Institute, its National Member Organizations, or other organizations supporting t h e work
INTERNATIONAL 'IXSlTlTTE FOR APPLIED SYSTEMS ANALYSIS 2361 Laxenburg. Austria
FOREWORD
This Collaborative P a p e r i s one of a series embodying t h e outcomes of a workshop a n d conference on Economic g t m c t u ~ a l Change: Analytical Issues, h e l d a t IlASA in July a n d August of 1983. The conference a n d workshop formed p a r t of t h e continuing IIASA program on P a t t e r n s of Economic S t r u c t u r a l Change a n d Industrial Adiustment.
S t r u c t u r a l change was i n t e r p r e t e d very broadly: t h e topics covered included t h e n a t u r e a n d c a u s e s of changes in different s e c t o r s of t h e world economy, t h e relationship between international m a r k e t s a n d national economies, a n d issues of organization a n d incentives in large economic s y s t e m s .
There i s a general consensus t h a t important economic s t r u c t u r a l changes a r e occurring in t h e world economy. There a r e , however, several a l t e r n a t i v e approaches t o measuring these changes, t o modeling t h e process, a n d t o devising appropriate responses in t e r m s of policy m e a s u r e s a n d institutional redesign. Other interesting questions con- c e r n t h e role of t h e i n t e r n a t i o n a l economic s y s t e m in transmitting s u c h changes, a n d t h e m e r i t s of a l t e r n a t i v e modes of economic organization in responding t o s t r u c t u r a l change. All of t h e s e issues were addressed by participants i n t h e workshop a n d conference, a n d will be t h e focus of t h e continuation of t h e r e s e a r c h program's work.
Geoffrey Heal Anatoli Smyshlyaev Erno Zalai
INNOVATION, PRODUCTnTrrY GROWTH, AND SI'RUCTURAL CHANGE
Institute for t h e Theory, Organization, and History of Science, Academy of Sciences of the
GDR,
Prenzlauer Promenade 149-152,1100 Berlin, GDR
This paper is concerned with t h r e e broad topics: first, changes in the conditions for productivity growth during the last decade; second, indus- trial innovation a s a factor of productivity growth; and third, produc- tivity a s a factor of structural change. A considerable amount of r e s e a r c h h a s been done on each of these areas, particularly through t h e work of IIASA's Innovation Task from 1978 to 1982. This unique t e a m included researchers from the Soviet Union, t h e United States, the GDR, t h e FRG, Austria, Japan, and the United Kingdom, and 1 hope t h a t some of its work will be continued in t h e new IIASA program on Economic Struc- t u r a l Change.
In
r e c e n t times, two main processes have h a d a marked effect on s t r u c t u r a l change in both t h e world economy and also in individual national economies:1. The radical change in the resource situation during the seventies:
t h e most significant results of tfiis change a r e an upward reva!ua- tion of n a t u r a l resources and a relative devaluation of existing pro- ducts and technologies.
2. The emergence of a new combination of productive forces, made up of s u c h basic innovations as microelectronics, information technol- ogy, flexible automation, new energy options, modern biotechnology, a n d new materials.
Under t h e pressure of t h e altered resource situation, this new combina- tion of basic innovations is likely t o trigger off a radical innovation push in t h e next few years t h a t will produce a new global economic s t r u c t u r e with a qualitatively higher level of productivity. The revaluation of n a t u r a l resources and devaluation of existing products and technologies is t h e reason for t h e c u r r e n t "revolution i n value," to use the terminol- ogy of Karl Marx, which is deeply influencing structural change throughout t h e economies of the world.
Figure 1 shows t h e development of this "revolution in value" during t h e last ten years for oil, for other primary raw materials, and for manufactured goods. The increase in the relative value of natural resources is demonstrated by t h e movement of real prices for oil (currently t h e main primary energy resource, accounting for 42% of glo- bal supplies), which were ten times higher in 1983 than in 1973. (Corn- pare, for example, t h e corresponding increase of only 30.5% over t h e e n t i r e preceding decade.) The decline in t h e relative value of
manufactured goods and production technologies is refiected in the fact that standardized products a r e currently a t their lowest price levels for thirty years. I t is well known t h a t today i t is almost impossible for the producers of machine engineering based on traditional electronics t o make any profit on the world market. On the other hand, producers of machine engineering who have been able to incorporate t h e achieve- ments of modern microelectronics into their products have been rewarded with very high growth rates in both production and value added.
Table 1 shows the very high growth rates for manufactured goods t h a t are heavily dependant on microelectronics. For t h e second and third generations of industrial robots, the average annual growth rate was 34% from 1972 till 1980. Average annual growth rates for other fields were 56% for computerized NC machines, 69% for computer aided design (CAD), 40% for computer aided manufacturing
(CAM),
and 30% for flexible manufacturing systems.Currently, the growth of value per unit of natural resources is one hundred times higher in t h e newer, microelectronics-based areas of machine engineering t h a n in traditional parts of t h e industry.
This
simultaneous revaluation of natural resources and devaluation of exist,- ing products and technologies h a s so far been dominant over the oppos- ing effects of the emerging new combination of basic innovations, which will tend t o restructure t h e world economy and increase t h e growth of productivity. This is the reason why productivity growth r a t e s in all the industrial countries have been declining in recent years (see Table 2).
The present decline in productivity growth rates, which is of course not conducive to equalizing productivity levels worldwide, cannot. be explained simply in t e r m s of t h e absolute levels of productivity reached.
Instead, we need to look for other fundamental factors t h a t t e n d to pro- duce similar effects in all countries, regardless of their level of develop- ment. From t h e historical point of view, we can point t o the fact t h a t the potential for increased efficiency created through the basic innovation of the forties and fifties h a s been largely exhausted; from the standpoint of the present t h e r e appears to have been a lack of basic innovation in recent years t o launch a new wave of productivity growth. The most important growth industries of t h e last thirty years have been chemi- cals, electrical engineering, automobiles, plastics, petroleum products, and aircraft. The basic innovations t h a t were the driving forces of pro- ductivity growth during the fifties and sixties are shown in Table 3. One of the main features of basic innovations is t h a t production units using them are able t o achieve higher productivity growth r a t e s than those working with traditional technologies. But these growth rates begin t o decline as soon as the potential for greater efficiency is absorbed. Figure 2 shows t h e development of t h e efficiencies of t h e main growth industries in t h e
FRG
during the fifties a n d sixties, and their tendency to decline in the seventies. Similar developments over this period can also be observed for the the United States, Japan, the United Kingdom, the Soviet Union, and the GDR.-
Manufactured goods-
Oil---
N o n ~ i l primary Percent changewr year
A
190-
Figure 1 Price changes on the world market for manufactured goods, oil, and other primary raw materials. 1963-1982. (Source: Financial k e s , October 11,
1982.) 150-
Future productivity growth will depend very heavily on the ability of society to utilize new basic innovations, which will emerge over the next two decades from the following areas:
I
100-
62.0
-14.8
Table 1 Basic innovations of flexible automation.
Innovation Year first Length of World growth r a t e s (7.) commer- take-off
cialized (years) 1972-80 1980-90 (forecast)
NC-machine 1955 17 35 20-30
Industrial robot 1962 10 44 25-30
Computer-aided
design (CAD) 1965 7 69 40-50
CNC-machine 1969 3 56 40-45
Computeraided manufacturing
(CAN, DNC) 1967 5 40 30-35
Flexible manu-
facturing
(FM)
1969 3 30 35-45Table 2 Industrial productivity growth rates in major developed countries, 1963- 198 1.
IPGR Change in Change in IPGR
IPGR OGR
Runned
USSR 5.6 4.8 -0.8 -1.4 3.5 2.0 2.8 3.2
Poland 5.9 8.0 2.1 3.6 4.8 2.9 1.0 -10.1
GDR 5.3 5.3 0 -0.3 4.2 4.0 4.5 4.3
CSSR 5.4 5.6 0.2 -0 .7 4.1 3.3 3.2 1.8
Hungary 4.6 6.3 1 .7 -0.2 5.2 4.3 1.2 4.1
Bulgaria 6.7 6.7 0 -4.3 6.4 4.2 2.9 2.8
Romania 7.0 7.8 0.8 0.1 6.8 5.8 3.9 2.6
Mmke t
USA 2.1 1.0 -1.1 -3.5 1.8 2.0 -1.0 2.9
Japan 8.9 3.7 -5.2 -9.5 6.3 8.4 4.9 0
FRG 5.3 3.6 -1.7 -4.4 0.8 4.7 0.8 0.7
France 5.2 4.0 -1.2 -3.4 3.4 5.3 1.3 -2.4
UK 3.9 1.3 -2.6 -3.6 1.4 1.2 -3.7 5.7
Canada 3.6 0.8 -2.8 -4.4 6.2 0.4 -1.6 1.2
Italy 5.6 0.8 -4.8 -4.1 3.2 - 6 . 3 5.0 0
Sources: Monthly Bulletin o j S a l i s t i c s , United Nations, New York, October 1982;
Satistische Jakbticher dst Mtgliedsldinder des RGW, Moscow (in Russian).
1. The electronics complex, including flexible automation, telecom- m u n i c a t i o n . ~ , office automation, and computerization of all spheres of t h e production process.
Table 3 Basic innovations that drove productivity growth during t h e fifties and sixties.
Degree of Industry impact
Innovation (year) Complete Plastics
Petrochemical Aircraft engineering
Plexiglass (1935), neoprene (1931), perlon (1938), polyethylene silicone (1946). crease-resistant fabrics (1932), terylene flbers, water-resistant cellophane (1936), ball- point pens (1938)
Catalytic petrol separation, anti-knock petrol (1935) Radar (1934), rockets (1935), helicopter (1930).
jet engine (1941)
Heavy Chemicals
Electrotechnology
Insulin (1922). kodachrome (1935), penicillin (1941), streptomycin (1944), deter- gent (1928). tungsten carbide (1926)
Radio (1922), synthetic polarizer (1938), fluorescent lamps (1934), television (1936), tape recorder (1937), cine camera (1953)
Automobile engineering Power steering (1930), hydraulic clutch (1937), automatic gearbox (1938) Precision tool making Giro compass (1909), zip
fastener (1932)
Marginal Polygraphic Xerography (1950)
Iron and steel Continuous warm rolling (1923), continuous steel casting (1948)
2. The energy complex.
3. Modern biotechnology.
4. Appropriate technologies for t h e industrialization of t h e developing countries.
5. Social and technical innovations in the fields of human settlement, communication, health care, a n d relaxation.
-
Electrical engineering-
Chemicals--
Manufacturing industry--
Petrochemicals-
Plastics-.--
Aircraft...--...
Average (all industries)Kgure 2 Labor productivity in various branches of industry in the FRG.
1950-1977.
One of t h e m o s t i m p o r t a n t influences on productivity growth will be microelectronics. Figure 3 clearly shows t h a t those industries t h a t a r e closely influenced by microelectronics have significantly higher levels of productivity growth t h a n t h e average.
F u t u r e productivity will depend very m u c h on t h e creation of a new potential for g r e a t e r efficiency through t h e basic innovation carried o u t now. But t h e r e a r e many reasons why production units show a strong tendency t o follow policies of improvement a n d i n c r e m e n t a l innovation r a t h e r t h a n actively supporting basic innovation. Table 4 lists some of t h e factors t h a t support t h i s a t t i t u d e a t t h e level of t h e individual Arm.
. -
I.
.. , ....
-....I\ ,
-1 980 Year
\
--
---_
I.-
Manufacture of automatic data processing (ADP) equipment-.-
Electrical engineering'---
Plastic procasing.... -- ....
Printing-
Automobiles--
Manufacture of mechanical engineering machinery'Includes manufacture of electronic data processing (EDP) equipment
Figure 3 Relative efficiencies of various branches of industry in the FRG in terms of labor productivity. 1970-1980. (Source: Federal Bureau of Statistics and own calculations.)
However, recognizing and countering t h e short-run p r e s s u r e s on firms t o p u r s u e improvement o r i n c r e m e n t a l innovation policies i s only p a r t of t h e solution. To achieve t h e right balance between improvement a n d basic innovation within a given production u n i t or national economy we m u s t improve our understanding of t h e relationship between innova- tion a n d efficiency. lnnovation i s not a goal in itself, and i t is not possi- ble t o m e a s u r e the r a t e o r i m p o r t a n c e of innovations by calculating t h e i r frequency or by identifying t h e input and output c h a r a c t e r i s t i c s of a particular innovation. Average efficiency coefficients, s u c h a s labor productivity, capital coefficients, o r t h e labor intensity of capital, a r e unable t o reflect t h e impact of innovation in a c l e a r form. We also have t o bear in mind t h a t t h e relative importance of t h e different input a n d output c h a r a c t e r i s t i c s has changed during r e c e n t years.
Table 4 Implications a t the company level of adopting either improvement o r basic innovation strategies.
Area of impact Implications of policy
Lmprovement Basic technological change
Marketing Demand relatively low, well- Demand high and relatively known, and predictable unpredictable
Risk of failure low Risk of failure high Acceptance rapid Acceptance initially slow Well-known marketing New marketing system
used necessary
Production Existing labor, skills Existing labor, skills
and patterns of cooperation and patterns of cooperation used t o a maximum becoming obsolete
Significant risk in Problems of quality, costs,
quality and process and effects new and unpredictable planning
Research and Existing RBcD potential Advanced R&D potential
development used needed
Basic research not New research fields and
needed disciplines needed
R&D risk relatively
R&D
risk high andpredictable unpredictable
Management Familiar management systems New management skills used and we1.l-tried and organizational solutions organizational solutions needed
adapted
Society Unpredictable problems Legal and social acceptance relatively rare or unpredictable
nonexistent
To u n d e r s t a n d t h e n a t u r e of t h e innovation process, i t is i m p o r t a n t t o distinguish between two kinds of efficiency:
1. Dyhamic eficiency: t h e efficiency of t h e p a r t i c u l a r production u n i t t h a t h a s adopted the innovation, denoted by e
( i ) t .
2. Average eficiency: t h e efficiency of t h e e n t i r e production field, denoted by
E(t
).We t h e n define t h e relative efficiency, z
( t ) ,
a s t h e r a t i o of t h e dynamic t o t h e average efficiencye i t
+ ( t ) = % t ) e
The dominance of particular types of innovation (basic, improvement, o r pseudo-innovation, t h e roles of product and process innovations, t h e s o r t s of barriers a n d stimuli typically encountered, and t h e m o s t appropriate m a n a g e m e n t skills and tools all very m u c h depend on how widely t h e innovation h a s been adopted and how g r e a t i s t h e efficiency g a p between t h e innovating production u n i t a n d t h e production field a s a whole. With t h e help of t h e relative eficiency coefficient we c a n under- s t a n d b e t t e r t h e probable direction of developments in a company, an industry, o r a country.
For t h e innovation s t r a t e g y of a firm or a country, two kinds of infor- mation a r e decisive:
1. What is t h e position of t h e production unit concerned in t h e d e v e l o p m e n t of efficiency of t h e production field of which i t is a p a r t ?
2. Are options available t o improve or t o maintain t h a t production unit's position in i t s own field, or should t h e unit abandon t h e pro- duction field altogether?
To acquire s u c h information we n e e d t o carefully investigate e a c h different stage of t h e innovation cycle in order t o identify appropriate strategies of growth, change. a n d survival. I believe t h a t i t is useful t o distinguish t h e following five stages in t h e development of a production u n i t t h a t h a s adopted a particular innovation: take-off, rapid growth, maturation, s a t u r a t i o n , a n d stagnation.
Efforts a r e underway t o confirm our hypothesis about t h e impor- t a n c e of different kinds of innovation with t h e help of empirical data. For t h e purposes of t h i s paper, o u r findings concerning t h e "employment"
a n d "productivity" effects of different kinds of innovation a r e especially interesting. These two effects have been identified with t h e help of d a t a g a t h e r e d by t h e Institut f u r Arbeitsmarkt und Berufsforschung, in Nurnberg,
FRG.
The d a t a provide information on 2266 technological c h a n g e s within 909 firms from four industrial b r a n c h e s (plastics, t h e metalwork industry, t h e food industry, and t h e wood a n d f u r n i t u r e indus- t r y ) in t h eFRG
during t h e period 1970-1973. By t h e "employment" effect of innovation we m e a n h e r e t h e r a t i o between t h e n u m b e r s of jobs c r e a t e d a n d eliminated a s a r e s u l t of technological change. The "produc- tivity" effect is t h e contribution of t h e different lands of innovation t o labor productivity growth a s a r e s u l t of technological change.Figure 4 d e m o n s t r a t e s t h a t basic a n d major improvement innova- tions have t h e highest employment effect, a n d t h a t t h e y a r e also respon- sible for a high contribution t o productivity growth. Within t h e s e categories, t h e implementation of new products had t h e highest single employment effect, creating 31.7 times m o r e new positions t h a n i t elim- inated. However, i t s contribution t o labor productivity growth t h r o u g h technological change was a relatively low 2.4%. This i s fairly typical in t h e take-off stage of t h e innovation cycle. The extension of innovations
-
a n activity in t h e rapid growth stage of t h e innovation cycle
-
contri-b u t e s significantly t o labor productivity growth (29.6%) and also h a s a high employment effect (12.6 tirnes). Major improvenlents in t h e quality of t h e product contribute 8.8% t o labor productivity growth a n d c r e a t e 5.9 t i m e s m o r e jobs t h a n t h e y eliminate. It is important t o realize t h a t
Basic and major Improvement and incremental lncrememal
improvement innovation and paudo-
innovation innovation
-
Employment effect-
Labor productivity effectFigure 4 The employment effect and the labor productivity effect of different kinds of innovation. (I, implementation of new products; Ex, extension of capaci- ty; Q, new quality of products; C, cost reduction innovation; IE, improvement of efficiency; SL, reduction on shortage of labor; Ssp, reduction on shortage of space; Wc, improvement of working conditions; R, replacement of product equip- ment; SO, shortage of orders.
basic innovation does both: it creates m a n y m o r e jobs t h a n a n y o t h e r type of technical change and i t contributes significantly t o productivity growth.
Improvement innovations devoted to cost reduction naturally pro- duce t h e highest contribution t o labor productivity growth (49.8%), but they a r e also t h e starting point from which t h e employment effect becomes negative. These innovations eliminate 1.4 times more jobs t h a n they a r e able t o create. Only in t h e case of improvements in w o r k n g conditions and production space does the employment effect become positive again, for obvious reasons. But in o t h e r types of technical change associated with medium improvement and incremental innova- tion, which occur in t h e fourth phase of t h e innovation cycle (satura- tion), the employment a n d productivity effects a r e very low. For exam- ple, the short-term reaction t o a shortage of workers has a n employment effect of only -3.3 times a n d a productivity effect of only 1.4%.
This proves our hypothesis t h a t a low employment effect is not so much caused by t h e development of labor productivity
-
which is what some of our colleagues have claimed up to now-
as by the dominance of medium improvement and incremental innovation (at the expense of basic innovation) in economic activities. This could also explain why, a t the present time, some of t h e industrially developed market economies are faced w i t h both a decline in productivity growth rates and high rates of unemployment.The main conclusion t h a t can be drawn from our mental model of the innovation cycle is t h a t a high degree of efficiency and production output is no insurance against future problems caused by the emergence of new technological options. In fact, a production unit t h a t currently displays a very high degree of efficiency, a large market share, and a high degree of standardization and vertical integration may very well h d i t extremely difacult simultaneously t o secure i t s future economic vitality, to search for new ways of satisfying a l a t e n t demand, or to s u p ply an existing m a r k e t with better and less expensive alternatives. Clas- sic r e c e n t examples of sectors t h a t have missed the right moment for change a r e the shipbuilding and steel industries. The main concern of the innovation policy makers of a country or a corporation should be to maintain the right mixture of business activities in t h e different stages of the innovation cycle. Countries or firms t h a t concentrate on innova- tion activities in t h e maturation or saturation stages will lose, in t h e foreseeable future, their advantages in t e r m s of dynamic efficiency and will run into stagnation.
One of t h e m o s t important lessons from t h e management of innova- tion in all t h e industrialized countries is the necessity for close inter- dependence between government innovation policy and company stra- t e g y Government actions to stimulate innovations have to take into account not only t h e way t h a t the attitudes of production units will vary as their emciency develops but also the adverse impacts on working con- ditions, environmental standards, and the health of t h e population t h a t may arise from the application and diffusion of new technologies. On t h e other hand, the corporations themselves must improve their ability to find appropriate responses to national needs and foreseeable shortages, and t o avoid not only primary but also secondary a n d tertiary adverse effects of t h e innovations they employ. This system of government- company interdependence is of major importance but i s still far from perfect.
1. Many of t h e ideas presented here are the result of joint work with Prof. Dr. Heinz-Dieter Haustein a t IIASA and in the CDR.
2. See for example Haustein and Maier (1980, 1984), Haustein et al.
(1981). Maier (1982), Maier and Haustein (i980), Maier and Robinson (1982), and Roman and Puett (1983).
3. "If t h e social capital experiences a revolution in value, it may hap- pen t h a t t h e capital of the indvidual capitalist succumbs to it and fails, because it cannot adapt itself to t h e conditions of this move- m e n t of values. The more acute and f r e q u e n t such revolutions in value become, t h e more does t h e automatic movement of the now independent value operate with t h e elemental force of a natural pro- cess, against t h e foresight and calculation of t h e individual capital- ist
...
and t h e g r e a t e r is the danger t h a t t h r e a t e n s t h e existence of t h e individual capitals." (Karl Marx, Cotpital, A C r i t i q u e of Political E c o n o m y , Vol. 11, Moscow, 1971, pp. 108,109.)Haustein, H.-D. a n d Maier, H. (1980) Basic, Improvement, and Pseudo Innovations and Their Impact on Efficiency. Technological Fbreccrst- zng and Social m a n g e , 16: 243-265.
Haustein, H.-D. and Maier,
H.
(1984) I n n o v a t i o n a n d E f f i c i e n c y : S r a t e g i e s f o r a W r b u l e n t World. Pergamon Press, London/Academy Publish- ing House, Berlin, forthcoming.Haustein, H.-D., Maier, H., and Uhlmann. L. (1981) h n o v a t i o n and A"f,fk- c i e n c y . RR-8 1-7. International Institute for Applied Systems Analysis, Laxenburg, Austria.
Maier,
H.
(1982) Innovation, Efficiency, and t h e Quantitative and Qualita- tive Demand for Human Resources. lkchnological f i r e c a s t i n g a n d S c i a l Change, 21: 15-31.Maier,
H.
and Haustein, H.-D. (1980) Innovation, Efficiency Cycle a n d Strategy Implications. T e c h n o l o g i c d Forecasting a n d Social Change.17: 35-39.
Maier, H. and Robinson, J. (Eds.) (1982) h n o v a t i o n P o l i c y a n d C o m p a n y B a t e g y . CP-82-S9. International Institute for Applied Systems Analysis, Laxenburg, Austria.
Roman, D.D. and Puett, J.F., Jr. (1983) I n t e r n a t i o n a l M n e s s a n d Tech- nological h n o v a t i o n . Elsevier, Amsterdam and New York.
