Invention

creation of an idea to do or make something (profitability not yet verified)

New ideas without commercialisation
Innovation:
new product/ process commercially valuable i.e. successfully developed inventions
3Definition: commercialisation of ideas
Innovation= introduction of new ideas that add value to a firms activities
Oslo Manual
the implementation of a new or significantly improved product (good or
service), or process, a new marketing method, or a new organisational
method in business practices, workplace organisation or external relations.
Must contain some novelty
Diffusion: the spread of a new invention/innovation throughout society or at least throughout
the relevant part of society.
Without this inventor and society cannot gain full benefits
Some benefits might be
To the inventor
Not to the inventor = spillovers or positive externalities
Types of Innovation
Product innovations
Used by consumer
Used by producers ie. computers, robots etc
Process innovations
Used by consumers ie. fast food, air travel
Used by firms ie. assembly lines, software
Radical or incremental
Radical (steam, internal combustion engine, computers, internet)
an innovation that has a significant impact on a market and on the
economic activity of firms in that market. This concept focuses on the
impact of innovations as opposed to their novelty. The innovation
could, for example, change the structure of the market, create new
markets or render existing products obsolete.
Incremental (constant improvements)
The diffusion of radical innovations nearly always depends on
incremental improvements, refinements and modifications, the
development of complementary technologies, and organisational
change and social learning.
Both important in driving economic growth
No great agreement on which is which

Types of goods

Excludable
(I can exclude others from
consuming the good (e.g.
private golf club)

Non-excludable
(I cannot exclude others)

Rivalrous
(if I consume, you cannot.
Clothes. An airline seat )

Private ( food, clothes, car)

Common-pool resource
(fish,timber, coal)

Non-rivalrous
(my consumption does not
exclude you. Pollution,
streetlights)

Club (cinema, satellite TV,

bridge)

Free public goods (free TV,

air, national defence)

Definition of property rights

IPRs: patents, copyright, trademarks
Basic trade-off with granting IPRs: trade-off between
Good for incentives to innovate
Bad for monopoly power (and might be bad for incentives to innovate if innovation
depends on a chain of innovations)
Measurement of Innovation
Surveys Community Innovation Survey (CIS)
Input measures
R&D is main measure
Output measures
Patents and other IP
TFP and related (UK innovation index)
Mixes of Input and output measures (many Innovation Scoreboards. Total waste of
time, see GR box 3.1)
Extension of Measurement of Innovation: (from class article:
http://spiral.imperial.ac.uk/bitstream/10044/1/11139/4/Haskel%202013-01.pdf)
Innovation output indicators
First, innovation surveys. Eurostat mandates all signatory countries to survey
businesses asking them to self-report how innovative they are on the
Community Innovation Survey.A typical question on the survey is, for
example, Over the last three years, did this business introduce (a) new or
significantly improved goods? (b) new or significantly improved services? (this
wording is taken from the UK survey)
A second approach is to use indicators such as patents, trademarks or
copyright as an indicator of innovation output. Other indicators are items such
as published scientific articles.
Innovation Inputs
The main approach here is R&D spend, which is measured in many countries
more or less according to standard accounting rules:

typically summing wages of R&D workers and their use of materials and
capital (such as laboratories)
Innovation inputs and outputs combined: the EU scoreboard method
This method is a kind of multiple indicators method exemplified in the
multi-year, multi- country EU innovation scoreboard.
It is a weighted average of 24 indicators for each EU country, with the
indicators ranging from GDP, R&D spend, ICT spend, exports of high
technology products and broadband penetration.
Growth accounting: outputs net of inputs.
The above methods cover innovation (a) outputs; (b) inputs; or (c) inputs and
outputs. A final method employed by many economists is outputs net of
inputs, namely multi-factor productivity
What does the have you innovated question measure?
45% of firms reported technological product/process
they were asked for text describing their innovation
Many firms said that new capital equipment was their innovation. of firms who
provided the information, reported process innovation is mostly new capital spending
This is why measured innovation is highest in IT boom
Conjecture: we would get same/better(?) information from a standard investment
survey
Input Measure (R&D is the main measure)
Basic Research:
experimental/ theoretical work undertaken primarily to acquire new knowledge
of the underlying foundations and phenomena and observable facts, without
any particular application or use in view
Applied Research:
original investigation undertaken in order to acquire new knowledge, directed
primarily towards a specific practical aim or objective
Experimental Development:
systematic work, drawing on existing knowledge gained from research and
practical experience, directed to producing new materials, products and
devices; to installing new processes, systems or services; to improving
substantially those already produced or installed
Points about R&D
Question to resolve scientific and technological uncertainty
Typically scientific spending excludes things like software, design,
marketing, training and etc
Almost all R&D is done by multi nationals, so it's difficult to measure across
borders since within company transfers are hard to measure
Output Measures
Patents
Potential advantages : they are novel, they are being cited so you can trace
the source of knowledge
Disadvantages : not all innovations are patented (eg Coca Cola, financial
services), citations noisy

TFP Measures
Define something called total factor productivity growth = TFP growth as the residual from
output growth minus share-weighted input growth

intensive versus extensive growth

extensive: add more inputs, leads to diminishing returns
intensive: improve efficiency of those inputs.
What do we want to measure? Eg RYAN AIR
Output (GDP) (increase in pax flown)
Human capital (better trained staff)
Physical capital (better planes flying faster)
Knowledge capital (software booking and flying, ticketless boarding)
How could a firm grow without innovation ?
Through duplication of physical and human capital
With innovation?
Output growth over and above contributions of human and physical capital
How to measure effects of innovation on output?
output= capital, labor, ideas
Use residual approach to measure the knowledge (ideas per se), after
considering the elasticities, because unlike capital and labor, it's harder to
measure knowledge

TFP growth points:

1. Its a residual i.e. the rise in output net of the weighted rise in K and L inputs, where
the weights are the output elasticities that convert percentage changes in inputs to
the their effects on output.
2. If factors are paid their marginal product, then TFP growth is exactly the contribution
of the use of free knowledge to output growth = innovation
3. So splitting DY/Y into (a) weighted inputs and (b) TFP growth can tell us how much
output growth is due to (a) more inputs and (b) TFP growth/technical progress/better
use of those inputs. Examples below
4. Long run growth? If economies just use more K and L might be diminishing returns
and growth slows. If they use ideas = TFP then growth can keep going. Application:
how did the Soviet Union grow? How is China growing?
CHINA
Growth after reformation in 1978
GDP in 1978: 1/40th of US and 1/10th of Brazil
2013: 1/5th of US, equals to Brazil

What happens during the reformation?

Accumulation of labour
Improved quality of labour
Investment/accumulation of capital
Technology
Can use growth accounting to test this
Growth accounting will test proximate determinants of growth =
labour, capital,quality of labour,TFP
ultimate determinants will be incentives and Institutions e.g. central
planning/reform etc.
Approach here: to note that investment might be caused by other
factors,below,investment is assumed proportional to income
So why has China grown post 1978?
Policy reform
Structural transformation
From agriculture to manufacturing + services
From state to private

Competition and Innovation

Learning objectives:
Entrepreneurship, entry/exit and creative destruction
Would you expect innovation from largest or smallest firms
How does competition affect innovation?
Inventors VS Entrepreneur
Inventors produce new ideas; Entrepreneur search for new ideas and exploit
commercially (through creating new firm, or licensing the idea, or could be internally
formed)
What could affect societys capacity to be entrepreneurial?
Corrupt economies: efforts into rent seeking
Economies with imperfect capital markets
Markets and innovation
Basic issue of causation
Model of firms/industries: structure=>conduct=>performance
Structure: is the market a monop or not? Leads to:
Conduct: is there innovation or not? Leads to

Performance: profits, profitability etc.

But what if the innovation changes market structure? What if the most efficient firm
becomes dominant/largest?
Direction of causation not clear
Incentives might differ e.g. economies of innovation scale for large firms, or
laziness for large firms

Schumpeter. Waves of creative destruction with competitive dominating and

then ceding leadership again

Evidence on competition and innovation

Data from accounting identities of role of entry and exit
Set out accounting relation between growth and entry/exit and other factors,
and document those relations. This is accounting, not behavioural.

Econometric evidence on competition and innovation

Postulate behavioural relation between competition and innovation and
analyse using econometrics

Competition and innovation

Econometric and case studies
What about the incentives that competition gives on innovation? Schumpeters view
on chain of causation from competition to innovation changed:
Early: entrepreneurs key. They were the source of innovation, so competition
(i.e. new entrepreneurs raised innovation)
Later: large firms produce innovation since they have the finance, are
diversified so can manage risk, have withstood fixed costs. So more large
firms means more innovation

Competition and innovation: an Inverted U

Let us assume that firms innovate to gain post-innovation profits relative to current
profits.
So a firm who is behind in technology might get ahead and become a dominant firm.
So competition might lead to innovation but then to less competition. So can we
make any predictions since competition and innovation affect each other? Turns out
we can with a very specific model
Suppose innovation leap-frogs a firm over another. What does that mean?
Some innovation is a better product e.g. a faster computer,
Some innovation is a different product, e.g. red cars and blue cars.

Lets consider innovation of the first type. If there is leap frogging then we might
imagine two situations.

Situation 1. A levelled industry.

Suppose most firms have the same level of innovation to start with. So firms
are level with each other.
those who innovate and become technology leaders, gain profits by escaping
competition. If competition is very intense, these are potentially large gains
(since they leap frog away from intensive competition) = the
escape-competition effect,
In this case, more competition in a levelled indsutry raises incentive to
innovate

Situation 2. An unlevelled industry.

Now suppose firms have very different levels of innovation to start with. So
firms are not level with each other.
if lagging firms innovate, and leap-frog other firms, they gain profits by
becoming leaders. But with more competition, those post-innovation profits
relatively low (since the leap frog into lots of competition) = the
Schumpeterian effect.
In this case, more competition in an unlevelled industry lowers incentive to
innovate

Thus effect of competition on innovation depends upon two things:

Incentive effects of innovation in levelled industries, versus that in unlevelled
industries
But also, how many industries are levelled and unlevelled (i.e. the
composition of innovation gaps across sectors

Session 1 Technological change and types of innovation

Technological change:
Path dependency, paradigms and trajectories

Technological change is typically cumulative and evolutionary.

Technological development is not a smooth, automatic process it takes place in
spurts and jumps.
In hindsight some changes can be identified as revolutionary in nature leading to
tidal waves of changes called technological revolutions or new techno-economic
paradigms
Technological change has major implications for the competitiveness of firms.

Technological Paradigms

Thought structure or way of thinking (about a problem)

Paradigms identify the problems to be addressed, and close off other approaches

The Cumulative Nature of Technological Knowledge

Technologies build on one another -Path Dependent Trajectories
Like you cant advance to another innovation/technological change without the
existence of the old innovation
Trajectories example
Moores Law- pentium

Erricsons ever lighter phones (phones getting lighter compared to 40 years

ago)
The S-curve of technological performance

Consequences of new technological change

New techno-economic paradigms
Re-design & new configuration of the capital stock
New skill profile in the labourforce
Redistribution of profitable activities
Winners & losers: nations and firms
Types of Innovation
Product Innovation
Service innovation ( shopping, airlines)
Like how shopping market evolved and how you have bar and shower in
planes
Process innovation
Product and process innovation often strongly intertwined.
Service and process innovation can also be intertwined.
Business model innovation
Business model articulates the customer value proposition, it identifies a market
segment, and it specifies the revenue generation mechanisms
Eg. for Budget airlines, they build the airport far away from the city, however, they
also build hotels and shopping outlets nearby to generate more revenue, to increase
the willingness of people to choose the airlines despite of its distance.
Radical versus incremental Innovation
Incremental Innovation

Minor changes in existing products, processes or services

Very common
Cumulativenew products build on past products
Reinforces capabilities of firm
Stable markets familiar competitors
Competing for small shifts in market share

Radical Innovation

Critical events that reshape designs, knowledge and product markets

Uncommon
May open new markets and potential applications
May create difficulties for established firms and open up opportunities for new entry
May require different sets of engineering and scientific principles

Architectural Innovation
A component innovation ( or modular innovation) entails changes to one or more
components of a product system without significantly affecting the overall design.
E.g.,adding gel-filled material to a bicycle seat
An architectural innovation e
ntails changing the way components interact.

E.g.,transition from high-wheel bicycle to safety bicycle.

Most architectural innovations require changes in the underlying components.

Incremental innovation introduces quality improvements in core components. The

word renovation would more precisely describe this type of innovation.
Modular/Component innovation may result in the complete redesign of core
components, while leaving linkages between the components unchanged.
Architectural innovation changes the nature of interactions between core
components, while reinforcing the core design concepts.
Radical innovation introduces a new meaning, potentially a paradigm shift.

Example:
Washing machines have been affected by both incremental and architectural innovation.
Changes in the spin speed are an example of incremental innovation. The spin speed
determines how dry the clothes will be when they come out of the machine. 20 years ago the
fastest machines spun at up to about 1,000rpm. Gradually spin speeds have risen and today
the fastest machines spin at 1,600rpm. Although these advances have resulted in improved
performance, the system has remained unchanged. However there have been architectural
innovations in the washing machine field. In the 1960s most washing machines were twin
tubs, where the washer and the spinner were completely separate and placed alongside
each other with access via the top of the machine. Clothes had to be manually moved from
the washer into the spinner. The automatic washing machine with the washer and spinner 51
combined in a single drum, allowing all the operations to be completed in a single cycle, was
an architectural innovation. Similarly when Dyson launched its Contrarotator washing
machine in November 2000 this was another architectural innovation. This has not just one
drum, as on a conventional machine, but two that rotate in opposite directions. This change
in the configuration of the system gives an entirely different washing system
Disruptive innovation
Generally underperform established products in mainstream markets
Have new features that fringe / new customers value
Cheaper, simpler, smaller, more convenient to use
Fast improvement in performance
An innovation that disrupts existing market unlike sustaining innovation
Eg. Cannon killed Xerox
Innovator's dilemma
The logical, competent decisions of management that are critical to the
success of their companies are also the reasons why they lose their positions
of leadership
The struggle to Innovate

Architectural vs Disruptive
Architectural innovation is difficult for technical and organizational reasons.
Disruptive innovation is difficult for market-related reasons.
The problem of mental models
Eg Polaroid

Strong cultures & deeply rooted mental models are extraordinarily resistant to
change
Firms can become insufficiently adaptable:
Unable to see and react to new ways of doing business
New customer requirements
Knowledge about the current architecture is often tacit and
taken-for-granted.
This is particularly problematic in firms where units are dedicated to specific
components.
Firms can suffer from organizational inertia (google : O
rganizational inertia is the

tendency of a mature organization to continue on its current trajectory. This

inertia can be described as being made up of two elements -- resource
rigidity and routine rigidity).

Resource rigidity stems from an u

nwillingness to invest, while routine
rigidity stems from an i nability to change the patterns and logic that
underlie those investments. Resource rigidity relates to the motivation to
respond, routine rigidity to the structure of that response.

Session 2: Diffusion of Innovations

Adopter Categories:

Innovators: (Customers want technology and performance)

Technology enthusiasts who appreciate technology for its own sake and are motivated
change agents among their peers
Tolerate initial glitches and problems that accompany innovation coming to market
Intrigued by any fundamental advance in technology
Gatekeeper of new ideas into a system

 Provide early revenue for marketersbut not a large group

Innovators are a source of ideas and feedback but only targeting them will not be enough to
kick start the adoption process

Early Adopters:(Customers want technology and performance)

Visionaries looking to adopt and use new technology to achieve revolutionary change to
gain competitive advantages

Often opinion leaders: decreases uncertainty about a new idea by adopting it

The early competitive gains enjoyed by the adoption of the innovation mean they are
not price sensitive
Demand personalised solutions, quick response, highly-qualified sales and support

Early Majority: (Customers want solutions and convenience)

Pragmatists looking for evolutionary change to gain productivity improvements
Averse to disruptions i n operations, want proven applications, reliable service and
results
Seek reference from trusted sources (another pragmatist) to determine whether to
purchase
Dont value technology for its own sake, but rather are looking for productivity
enhancements
Early majority can create momentum and build a critical mass of adopters

Late Majority:(Customers want solutions and convenience)

Conservatives very risk-averse and technology-shy
Very price sensitive
Demand preassembled, bulletproof, turn-key solutions
Forced by necessity and peer pressure
Laggards:(Customers want solutions and convenience)
Sceptics seeking to maintain the status quo
Reluctant to believe that new innovations can improve productivity
Will only buy if the alternatives are proven to be worse and the cost-benefit is
guaranteed.
Adoption of Innovation
The S-curves of technology diffusion

Adoption is initially slow because the technology is unfamiliar

It accelerates as technology becomes better understood
Eventually the market is saturated and rate of new adoptions declines

Perceived attributes of innovations: Rogers (2003) Model

Relative advantage:
degree to which an innovation is perceived as better than the idea it
supersedes

Eg : how better is Tesla compared to any other cars?

Compatibility:
degree to which an innovation is perceived as being consistent with the
existing values, past experiences, and needs of potential adopters
Eg: it will make you question things like how is this new innovation gonna suit
my lifestyle? Does it require change?
Complexity:
perceived difficulty of understanding and use
Eg: Parents and the use of smartphones, the perspective of complexity
Trial-ability:
degree to which an innovation may be experimented on a limited basis by
potential adopters before adopting it.
Eg: how much can you test it before buying it? (Phone test?) another example
could be: test drive a car
Observability:
degree to which the results of an innovation [adoption] are visible to others
Eg: black and white earphones - Apple choose to make their earphones white so that

org tau yg org pakai that earphone is using ipod or iphone

How could other people know that you are using it ? YOU WANT PEOPLE TO KNOW
YOU ARE USING APPLE= hence, white earphones

Managerial implications
Managers who understand the role of these factors can :

better anticipate the likely adoption of an innovation

proactively develop a product so as to increase the likelihood of product adoption
tailor ones marketing activities to leverage those factors on which the innovation
does well and overcome those factors on which the innovation does poorly

Limitations of Rogers model

The innovation being adopted does not change during the adoption process
The established technology does not change either
Sailing ship effect
When an established technology is threatened by the arrival of a new
technology this triggers suppliers of the established technology to
improve it
These improvements are referred as the sailing ship effect
Benefits and costs of adopting the innovation are not directly analysed
Switching costs
When users incur a cost of switching products/suppliers
Examples include:
Contractual commitments
Compensatory or liquidated damages
Durable purchases
Replacement of equipment

Brand-specific training
Learning a new system
Information and databases
Converting data to a new format
Loyalty programs
Any lost benefit from incumbent supplier
Network externalities
In markets with network externalities, the benefit from using a good
increases with the number of other users of the same good.
Network externalities are common in industries that are
physically networked: telecom.
Network externalities also arise when compatibility or
complementary goods are important

Network externality value

In industries characterized by network externalities the value of
a technology is influenced by both:
Technologys standalone value
Network externality value, the value created by the size
of the technologys installed base and the availability of
complementary goods
A new technology that has significantly more standalone
functionality than the incumbent technology may offer less
overall value because it has a smaller installed base or poor
availability of complementary goods

Increasing returns to adoption

A technology with a large installed base attracts developers of complementary
goods; a technology with a wide range of complementary goods attracts users,
increasing the installed base.
Standards
De-Jure Standards defined by law (e.g., for health and safety)
De-Facto Standards informal standards, defined by markets and other social
processes.
Some standards might not be the most technological superior
Eg: QWERTY keyboard
Standards wars:How can firms win standards wars?
The ability of a firm to establish its technology as an industry standard has become a
key determinant of its long-term competitiveness.
The outcome of standards wars depends on how compatible each players proposed
new technology is with the existing one.
If the new technology is compatible with the current one it means that
switching costs are lower.

If the new technology is not compatible it needs to offer such a superior

performance that consumers do not mind incurring switching costs

Standards wars:Market strategies

Pre-emption is based on early lead and positive feedback.
Techniques: early product launches, penetration pricing (below cost)
Expectations management is about establishing credibility with customers.
Techniques pre-advertising, assembling allies, making grand claims about
your product current or future popularity.
Standards: Key learning points
Network externalities: the higher the number of users, the higher the value of a
technology for these users.
When the switching costs between technologies are high and the benefits of
changing to a different technology are marginal, lock-in may occur, sometimes in
inferior technologies.
Standards wars are hard to predict, but can make or break companies. Who wins is
the outcome of a complex interplay of factors.

Session 3: Product Lifecycle

Learning objectives:
1. understand the phases of the product life cycle and how they apply to an industry.
2. distinguish a range of first-mover advantages that apply when firms enter new
markets.
3. determine when the firms market and technological environment influence the
sustainability of first mover advantages.

The product life cycle

In the product life-cycle model Utterback and Abernathy (1975) characterized the
technology cycle in three phases
1. The fluid phase when there is considerable uncertainty about the technology and its
market; firms experiment with different product designs
2. The transitional phase market expands and the industry stabilizes around a
dominant design
3. The specific phase when firms focus on incremental improvements to the design
and manufacturing efficiency
After the establishment of a dominant design, product innovation becomes gradually less
important; process innovation becomes more important (below will explain more about
product vs process innovation)

Product and process innovation

Dominant design
Establishes what defines the product and what is required by the product
Basic design architecture that becomes the accepted market standard
Constitutes industry agreement on the attributes of a design that holds overwhelming
market share

Not always be based on technological superiority

Product lifecycle:Implications for innovation

To be able to survive, an organization must change the nature of its innovative
activity:
from product to process innovation
from radical to incremental innovation

Each phase requires different organizational competences:

fluid phase identifying ill-defined consumers needs
transitional phase developing distribution channels
specific phase designing standard products

Session 3: First Mover Advantage

Learning Objectives:
1. distinguish a range of first-mover advantages
2. determine when the firms market and technological environment influence the
sustainability of first mover advantages

First mover approach

Firms can create and dominate a new market where profits abound by
entering first a
nd setting up a strong differentiation
The fast second approach
Companies should not trying to become pioneers but should target the newly
created market in second position a
nd colonize it
Timing of entry:Different categories
First movers are the first entrants to sell in a new product or service category
(pioneers)
Fast followers are early to market but not first.
Late entrants do not enter the market until the product begins to penetrate the
mass market or later.

First Mover Advantages: Pros and Cons

Advantages
Temporary monopoly rents
Opportunity to build brand loyalty and technological leadership
Potential for preemption of scarce assets
Potential to exploit buyer switching costs
Chance to define a standard
Disadvantages
High research and development expenses
Uncertainty of customer requirements
Undeveloped supply and distribution channels
Immature enabling technologies and complements

Assessment of Sustainable First Mover Advantage:

Durability of First Mover Advantage :
Pace of market adoption
Slow pace allows early entrants to develop production and distribution
facilities and makes it easier to keep up with demand
Pace of technology evolution
Slow pace makes it harder for late entrants to differentiate themselves and
gives time to erect entry barriers (e.g. patents)

When the market leads: fast Market, slow Technology

Challenges:

When the market leads, it is difficult to satisfy demand in an emerging market.

Competitors can introduce highly similar products (especially if patents offer weak
protection) at a fraction of the R&D investment.
Only through massive investment in marketing, FMAs may be durable.

When technology leads: slow Market, fast Technology

Challenge:

When the technology leads, followers can differentiate via technology, potentially
avoiding earlier technological shortcomings from early entrants.
Slow market uptake means profits of early entrants were already limited.

Only through massive investment in R&D, FMAs may be durable

Rough waters: fast Market, fast Technology

Challenge:

When the technology evolves very fast, new products become obsolete very fast,
followers can offer something new to a growing number of customers.
When the market adopts quickly, it is difficult to satisfy the growing demand..
Only through massive resources, FMAs may be durable.

Other factors of Timing of entry :

Entry barriers
Increasing returns to adoption
Enabling technologies

Reputation may decrease uncertainty

Launch timing
Firms can use the timing of product launch to take advantage of business cycle or
seasonal effects
Video game consoles are always launched just before Christmas
Timing also signals customers about the generation of technology the product
represents
If too early, may not be seen as next generation
Timing must consider the possibility of cannibalization
When a firms sales of one product diminish its sales of another
Key learning points
A first mover may be able to build brand loyalty and a reputation for technological
leadership, preemptively capture scarce resources and exploit buyer switching costs.
First movers, however, carry a large burden of R&D expenses and face uncertainty
about consumer preferences and often poor supply of complementary technologies.
Fast followers may take advantage at the expense of first movers.
The optimal time of entry depends on a variety of factors, most crucially on the speed
of technology change and the pace of market evolution.

Session 4 :Protecting Innovation

Intellectual Property Rights

A legal concept which refers to creations of the mind for which there are
exclusive rights
Why do we have IPRs?
confer ownership and provide incentives to produce new knowledge and
devices
Technical know-how, created by R&D is, in general, expensive to produce
and relatively cheap to reproduce
IPRs protect against rapid imitation and allows the innovator a monopoly to
pay back the investments in R&D
Without protection, the market would under-produce knowledge (arguably,
there is a lot of debate about this!)
Property rights confer monopoly use. Short-run welfare loss becomes welfare
gain in the long-run (as technology becomes a public good).
Exclusive Rights:These exclusive rights are powerful.
Enforceable in the courts
Injunctions for IPR infringements
Civil damages
Employment law
Government support and actions
Criminal sanctions
Trade policy measures
Long lifetime:
Copyright 70/95 years

Trademarks -forever
Patents -20 years
Types of Protection Mechanisms
Formal
Informal

Trademarks:Definition
A sign which can distinguish the goods and services of one trader from those of
another.
Protects against use of recognisable sign, design or expression that identifies a
product or service
Generally relates to a series of products
Reinforces a brand and reputation
Relatively cheap form of protection especially as applies to one or more classes of
goods and services
Criteria is based around distinctive identity.Needs to meet the following criteria:
Able to distinguish (distinctive) the goods or services;
Will not confuse consumers
Will not deceive consumers with respect to quality

Appropriability:Who profits from innovation?

Suppliers and complementors benefit by selling larger quantities

Imitators benefit by marketing the imitation while saving on R&D cost.
Innovator benefits by selling the innovative product
Customers benefit when their valuation of the new products exceeds its price

Types of complementary assets:

Generic complementary assets

If they do not need to be modified to fit the innovation (e.g. general
purpose manufacturing equipment)
Specialized complementary assets
If they need to be modified to fit the innovation
Unilateral dependence between the innovation and the
complementary asset
Co-specialized complementary assets
Bilateral dependence between the innovation and the complementary
asset

PAST YEAR MOCK EXAM : JAWAB!

Section A: Answer TWO out of the four questions.
Question 1
A consultancy suggests measuring innovation by company responses to a questionnaire
asking them have you produced new or significantly improved products over the last year?
Discuss this method of measuring innovation and whether any alternative method or
methods might be preferred. (25 marks)
Dafnies:
Method of measuring innovation Survey done -Surveys Community Innovation
Survey (CIS)
It is not really the best method to measure innovation because companies tend to
answer in text in describing their innovation. Different industries have different forms
of product and process innovation which also explains things like why IT industry
reports the highest innovation progress based on their capital equipment and process
innovation.
This method could be reliable if there is a standard survey being applied to all
industries to get a better information
Other alternative methods such as TFP measure which we use residual approach.
Use residual approach to measure the knowledge (ideas per se), after considering
the elasticities, because unlike capital and labor, it's harder to measure knowledge.
From the article:
(http://spiral.imperial.ac.uk/bitstream/10044/1/11139/4/Haskel%202013-01.pdf)

First, surveying firms to ask how innovative they are could in principle get at some of
the elements of. Recall that firms are asked if their products and services are new or
significantly improved. This could perfectly well capture dlnQ: output of a new drug
for example. A well-known issue however is that much depends on how firms
understand significantly (is the iPhone 5 significantly improved?). Much too
depends on how firms think of their new capital equipment when answering the
questionnaire. In (7) an airline buying new planes is not innovation (i.e. dlnK is
subtracted out), since the new plane is likely innovation in the aircraft industry and so
we dont want to double count it.
To look at how firms treat new capital equipment in answering the questionnaires,
Crespi et al (2007) analysed the text replies for a certain UK Community Innovation
Survey year where firms were asked to fill in a text description of their innovations.
Many of the replies described an innovation as being the deployment of a new
machine (indeed, this tallies with the time series observation that reported innovation
rose very strongly during the ICT spending boom of the late 1990s). All this suggests
that in innovation questionnaires, firms might be reporting on both dlnQ and also
dlnK, which is not what requires and runs the risk of double counting if innovation is
counted by the firm producing the new capital and the firm installing it. So, innovation
questionnaires may be hard to compare between firms at a point in time (if they

interpret significantly differently) and hard to compare over time (if innovation
includes capital spending which is very cyclical).
Second, what of R&D surveys, that measure wage and capital costs of R&D
activities? They are invaluable measures of the upstream innovation process.More
work is needed however to find out the effect on growth. When R&D is capitalised
into national accounts, as it will be in future years, this effort will be easier but at the
moment it is left to the analyst. It is of course worth noting that counting PLLN and
PKKN leave open how to estimate . In addition, there may be other knowledge
investment besides R&D.
Patents represent of course a potentially very powerful measure of output of the
innovation sector (for a very early and prescient discussion, see Kuznets, 1962). In
this framework, innovative output N is weighted by its price. In practice the patent
price is very rarely observed and so citation-weighted patents (the vast majority of
patents are never cited) are used. In addition, patent citations enable knowledge
flows to be traced rather than leaving them, as here to the residual.
As is well acknowledged however, patents do not cover all innovations/knowledge
investment (in the UK for example software cannot be patented). As Jaffe and
Trajtenberg (2002, p.3) say There are, of course, important limitations to the use of
patent data, the most glaring being the fact that not all inventions are patented. An
important recent addition therefore to this line of work is the use of trademarks which
might be a complementary use of IP to patents or another indicator of novelty
In sum, patents are a vital source of important information in areas that the
accounting framework does not cover; how much the findings can be generalised to
unpatented innovations is yet to be established.
Finally, it will be apparent that the scoreboard mix output and inputs does not sit at all
well with the framework here. Indeed, the essence of this approach is to carefully
distinguish between output and inputs. A mix of the two might convey some sense of
total activity in the economies concerned but not much else. In addition, the
scoreboard method suffers from the significant problem of not knowing how to weight
the different activities (how does one compare broadband in Italy with the numbers of
graduates in the UK?), whereas the weights in this method come directly from market
prices (that in turn form the shares, s) so that markets signal relative valuations of
different factors.
So the TFP approach does have some advantages. First, it is based on a logically
consistent framework, which, as we argue below, will help guide measurement of its
various parts. Second, it is integrated with national accounts concepts such as GDP,
investment etc. and so can bridge the discussion from innovation to familiar and
well-established measures. Third, some insight on policy can be gained since the
framework lends itself to quantifying spillovers (Griliches, 1988).
There are many disadvantages however. First, the framework places a very heavy
burden on measurement. Since dlnTFP leaves no economic footprint, that is, no
price or quantity (e.g. how could you measure the price of quantity of information
learned over the internet?), it is measured in practice as a residual from (7). Thus
mismeasurement of other terms will land into dlnTFP.

Second, this framework cannot be readily implemented using current data. At

present, much knowledge investment is not counted as investment in the national
accounts, but rather as an intermediate (see below for which is and is not counted).
For purposes of demonstration assume that no knowledge investment is counted.
Thus value added growth will be counted as dlnY and not dlnQ and the following
growth accounting relation will hold

Question 2
You wish to improve innovation in an industry currently dominated by large firms. You
propose doing so by splitting the current large firms up into smaller firms. Will innovation
increase? Explain your answer. (25 marks)
1. We want to look at the amount of innovation, after splitting up large firm into small
firm? How do we measure? 1 method=return to R&D?
2. Small companies have smaller sales compare to large companies. Hence the ratio of
R&D spent to sales will be higher?
3. Small companies can make more innovation as they have a relatively low org issue
compare to larger companies. L
arge companies simply can't compete with startups
on a cost and execution basis. Organizational hierarchies slow decisions that could
be made over lunch or beers in a startup, and established salaries and service
providers create costs that would bury almost any early stage company. While
startups beg, borrow and barter, large companies follow established processes,
protocol and prices to accomplish the same things at a much slower speed and a
heavy multiple of the cost.
4. Small companies have the distinct advantage of changing the plan or tactics much
faster than larger competitors. Small companies can bring a product to market more
quickly as they have only a few people involved in its creation. A larger company
must involve many people and processes in product development, slowing the
process and giving you an advantage. Small companies also can also adapt your
product, based on customer feedback, much more easily than their huge competition.
While they are studying options and gaining approvals, small companies can already
have their innovated product on the shelves.
5. It can be argued that, small companies might have issue with limited capital,. For
example, larger firm like monopoly company can gain abnormal profit by charging a
higher price hence monopoly has excess money to spend on technological
advancement or R&D. This is one of the benefit of monopoly where it gives them the
dynamic efficiency. So in certain cases, larger companies such as monopoly or
oligopoly companies may have a larger innovation compared to smaller companies.
Question 3
The Financial Times, 4th November 2015 reported on various companies making mobile
computer games. They said that King Digital is spending 200m on R&D with sales of
2,000m, whereas Zynga is spending 350m but only has sales of 500m. They described
King has having higher R&D efficiency. Explain how you would work out which, if either,
company has a higher return to R&D spending and whether the data provided can answer
this question or, if not, what extra data you would need. (25 marks)

Question 4 [Total 25 marks]

a) How might knowledge spillovers arise? (10 marks)
Spillovers are the unintentional transmission of knowledge to others beyond the
intended boundary. At every possible interaction, there is a potential for knowledge
exchange. If knowledge is exchanged with the intended people or organizations, it is
knowledge transfer, any knowledge that is exchanged outside the intended
boundary is spillover. The unintended use of exchanged knowledge is called
Knowledge Externality.
a) Individual Level (across people) - This is a case where knowledge is
unintentionally exchanged between people. Individuals have control over their tacit
knowledge and can share them with whomever they want or need to. Spillover can
happen due to ignorance, or when the tacit knowledge is externalized to put to use. A
person can use patent or copyright to protect his or her individual knowledge, but
once the knowledge is explicit it could be spilled over to others. Members of a team
working together, whether from within the same organization or from different
organizations like in customer supplier relationships, exchange knowledge. That
knowledge is not considered a spillover as long as they intended to share this
knowledge. However, sharing knowledge that is not intended for the group or sharing
the group knowledge with people outside the group or outside the organizations who
are not intended to have such information is a spillover.
b) Enterprise Level (across firms) - Knowledge could be exchanged between
companies. This can happen between neighboring companies (sometimes located in
close proximity) or can happen as a result of these companies doing business
together. If the information exchanged is intended for the other organization that is
knowledge sharing or knowledge transfers. Any information exchanged that is not
intended is spillover. Intra-industry, knowledge spillovers happen as a result of
industry specialization, as shown in the early work of Marshall (1920) and Arrow
(1962) and reaffirmed by Romer (1986, 1990). It is referred to in the literature as
MAR, MarshallArrowRomer, externalities, where knowledge accumulated by one
firm tends to help the development of technologically close firms (Jaffe, 1986).
Industries that are geographically concentrated benefit most from exchange of
knowledge within the industry and should, therefore, grow at a more rapid pace.
Inter-industry knowledge spillovers happen as a result of the diversity and variety of
knowledge between complementary industries or customers and suppliers that
service each other. According to Bairoch (1988), diversity of industries in an urban
area may lead one sector to adopt a technological solution that has worked for
another.
Global Level (across nations) - This is the case where knowledge is unintentionally
exchanged between countries. This can happen between neighboring countries like
in Bernsteins (2002) study of United States spillover to Canadian manufacturing
firms, or it can accompany the process of technology transfer that happens when
countries trade with one another, as shown by Coe and Helpman (1995), Walter
(1995), Xu and Wang (1999) and Madden and Savage (2000). The unintentional
knowledge transfer in this case is international spillover. For example, when a
country imports a product from another and does reverse engineering to that product,

even if the product is not copied the insight gained is still a spillover, since it was not
the intention of the exporting country (or company) to transfer the knowledge of how
to make the product. However when a US company sets up an R&D lab in a
developing country for the purpose of transferring knowledge to local engineers and
scientists, that is a case of technology transfer and not a spillover.

b) What does the evidence suggest about them? (15 marks)

Basic twins comparison, before and after opening of new plant
In 7 years before opening , TFP in winning countries = productivity in losing counties
In 5 years after opening , TFP in winning countries > productivity in losing counties , by
12%
These effects are statistically significant and economically substantial
on average, incumbent plants output in winning counties is $430 million higher 5 years
later (relative to incumbents in losing counties), with inputs held constant.
A 12 percent increase in TFP is equivalent to moving a county from the 10th percentile of
the county-level TFP distribution to the 27th percentile; alternatively, it is equivalent to a
0.6-standard-deviation increase in the distribution of county TFP.
We interpret this finding as evidence of large productivity spillovers generated by
increased agglomeration.
The impact on productivity varies with economic distance
Spillovers are larger for pairs of industries with high flows of workers
Spillovers are larger for pairs of industries with similar technologies
Little evidence that input and output flows affect spillovers
Overall, this evidence supports idea that spillovers occur between firms that share workers
and use similar technologies

Based on case study:

Question 5
Do you think they made the right decision to launch immediately? Why or why not?
(25 marks)
Questions 6
Explain why the innovation was only slowly adopted by consumers. (25 marks)
Question 7
Discuss some alternative means of potentially capturing value from the innovation.
(25 marks)
Question 8
How important was intellectual property to the innovations success? Explain your answer.