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Innovativeness and patterns of innovation. Explaining structural change. ESST Module 4: Unit 3 Andreas Reinstaller. Innovativeness: Creative Destruction. J.A. Schumpeter on Creative Destruction

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Innovativeness and patterns of innovation explaining structural change l.jpg

Innovativeness and patterns of innovation. Explaining structural change.

ESST Module 4: Unit 3

Andreas Reinstaller

Innovativeness creative destruction l.jpg
Innovativeness: Creative Destruction structural change.

J.A. Schumpeter on

Creative Destruction

“The fundamental impulse, that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets...[This process] incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism”, Schumpeter (C.S.D. (1942), p.83)

Phases of the innovation process l.jpg
Phases of the innovation process structural change.

  • Identification of economic opportunity an technological search/invention

    • Perception of opportunity (?)

      • Incremental innovation: exploitation of unexplored (new) technological sub-solutions on existing designs (identification of potential linkages and complementarities between existing sub-components)

      • Radical innovation: cognitive re-framing of the problem and establishment of a new search trajectory, i.e. artefacts leading to new design and structure of linkages between (new and old) sub-components.

    • Interaction between science, research and existing meta-heuristics high

  • The adoption decision of innovators and early diffusion:

    • the era of ferment: the identification and emergence of different possible design trajectories. Firm as mediator between science, development and customer needs, low appropriability.

  • The diffusion:

    • establishment of one or several dominant designs through co-evolutionary learning, between producers and adopters. Gradually internalizing research and development and increasing appropriability.

Creative destruction patterns of innovative activity l.jpg
Creative Destruction: Patterns of innovative activity structural change.

  • Innovation is a nested phenomenon: it occurs at very different levels (Freeman-Perez (1988)):

    • Incremental innovations

    • Radical innovations

    • Changes of the technology system

    • Changes in the techno-economic paradigm

  • Radical and incremental innovations can take different forms again (Abernathy-Clark (1985))

    • Architectural

    • Niche markets

    • Regular

    • Revolutionary

  • OR

    • competence enhancing or competence destroying (Tushman - Anderson (1986))

  • OR ....

Diffusion phases of entry l.jpg
Diffusion: Phases of entry fundamental concept

Diffusion and substiution i long term effects of pervasive technologies infrastructures l.jpg
Diffusion and substiution(i): Long term effects of pervasive technologies (infrastructures)

Changes in Transportation Systems

Changing Energy Efficiency

of Electricity Generation

Source: Ausubel et al. (1998), European Review, Vol. 6, No. 2, 137-156

Slide8 l.jpg

Diffusion and substitution (iib): a localised substitution effect & demand/regulation effects

Fitted Logistic (ECF time series):


t0=1995,7, t10%-90%=8,12, b=0,541



t0=1993,8, t10%-90%=7,12, b=0,617


Diffusion and substitution iic a localised substitution effect demand regulation effects l.jpg
Diffusion and substitution (iic): a localised substitution effect & demand/regulation effects


t0=1990,92, t10%-90%=4, b=1,099



t0=1993,211, t10%-90%=4,002, b=1,098



t0=1990,3, t10%-90%=3,001, b=1,46


Creative destruction and technological regimes l.jpg
Creative Destruction and Technological Regimes effect & demand/regulation effects

  • Schumpeter MK I is a good candidate for shake outs, but may happen also in MK II

  • Causes for shake outs:

    • Innovation builds on knowledge external to the industry or it is competence destroying; (Nelson/Winter (1982), Tushman/Anderson (1986, 1990)

    • Innovation requires a minimum scale of production which smaller incumbents do not match (Jovanovic/McDonald (1994)

    • Innovation is appropriated and internal to the firms (competence enhancing), but their market focus is too narrow Christensen (1997)

Creative destruction and industry shake outs l.jpg
Creative Destruction and industry shake outs effect & demand/regulation effects

Source: Swaminathan et al. (2000), mimeo.

Slide12 l.jpg
But what causes “entry” or new industries to rise: the perception of opportunity. Bottlenecks and incoherences in the production system

“... most productive processes throw off signals of a sort which are both compelling and fairly obvious; indeed, these processes when sufficiently complex and interdependent, involve an almost compulsive formulation of problems. (...) In a sense the capital good sector is always bombarded with messages of the sort that say: ‘I expect to be able to earn a profit if I can produce a new device which will conform to certain specifications. But no machinery now exists which can produce such a device. Therefore you can earn a profit by devising and selling machines which will produce according to these specifications.’N.Rosenberg (1976), in: Perspectives on Technology

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The perception of opportunity: Consumption as social learning and the opening of new market niches

  • It reflects social processes: commodities are carriers of social meanings

  • Functionings (Sen 1985): „what she manages to be ... part of the state of that person“ in a certain social environment

  • Evaluation of products takes place in such a context

  • Interpersonal ranking is hence important

  • An embedding in a certain social structure (which is mainly due to the division of labour) gives rise to lifestyles and related consumption patterns

  • Consumption reflects social structures and social learning: it is to some extent a carrier of „social history“

Slide14 l.jpg

How are niches generated: Consumption Dynamics learning and the opening of new market niches

Critical income levels

Distinction: Lifestyle niches

Dissent, Revaluation: Value niches

Aspiration: main markets

Variety of goods

Opportunity and the creation of new technological paths a short summary l.jpg

Role of production constraints learning and the opening of new market niches:

Cognitive focusing devices of technological search

Triggers of “information crises”

Role of social learning of consumers:

Search of and testing of new product characteristics (feedback mechanism to production)

The creation of new technological path as response to information crises:

Information crisis: “rules and routines of an existing regime do not match any longer problem pattern and thus lead to decrease of fitness”

Leading to cognitive reframing of the new problem through interaction with other knowledge suppliers

Opportunity and the creation of new technological paths: a short summary

Pathdependence definition and sources l.jpg

Definition by P.David: learning and the opening of new market niches

“Processes that are unable to shake freeof their history, are said to yield path dependent outcomes.”

They depend on:

On the sequence of choice

Small historical accidents affecting this sequence

Positive feedbacks related to such a choice

Sources: positive feedbacks generated by

Demand side externalities

Network effects

Installed base effects

i.e. through costs reductions attributable to experience based learning, or through the attainment of system scale economies

Pathdependence: definition and sources

Sources of path dependence within an amongst firms l.jpg
Sources of path-dependence within an amongst firms learning and the opening of new market niches

System of horizontally/

vertically integrated enterprises


  • machinery and equipment

  • sunk costs

  • embodied knowledge

  • knowledge base

  • learning by using/doing

  • learning by interacting with

  • staff/customers

  • complementarity between goods

  • organization

  • rule base

  • reciprocity/institutional inertia


Economies of scale

and scope

network effects,

technological interrelatedness

Socio-economic/institutional framework

Path dependence and initial conditions diffusion of two competing technologies l.jpg
Path-dependence and initial conditions: diffusion of two competing technologies

Superior technology and

inferior technology have equal

initial probability of choice 0.5:0.5

Inferior technology has slightly

higher initial probability of choice


Superior tech

Superior tech

Implications of path dependence l.jpg
Implications of path dependence competing technologies

  • Technological development depends on the past history of choices made by individuals or groups of individuals

  • This development may be irreversible in some cases, or reversible only at very high cost

  • Technological development is unlikely to give always rise to “optimal” solutions, as postulated by Neoclassical theory

The consequences of localised search and learning technological lock in the arthur model l.jpg
The consequences of localised search and learning: technological lock-in; the Arthur-Model

Criteria of



with feedback

New adopters

R has a natural preference for A, aR>bR

r ++








r0 = s0





s ++



S has a natural preference for B, aS<bS

  • The choice of a technology depends only on its payoff

  • The payoff depends on natural preferences and the number

  • of adoptions