Path creation and destruction in industries, regions, and firms

1. Path creation and destruction in industries, regions, and firms Strengths and limitations of the concept of path dependence in innovation studies Path creation and destruction – C. Davis – ISRN – Vancouver - May 2004

2. agenda • Path dependent processes • Narrow and broad definitions of path dependence • Path dependence and increasing returns to scale • Agents and trajectory lifecycles • What does it mean to contribute to theory in this area of management and policy? Path creation and destruction – C. Davis – ISRN – Vancouver - May 2004

3. Polya urn process simulations • This simulation models only the internal dynamics of a Polya process (there is no competition from another system) • The feedback mechanism is the rule: Probability (Add Redt+1) = f (Proportion Redt) Balmann et al., 1996 Path creation and destruction – C. Davis – ISRN – Vancouver - May 2004

4. A simple test of path dependence AN, BN, CN Space AN, BN, CN AN, BN, CN A1, B1, C1 AN, BN, CN time Path creation and destruction – C. Davis – ISRN – Vancouver - May 2004

5. Degrees of genetic determinism in path dependence • Antonelli • A state at time t that is predictable at time t-1 is past dependent • A state at time 1 that is predictable from the sequence of prior states at times t-n is path dependent Path creation and destruction – C. Davis – ISRN – Vancouver - May 2004

6. Famous pathways 1: Matthew Effect "For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath." (Matthew 25:29) Path creation and destruction – C. Davis – ISRN – Vancouver - May 2004

7. Famous pathways 2: Noah Effect Severe environmental selection with some recovery Path creation and destruction – C. Davis – ISRN – Vancouver - May 2004

8. Famous pathways 3: Joseph Effect Seven fat years and seven lean years Path creation and destruction – C. Davis – ISRN – Vancouver - May 2004

9. Path dependence claims in social sciences (usually refer to Polya Urn processes of advantage accumulation) • Importance of specific sequences of events • Importance of specific timing of outcome-shaping events • Similar starting conditions yield a wide range of possible outcomes • Small or contingent events can have large consequences • Practical irreversibility • In economic systems, effects of increasing returns to scale (IRS) Path creation and destruction – C. Davis – ISRN – Vancouver - May 2004

10. Sources of increasing returns (Arthur, 1988) • Large set up or fixed costs such as R&D, distribution networks, brand names, or specialized position in a division of labor, which provide an incentive to recover investment over longer production runs. • Learning effects: investments in learning to operate and manage complex technology systems produce increases in efficient and effective actions and constitute a disincentive to change systems • Coordination effects (externalities) are the benefits that one receives when others adopt the same option. Standardization leads to decrease in coordination costs. • Adaptive expectations: individuals’ expectations about the future are based on their reading of the past (rather than on rational analysis), and these expectations can be self-fulfilling. Path creation and destruction – C. Davis – ISRN – Vancouver - May 2004

11. Externalities as positive feedback mechanisms (centripetal forces) in agglomeration processes • Pecuniary externalities • Market-mediated geographically proximate backward and forward linkages • Technical or non pecuniary externalities • Spillovers and untraded interdependencies • Location economies vs. urbanization economies Path creation and destruction – C. Davis – ISRN – Vancouver - May 2004

12. Path destruction Fuzzy front end of path creation Growth pathway The lifecycle of a trajectory Path creation and destruction – C. Davis – ISRN – Vancouver - May 2004

13. Cognitive map of knowledge assets producer located at the fuzzy front end of path creation process – the case of experienced aquaculture researcher “Dr T” Path creation and destruction – C. Davis – ISRN – Vancouver - May 2004

14. Cognitive map of “Mr B,” an entrepreneur engaged in the construction of a web-based regional tourism product Note: arrows are reversed in this map Path creation and destruction – C. Davis – ISRN – Vancouver - May 2004

15. Path destruction Fuzzy front end of path creation Growth pathway The lifecycle of a trajectory Path creation and destruction – C. Davis – ISRN – Vancouver - May 2004

16. Exploitation of IRS implies ability to leverage externalities: case of NB IT gazelles, 1999-2001 Gazelles have higher rates of product innovation and use innovation support infrastructure more intensely than non-gazelles Gazelles earn greater portion of IT revenue from recently-commercialized products than non-gazelles Gazelles have learned to tap sources of growth in distant markets Path creation and destruction – C. Davis – ISRN – Vancouver - May 2004

17. Path destruction Fuzzy front end of path creation Growth pathway The lifecycle of a trajectory Path creation and destruction – C. Davis – ISRN – Vancouver - May 2004

18. In 2001, NB IT firms estimate their revenue growth in various markets Path creation and destruction – C. Davis – ISRN – Vancouver - May 2004

19. Business development capability as a dynamic capability enabling path creation: the case of NB IT SMEs, 2003 Davis and Sun, 2004 Path creation and destruction – C. Davis – ISRN – Vancouver - May 2004

20. conclusions • Path dependence goes beyond IRS phenomena • IRS and other factors are generating “black noise” in the business environment • Actors are boundedly rational at best • Many paths are possible: pathways are created by actors within constraints that they discover or impose on each other • It is easier to generate autoregressive models than to test them with real data. Path creation and destruction – C. Davis – ISRN – Vancouver - May 2004