The Economics of Innovation and Technological Change Introduction Manuel Trajtenberg 2005

1. The Economics of Innovation and Technological ChangeIntroductionManuel Trajtenberg2005

2. The Economics of Innovation & TC as a field • There is a core, and a great deal of interface with other, central fields in Economics: • With IO: market structure & innovation (main theme), incentives to innovate, innovation & industry dynamics, innovation & antitrust, demand for new products, etc. • With Macro: productivity growth, business cycles, institutions, etc. • With Labor: rising inequality & skill-biased tech change, innovation & unemployment (deskilling), etc.

3. Interfaces with other fields – cont. • With International: technology and comparative advantage, outsourcing, North-South, globalization; international aspects of intellectual property (IP). • With Law and Economics: IP. • With Finance: how to finance R&D, venture capital. • With Health Economics: new drugs, new medical devices and health care costs. • With Economic History: very central, Industrial revolutions, secular growth, etc. • With Defense Economics – Defense R&D

4. Lots of interest in the interface between Technology and Economics • Internet – pervasiveness, brings about changes in lots of aspects of life, social, economic, personal; e- commerce, eBay, the last bubble. • New, exciting tech frontiers, e.g. Nanotechnology; Tech • and Health Care - biotechnology , the Genome project • Feeling of acceleration of changes, but that was true also in the past… • But above all: because recognition that innovation key to long-term growth, key to raise in standards of living. • So, lets look at data on growth

5. CNN JOINS WITH LEMELSON-MIT PROGRAM TO PRESENT TOP 25 INNOVATIONS • CNN enlisted the aid of the Lemelson-MIT Program in preparing the list of the Top 25 non-medical innovations that, • have become widely used since 1980, • are readily recognizable by most Americans, • have had a direct and perceptible impact on everyday life, and • could dramatically affect the future.

6. Top 25 Innovations 13. Air bags 14. ATM 15. Advanced batteries 16. Hybrid car 17. OLEDs 18. Display panels 19. HDTV 20. Space shuttle 21. Nanotechnology 22. Flash memory 23. Voice mail 24. Modern hearing aids 25. Short Range, High Frequency Radio

8. GNP Per Capita, 1999: Selected CountriesCompared with the US 1870-1999 Switzerland Canada Japan Sweden UK Israel Czech Argentina Poland China Pakistan Nigeria

9. Growth Across Countries – recent periods

10. Periods during which output per capita doubleddiffusion? acceleration?

12. Global Population Trends

13. Life expectancy at birth:selected countries in 2000 compared with Japan, 1900-1999 France Israel United States Sri Lanka China Thailand Brazil India Bangladesh Senegal Burkina Paso Uganda

14. From Technology ReviewMIT Magazine of Innovation “Technology and Happiness” by James Surowiecki “Does Economic Growth Improve the Human Lot? Some empirical evidence”, by Richard Easterlin In Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz, edited by Paul David and Melvin Reder, Academic Press, 1974

15. “Technology and happiness” People adapt very quickly to good news (like lottery winners) – “hedonic adaptation”. So with technology, no matter how dramatic a new innovation is, it is very easy to take it for granted. Things that once seemed miraculous soon become mundane, and even frustrating when they don’t work properly. Bad externalities: congestion, invasion of privacy, can’t get away from it all, too much choice (but Internet helps) On the other hand: much better health care.

16. Reminder: sources of growth gi : Growth rate of variable “i”  : Rate of productivity growth -“the residual” growth of income (product) per capita: (gY – gL )=  +  (gC – gL)

17. Sources of growth - continued (gY – gL )=  +  (gC – gL) Two sources: (1) Factor accumulation (traditional…): Increase in capital per worker (gC – gL): more machines, equipment, structures per worker (2) Increases in productivity,: technological advance/innovation, fueled by R&D

18. Technological Change and Growth • Findings of landmark research by Robert Solow: increases in productivity (due to tech change) main determinant of growth! (one of the key empirical findings ever in economics) • (confirmed commonly held perceptions – bewilderment from technology, international exhibitions, Edison and Ford, etc.) • Fundamental question: innovation key to growth, but can the market economy “deliver”?

19. Solow’s discovery and its aftermath • The large residual: “manna from heave”? “a measure of our ignorance”? Embarrassing for economists: the most important determinant of economic well-being – out of reach?! • This finding largely determined the research agenda: • Measurement issues: quality of products, of capital, human capital, economies of scale. • Understand the mechanisms: incentives, diffusion, GPTs, case studies, etc. • The new growth literature – endogenous growth.

20. The Economics of Innovation Institutional Structure (Government, Universities, Military) Markets Structure Legal Structure (competition, other incentives) (Property rights protection, Patents) R&D Basic Science Scientific publications, patents, citations, etc. Spillovers Innovation & Technological Change

21. The Economics of Innovation – cont. Innovation & Technological Change Other effects Economic effects • Health, Life expectancy • Uncertainty & Risk reduction • Military balance • Rise and fall of world • powers • Cultural influences Micro Macro • Entirely new products • Qualitative improvements • in existing products • Better production processes • Industry dynamics – entry & exit • Productivity • Growth • Standard of living • Inequality • Unemployment and feedback mechanisms…

22. The Historical Stage: 10,000 years of crawling pace, then the tide of modern growth • The 3 big enablers of the 1770s: • 1769:Watt’s steam engine (patent on separate condenser, etc.) • 1776: The American Revolution: emergence of political regime that would support the advent of the market economy; built-in mechanisms to accommodate & foster change (based on England, lead of 150 years…) • 1776:Adam Smith – The Wealth of Nations: the intellectual basis of the market economy.

23. The Globalization of S&T: basic facts • Advanced S&T spreading around the world, also in developing countries (e.g. India, ppp $2,900, China, $5,000 versus US $37,800). • Increased mobility of scientists and inventors (geographic, institutional) • Larger, more diverse teams of inventors and scientists • More international cooperation • Decentralization of “big science”: e.g. the Genome project.

24. Why globalization of S&T? • Some of the reasons: • Globalization in trade, finance, IP, WTO, etc. bound to impact also S&T. • Increased complexity, cross-disciplinary nature of frontier S&T (e.g. Genome, nano), increased specialization of researchers. • Advances in ICT, ease of communication and transportation, lowering of barriers.

25. But also persistent agglomeration effects… • Geographic localization of research and innovation, by fields: • Silicon Valley (around Stanford) • Boston area (around MIT, Harvard) • Cambridge UK (e.g. biotech) • Israel “Waddi” • Contradicts globalization? not quite: creativity/ innovation requires close interaction, highly specialized inputs, personal contacts, etc.

26. Present facts about mobilityof S&T players: Inventors, Scientists, Students

27. International Mobility of Patent Inventorsnumber of cross-country moves per year 1975-1999

28. Flows of Inventors across countries From To

29. Net international flows of inventors

30. Flows of inventors across US states

31. Net flows of inventors across states,

32. Agglomeration:Silicon Valley inventors • 44,805 inventors “related” to Silicon Valley, involved in 160,000 patents. • 3.6 patents per inventor (US mean of 2.7) • corporate movers: 45%(all inventors: 33%) • state movers: 16%(US inventors: 7%) • country movers: 3.7%(all inventors: 1.9%) • (all percentages out of inventors with > 1 patent)

33. Further facts about globalization of S&T • Larger teams of researchers per unit of S&T output (papers, patents, etc.) • More international and institutional cooperation and diversity • More geographic dispersion of researchers • Large fraction of foreign PhD students

34. Mean Number of Authors per Scientific Paper

35. Size of R&D Teams:Average Number of Inventors per Patent

36. Institutional collaborations:Mean number of universities per scientific paper 1981-1999

37. % of US scientific papers joint with foreign co-authors w/foreign universities

38. International Diversity of Teams of Patent Inventors(1 – Herfindahl index on countries of inventors)

39. Geographic diversity of inventors in the US(1 – Herfindahl index on states of inventors)

40. International mobility of Ph.D. Students:Foreign Students as % of total PhD enrollment 2000 25%

41. S&E doctoral degrees earned by foreign students – 2001 (NSF)

42. International flows of inventors: turnover

43. Flows of inventors across states, and turnover