lecture 5 technology diffusion and technology transfer 1196523038131718 3

8/6/2019 Lecture 5 Technology Diffusion and Technology Transfer 1196523038131718 3

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Lecture 5: Technology diffusionand technology transfer


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Introduction Diffusion=adoption of innovation(s)

Technology transfer=much broader [Diffusion plus]

Accumulation of knowledge takes place with the interaction amongactors.[this process builds on investment decisions and allocation ofresources compare that to the technological capabilities approach]

Useful line of research for better understanding of the supply side ofinnovation dynamics and the structure of R&D systems.

[increasingly relevant to industrializing countries with indigenousR&D systems]

Availability of data for empirical research and well establishedmethodologies [sectoral linkages, stocks of knowledge, trade flows,data on innovation dynamics].

An emerging field of research in Developing Countries with dynamicexport oriented, high-tech sectors

Relevant to several policy issues: FDI, IPR, Public policiessupporting R&D.


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Theories of Diffusion Up to this point, we have focused on the development of new

knowledge. However, technology can only have a wider impact on

the economy if it is used by a large population offirms/comsumers. Thus, the picture is incomplete. Now, we look atthe adoption of new innovation. This is the study of diffusion.

Today we look at models of diffusion, to see how economists model

the decision to adopt technology. Well also look at some empiricalresults. Next, we'll discuss policies that encourage diffusion within acountry. Finally, well look at international technology diffusion.

Key questions:

What is the rate of adoption and innovation? What variables affect this rate? How does policy affect diffusion?


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Early studies of diffusion Early studies of diffusion focused on agricultural technologies. The first studies were done by

anthropologists and sociologists, not economists.

The diffusion traditions of various disciplines began to merge in the 1960s with the Ryan-Grossstudy of hybrid corn. This was a sociology study.

Hybrid corn, introduced by Iowa State in 1928, had yields 15-20% higher. It had been adopted bymost Iowa farmers by 1940.

Ryan and Gross studied what factors influenced its adoption. They found that communicationbetween previous and potential adopters was important. They found an S-shaped rate ofadoption. This result is still typical today.

Sociologists focus on the following reasons to explain the S-shaped curves: What is the relative advantage of the innovation over the existing technology? Is the technology compatible with potential adopters current way of doing things, and with

current social norms? How complex is the technology? Can the technology be tested?

How easy is it to evaluate the innovation after it has been tried?

They also define five categories of adopters: Innovators Early adopters Early majority Late majority Laggards


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Griliches (1957) hybrid corn study

Economists have added to the diffusion literature by examining individual differences (anddecisions) in diffusion.

Griliches looked at the diffusion of hybrid corn both within regions (as did Ryan/Gross) and acrossregions. Goal: to explain why individual adoption decisions vary:

The acceptance problem what explains variation in adoption rates within a

region. The availability problem what explained the timing of the development of

hybrid corn for specific areas.

Griliches did this by fitting an S-shaped logistic trend diffusion curve to data on the percentage ofcorn area planted with hybrid seed.

Key features of the curve: Origin: the starting point. Griliches defines as date at which 10% of a regions

corn was hybrid. This is meant to indicate commercial availability of hybrid corn. Average lag between technical availability and commercial availability was 2

years. Agricultural stations did more work on hybrid corn in regions where corn was

important (e.g. Iowa, Wisconsin). The date of origin is earlier here. Slope: indicates the rate of acceptance Ceiling: measures the percentage of acceptance when usage stabilizes

Interpretation: differences in rate of acceptance (slope) and level ofacceptance (ceiling) can be explained by differences in how profitable it is to

shift to hybrid corn. .


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Diffusion of industrial technology

The standard S-shaped diffusion curve has also been found instudies of industrial technology diffusion. Mansfield (1968) looked atfactors influencing inter-firm and intra-firm diffusion. He examinedthe diffusion of 12 different technologies in 4 different industries.

Mansfield found that key variable was Profitability

Example: Mansfield used regression techniques to explaindifferences in diffusion patterns

Significant variables included: Profitability of investing in diesel locomotive Inter-firm differences in size and liquidity Differences in the starting date


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Environmental technologies

Recent work in environmental economics shows that environmentalregulations do lead to faster diffusion of environmental technologies.

However, rates of adoption are slow. Cost-effective technologiesdiffuse very slowly. Why might that be?

Potential market failures include: Inadequate information

Agency problems The person installing the technology might not berewarded for doing so (e.g. landlord/tenant relationship)

Consumers have high discount rates. Thus, they place little weight onpotential benefits.

Lack of access to credit markets

Subsidies have been found to be more effective increasing diffusionthan higher prices, suggesting that access to credit is important --people will adopt when they can afford to.


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Recent work on diffusion has focused on trying to explain the prevalence of the

S-shaped diffusion curve - The epidemic model

The epidemic model considers information to be the key to diffusion. As more people adopt thetechnology, information of it spreads quickly, leading to a period of rapid adoption.

The epidemic model models technology as a contagious disease. Adoption occurs as potential

adopters learn about the new technology. Adoption is slow at first, as few people (or firms) knowabout the technology. The more people infected (that is, those that have adopted), the morelikely others will also be infected. Thus, as information spreads, a period of rapid adoptionfollows.

Shortcoming This model assumes that, once potential adopters learn of a technology, they will use it. This model assumes the quality of the technology is the same over time.

Implications Adoption includes a positive externality. The decision to adopt makes it more likely that others will also learn

about the innovation. This suggests that gradual diffusion is the result of a market failure. It also suggeststhat, until market saturation is reached, the economy is in disequilibrium.

Recent modifications focus on equilibrium. These models assume there is perfect information onthe technology, so that the epidemic model is not relevant. Rather, there are differences among

users that explain gradual diffusion. Firms must pay a cost, ct, to adopt the technology at any timet. This price changes over time. Each firm weighs the benefits of adoption at time tagainst thecost of adoption at time t. As the costs or benefits of adoption change, the number of adopterschanges.

Implication: Gradual diffusion is rational. It is the result of profit-maximizing behavior, rather than a market failure.


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Other diffusion models Stock models As the number of users of the new technology increases, the gross benefits from adoption decline.

That can be due to the effect of technology adoption on prices or due to prices in factor markets

(supply effects).

Order models The firms position in the adoption order determines its gross return from adoption. Early adopters

typically get a higher gross return. This suggests the first-mover advantage dominates theadvantage of waiting for better technologies. However, costs are important to get net return fromadoption.

Very recent work combines equilibrium and epidemic models. These models are hazardmodels. Hazard models combine a baseline epidemic diffusion curve with firm-specificvariables to capture the effects above.

Firms adopt when the Net Present Value of adoption is: Positive, so that adoption is profitable, and Higher than it would be if the firm waited until a later date to adopt

Thus, unlike the other models, there may be a benefit to waiting.

This approach allows the researcher to capture the magnitude of each effect. Indeed, theserecent results suggest the firm-specific effects are more important.


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Types of equilibrium models: Rank (or probit)

models Potential users differ in some important characteristic.

Thus, some firms benefit from adoption more than othersdo. The net benefits can be ranked across firms. Those

with the highest ranks go first. Examples of rank effectsfound to be important:

Firm size (generally a positive effect)

R&D expenditure Market share

Market structure (ambiguous effect)

Input prices Characteristics of the technology

Government regulations


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Neoclassical Equilibrium VS Evolutionary DisequilibriumNeoclassical Equilibrium VS Evolutionary Disequilibrium

Neoclassical Equilibrium

AssumptionsAssumptions

Full info/limited info Infinite rationality Equilibrium mechanism Exogenous/endogenous Continuous & quantitative

Characteristics of the diffusion processCharacteristics of the diffusion process Predictable A-historical Efficient

Evolutionary Disequilibrium

Necessarily limited info Bounded rationality Disequilibrium mechanism Necessarily endogenous Continuous & quantitative, or Discontinuous & qualitative

Unpredictable Path-dependent (historicity) Efficient, or (possibly) Inefficient


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U.S. diffusion of major inventions

0

1020

30

40

50

60

70

80

90

100

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Year

Share(%

)

Electric Service

Refrigerator

Telephone

VCR

Washing machine


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Economic determinantsThe adoption decision will depend on the

factors that usually affect investmentdecisions:

Benefits

Costs

Risk and uncertainty/information

Environment and institutions market and/orregulatory


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Benefits depend on Closeness of substitute technologies

Mobile and landline telephones

Networks and standards

ATM adoption by banks VHS/Beta

Experience and Learning Investment in adopter skills


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Costs depend on Price of new technology

Complementary investments Infrastructure and other capital equipment

Training/skills

Scale Due to fixed cost nature of adoption in many cases

Cost of finance

Large body of literature on innovation investmentwhere there is uncertainty


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Uncertainty/information New technology less understood, more uncertainty

about how well it works

Uncertainty about whether it will be successful(standards)

Benefits are a flow, costs are upfront => benefits maybe more uncertain

The option to delay decision in order to acquire moreinformation may cause delay in adoption


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Environment - regulatory Accelerates adoption

mandates pollution or safety standards

solves coordination problems in networkindustries

Delays adoption

Safety regulation, e.g., new pharmaceuticals

and medical instruments. Standard-setting process -

telecommunications lighting innovation?


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Some empirical examples(B. Hall)

Date Authors Technology Observations Factors1957 Griliches hybrid corn Midwest farms profitability; need to specialize product

1975 David mechanical reaper US,UK farms minimum efficient scale

1984 Hannan/MacDowell ATMs US banks

regulation; concentration;firmsize;holding co. (risk);cost of

substitutes

1995 Saloner/Shepard ATMs US banks network size;customer deposits (size)

1995 Helper CNC machine tools

US auto

component firms

prod worker wage;tech complexity;size;stable customer

relationshp

1997 Kennickell/kwast electronic banking US consumers education; assets; learning (older services versus newer)

1998

Majumdar/Vankatara

man elec switching tech US telecomms network effect and scale (weaker over time)

1998 Gray/Shadbegian new tech in paper US paper plants environmental regulat ion

1998 Hubbard on-board IT US trucking

on-t me ene ts ;s ta e cus tomer re at ons p - e ps

monitoring

2000 Stoneman/Toivanen robot technology

firms cross-

country real options ; volatility in uncertain inves tments?

2001 Caselli/Coleman computers OECD countries

e uca on eve o wor ers;openness;overa nves men

rate

2001 Gruber and Verboven mobile telephones

European

consumers concentrat ion of providers;tech improvements


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Technology Transfer - Types of

technology transfer: Cooperative research and development

Licensing or sale of intellectual property

Either across firms or to a start-up spin-off firm

Technical assistance

Public exchange of information [e.g.conferences, publications, networking]


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Three competing paradigms for

government support First, Market failures: The government intervenes to correct market

failures. Examples used include externalities, high transactions

costs, and imperfect information. However, transactions costs neednot be a market failure. Transactions costs are legitimate costs paidby individuals. However, the government can still take advantage ofopportunities to lower transactions costs.

The evolution of universities as the source of basic research afterWWII follows from this.

Examples of other policies: Intellectual property rights

R&D subsidies R&D tax credits


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Three competing paradigms for

government support Second, Mission technology paradigm:

Government should perform R&D in service of well-specified missions for thenational interest that arent well-served by private R&D. Has been used to justifyagricultural research for a long time.

More prominent after WWII, in areas such as defense, energy, and health. Insome ways, this is related to market failure, as that may be why private R&Ddoesnt serve the need. Other times, private R&D won't serve the need becausethere is no market -- it is the government who is purchasing the good [missingmarkets].

Third, Cooperative technology paradigm: Government plays an active role in technology transfer. Has received more

attention recently [think of Taiwan in lecture 4].

Example: patent citations from government labs. Jaffe, Banks, andFogerty (1998) look at patent citations received by NASA patents.NASA patents are more general (that is, cited by patents in morepatent classes) and more important (that is, cited more often) thanother patents


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Institutions for Technology Transfer- US, Research joint ventures (RJV)

They are a type of strategic research partnership (SRP). Types of actors:

88% for-profit firms 9% non-profits (including universities) 3% government

However, more RJVs have someparticipation from government or universities.

15% of RJVs have a university member Varies by industry: from 1985-2001, 30% of RJVs in electronics had at least one universitymember.

12% of RJVs have a government laboratory member. Two-thirds of partnerships in electric equipment, computers, chemicals, or transportation.

Size of RJVs: Largest: Oil and gas RJVs had a median of 8 members.

Chemicals: median of 5 Electronics: median of 6

Motivation: Alleviate the spillover problem by internalizing leakage of R&D Improve coordination of R&D efforts to avoid wasteful duplication Spread the risks associated with large-scale projects Assure access to complementary knowledge Take advantage of scale economies

However, unintended transfer of technologies is a concern of industry When are they likely to be effective?

When spillovers are only moderately high; If spillovers are too high, there is no incentive to join. Being a freerider makes more sense; If they are too low, there is no reason to internalize them ; When overall IPprotection is weak; If IP protection is strong, the costs of sharing information are greater (you give up moreof your private benefits by sharing).


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Government Laboratories

In the US, of the $93.3 billion government funded R&D in 2004, 26% was performedby the government.

Types of research done at government laboratories Research in support of agency activities. This contributes to technologies

purchased by the government.

Data collection (e.g. Department of Commerce, NSF) Basic and applied science in areas with a public interest, such as:

Biomedical research at NIH Basic physics research at DOE Meteorology research at NIST Agricultural research at Agricultural Research Stations

Supporting the commercial activities of firms Unlike the above three (mission research), this type of research focuses on

technology transfer.

The rationale for Government laboratories

Scale some research projects rely on large capital expenditures (e.g.

medical institutes, large telescopes) Security some projects require direct government supervision [DOD isin charge of a large share R&D].

Mission and regulatory requirements agencies such as FDA arerequired to perform a certain amount of R&D

Knowledge management Long-term R&D kept in house to preserve

control of projects and keep close connections with sponsors


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Technology diffusion across countries

An important consideration is the ability of acountry to absorb new knowledge. Trade canprovide the elements of technology, but these

other elements must also be in place fortechnology transfer to be successful. Production capabilities

Investment capabilities: does the country have theability to expand production facilities and build newones.

Invention capabilities: the ability of the local efforts to

adapt, improve, and develop technology.

Very similar ideas to technological Capabilities.However, they elaborate further with concepts

yielding empirical results


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The first basic mechanisms of technological diffusion

- direct learning (active spillovers)

Direct learning about foreign technological knowledge. This means learningabout the blueprint of the technology, so that the recipient country can

reproduce the technology.

If the cost of obtaining the knowledge is less than the cost of invention, aspilloverhas occurred. Such spillovers should increase the productivity ofdomestic inventive activity. It becomes part of the domestic knowledgestock off which inventors build.

No purchase is necessary for active spillovers. They can simply betransferred via blueprints. Such transfer can be low-cost.

However, without licensing agreements, the inventor may choose to keep

the blueprints secret.

Although no direct purchase is required, activities such as trade or FDI canhelp create and maintain communication channels.


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Direct learning-2 Active technology transfer refers to tacit

knowledge also.

Tacit knowledge can be transferred by: Demonstrations

Personal instruction

Provision of expert services Hiring workers away from the innovating firm.


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The second basic mechanisms of

technological diffusion: passive spillovers

Technology embodied in specialized and advanced intermediate productsthat have been invented abroad.

Its use should make production more efficient. However, no new knowledgeis passed on directly to domestic inventors. Thus, the productivity ofdomestic R&D does not increase. If the product is purchased for less thanthe opportunity cost of producing the product, including R&D costs, aspillover occurs.

Then we have a passive spillover. Griliches calls this a pecuniaryexternality.

For passive spillovers (embodied technological change), a purchase mustoccur. Passive spillovers are transferred via:

International trade Foreign direct investment (FDI)


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Output

Knowledge

Country i

Intermediate inputs

Investment goods

Patent flows

Economic transaction

Inputs

Technological proximity

Rent

Spillovers

Knowledge

spillovers

Capital

Countryj

R&D

Knowledge

Four different channels through which economic transactions can result inspillovers: input-related spillovers (P); investment-related spillovers (P);

Knowledge spillovers; and patent-related spillovers (A)


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Some empirical evidence Role of trade Coe & Helpman (1995) estimate the effect of both domestic and foreign

R&D on TFP growth for 22 countries. Domestic R&D more important for larger countries, foreign R&D more

important for smaller countries in the sample.

Competition may play a role here. There are two competingpossibilities. Foreign knowledge: Increases productivity through spillovers. Competes with domestic products.

For a technology leader, competition is likely to be moreimportant.

Domestic R&D elasticity. 0.08 for smaller countries, 0.23 for G-7 countries.

Foreign R&D elasticity: 0.12 for smaller countries, 0.06 for G-7countries.

Blyde (2001) finds OECD imports have a stronger effect on TFPthan Latin American imports. Explanation: more R&D isembodied in OECD imports.

Alternative trade weighting methodologies


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Alternative trade weighting methodologies

Coe and Helpman (1995) measure the foreign R&D capital stock for a country as the

sum of every other countrys R&D capital stock weighted by bilateral import shares.

The underlying assumption is that trade is a mechanism which disseminates

knowledge between countries.

jt

ij it

ijtF

it Km

mK =

[variable]_td" (1)

where FitK is the foreign knowledge stock of country iat period t, mijt is the imports of

country i from country j, mit is country is total imports,t

ijt

m

mis the import share of

countryjin country isimports, and Kjt is the knowledge stock of countryj. The weights

sum to one.

Their preferred specification scales equation (1) by country is import intensity on the

assumption that a countrys level of imports relative to its GDP affects the benefits a

country receives from foreign R&D:

jt

ij it

ijt

it

itF

itK

m

m

y

mK =

[variable]_tch (2)

whereit

it

y

mis country istotal imports over its GDP ratio.

Lichtenberg and van Pottelsberghe (1998) identify two problems with equations (1) and

(2):

the specifications are not invariant to the level of data aggregation combining any

two countrys stocks in (1) would always increase the stock of foreign R&D; and

the addition of the termit

it

y

m, combined with transforming the level of R&D stocks

into indexes and taking logs, results in equation (F2) being misspecified.They propose the alternative formulation:

jt

j jt

ijtF

it Ky

mK = [variable]_ti (3)

where yjtis countryjsGDP. In this formulation, the stock of R&D that country ireceives

from country j is country jsR&D stock times the fraction of country jsoutput that is

exported to country i.

Source:Coe and Helpman (1995); Lichtenberg and van Pottelsberghe (1998).


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Firm-level Technology Transfer Firms that wish to serve foreign markets must

choose between producing the good at homeand exporting it or setting up production abroad.If they set up production abroad, they can useFDI through a subsidiary, or they can licensetheir technology to another firm.

Two key choices: Export vs. Production Abroad [Empirical evidence

suggests these are complementary processes. Likelybecause intermediate goods must be exported tosubsidiaries]

FDI vs. Licensing


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Empirical findings FDI does not necessarily lead to strong positive spillovers.

Firms choose to operate through a fully-owned subsidiary(FDI) rather than through joint ventures or technologylicensing because FDI helps keep the private returns oftechnology internal to the firm.

Overseas R&D activity is still the least globalized of MNEsactivities, largely concentrated in developed countries

91% of overseas R&D activity of US MNEs is located inother developed countries. The rest is concentrated in ahandful of relatively advanced developing countries


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Spillover channels of FDI

Driver Source of the productivity gain Example or Description

Imitation or

demonstrationeffect

Adoption of new production methods.

Adoption of new managementpractices.

The local firms learn by imitating an

MNE.

Competitioneffect

Reduction in X-inefficiency.

Faster adoption of new technology.

The local firms have to improve theirperformance because of competitionfrom more efficient/productive MNEs.

Training(Human capital)

Increased productivity ofcomplementary labour.

Tacit knowledge.

MNE trained workers move to localfirms or set up their own firms.

Exports Scale economies.

Exposure to technological frontier.

MNE may generate exportinformation externalities and mayprovide a demonstration effect tolocal firms.

Sources: Blomstrom and Kokko (1998); Grg and Greenaway (2001); Grg and Strobl (2002); Grg andGreenaway (2003).


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What makes technology transfer successful?

Newly acquired technologies are rarely used at their peak productivity. Both the initial productivity and the time it takes to master the technology depend

on the starting level of ability. Three key factors:

Labor cannot be effectively trained without experience with the activity.

Technologies usually need to be integrated into larger systems. Suchintegration takes experience.

Technologies are sensitive to local circumstances. An important factor is the ability of the country to absorb new knowledge. This can

be affected by:

Human capital [This may explain why rich countries benefit more fromFDI.]

R&D [R&D may be necessary to adapt technology to local conditions.]

Geography matters Features that affect technology transfer include:

Physical constraints, such as soil & climate conditions Economic constraints Social factors such as legal systems, transaction costs, etc.


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ReadimgsRead Hall, Cort, Saggi

Branstetter replaces Keller

Forbes [on Moday]

Rogers (general reading)

lecture 5 technology diffusion and technology transfer 1196523038131718 3

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