TECHNOLOGICAL CHANGE IN A

GLOBAL ECONOMY

Presented to: Dr. Khurrum S. MughalDecember 25, 2013

GROUP MEMBERS

2

Ghalia Ahmed

Ghazi Nadeem Junaid Zia Madiha

Younus  Muslim Habibi

Warda Ashfaq

19670 11201 11253 19337 19676 19656

AGENDA Impact of technological changes Relationships between rate of

technological change and market structures

Characteristics of innovation and factors that result in successful innovation

3

4

TECHNOLOGICAL CHANGEThe overall process of invention, innovation and diffusion in technologies and processes is called Technological Change

Example: Electron microscopes

Impacto New products o Improvements o Cost reductions for existing products o Better ways of managing business operations

5

TECHNOLOGICAL CHANGE AND PRODUCTION FUNCTION Allow use of fewer input for same level

of output Shift in production isoquant

QQ1

Q1

Q

6

CONTD. Technological change can be:

o Input-Neutralo Capital saving

o Example: transistorso Labor saving

o Example: industrial robots in automobile manufacturing

Input-Neutral Labor SavingCapital Saving

7

TECHNOLOGICAL CHANGE, PRODUCTIVITY AND ECONOMIC GROWTH Labor productivity

o Common productivity measure Labor Productivity = Output

Laboro Productivity of inputs real income

Percentage Increase in Labor Productivity

Country Increase: 1970-1989

United States 2.9%

Canada 2.5%

Denmark 3.3%

France 4.1%

Italy 4.9%

Japan 6.0%

Netherland 4.9%

Sweden 2.9%

United Kingdom 3.8%

Germany 3.2%

8

CONTD. Change in labor productivity

o Technological changeo Human capitalo Capital stock of economyo Change in relative input prices

Measures of productivityo Labor productivity – easy to computeo Total factor productivity – better indicator

Compares changes in output to that in inputs

o Knowledge/Technology – single most important source of economic growth

9

EFFECT OF MARKET STRUCTURE ON TECHNOLOGICAL CHANGE

Unresolved Issues Competitive Markets

o Small firms – no funds for R&Do Easily imitated new products – unable to capture all

economic profits Study by Jewkes, Sawers and Stillerman

o Investigated origins of 70 major inventions since 1880

o Results: 54% – people working alone 35% – individual research laboratories 11% – individuals working with research

institutions

10

CONTD.

Small firms more progressive than larger firms Small Firms

o Environment for new ideaso Innovate to survive

Large Firmso Bureaucratic ruleso Little motivation to change

Evaluation Ability Incentives

11

EFFECT OF TECHNOLOGICAL CHANGE ON MARKET STRUCTURE

Market Structure Technological Change

Example 1: TelecommunicationExample 2: Computer Industry

12

STATIC VS. DYNAMIC INEFFICIENCY

Large firms with market powero Facilitate technological changeo May cause firm to be inefficient

Static efficiency Dynamic efficiency

Static efficiency is less important than dynamic efficiency

13

Effects of Static vs. Dynamic Inefficiency

Year

Scenario-I Output Scenario-II Output

Static Efficiency and 3% Growth in Factor

Productivity

Static Inefficiency and 6% Growth in Factor

Productivity

1 100.00 90.00

2 103.00 95.40

3 106.09 101.12

4 109.27 107.19

5 112.55 113.62

6 115.93 120.44

CONTD.

14

R&D AND PRISONER’S DILEMMAPrisoner’s Dilemma

“A paradox in decision analysis in which two individuals acting in their own best interest

pursue a course of action that does not result in the ideal outcome.”

Example Cigarette advertising

15

Situation where R&D is wastefulo Firms in duopolyo One firm reduces cost – most efficiento Both firms reduce cost – little benefit

80, 40 160, -40

-40, 120 120, 80

R&D

No R&D

No R&DR&D

Firm A

Firm B

CONTD.

16

COUNTRY-WISE COMPARISON OF R&D EFFORTS

USA Japan

Duplicate R&D Share information

Anti-trust laws prevent joint research

Government encourages joint R&D

Fear of falling back – no cut back on R&D

No fear of falling behind

17

INDUSTRIAL INNOVATION

Inventiono Creation of new ideas

Innovationo Taking those ideas and transforming them into

something useful for the society Diffusion

o New product/process becomes widely available

Example: Scurvy (no diffusion)

Invention Innovation Diffusion

18

PRODUCT VS. PROCESS INNOVATION

Innovation

Product Process

19

REQUIREMENTS FOR SUCCESSFUL INNOVATION

Often no reward for first mover Examples

o Bowmar instruments (pocket calculators)o RC cola (cola drinks) o Electrical musical industries (CAT-Scan

technology) Challenge Solution Patents and Innovation

20

Thank You