Innovations And Growth Essay

1319 words - 5 pages

IntroductionTechnological development and technological innovation exercise an increasingly important influence on firms and their success. Regardless of the industry sector, no firm can today ignore technological trends, if they wish to remain competitive and succeed in the long term. It is therefore important for managers to understand the dynamics of innovation and technological development, as well as the implications of these for the design and implementation of firm-level competitive strategies.The three basic sources of growth in any economy are growth in inputs of production,improvements in the efficiency of allocation of inputs across economic activities, andinnovation that generates new products, new uses for existing products and brings aboutincreases in the efficiently of use inputs 1 . Solow's (1957) path-breaking analysis of growthin the US economy during the first half of the twentieth century showed that the contributionof growth in inputs of production, namely labour and capital to aggregate growth, was aroundhalf, and the remaining half, that is the unexplained Solow residual, is commonly attributedto technical progress or the contribution of innovation in the sense I have used the term.Since by definition the residual growth is the difference between aggregate growth and thecontributions of growth in factors of production; it is also called Total Factor Productivitygrowth or TFP growth. Whether or not TFP growth accounts for a similarly large share ofoutput in East Asian economics of Korea, Singapore, and Taiwan has been debated (Young(1992, 1995) and Lau and Kim(1994)), in part on methodological grounds (for example, thedependence of estimates on essentially arbitrary assumptions about scale economies andfunctional forms for the aggregate production function) and in part on grounds of possible errors of measurement and biases in the data (Pack, 2001).An alternative to the induced innovation model isthe celebrated "learning by doing" model of Arrow (1962). In this model, innovation asreflected in increases in labour productivity was the unintended or serendipitous effect ofproduction. It was external to the firms who did the producing. Thus, strictly speaking, theprocess of innovation through "learning by doing" in the Arrow model is exogenous.Nordhaus (1969) and Shell (1973) endogenize innovation by modeling the incentives toinnovate as arising from the prospect of monopoly rents from patented innovations.In models of pure learning, sustained growth effects are ruled out if there are diminishingmarginal returns to learning in any single activity. For sustaining growth, new activities withlearning potentials have to emerge and be adopted all the time, as in the model of Lucas(2002, Chapter 3). The adoption of new products could be endogenous, thus endogenizinglearning and hence growth. However there is an inherent ambiguity about learningprocesses. As Lucas (2002, p. 84) points out:"Is it the individual worker who is doing the...

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