Introduction For Computer Innovations

-->

-->Introduction For Computer Innovations

The current contest on long waves, or escalation cycles, has not so far paid enough attention to the process of spread by which major new technologies originating and developing in the capital goods sector. An understanding of this transmission process requires a more complete view of technological innovation and diffusion than is provided by the traditional demand-pull model: as is recognized in the more recent innovation literature, such a view must encompass both the supply of a new technology by its producers and the demand for that technology by its users or adopters. It is argued here that examination of the technology transmission process helps to explain the underlying dynamics of the growth cycle, in terms of a disequilibrium in the rates of innovation achieved .in the capital goods sectors and the consumer freight sectors.

This view of the innovation process, and the role of technology transmission in the growth cycle, can further offer insights into the likely course of events during the new technological revolution now beginning, sometimes labeled the "Fifth Kondratiev". There is a widespread consensus that this new revolution will e based on the emergent information technologies; what has so far been less recognized is that the key adopter sectors in this revolution are likely to be the service industries, rather than the manufacturing sectors which have dominated previous technological revolutions. From this supposition it can be argued that the application of information technology in a wide variety of previously "pre-industrial" service activities will provide the motor for the next major wave of expansion of output and employment in advanced industrialized economies, and that an understanding of this new source of economic growth requires the development of a theory of innovation in services.

There has been a growing awareness in recent years of the importance of service industries within advanced industrialized economies, though this realization has perhaps been rather belated given that in such economies services already typically account for at least 50 percent of total output and employment: With this growing awareness there has begun to emerge a body of applied research into services, such as the work of Pershing. is proposed, based upon the idea of a "reverse product cycle" operating in service industries. This model has been developed out of a quite extensive programme of empirical research into technical innovation in services; this research has focused primarily on the adoption and impact of information technology in service industries and has involved a mixture of econometric and case study analysis of current trends, as well as some more speculative and less formal forecasting of likely trends over the next ten years. Nevertheless, given the relative lack of previous research in this area, and the still emergent nature of many of the service innovations which are described, a great deal more empirical testing needs to be undertaken before any claim can be made to have constructed a complete theoretical edifice on these foundations.

-->

The origin and development of new technology :

-->

The origins of a major new technology such as information technology can be located in the capital good sector, where primary product innovations such as computers are twisted after what may be a long period of research and development in industries such as electronics, business equipment and telecommunications. If a bring together of related innovations emerge, and if their combined influence on other branches of economic activity is potentially very invasive then the foundations of a major new technology are established, particularly if reinforced by the establishment of an infrastructure such as a digital telecommunications network suitable for opening up a wide range of markets to the influence of technology. The importance of such product innovations in capital goods supply industries has been touched upon by several authors; while the long wave literature stresses the central role of the new technologies associated with these innovations in creating the Schumpeterian "technological revolutions" underlying successive growth cycles.

Once the new technology has been established and embodied in a set of emergent products, the development of the new capital goods industries set up to manufacture these products can be described according to the by now standard product cycle theory first expounded by Kuznets and afterward elaborated by authors such as Utterback. Three phases of development can be identified. The first take-off or introduction phase, corresponding to the period of major product innovation during the establishment of new industries, is characterized by rapid technical advances and a diversity of new products; labor intensive, relative high cost flexible production methods are applied to low volumes of output and the competitive emphasis is laid upon product performance to capture new markets. In the second, growth phase, the competitive accent shifts to major process innovations designed to improve the quality of a lessening range of products; production methods become more standardized and automated with increasing capital intensity; and production volumes increase as user markets continue to expand. The third, maturity phase, sees a further shift in competitive accent towards more incremental method improvements designed to reduce the unit costs of a relatively tapered range of standard products in markets nearing diffusion; production methods reach their highest stage of

Automation, with rising concentration in larger production units and high rates of industry saving investment progressively raising the costs of further innovation.

The progression through these phased of the product cycle is accompany by a shift from the early predominance of product innovations, which on balance generate increased employment through investment which is "capital widening", to later process innovations, which on balance displace employment through savings which is "capital deepening". additionally, once the maturity phase is reached, the by now traditional technology, and the established capital goods industries which produce it, become increasingly vulnerable to competition from new and more difficult technologies, leading to a fourth, transitional phase in which the whole cycle begins again as the old industries decline and new industries begin to emerge.

While the main phases recognized by this theory are plausible, it is necessary to be beware of too one-dimensional an interpretation of the mechanisms complicated. Thus several authors stress that the cycle does not involve s strictly linear, sequential process, but rather there exists close interaction and feedback between process and product innovations at each stage. This relations and feedback can be seen very clearly in the development of the computer industry in the 1960s. Successive generations of the technology each represent an important product innovation which has then been extensively improved by a sequence of subsequent process innovations, during a period when the industry as a whole has moved from the take-off to the growth phase. It is also too simplistic to assume that either "technology-push" or "demand-pull" is the single governing driving force for innovation through out the product cycle, since both are operating and interacting at each stage. Nevertheless, it is not unreasonable to suggest that in the early phase of major product innovations, technology push pressure resulting from an earlier phase of fundamental research and development is the predominant driving force, where as in the later phases of more incremental innovations, the demand pull pressures created by users of the technology become increasingly dominant. Since the case of information technology, the major of these users consist of service industries, then the understanding of their role in the innovation process becomes essential.

-->The diffusion of technology :

-->

The diffusion of a major new technology such as information technology, from the capital goods sector in which it is produced to the user sectors, and mainly the service sectors, in which it is applied, occurs slowly over a considerable period of time. Two types of delays occur. The first consists of the adoption delays which are widely discussed in the innovation diffusion literature, analogous to the lag between the availability of capital goods embodying the new technology, and their take-up by potential users.. This second type of delay is closely related to the innovation process within the new industries themselves Starting with the familiar "approval delays", the writing recognizes three main types of factors which adjust the rate of adoption or circulation of a technology: the first is the trade-off between price and technical performance, which influences both the investment cost and the profitability of adopting the new technology; the second is the risk or the uncertainty attached to the investment; and the third is the market structure of the adopter industry. As far as the price-performance trade-off is concerned, Rosenberg points out that there is often a considerable delay between the attainment of technical feasibility for a fundamental product innovation in the product sector, and the achievement of economic feasibility for potential users through a whole series of subsequent incremental improvements by the producers - particularly if the older, competing technologies are also subject to continuing improvement. In a similar vein, Metcalfe discusses the crucial role of the price mechanism in creating a "balanced transmission path", such that the waning price of the invention balances the growth in demand as adoption increases in parallel with the growth in production capacity in the supply industry. The first factor is ""opportunity", defined as the suitability of the activities carried out within the user sector for applications of the new technology. In the case of computer technology, opportunity is another factor contributing the leading role of financial institutions in the use of computers, since financial transactions of all types are ideally suited to computerization. The second factor is the "usability" of the technology, which in recent years has become a far more critical constraint on the rate of innovation in the use of computers than the technical performance of the hardware. Here usability is defined to cover both the availability and quality of software, which provides the direct embodiment of service sector applications of the technology, and the "user friendliness" of the system's basic operating procedures. The final factor affecting the realization of the potential of a technology is the "adaptability" of the organizations installing the equipment: this includes workforce or managerial resistance to the introduction of new technology: the extent to which working procedures can be adjusted; and the rate at which the workforce can be trained in the necessary skills to use the technology.

The path taken by this adoption and diffusion process can be described by the familiar S¬shaped, logistic diffusion curve or, perhaps more usefully, by the concept of a "natural trajectory" of innovation first put forward by Nelson and Winter. Different trajectories in different user industries reflect a arrangement of the common price-performance characteristics of the technology, and the differing market structures and types of applications to be found in each industry, all of which define the selection environment for user adoption and innovation. With the adoption and innovation of computer technology, the most dynamic influence on the diffusion process has been provided by the very rapid rate of technical progress in the production of computers, which as already indicated is creating a continuous expansion of the "technological frontier" defined by the price-performance characteristics of the equipment, and thus a parallel expansion of the user markets being penetrated by the technology.

The first set can loosely be characterized as "technology-push" factors associated with the capital goods embodying the technology, i.e their price-performance characteristics, the uncertainty about their performance, and their usability; the second set be characterized as "demand-pull" factors stemming from the nature of the user industries and their applications of the technology. However, these factors tell only half the story, since they are concerned with the transmission of the technology from the capital goods producer industries to the consumer goods industries. The second half of the story concerns the innovation process within the user industries themselves, which determines how the technology is applied in the production of consumer goods and services as a result of both "technology push" pressures originating within these industries and "demand pull" pressures originating within the consumer markets for their products.

-->

The reverse product cycle

-->

The container has now inwards at the central question addressed in this paper ¬how does innovation occur in user industries such as services? The answer which is proposed here relies upon a model of innovation which mirrors the theory pf the product cycle, as it has been applied to the production of goods embodying a new technology, but which assumes that in the user industries which adopt the technology, the cycle operates in the opposite direction. This model, derived from empirical study of the adoption of information technology in service industries has been termed the "reverse product cycle". In summary, the three phases of the reverse product cycle consist of a first stage in which the applications of the new technology are designed to increase the efficiency of delivery of existing services: a second stage in which the technology is applied to improving the quality of services: and a third stage in which the technology assists in generating wholly transformed or new services. Furthermore, this sequence of phases in the reverse product cycle within user industries will tend to parallel the succession of phases of the normal product cycle within capital goods industries such as the computer industry which are producing the technology.

Consequently, this second stage movement towards a qualitative improvement in services can be views as an interim "transition phase", between the improved efficiency of delivery of existing services, and the generation of new types of services. These quality improvements begin to encourage some expansion of markets for the improved products, while the competitive emphasis on quality may typically be accompanied by corporate diversification or integration among the service providers. Furthermore, while investment in the capital equipment embodying he technology continues at a high rate, there is a shift towards a more neutral form of technical progress, with the capital widening impact being at least as strong as the capital deepening effects and the net impact on labor utilization also being broadly neutral.

In other words, the transition phase which began in the previous phase of the cycle will extend to cover the period between the achievement of technical feasibility in the delivery of the new services, for example with the installation of a telecommunications infrastructure suitable for home banking and shopping and the achievement of economic feasibility in competition with older established service equivalents such as existing banking and retailing services. Thereafter, as the "new service" industries win an increasingly dominant position within their respective consumer markets, their further development will involve a shift from product innovations to major process innovations during the growth stage and thereafter a further shift to incremental process improvements as they reach maturity. At this stage, a new wave of technology may emerge within the capital goods sector, suitable for transmission to the service sector and thus triggering the start of a new reverse product cycle among the by now mature service industries which originated during the previous cycle.

-->

Innovation and the escalation cycle :

-->

The conjectural model developed in previous sections has articulated the innovation process in the capital goods sector and the consumer goods and service sector in terms of what Van Duijn calls "innovation life cycles", based on the theory of the product life cycle. Furthermore, the model has assumed the emergence of a cluster of related innovations in the capital goods sector which are so fundamental and so pervasive

in their impacts that their combined effect, particularly when reinforced by the development of an appropriate infrastructure, is to establish a major new technology, or as Freeman et al. term it, a "new technology system". As already indicated, much of the long wave literature affords a central role to the emergence of these major new technologies as the driving force underlying successive growth cycles; this tradition started with Schumpeter's original formulation of a theory of "technological revolutions" and continued through to recent discussions of the discontinuities in growth and innovation trajectories caused by the emergence of new "technological paradigms".

Output and labor productivity are growing strongly to satisfy demand in expanding consumer markets, employment is stabilizing at its peak level, and there is a continued strong growth in capital investment which increases the capital intensity of production while stabilizing capital productivity and the rate of profit. During this phase, technical progress is concentrated principally within the consumer sector, and it is broadly neutral in its impact. Within the capital goods sector, on the other hand, a transition phase between successive "technical paradigms" prevails, with little further improvement possible in the technologies established in the previous cycle, while the next wave of technology is still in the research and development phase, generating "emergent products" which may have reached technical feasibility but are as yet of limited economic feasibility. Such was the stage reached in the emergent computer industry during most of the 1960s, at the peak prosperity phase of the post war boom generated by the previous wave of technologies established in the 1930s and 1940s.

Once the emergent technologies in the capital goods sector have reached the stage at which it is economically feasible for the consumer sector to begin widespread adoption of the new capital goods embodying these technologies, then the growth cycle moves into its recession phase. These product innovations create a rapid rate of cheapening of the new capital goods, which encourages a similarly rapid expansion of their markets among the by now maturing consumer goods and services industries. Since the consumer sector has now reached its maturity phase, overall output growth is slowing down as market nears saturation; the rapid rate of investment in the new technology is thus predominantly labor saving and capital deepening in its effects, so that while labor productivity continues to increase, though perhaps at a lower rate, employment, capital productivity and profitability all enter a period of decline. Such were the conditions of recession prevailing during most of the 1970s when, despite the recession, the computer industry experienced very high rates of growth and of product Consequently, the limited expansion of markets created by product improvements in the consumer sector, even when combined with the strong growth in the capital goods sector producing the new technology, is not sufficient to offset the decline in already mature consumer goods and services sectors which are suffering from saturated markets and a limited scope for further process improvements using by now outmoded technologies. The economy thus suffers a phase of depression, with output levels static or only slowly rising, maintaining high levels of unemployment and under-utilized capacity, even though the decline in employment levels does tail off. Capital investment is now broadly neutral in its effects, halting the decline in profitability and capital productivity; this new investment is accompanied by extensive scrapping in the mature consumer industries of underutilized capacity embodying obsolete technologies, giving an apparent boost to average labor productivity across the sector as a whole

-->Conclusion :

-->

The fight which has been developed in this paper starts with an examination of the origins of a major new technology in the capital goods sector, and its later development according to the product life cycle theory. Consideration is given next to the diffusion process by which this new technology is taken up by user industries in the consumer goods and services sector, identifying the factors which contribute both to delays in the adoption if the technology and to delays in the realization of its potential and discussing how these factors shape the innovation trajectories which emerge in the user industries. The central thrust of the argument is then directed towards the nature pf the innovation process in the user industries, concentrating in particular upon the innovations in services currently being generated by the adoption of information technology. A "reverse product cycle" is proposed to describe the innovation process in these industries, running in parallel to the normal product cycle in the capital goods sector, but operating in the opposite sequence of stages. Finally, the existence of two out¬of-phase innovation cycles - i.e the capital and consumer sectors, deriving from a technology transmission process which causes disequilibrium in technical progress between the two, is put forward as a dynamic mechanism helping to create the long wave fluctuations in economic activity which are symptomatic of successive Schumpeterian "technological revolutions".The theoritical model of innovation in services which has been proposed in the paper, based upon the idea of a "reverse product cycle", does appear to correspond to empirical observation of how the innovation process has been operating in three case study sectors over the past 20 years, as a result of the introduction of computer technology. However, far more applied research is needed to test the model fully across a wider range of sectors, and such a programme of research would have to stretch over several years to allow for the gradual emergence of the electronically based "new services" which in most cases are still no more than a product of speculation. There are also more specific questions to be answered as to how the operation of the reverse product cycle varied according to differences in technology, in service applications and in national economic conditions. Once the operation of the proposed reverse product cycle is established and fully understood, then its interaction with the normal product cycle in capital goods industries could be investigated

empirically, to ascertain how important is the disequilibrium between the innovation life cycles in the two sectors as a mechanism contributing to long waves of economic growth.

Once such an infrastructure is installed, there is enormous potential for the generation of new service products in a wide variety of fields such as financial and business services, retail and wholesale distribution, entertainment and leisure, education and health, and public administration. The development of such services is likely to be further assisted by current software developments in "proficient or "information based" systems. While the precise form of these network-based services is difficult as yet to predict, the indications are that they could generate a major wave of capital saving, . employment-generating output growth. Furthermore, they could be produced by high skill, relatively labor intensive and more decentralized organizations, using the IT infrastructure as their main means of production and so perhaps generating more modest capital requirements, particularly for expensive buildings, than those of today's major service providers. Of course, such predictions beg a whole series of questions about the distributional impacts of a new growth cycle based on information technology, but these lie outside the scope of this paper. A separate paper does, however, consider some of the broader implications of a new services-led boom, which is likened to a "navy Revolution" comparable in scope and importance to the nineteenth century Industrial Revolution in manufacturing, and draws out some pointers for government policies which can encourage this boom, with a view to promoting the much sought-after recovery towards full employment and advanced industrialized economies.