Transcript Technology and Theories of Economic Development (Neo

Technology and Theories of Economic
Development
(Neo-Schumpeterian Approach: Technoeconomic Paradigms)
Structural Crises of Adjustment,
Business Cycles and Investment
Behavior
by C. Freeman and C. Perez, 1988
in G. Dosi et al. (eds.), Technical Change and Economic Theory,
London: Pinter, p. 38-66.
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Introduction
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Schumpeterian theory of business cycles
Failure of Keynesian economics with the
influence of technical change
Techno-economic paradigm → accompanied
by structural crisis of adjustment
Why Schumpeter’s ideas?
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Slow down in the growth of the world economy
Application of Keynessian policies to prevent
reoccurence of depression comparable to 1930s,
but deeper reccessions of 1970s and 1980s
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Business Cycle Theory
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The 1930s depression and recessions of the 1970s and 1980s
Sources of cyclical fluctuations (Samuelson, 1980)
 The instability of investment
 Characteristics of investment making fluctuations inevitable:
postponability, competitive pressures to expand capacity,
uneven development in relative growth rate and capital
intensity, accelerator principle (endogenous)
 External factors like technological innovation, dynamic growth
of population and fluctuations in business confidence
 Over restrictive monetary policy, instabilities in the
international economy, lack of sufficient new markets,
saturation of some existing markets, uncertainties about
technology, protectionism
 Self-regulating private market mechanism
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Keynes
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Neo-classical tradition: limitations of self-regulating
market mechanism
Public responsibility for the overall level of
investment and employment
Impossibility of rational calculations about the future
rate of return from new investment
Importance of climate of confidence and the role of
animal spirit in the level of investment
Importance of technical change for investment
behavior
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Keynes
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Technical change and investment: uncertainty
Favorable conditions like complementarities between
innovations and appropriate infrastructure favoring
diffusion of new technologies and leading to further
investment
Opposite effect due to diminishing returns and declining
profitability may lead to sluggish investment
In early stages of radical technical innovation uncertainty
prevails so that Schumpeterian entrepreneurship and
Keynesian animal spirit needed
Diffusion of new technologies and resulting exceptional
profits may generate rising confidence given the social
and institutional framework and infrastructure favoring
these developments
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Keynes
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Influence of technical change on investment behavior
Keynes accepts Schumpeter’s explanation of investment but also
emphasizes role of monetary policy and does not recognize the
crucial role of technical innovation
Keynesian analysis lack long-term changes in technology: purely
quantitative aspects of investment and employment, whereas
Schumpeter stated the importance of qualitative aspects
Criticism of Keynesian theory: the relationship between technical
change and business cycles
 Schumpeter’s long-wave theory:
 Booms (as 1950s and 1960s based on the diffusion of major
new techno-economic paradigms)
 Depressions (periods of structural adjustment when social and
institutional framework adapting to the rise of new
technologies)
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Complexity of Technical Change: Generalization
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Incremental innovations:
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Continuous
Due to combination of demand pressure, socio-cultural factors,
technological opportunities
No R&D activity
Outcome of inventions and improvement suggested by
engineers, others engaged in production process or by users
Improve efficiency in use of all factors of production
Associated with the scaling-up of plant and equipment and quality
improvements to products and services
Apparent in the steady growth of productivity
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Complexity of Technical Change: Generalization
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Radical innovations:
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Discontinuous
Result of delibarete R&D activity
Unevenly distributed over sectors and time
Important for the growth of new markets and new
investments
Product, process and organizational innovation
Structural change but in terms of aggregate impact
they are relatively small and localized
Example: nylon, nuclear power
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Complexity of Technical Change: Generalization
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Changes of “technology system”:
 Far-reaching changes in technology
 Combination of radical and incremental innovations together with
organizational and managerial innovations
 Example: petro-chemical innovations
Changes in “techno-economic paradigm” (technological revolutions):
 Influence on the entire economy
 Clusters of radical and incremental innovations and new
technology systems
 Pervasive effects both directly and indirectly
 Schumpeter’s long cycles as a succession of “techno-economic
paradigm”
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Characteristics of Techno-economic Paradigm
“Techno-economic paradigm develops initially within the old, showing
its decisive advantages during the downswing phase of the previous
cycle and becomes established as a dominant technological regime
only after a crisis of structural adjustment, involving deep social and
institutional changes”
 A combination of interrelated product, process and organizational
innovations, embodying increase in productivity and new investment
and profit opportunities
 Diffusion pattern is spread from the initial industries to a much wider
range of industries
 A radical transformation of the prevailing engineering and
managerial common sense for best productivity and most profitable
practice
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Characteristics of Techno-economic Paradigm
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Conditions for key factors of the paradigm:
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Low and rapidly falling relative cost
Unlimited availability of supply over long periods (important condition of
confidence for the investment)
Potential for the use or incorporation of the new key factors in many
products and processes throughout the economic system
These key factors existed long before the new paradigm but become
possible if the previous key factors and technologies give strong
signals of diminishing returns and limits to potential for further
increases in productivity and profitable investment
Innovations as means for overcoming the specific bottlenecks of the
old technologies
Differs from conceptualization of changing factor costs in neoclassical theory but similar in persistent search for least-cost
combinations of factor inputs to sustain and increase profitability
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The Waves of Technological Change
Long waves or cycles
Approx.
Kondratieff waves
timing
1780s-1840s Industrial revolution:
factory production for textiles
1840s-1890s Age of steam power and railways
Key features of dominant infrastructure
Science technology
Transport
education and training
communication
Apprenticeship, learning by
Canals, carriage
doing, scientific societies
roads
Professional mechanical and
Railways (iron),
civil engineers, institutes of
telegraph
technology, mass primary
education
1890s-1940s Age of electricity and steel
Industrial R&D labs, chemicals Railways (steel),
and electrical, national
telephone
laboratories
1940s-1990s Age of mass production (Fordism) Large-scale industrial and
Motor highways,
of automobiles and synthetic
government R&D, mass higher radio and TV,
materials
education
airlines
1990sAge of microelectronics and
Data networks, R&D global
Information
computer networks
networks, lifetime education
highways, digital
and training
networks
Energy
Universal and
systems
cheap key factors
Water power Cotton
Steam power Coal, iron
Electricity
Steel
Oil
Oil, plastics
Gas/oil
Microelectronics
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Characteristics of Successive Long-waves
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Early mechanization Kondratieff
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1770s &1780s to 1830s &1840s
Upswing: Industrial revolution
Downswing: Hard times
Main carrier branches and sectors: textiles
Key factor industries offering abundant supply at
descending price: cotton
Other sectors growing from small base: steam engines,
machinery
Organization of firms: individual entrepreneurs and small firms,
local capital and individual wealth, partnerships between financial
managers and technical innovators
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Early Mechanization Kondratieff
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Limitations of previous paradigm: scale and process control in
domestic system, hand-operated tools and processes
Solutions which new paradigm offers: mechanization and factory
organization
Technological leaders: Britain, France, Belgium
Newly industrializing countries: German states
National regime of regulation: breakdown of privileges on trade
and competition, laissez-faire
International regime of regulation: emergence of British
supremacy in trade and international finance
Features of national systems of innovation: learning by doing,
local scientific and engineering societies
Other sector developments: rapid expansion of trade, merchants
as source of finance
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Industrial Revolution
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Adam Smith: Wealth of Nations
Why British standard of living was higher than in other
European countries?
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The growth of national income due to agricultural productivity
Manufacturing industry and trade
The division of labor in manufacturing facilitated the use
of new machines and the accumulation of specialized
skills
The opening of markets enabled these manufacturers to
compete, to enlarge their market
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Industrial Revolution
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Technical change, capital accumulation and specialized skills
The embodiment of inventions in new machines through
capital investment
A fundamental organizational change from a system of
cottage production of textiles to a system of factory production
with political change and cultural changes
Acceleration of British industrial output, investment and trade
in the last two decades of 18th century
The manufacturing industry and the transport infrastructure as
well as agriculture
Social and economic changes in agriculture was one of the
main factors facilitating mobility of labor and capital
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Industrial Revolution
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Not balanced growth of all industries but rapid growth of a few
leading sectors, the cotton industry and iron
Big increases in productivity based on system of factory (mill)
production
The improvements in process technology made possible the
rapidly falling prices which in turn provided competitive
strength for British exports to undercut Indian and other Asian
textiles
Exports of cotton textile increased
The speed with which inventions became innovations
The inventions were incremental improvements to existing
processes and products that were often made by workers
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Industrial Revolution
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Innovations in the cotton industry was time-saving that
also resulted indirectly to savings in capital, labor and
land
The capital accumulation through a developed capital
market, the wealthy class of landlords and family
The coal-mining regions, the new industrial textile
regions, the ‘village industries’
The manufacturing interests also determined
government policy, merchant and landed interests,
“bourgeois”
Inventor-entrepreneurs
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Characteristics of Successive Long-waves
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Steam power and railway Kondratieff
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1830s &1840s to 1880s & 1890s
Upswing: Victorian prosperity
Downswing: Great depression
Main carrier branches and sectors: steam engines, railway
Key factor industries offering abundant supply at
descending price: coal, transport
Other sectors growing from small base: steel, electricity, gas,
heavy engineering
Organization of firms: larger firms employing hundreds, limited
liability and joint stock company, small-firm competition
Political economist: Ricardo, Marx
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Steam Power and Railway Kondratieff
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Limitations of previous paradigm: water power in terms of
inflexibility of location, scale production
Solutions which new paradigm offers: steam engine and new
transport system
Technological leaders: Britain, France, Belgium, Germany, USA
Newly industrializing countries: Italy, Netherlands
National regime of regulation: Laissez faire
International regime of regulation: ‘Pax Britannica’, international
free trade, gold standard
Features of national systems of innovation: growing
specialization, development of professional education
Other sector developments: growth of domestic service, transport,
distribution, financial services, universal communication services
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Steam Power and Railway Kondratieff
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The second wave of major innovations related to
revolutionary developments in transportation and
the powering of the factories
The major innovation: steam power
The application of steam power in factories
(flexibility in terms of choosing location) and in
transportation
The new applications of steam saw the spread of
industrialization to the European continent (Belgium,
Germany) and the US
These countries took over part of British
technologies and in many cases improved on it
(steam engines in the US)
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Steam Power and Railway Kondratieff
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The steam power actually an innovation that
emerged during the previous long wave
As steam power taking control of the economy, the
technological paradigm that was going to replace
steam power, electricity was slowly being invented
The main application of electricity during the age of
steam and railways was the telegraph
Together with the railways, the telegraph increased
communication between different parts of the
country
At the same time there were innovations laying the
foundation for the chemical industry that was going
to rise during the next waves
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Steam Power and Railway Kondratieff
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The institutional changes: the joint-stock
company and stock market
Facilitated the raising of capital for the
establishment of new firms and decreased
the dependence on personal capital
The type of speculative behavior by investors
having high expectations of firms applying
new technologies: that is the main driving
force of the Schumpeter’s secondary wave
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Characteristics of Successive Long-waves
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Electrical and heavy engineering Kondratieff
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1880s & 1890s to 1930s & 1940s
Upswing: Belle époque
Downswing: Great depression
Main carrier branches and sectors: electrical engineering
Key factor industries offering abundant supply at
descending price: steel
Other sectors growing from small base: automobiles,
aluminum
Organization of firms: emergence of giant firms, monopoly and
oligopoly, concentration of banking and finance capital
Political economist: Marshall, Pareto
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Electrical and Heavy Engineering Kondratieff
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Limitations of previous paradigm: iron in terms of strength and
durability, inflexible belts
Solutions which new paradigm offers: group drive for electrical
machinery, power tools, standardization in worldwide operations
Technological leaders: Germany, USA, Britain, France
Newly industrializing countries: Italy, Canada, Japan
National regime of regulation: nationalist state, social legislation,
growth of state bureaucracy
International regime of regulation: imperialism and colonization,
destabilization of international financial and trade system
Features of national systems of innovation: ‘in-house’ R&D,
university scientists
Other sector developments: domestic service industry,
department and chain stores, education, tourism and entertainment
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The Age of Electricity and Steel
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So far → Inventor- entrepreneur, invention coupling with a potential
market defined as innovation, specific innovations
Leading sectors, steel and electricity, had linkages with almost all
other industries
US imported much of its technology from Europe but modified and
reshaped to national circumstances
British colony: transfer of innovative thinking and institutions
Higher relative price of labor interacted with the resource abundance
advantage to induce substitution of capital and natural resource
inputs for skilled labor
Labor-saving, capital-intensive technological trajectory of
mechanization and standardized production
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The Age of Electricity and Steel
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Development of new production techniques in steel led to
large-scale production and usage, reduction in the costs and
application in many new products
The interdependence of developments in steel and
electrification
A wide range of new applications: machinery, electric
furnaces, electrical transformers, generators, stainless steel,
consumer goods like cans, bicycle, construction
The complementarities between innovations affecting every
branch of industry and services
The applications of electrification started in 1860s but
diffusion with further series of inventions in steel
The role of laboratory science in the development of electricity
was important
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The Age of Electricity and Steel
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The electric power generation for tramways and electric railways,
communication, lightning, industrial applications in electrochemistry,
wire and copper, aluminium industry, electric engines, electric
phones
The new investment opportunities based on cheap steel and electric
power, new infrastructure, new regulatory framework
The new flexible source of energy overcome the inflexibility of the
old system (steam engine) saving energy and factory floor space
Giant firms (Germany: Siemens and AEG, US: General Electric and
Westinghouse) (capitalist enterprise) and management innovation
(office organization, professional manager)
The emergence of specialized R&D department in electrical and
chemical firms
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The Age of Electricity and Steel
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Why US leadership?
US possessed a large and homogenous market
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US were abundant in natural resources, including land and
minerals
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As the new technologies were capital intensive and displayed
important scale effects, this led to production costs falling when
served to a larger market
This gave American firms an important cost advantage and
helped them to keep the prices low and hence serve a large
market and reap the scale economies of the new paradigm
The liberal “American spirit” was aimed at entrepreneurship
and capitalist investment and was also very much open to
change and the introduction of new technologies
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The Age of Electricity and Steel
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Changes in the type of firms due to scale economies: the giant
management-led firm (DuPont)
The rise of professional manager himself
The growth by means or mergers and take-overs
Taylorism: the principle of division of labor, breaking down the
production process into simple tasks, each of which could be
standardized and timed (the amount of work to be optimized)
Large managerial companies were well suited to take the advantage of
economies of scale (decreasing unit costs resulting from an increase in
the scale of production) and scope (knowledge may be used for several
product families)
The giant-management led firm causing to a shift away from the
individual inventor in the technological process: introduction of R&D
departments
The first R&D laboratories emerged in Germany in the chemical
industry from 1870
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Characteristics of Successive Long-waves
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Fordist mass production Kondratieff
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1930s & 1940s to 1980s & 1990s
Upswing: Golden age of growth and Keynesian full employment
Downswing: Crisis of structural adjustment
Main carrier branches and sectors: automobiles
Key factor industries offering abundant supply at
descending price: energy (oil)
Other sectors growing from small base: computers, software
Organization of firms: oligopolistic competition, multinational
corporations based on FDI, increasing concentration, ‘technostructure’ in large corporations
Political economist: Keynes, Schumpeter
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Fordist Mass Production Kondratieff
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Limitations of previous paradigm: batch production
Solutions which new paradigm offers: assembly line production
techniques, new patterns of industrial location, cheapening of mass
consumption products
Technological leaders: USA, Germany, Japan
Newly industrializing countries: Korea, Brazil, Mexico
National regime of regulation: welfare state, high levels of state
expenditure and investment, Keynesian techniques
International regime of regulation: ‘Pax Americana’, US military and
economic dominance, decolonization, Cold War, US dominating
international trade and financial regime
Features of national systems of innovation: specialized R&D
departments, military R&D, technology transfer through licensing
Other sector developments: decline of domestic service, self-service,
researchers and financial services
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Fordist Mass Production Kondratieff
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Reliance on scale economies and massproduction in the US spread to Western
European countries and NICs
The adoption of mass-production methods led to
significant rise of labor productivity levels relative
to the US: Abramovitz “catch-up boom”
The expansion of mass-production depended on
application and spread of automobile (internal
combustion engine) and (petro) chemical
technology, again had been around for some
time
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Fordist Mass Production Kondratieff
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Henry Ford’s Model T in 1908
Managerial capitalism
Introduction of the assembly line in the production process:
a process innovation that was characteristic of the Taylorist
way of producing
Breaking down the task of assembling an automobile into
small parts and giving workers a standard (and small)
amount of time to carry out this task
High productivity, relatively low prices of the final product
led to rapid growth of the sales of the Model-T Ford
Applied in factories producing in mass volumes
Disadvantage: decreased the quality of work, repetition of
tasks and mental stress resulting from the steadily moving
belt
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Fordist Mass Production Kondratieff
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The unionization: a special mode of regulation of
labor relations based on negotiations between
employers and unions
This led to increase in wage levels in the
industrialized world, in turn led to increased
demand for consumption goods and increased
the circle of scale economies and massproduction
Fordism: the above mode of regulation in the
labor relations and the general socio-economic
changes associated with it
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Fordist Mass Production Kondratieff
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The mineral oil: automobile depended on gasoline derived from
mineral oil, ways of cracking, cracking process providing as a
stimulus for the development of the synthetic materials: plastic
materials
Thus oil became a main source for both energy and material
input in the age of mass production
The widespread diffusion of the technological paradigm based on
oil took place in the period after 2nd WW and the same holds for
the process innovation, assembly line
The organizational changes: large conglomerate firms extended
their activities beyond with the help of developments in air travel
and telecommunications, multinational firms
New concepts: International trade and foreign direct investment
(FDI)
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Characteristics of Successive Long-waves
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Information and communication Kondratieff
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1980s & 1990s ?
Upswing:
Downswing:
Main carrier branches and sectors: computers, software
network
Key factor industries offering abundant supply at
descending price: chips (microelectronics)
Other sectors growing from small base: third generation
biotechnology products, space activities
Organization of firms: networks of large firms based on
computer, just-in-time production
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Information and Communication Kondratieff
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Limitations of previous paradigm: inflexibility of assembly line,
energy and material intensity
Solutions which new paradigm offers: electronic control systems,
networking and integration of design, production and marketing
Technological leaders: USA, Japan, Germany
Newly industrializing countries: Brazil, Mexico, China
National regime of regulation: regulation of ICT, regulation of
financial institutions and capital markets
International regime of regulation: “multi-polarity”, institutions
Features of national systems of innovation: computer networking
and collaborative research, factory as laboratory
Other sector developments: ICT, integration of services and
manufacturing in publishing, growth of information services
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Information and Communication Kondratieff
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The success of the mass production paradigm
broke down in the 1970s when growth rates
slowed down significantly
Two oil crises
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The first oil shock (1973-79)
The second oil shock (1979-83)
The technological opportunities for further
increase in the efficiency of mass production
systems were coming to an end
“productivity slowdown”
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Information and Communication Kondratieff
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In the late 1980s, the productivity slowdown turned
into a “productivity paradox”
A potential new technological revolution associated
to computers and electronics was not yielding to an
upswing: technological paradigms taking a long
period to reach their full potential
The need to connect computers to each other
forcing advances in the telecommunications sector
The convergence between the computer industry
and the telecommunications industry led to ICTs
The ICTs reached a level of diffusion and
application that gives reason to speak of a new
technological revolution beginning to shape up
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Information and Communication Kondratieff
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The organizational changes: growing importance of
networks
The early form of networking applied in Japanese firm
Toyota, “lean production” from the late 1940s
The system was aimed at reducing inefficiencies in the
assembly line process
Ohno’s system consisted of adding flexibility to the process
(also called flexible production) by
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Relying on the skills of the workers who were trained to perform a
large variety of tasks rather than a single task
A large number of suppliers for specialized parts that is a model
of networking firm (consisted of long-term ties between the
buying firm and its subcontractors)
The possibilities of networking between firms have been
facilitated with ICTs
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Diffusion of New Techno-economic Paradigm
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A new paradigm emerges in a world still dominated by
an old paradigm and begins to demonstrate its
comparative advantages at first only in few sectors
New paradigm not displace the old until the supply of the
new key factors satisfies three conditions: falling costs,
rapidly increasing supply and pervasive applications
Emerges gradually as a new type of productive
organization, brings a radical shift in engineering and
managerial common sense
Diffuses as rapidly as conditions allow and replaces the
investment pattern of the old paradigm
Also restructuring of the whole productive system
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Diffusion of New Techno-economic Paradigm
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The new techno-economic paradigm involves
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A new best-practice form of organization
A new skill profile in the labor force
A new product mix using low-cost key factor intensively
New trends in radical and incremental innovation
A new pattern in the location of investment
A tendency for new innovator-entrepreneur-type small firms
A tendency for large firms to concentrate
A new pattern of consumption goods and services
 The period of transition is characterized by deep structural
change in the economy requiring a transformation of the
institutional and social framework
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The Information Technology Paradigm
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Post-war boom technological regime
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Low cost oil and energy intensive materials
Giant oil, chemical, automobile and mass durable good
producers
Continuous-flow assembly-line turning out massive quantities of
identical units
Corporations
In house R&D
Middle range skills for labor
Expansion of the marker for consumer durables
Adaptation of the financial system
Infrastructural network of motorways, airports
Expenditure of government stimulating aggregate demand
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The Information Technology Paradigm
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Today:
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Cheap microelectronics
Developments in computers and telecommunications
Energy and material intensive inflexible mass production not valid
no longer
Information intensive productive organization with integrated
system
Electronics and information sectors
Price of getting information lower
Skill profile change from the concentration on middle-range craft
and supervisory skills to increasingly high- and low range
qualifications and from narrow specialization to broader multipurpose basic skills for information handling
Diversity and flexibility
Computer-based capital equipment
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Structural Crisis of the 1980s
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A major upheaval in all sectors of the economy and changes in skill
profile and capital stock throughout the system
Increase in instability of investment behavior
Leading-edge industries: over capacity, technology changing so out
of date capital equipment
Manufacturing and service sectors which still have growth potential
but need a change in their production processes, product mix,
management systems and skill profiles
 Possibility for the world economy to experience a depression
 Sources of instability that also prevailed in 1930s: the
international debt situation, imbalances in international
payments, weakness in agricultural prices, instability in
exchange rates, absence of an adequate system of regulating
international economy and lack of long-term vision in policymaking
 Development of new national and international “regimes of
regulation”
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