Lessons 8 - 14

Question 1

Capabilities vs dynamic capabilities?

Answer 1

Capabilities: purposeful combination of a firm’s resources that enable the firms to perform activities, such as logistics, marketing and sales, manufacturing.
The bridge between intentions and outcomes.

Dynamic Capabilities: the ability of firms to deal with change: integrate, build, reconfigure internal and external skills to address rapidly changing environments. (higher level capabilities)
Based on the three basic processes: (Teece)
-Sensing: identify opportunity.
-Seizing: R&D investments and competence building.
-Transforming: recombination and organizational change.

Question 2

What are the main views on capabilities?

Answer 2

1) Origin of capabilities, by Edith Penrose. Firms are made of tangible and intangible assets: production resources and capabilities.
2) Resource-based view of the firm: firm is made by financial, human, technical… resources. Capabilities are the way a firm can efficiently organize them.
3) The evolutionary view of capabilities: firms are repositories of knowledge embodied in organizational routines, partly tacit. Such knowledge evolves through processes of adaptation and search, which is idiosyncratic to each firm. Firms have distinctive capabilities and unique ways of doing things.

Question 3

Capabilities vs routines?

Answer 3

Capabilities have intentionality.
Routines are procedural and behavioral knowledge, “the way things are done”.
Routines are building blocks of capabilities.

Question 4

What are organizational capabilities and why are they important in representing firms?

Answer 4

Organizational capabilities (Nelson) are a set of skills, routines and complementary assets not transferable among firms.

They are:

• partly tacit
• based on procedural knwoledge
• specific to an application domain
• difficult to imitate
• they bind the range of possible actions of the firm

The are important in representing firms because they are idiosyncratic to each firm.

Question 5

Can you provide some examples of capabilities?

Answer 5

Core Capabilities: (prahalad and hamel)
capabilities at the root of organization (NEC):
Cap-> Product->Business->Final product
as opposed to the traditional view of the firmGTE):
Strategic Business Unit ->Cap->Business->Final product

Hierarchy of Capabilities, from bottom to top: Functional, Organizational, Strategic.

Integrative Capabilities: capability of integrating different pieces of knowledge (internal & external).

Dynamic Capabilities: the ability of firms to deal with change: integrate, build, reconfigure internal and external skills to address rapidly changing environments.

Question 6

What can you say about the inertiality of competences?

Answer 6

Competences have inertia: they are reluctant to change. It happened in history that firms remained focused on their core capabilities, failing to focus on new capabilities they needed to stay relevant. These became core rigidities. (KODAK)

This is why Dynamic capabilities are so important, they enable firms to adapt skills based on changing environments and develop new capabilities.

Question 7

What is the difference between competence enhancing technological change, competence destroying technological change and lock-in?

Answer 7

Competence enhancing = technological change that uses the same capabilities of the older technology paradigm.

Competence destroying = advent of a new technology where the competences of the old one are no relevant anymore. Dynamic capabilities are necessary to anticipate the change and build a timely transition to the new technology. (Sense, Seize, Transform)

Lock-in = when companies remain stuck in their own value networks, given the positive feedback of current consumers.
They can’t develop new capabilities on the side, so they are destined to be displaced by new entrants.
(IBM pc, Blockbuster)

Question 8

What is disruptive innovation and the Innovator’s dilemma?

Answer 8

The innovator’s dilemma is a book by Christensen 1997 that talks about disruptive technological innovation and its role.

A disruptive innovation is a radical innovation that displaces previous technology or practices.
They are sustaining: improving the performance of existing products.

A disruptive innovation initially underperforms existing products in mainstream markets, it has some features that appeal to a small niche of consumers. But its trajectory leads it to eventually overperform existing products and become appealing to mainstream consumers.

Question 9

In what ways do firms react to disruptive innovations?

Answer 9

• Focus on existing distinctive competences.
• Attack who threatens you.
• Innovate the same way/Imitate
• Innovate in different ways

Question 10

What are different approaches that look at industrial evolution?

Answer 10

• Industry dynamics
• Industry life cycle
• Evolution of sectoral systems

Question 11

What is industrial dynamics and discuss the characteristics?

Answer 11

Industry dynamics looks at how the industry changes over time due to the entry, exit and growth of firms in the industry.

Analysis possible due to the recent availability of large datasets about the statistics of countries and industries at firm and employee level. 1989-1994

Question 12

What are the stylized facts about industry dynamics?

Answer 12

1) Entry and exit are common (firm turnover rates = entry and exit /total firm population; 15-20% across countries
2) Entry and Exit happens mainly by small firms. (employee turnover rate) 4-12%
3) Entry and Exit are correlated – The revolving door. More entry, more exit.
4) The firms that survive, grow. (size and age data)

Question 13

Compare entry in microeconomics and entry in evolutionary theory.

Answer 13

Entry in Microeconomics: - has an Equilibrating role
- driven by prices (High prices signal
that there is profit margin. Firms
enter, supply increases and prices fall)

Entry in Evolutionary theory: Entrant increase the variety of actors in the industry by introducing new products, strategies, organizational forms and approaches. So often they bring disequilibrium and challenges to the incumbents.

Question 14

What are technological entrants?

Answer 14

Technological entrants are firms that patent a technology for the first time in a specific technology.

Question 15

What do we know about the main obstacles to innovation of young innovative firms compared to old innovators?

Answer 15

Main obstacles for young innovative firms are:

• Financial constraints. High fixed start-up costs and capital investments + Innovation Cost
• Talented advanced human capital
• Finding cooperation partners
• Lack of experience (organization, technical…)

Question 16

What are the stylized facts about spinoffs?

Answer 16

1) better performance than de-novo entrants
2) are rare in very young or very old firms
3) high performing firms generate more spinoffs
4) high performing firms generate better performing spinoffs

Question 17

What theories can explain the creation of a spin-offs

Answer 17

1) Agency theory, no sharing of information, ownership.
2) Cannibalization. new product might cannibalize company product.
3) Disagreement. Sharing of information, but it is not considered valid.
4) Rigid organization. The inventor learns in the company but leaves because the company is Rigid.

Question 18

What is an Industry life cycle?

Answer 18

Industry life cycle is a model that looks at industrial evolution and takes into account the following parameters:

• entry, exit, growth
• product and process innovation
• competition and concentration

The industry life cycle consists of:

• Emergence stage (uncertainty, variety of products, low barriers)
• Growth stage (dominant design, increase efficiency, shakeout)
• Maturity stage (no uncertainty, low innovation, high concentration)
• Discontinuity (new technology comes in and obsolete old one)

Question 19

Provide an example of industry life cycle?

Answer 19

Automotive industry:

• Start. Lots of players at beginning 21st century.
• Growth. Emergence of of 3 large producers. Japanese enter (first shakeout). High competition with product and emergence of dominant design. Increase efficiency with Ford assembly chain and mass production. Lots of exit.
• Maturity. Oligopoly.

Question 20

Give me the exceptions to the industry life cycle.

Answer 20

• Process then product (service based industries)
• product innovation only (specialized suppliers, instruments)
• Early process innovation (petrochemicals)
• joint occurrence of product and process (pharmaceuticals)
• segmentation and submarkets (lasers)

Question 21

What is industry evolution/evolution of a sectoral system?

Answer 21

Elements of a sectoral system provide a good basis for conducting industry evolution analysis.

Method of examining industries with:

• entry, exit, growth, product, process, concentration, competition
• origin of industries
• change in firms’ competences
• change of firms boundaries
• developments of network of firms
• role of institutions

It consists of:

• trigger event
• incubation stage

Question 22

What is a trigger event of a new industry?

Answer 22

Event that activates the emergence of a new industry:

• Scientific discovery
• radical innovation
• new demand segment
• Mission oriented grand challenges.

Question 23

What is the incubation stage?

Answer 23

Period between the introduction of a discontinuity and the first instance of commercialization, which will shape the industry structure and firm strategy.
In this stage there are heterogenous actors with diverse knowledge.
Lots of experimentation to reduce uncertainty.

Question 24

What are the approaches to modeling industry dynamics?

Answer 24

1) Neocalssical. Jovanovic Model.
Homogeneous product, known demand and perfect competition.
Firms differ in their efficiencies, but are uncertain about their own level of efficiency. As they enter and operate in the market, they understand their efficiency and may decide to exit or adjust their production level.

2) Evolutionary. Nelson’s and Winter model.
Are competitive industries more innovative than concentrated industries?
Depends on 4 factors affecting concentration:
1. Rate of growth of technological opportunities (basic or applied)
2. Appropriability conditions
3. Uncertainty (variance of innovative results)
4. Investment policies (aggressive or non)

Concentration is high when… (high all)

Imitation is better when there is low appropriability.
In high technological opportunity scenarios, large firms may decide to imitate, because they can produce in large scale.
IBM, fast second mover.

Question 25

Give me an example of a model of the industry life cycle.

Answer 25

Klepper model:

1. Competences->success of product
2. Successful products -> Standard products
3. Success of product -> growth -> higher market share
4. Higher market share -> Inventive to move from product to process innovation -> decrease in prices
5. Decrease in prices -> shakeout
6. Shakeout -> Increase in concentration -> Oligopoly
7. Reduction in product diversity.

Question 26

What are history friendly models?

Answer 26

History friendly models are agent based models that aim to capture in stylized form qualitative theories about factors affecting industry evolution.

Bridge between highly abstract and highly empirical models.

They are “evolutionary” models (bounded rationality, routines, learning and capabilities, historical processes, competition and selection)

Question 27

Give me an example of the history friendly model?

Answer 27

Factors affecting the evolution of the computer industry:

• cumulativeness and increasing returns along different product trajectories.
• technological and market discontinuities (transistors -> microprocessors, mainframe -> pc)
• bandwagon effect in demand (herd mentality)

1. Products are characterized by cheapness and performance.
2. Technical change is cumulative and follows specific trajectories.
3. Products and technologies.
   Model starts at z in the cheapness and performance graph.
   Trajectory is determined by:
   - R&D expenditure
   - Experience
   - distance to the frontier (and speed)
   - random element
4. Demand. Two main user groups (MF large firms and PC individuals) there is a minimum threshold of cheapness and performance in order to sell. Bandwagon effect.
   Market share is another variable.

Simulation runs.
Historical.
Counterfactuals. (what would have happened without the bandwagon effect?)
Herfindahl index shows concentration in the MF and PC industries.
(IBM would have been way less dominant, more competition)

Question 28

Neoclassical (policies from readings) vs evolutionary or system.

Answer 28

Policy making aims and policies.
Neoclassical framework. Failures to prevent with policy:
1. Science is a public good. Non rivalry consumption.
2. Basic R&D is expensive.
3. Spillovers of technology (Arrow’s paradox).
4. Indivisibility of large R&D projects. Small firms can’t do them.

Evolutionary Framework. Failures to prevent with policy:

1. Fail to generate tech opportunities.
2. Fail in accumulation of capabilities by firms.
3. Evolutionary tradeoffs:
   a. Competence traps
   b. Exploration vs Exploitation
   c. Variety creation vs selection
   d. Tight appropriability vs distributed competences

System Framework. Failures:

1. Key element is missing
2. Connections among heterogeneous agents and complementary activities are not present
3. Failure of workings of innovation system

Question 29

Three approaches to innovation policies?

Answer 29

Christopher Freeman: Japan. Public support in R&D cooperation between large firms

Henry Ergas: taxonomy on policies.

• mission oriented countries (Target: international leadership in sector, centralized policies) Usa, France, Uk
• diffusion oriented countries (target: develop distributed compentences, decrentalized) Germany, Sweden
• mission + diffusion oriented countries. Japan

Mariana Mazzucato: government should shape and open new markets (instead of only restricting).

Question 30

What is a common distinction in innovation policy-making?

What are the evidences of policies in different counties/areas?

Answer 30

All countries have adopted three types of policies:

• Science Policies
• Technology Policies
• Innovation Policies

Question 31

Demand side vs supply side policies.

Answer 31

Demand side: Adoption subsidies, Information diffusion policies, public procurement policies (government as a lead user, us department of defense).

Supply side: horizontal subsidies (all firms in economy), thematic funding (in pre-competitive area), protectionist measures (must be temporary, Financial measures (vc).

Question 32

Describe in a few words the characteristics of European Policies.

Answer 32

• Focused on specific areas and issues
• Pre-competitive
• Focus on European cooperation

Mainly: strong effort in R&D, improvement of human capital (improve public education), improvement in innovation financing (increase availability), regulation favorable to innovation (cheaper patenting, new regulation, fast standard setting)

Question 33

What are national innovation systems?

Answer 33

National innovation systems are networks of actors at national level that interact and contribute to the economic growth and international competitiveness of the nation.
They are characterized by: actors, feedbacks between actors, national institutions.

System failures might be present. Lack of actors (or competent actors), lack of connections, weak institutions.

Question 34

What are the factors at the country level that affect the performance/competitiveness?

Answer 34

Factors at country level that affect competitiveness:

a) Technology: measured with patents and quality of science
b) Capacity to exploit opportunities: education, financial system.
c) Demand: worldwide.
d) Price: unit labor cost.

Question 35

Relationship between sectoral systems and national systems?

Answer 35

Two way interaction that evolves over time.
Actors in the national system may be actors in the sectoral system as well.

Korea has specific advantages in some sectors, pushed Korean policies to be in tune with industries.

Different from Indian policies and industries.

Question 36

Why are the USA leaders in technology? What is their main strength?

Answer 36

Military and Health.

Private Markets:
High entry and exit, though selection and high growth of successful firms (financial role of VC)
Large and sophisticated demand.

Science and Universities: Top Science universities and local knowledge networks (Silicon valley)

Advance human capital, inflow of advanced human capital

Question 37

What are the main features of the European innovation system?

Answer 37

1. Heterogeneity amongst EU countries
2. R&D: medium.
3. Industry-University cooperation: strong in Germany, Sweden, Switzerland
4. Industrial structure: Large firms in UK, Ger, France.
   Entry&Rivalry: not so high in high tech
   Cooperation amongst firms.
5. Demand: medium size and medium sophistication.
6. Finance: market based, bank based. VC only in some countries.
7. Public policies: European-focused.

Question 38

What is catch-up? Why is catching up easier or harder nowadays?

Answer 38

Catch up is a process where merging countries accumulate knowledge that may differ more or less from the ones of advanced countries.

Now easier because: Internet (diffusion of information and faster communication), faster transportation, more financial opportunities(?)

Now harder because: rate of change is faster.

Question 39

What are catch-up cycles? Provide examples.

Answer 39

Catch-up cycles are a dynamic process where leading countries are often displaced by new leaders coming from emerging economies. (again and again)

They happen because there are windows of opportunity:

• Technology windows
• Demand windows
• Government windows (de-regularization)

Example: camera industry. Technological window of portable cameras, leadership change from Germany to Japan. Then new trajectory of compact system camera generated a change from Japan to Korea.

Question 40

What is the role of capabilities in catching up?

Answer 40

Windows of opportunity must be matched by positive response from firms. Firms capabilities play a major role in their ability to catch-up.

Success might even be related by the leader being stuck in the “Winner Trap”. Core capabilities that became core rigidities.

Capabilities relevant to catch-up:

• Social capability.
• National technological capability(financial resource, education, national R&D efforts)
• Absorptive capability
• Firm technological capability

Question 41

What are the main drivers of economic development as found by Fagerber and Schrolec?

Answer 41

1) Technological capabilities/Innovation system. (Indicators: patents, scientific publications, ICT infrastructure, education)
2) Governance. (IPR, working of the judicial system, regulation)

found not to be correlated with level of development:

3) Political system
4) Openness (imports and inward FDI)

Question 42

Can you say something about india and china?

Answer 42

China: has developed domestic technologies and innovative capabilities:

• major increase in R&D expenditures
• focus on growth of human capital