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Towards an evolutionary complexity of endogenous innovation

The Economics of an Emergent System Property

Cristiano Antonelli

This chapter implements an evolutionary complexity approach that builds on the legacy of Schumpeter (1947) with the notions of: i) reactive decision-making; ii) multiple feedback; iii) innovation as the outcome of an emergent system process rather than individual action; iv); organized complexity and knowledge connectivity; iv) endogenous variety; and vi) non-ergodic path-dependent dynamics. Building on these bases, the chapter articulates an endogenous theory of innovation centred on analysis of the systemic conditions that make the creative reaction, and hence the introduction of innovations, possible.

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Cristiano Antonelli

Technological congruence is an emergent system property defined by the match between the relative size of output elasticity and the relative abundance and cost of inputs in local factor markets. With given total costs, output is larger the larger is the output elasticity of the cheapest input. Technological congruence is a powerful tool that helps in grasping the economic complexity of technological change with respect to determinants of the direction of technological change and its effects in terms of growth accounting and specialization, both at the firm and the system level. Its appreciation stems directly from advances in the economics of innovation in understanding the endogenous determinants of the introduction and diffusion of directed technological changes. Technological congruence is most relevant to influence the actual levels of total factor productivity of new technologies and, consequently, to shape the competitive advance of firms and countries.

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Standing on the shoulders of giants

The Economics of an Emergent System Property

Cristiano Antonelli

This chapter highlights the limits of current approaches to the economics of innovation. It also stresses their role in articulating a theory of innovation as an endogenous process that relies upon the characteristics of the system in which the response of firms to unexpected mismatches in both labour and factor markets takes place. The role of Marshallian contributions to Schumpeterian thinking is stressed.

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Cristiano Antonelli

This chapter accommodates in the Schumpeterian frame of the creative response recent advances in the economics of innovation, technological change and knowledge to articulate a comprehensive model of Schumpeterian growth. Schumpeterian rivalry in product markets engenders mismatches in product markets and the consequent flows of R & D expenditures. Knowledge appropriability declines over time so that additional knowledge piles up, increasing the stock of public knowledge. Because of knowledge indivisibility – articulated in knowledge complementarity, exhaustibility, cumulability and transient appropriability – knowledge externalities are diachronic. Diachronic externalities stemming from the stock of public knowledge favour the generation of new technological knowledge, the search for technological congruence and the consequent reduction in the cost of knowledge. The secular decline in the cost of technological knowledge induces the creative reaction of firms, the search for higher levels of technological congruence and the consequent introduction of biased technological changes that augment the output elasticity of knowledge as an input. Knowledge cumulability and induced technological change account for the secular trend towards the knowledge economy.

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Cristiano Antonelli

This chapter elaborates a Schumpeterian version of the H–O model (S–H–O) based on the hypothesis that technological change is endogenous and biased towards the most intensive use of production factors that are locally most abundant in comparative terms. In the standard H–O model, the differences between trading partners in the levels of the output elasticity of inputs and technological change are exogenous. The (S–H–O) model rests on the Schumpeterian notion of the creative response of firms which, caught in out-of-equilibrium conditions by the changing conditions of both factor and product markets, try to react by introducing biased technological changes directed towards the most intensive use of inputs that are locally most abundant in relative terms. The actual introduction of technological innovations, however, will depend on the availability of appropriate knowledge externalities. According to this framework, countries exposed to the out-of-equilibrium conditions engendered by enhanced globalization react with the introduction of new technologies biased towards the intensive use of technological knowledge as the most abundant and specific input. Technological knowledge in fact is characterized by its strong collective and systemic character that limits its dissemination and use outside its context of origin.

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A new framework of innovation and knowledge policy

The Economics of an Emergent System Property

Cristiano Antonelli

This chapter highlights the implications of the analysis carried on through the book for a new knowledge and innovation policy framework that includes support for the dissemination and secondary use of external knowledge alongside traditional policies focusing the support to appropriability and the provision of incentives for the generation of new knowledge. The role of telecommunications infrastructure, regulation and policy as a tool for a new knowledge policy is stressed.

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Cristiano Antonelli

Building on Schumpeterian and the Marshallian legacies, this chapter elaborates a model of endogenous growth. It provides a systemic explanation for the levels and rates of total factor productivity growth. The generation of technological knowledge consists in the recombination of existing items of heterogeneous technological knowledge that are necessarily possessed by a myriad of agents. As such, much technological knowledge is external to each agent, and yet an essential input. In this context knowledge governance mechanisms play a key role in the identification, recollection and provision of the specific items of necessary technological knowledge external to each agent. Effective knowledge governance mechanisms engender pecuniary knowledge externalities that take place, mainly at the regional level, when and where existing units of external knowledge can be identified, accessed, unbundled and reused at costs that are below equilibrium for the recombinant generation of new technological knowledge.

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The knowledge appropriability trade-off

The Economics of an Emergent System Property

Cristiano Antonelli

This chapter explores the full range of effects of knowledge properties, and explains how properties such as transient appropriability, non-exhaustibility and indivisibility have both negative and positive effects. Knowledge externalities help reduce the cost of knowledge, and imitation externalities reduce revenue from and profitability of innovations. Their effects need to be considered jointly in a single analytical framework. An analysis of their combined effects questions the scope of application of the Arrovian postulate. Policy implications suggest that, along with public interventions designed to support the supply of knowledge and compensate for missing incentives, much attention should be paid to all interventions that favour the dissemination of knowledge, knowledge connectivity of the system and selective support for high-quality research projects.

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Innovation as an emergent system property

The Economics of an Emergent System Property

Cristiano Antonelli

This chapter summarizes the results of Part I and stresses the interdependence between the evolution of properties of the system and the creative reaction of firms.

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Innovation as a creative response

The Economics of an Emergent System Property

Cristiano Antonelli

The chapter uncovers the merits of the essay ‘The creative response in economic history’ published by Joseph Alois Schumpeter in the Journal of Economic History in 1947 and ‘almost’ forgotten since then. Correct appreciation of this contribution is important for two reasons. First, it enables us to better understand the evolution of Schumpeter’s thinking. The 1947 contribution should be regarded as the final attempt to provide a synthesis of his evolving approaches to understanding the origins, causes and consequences of innovation in economics and in the economy. Second, the 1947 essay portrays innovation as the result of a creative reaction conditional on the context in which it takes place, anticipating the notion of innovation as an emergent property of system dynamics.