Localized Technological Change in Italy
Chapter 7: A Model of Localized Technological Change Cum Pecuniary Knowledge Externalities
7.1 THE BASIC MODEL We can now put together in a simple model all the elements that have been introduced so far. Let us assume that a myopic firm or a group of myopic firms has made plans and set the basic conditions of their production process selecting the levels and combination of inputs according to the expected conditions of product and factor markets. These firms are characterized by substantial bounded rationality that impede longterm foresight. Their production factors are characterized by substantial irreversibility: all changes both in the mix and in the levels require dedicated resources and are expensive. Then, unexpected changes in product and factor markets engender a reaction. Their reaction can be either passive or creative, according to the conditions of access to external knowledge, an indispensable input into the generation of new technological knowledge. More specifically, we argue that firms, stirred by unexpected events, constrained by the irreversibility of their production process, hence localized in terms of competence, production mix and levels of inputs, and by the historic path through which they have defined their conditions at each point in time, will be able to introduce technological innovations that actually increase the overall efficiency of their production process, only if the system into which they are localized provide them with access to pools of external knowledge at costs that are lower than equilibrium ones. Let us assume that the production process is characterized by substantial irreversibility: the firm can change only a portion of the 51...
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