The Comparative Economics of Research Development and Innovation in East and West

Professor Philip Hanson, P. Hanson, K. Pavitt

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136471735
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

A systematic comparison of the institutions and incentive systems governing the processes of technological invention, innovation and diffusion in advanced market and centrally planned economies.

The Comparative Economics of Research Development and Innovation in East and West: A Survey*

PHILIP HANSON

Centre for Russian and East European Studies, University of Birmingham, UK

KEITH PAVITT

Science Policy Research Unit University of Sussex, Falmer, Brighton, UK

1. NATIONAL ECONOMIC ORGANIZATION AND TECHNOLOGICAL INNOVATION—SOME GENERAL CONSIDERATIONS

1.1. Introduction

The introduction and diffusion of new products and processes result from a variety of interrelated activities: research, development, testing, design, production engineering and production learning, investment. The organisational variety of the arrangements under which these activities are pursued within developed capitalist economies is considerable. In socialist economies the institutional setting of what we shall call research, development and innovation (RDI) activities is entirely different from that in capitalist countries. The variety of institutional arrangements for technological innovation in the developed world as a whole is therefore extremely large. The innovation process, moreover, is international in character. Every country uses products and processes the origins of which are in the RDI activities of other countries. It is therefore possible for RDI in some countries to be directed mainly to the search and acquisition, diffusion and adaptation of technologies acquired from abroad. This is generally the case in developing countries.

In all industrially developed countries whether capitalist or socialist, substantial resources are devoted to the whole range of RDI activities, including scientific and technical education, curiosity-oriented research, mission-oriented research, inventive activity and their exploitation, development, testing, production engineering, initial commercialisation and diffusion. Decisions are taken which determine the rate and direction of inventive activity, the disclosure or witholding of inventors’ results, the selection and funding of development projects and the adaptation of new products and processes for regular production.

In any country, these decisions are influenced by the national structure of economic institutions. This monograph is chiefly concerned with the impact on innovation and diffusion of features of national economic organisation that distinguish centrally administered economies, with predominantly socialised natural resources and capital, from economies in which market transactions and private resource ownership predominate, or at least are characteristic of a very large part of economic activity.

One problem of such a comparison is the inadequate analytical framework within which to embed it, since mainstream theoretical developments have been concerned mainly with static, allocative efficiency. Thus, Arrow's (1962/1971) conclusion in favour of a Soviet style organisation—with publicly funded RDI made freely available to all takers—was based exclusively on allocative criteria. Its assumption about the nature of the end product of RDI was oversimplified, since equated with infinitely and costlessly reproducible information. Recent empirical research puts this assumption into question (see for example, Rosenberg and Frischtak, 1986). Although technology does have informational and public goods components, most of it is specific to products and processes, cumulative within organisations, and a good part of it is tacit. Costs are therefore associated with both production and with use, and technology has characteristics of a private good.

Following Nelson (1977), we shall analyse how organisational features, decision rules and incentive systems related to RDI differ amongst the two main systems, and influence their capacity to generate technological alternatives, to screen them, and to adopt and improve them. We begin by considering the implications for the innovation process of several key ideas on economic organisation in a context in which the use of ‘available’ knowledge entail costs: in particular, ideas associated with the names of Friedrich von Hayek, Joseph Schumpeter, Janos Kornai, Oliver Williamson, and Richard Nelson and Sidney Winter. These writers have much in common, including a major interest in the dynamics and the institutions of economic systems, their belief in the inevitable imperfection and partialness of knowledge and information, and their mistrust of static equilibrium models assuming perfect information and considerable foresight.

Our discussion is organised around the familiar distinction between markets and hierarchies and the emphasis is on the comparative performance of national economies in technological innovation over time. This is where the evidence shows marked systemic differences, of considerable economic and political importance.

The first section concludes with a number of hypotheses about the likely characteristics of centrally administered socialist and market socialist economies as environments for RDI, by comparison with capitalist market economies. The second section describes Soviet institutions concerned with RDI and the information flows and incentives that operate in the Soviet system; it also briefly summarises departures from the Soviet model in other socialist countries, paying particular attention to Hungary. Section three draws on recent studies of the capitalist innovation process to identify characteristic East-West differences, and considers their likely welfare implications. Section four reviews empirical work on the effects of systemic differences on RDI, including various measures of RDI inputs and outputs (e.g., patents); measures of aggregate national technological progress; comparative sectoral case-studies of foreign trade and licensing: and the assimilation of imported technology. Section five briefly synthesises the results, and draws some conclusions.

1.2. Hayek and idiosyncratic knowledge

Hayek's classic paper on The Use of Knowledge in Society’ (Hayek, 1945) was a defence of the market against the claims of national economic planning. An implicit assumption in the paper is that national economic planning necessarily entails a hierarchical organisation of production, with resource-allocation decisions made in the upper levels of the hierarchy. Hayek's crucial argument about information was not directed specifically to the question of technological innovation. He did, however, draw attention to the importance of economic change in general, and its is clear that he had in mind change that is not reliably predictable.

According to Hayek, the general advantage of the market over planning is that it leaves resource allocation decisions to the buyers and sellers on particular markets, who can make the best use of the imperfectly available ‘knowledge of the particular circumstances of time and place.’ Such knowledge cannot, Hayek argues, be passed to a single centre for centralised decision-making without distortion and the loss of important detail: in other words useful economic information is not a free good, and the market is the institutional device which is best at economising on the administrative costs associated with its use. More recently, Pelikan (1986), has suggested that Hayek's argument holds when “knowledge of a particular time and place” is tacit, uncodifiable and incapable of complete communication.

1.3. Postulated advantages of central planning

Hayek's proposition, which only Marxist and neo-classical economists could ever have found surprising, is an important element in all subsequent writings about economic behaviour in hierarchies and markets. With respect to performance in technological innovation, however, the Hayekian argument about the best use of information does not deal with the following issues:

i) Central planning or some other form of social-interest regulation of the innovation process may generate gains by allowing for discrepancies between social and private costs and benefits, i.e., by incorporating externalities; these may be greater than the costs arising from the information losses which central planning entails.

ii) Even with the private sectors of modern mixed economies, there are substantial activities where transactions are conducted within hierarchies rather than through markets. In particular, industrial research and development (R and D) is organised as an in-house activity rather than contracted out to specialist research groups whose services are purchased on the market (for an assessment of the influences involved, see Mowery, 1983). This observation amounts to prima facie evidence that hierarchical arrangements have some advantages for the survival of firms operating within what is at the same time a broader market environment. It may be that the difference in scale between a corporation and an entire national economy makes a critical difference to the working of hierarchies, but this cannot be assumed a priori.

To begin with, the familiar notion that central planning may have advantages over the market with respect to externalities, clearly constitutes an a priori argument in favour of planning. In the innovation process, it is commonly argued that externalities may be large. Uncertainty surrounds the expected returns to resources allocated to research and invention; the marginal benefits created by an invention often cannot be fully appropriated by the inventor; there are apt to be indivisibilities in the use of information. In practice, patents, commercial secrecy and the market advantages attached to early use of a new technology, enhance the potential returns to invention and innovation, and ensure that technology is in general far from being a public good. Nonetheless, a number of empirical studies of innovations have indicated that the social returns to invention and innovation often do exceed the private returns (see Scherer, 1980, Chapter 16; Mansfield et al., 1977).

If a highly centralised national regime for decision-making in the RDI process were able to secure social benefits which decentralised regimes could not, it might be expected to do so in three main ways.

a) By giving more weight to the interests of future generations and therefore allotting a larger share of resources to investment in scientific and technical education, in research and development and in productive physical assets. The importance of the last of these lies in the fact that, with a given rate and composition of inventive activity and a given initial size and age-composition of the physical capital stock, and on the assumption of embodied technology change, a higher rate of net investment will generate a more rapid diffusion of new technology. This proposition also requires that new investment should in general embody best-practice technology—a plausible general assumption but one which, as will be seen, may not be made with equal assurance for different economic systems.

b) The branch allocation of investment, including RDI inputs, might be more effectively guided towards a high national rate of technological advance under centralised economic administration, insofar as the central planners could allow for inter-branch linkages the benefits of which would not be appropriated by innovating firms; and insofar as central administration could better enforce any plans which incorporated such externalities. In other words, the centralised imposition of priorities might make for more successful national industrial policies than can be secured by the economic levers available to governments in Western mixed economies.

c) A regime of central control might be better able to harmonise technological change with the provision of public goods (e.g. preservation of the countryside, avoidance of regional strains on social infrastructure).

The argument that central planning may cope relatively well with externalities, therefore, directs attention to the relative performance of countries with different economic systems in (a) the growth of human and physical capital over time; (b) the implementation of what is commonly described as ‘industrial policy’, and (c) minimising the negative side-effects of technological change on public goods.

1.4. Schumpeter, monopoly rights and the entrepreneurial function

Hayek's ‘market’ is by implication imperfect but in some sense competitive but he had little to say about specific market structures. Joseph Schumpeter drew attention to the advantages of a degree of monopoly in fostering rapid technological and productivity advance (Schumpeter, 1946, esp. pp. 73–107). This did not stem from legally entrenched or otherwise secure long-term monopoly; it was market power limited by the threat of market entry by new competitors, and particularly by new competitors with radically new products and processes. The element of organisational slack or relatively high profits (or both) associated with monopoly facilitated expenditure on R and D. The lure of ‘spectacular prizes’ in the form of monopoly profits to be obtained from being first with a successful new product or process encouraged entrepreneurial risk-taking in RDI. It had this effect, according to Schumpeter, even though many entrepreneurial innovations proved to be unsuccessful and therefore unprofitable.

Schumpeter's ideas are important for any consideration of the relationship between economic systems and innovation. His theory of the innovation process is deliberately presented as an analysis of the economic workings of capitalism: ‘Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary’ (p. 82). He treated entrepreneurial profit-seeking as the motive power behind technological change, and envisaged the eventual replacement of capitalism by socialism as a peaceful transition brought about precisely by ‘the obsolescence of the entrepreneurial function.’ At high levels of technological sophistication, people's desire for further technological change would in any case become routinised and predictable. As a result, entrepreneurial profit would vanish and non-entrepreneurial, non-dynamic, socialist ownership would emerge in the industrial sector.

The possibility that a socialist economy might also be a decentralised, market ecconomy is one that Schumpeter scarcely entertained. In any case, he treated socialist economic institutions as incompatible with anything but slow, ‘routinised’ and predictable technological change. Schumpeter's approach is not, in this respect, in conflict with that of Hayek: Hayekian imperfection of economic information is necessary to Schumpeterian entrepreneurial profit; for both authors, some form of market competition is needed (though only for the time being, so far as Schumpeter is concerned) to generate economic progress. Schumpeter's writings do, however, suggest four further questions for any assessment of the capacities of different economic systems for innovation.

a) Is the lure of high material rewards a necessary condition for radical, unpredictable technological advances?

b) Can a socialist economy provide such rewards, or some other stimulus of equivalent effect?

c) Can market socialism, with or without worker-managed firms, provide stimuli to technological entrepreneurship which a centrally administered socialist economy cannot?

d) If, as Schumpeter implies, the answer to a) is yes and the answer to b) and c) is no, does international technology transfer allow socialist economies to secure rapid technological advance by routine and predictable assimilation of new technologies developed in capitalist countries?

1.5. Kornai and budget constraints

Further insight into innovation under different economic systems can be obtained from the writings of the Hungarian economist, Janos Kornai (especially Kornai, 1980). Kornai's theory of ‘the shortage economy’ is prompted by observations of economic behaviour in Eastern Europe, though its application is not limited to the Soviet, East European and other socialist economies. Kornai distinguishes between the economic behaviour of enterprises subject to hard budget constraints (HBC) and enterprises subject to soft budget constraints (SBC). (It might be argued that nations are, in general, HBC entities. The assumption made by Kornai and by the present authors, however, is that the prime determinants of the innovation performance of nations are to be found at the micro-economic level.) Degrees of hardness and softness are allowed for in the analysis; nevertheless there is a dividing line between (in crude summary) an HBC enterprise which in the long run has either to cover its costs by its efforts on the market or cease to exist (ie be taken over or declared bankrupt), and an SBC enterprise which can have some confidence that appeals to a superior or patron institution will if necessary produce funds to bail it out of financial difficulties (see especially Kornai, 1985, for an emphasis on the importance of this hierarchical setting for SBC enterprises). He provides strong grounds for treating the hard/soft budget distinction as something that is intimately bound up with system and not, as is sometimes suggested, as a matter of policy.

The difference in economic behaviour between SBC and HBC enterprises has strong implications for technological change. The HBC enterprise has powerful and continuously operating incentives to increase sales revenue and economise on total input costs. These incentives will be blunted by monopoly power, but if Schumpeterian (market entry) competition is a possibility, there should still be limits to the amount of organisational slack that is compatible with survival. The SBC enterprise, on the other hand, has much weaker incentives to increase revenue and economise on inputs. Both product and process innovation will therefore, other things equal, be treated as much less compelling pursuits by the SBC enterprise. In an earlier work, before his analysis of the shortage economy was fully developed, Kornai also drew attention to the almost totally capitalist market provenance of radical and epoch-making innovations (Kornai, 1971, chapter 20).

The hard/soft budget distinction, it is true, does not correspond exactly with the distinction between capitalist and socialist economies. Public-sector organisations in the West will tend to be subject to soft budget constraints. So will private firms which have reliable access, for whatever reason, to government favours. So, too, within the limits set by the constraints on the firm as a whole, will sub-units within larger business firms. There must, however, be a very strong presumption that SBC behaviour is characteristic of enterprises in a centrally-administered socialist economy. Such behaviour may also be hard to avoid even in market socialist economies, so long as the state is perceived as responsible for protecting the continued existence of socially owned enterprises and the individual jobs attached to them. More generally, the organizational adaptability expressed in the creation, growth and demise of production units may tend to be low in the absence of private enterpreneurship (Balcerowicz, 1985). At least in the private sector of a Western mixed economy, there must be a strong presumption that economic behaviour will generally be strongly conditioned by hard budget constraints.

The SBC enterprise lacks one powerful incentive, in particular, to introduce new products and processes, which its HBC counterpart will clearly have: the need for imitative and defensive innovation if the firm is to stay in business against innovating competitors. Thus, even if Schumpeterian rewards are available as a stimulus for inn...

Table of contents

• Front Cover
• Half Title
• FUNDAMENTALS OF PURE AND APPLIED ECONOMICS
• Title Page
• Copyright
• Title Page
• Copyright
• Contents
• Introduction to the Series
• 1. National Economic Organization and Technological Innovation—Some General Considerations
• 2. Institutional Characteristics of Research, Development and Innovation in the USSR: An Outline
• 3. Structural Similarities and Differences between East and West
• 4. RDI Inputs and Outputs
• 5. Synthesis and Conclusions
• References
• Index