Localized product innovation: the role of proximity in the Lancastrian product space
Introduction
Economics of information has provided economics of innovation with substantial contributions, ever since its first steps. The effects of technological change are clear: the continual introduction of new products and new processes increases the relevance of the basic notion of information asymmetries, information impactedeness and moral hazard. The specific conditions in which information is generated and circulated and its acquisition costs become relevant also to understanding the determinants of technological change. The basic tools of economics of information and knowledge,1 such as bounded rationality, imperfect knowledge, information asymmetries, search and information costs can be applied systematically to explore the determinants of technological change and to understand the context in which endogenous technological innovations are generated and introduced by firms (Lamberton, 1971).2 In this context the notion of proximity in a multidimensional space plays a key role: proximity in regional space, in technical space, in product space, in technological space all matter in assessing the rate and direction of technological change.
This paper provides an extension and an application of the notion of localized technological change, traditionally applied to process innovations, to understanding the role of technological and market proximity in the introduction of product innovations. The basic ingredients of the localized technological change approach, such as the inducement context of analysis, the key role of learning and information asymmetries and switching costs associated with bounded rationality, proximity in technical space and irreversibility apply to understanding not only the dynamics of process innovations but also the role of proximity in product space and the dynamics of product innovation.
The main contribution of this paper consists in the use of a variation of Kelvin Lancaster’s (1971) concept of product space to demonstrate how the clustering of product innovations in technical and product space may be beneficial and how it affects the innovative conduct of firms. The implementation of the framework elaborated by Lancaster to analyze the choices of consumers with the analysis of the market place based upon monopolistic competition provides a context into which the role of proximity in the product space can be assessed and the dynamics of localized product innovation can be understood. In so doing the paper provides a microeconomic foundation for the analysis of induced innovations and implements it along the lines of the localized approach to analyzing technological change.3
The paper is structured as follows. Section 2 provides a preliminary discussion about the role of proximity in product innovation both from the technological and the market viewpoint. Section 3 elaborates a simple model which makes it possible to implement the basic intuition that firms are able not only to introduce innovations when facing unexpected events, but also to choose whether to introduce product or process innovations, according to the localized context of opportunities and constraints that are defined in historic time. The conclusions summarize the results and explore some implications for empirical research, innovation policy and innovation strategy.
Section snippets
The localized technological change approach: proximity and product innovation
In the localized approach technological change is the endogenous outcome of the creative reaction, to the mismatch between expectations and actual facts, of myopic firms that are not bounded to quantity–price adjustments, but are able to change also their technology in a limited technical space defined by the pervasive role of irreversibility of fixed production factors. In this tradition of analysis technological change is made possible by the continual efforts of accumulation of competence
A Lancastrian model of localized product innovation
Firms can face unexpected changes in their product and factor markets either changing their technologies or their techniques. The changes in techniques imply that the firm is able to move on a given map of isoquants. Changes in product markets can be accommodated moving from one isoquant to another on given isoclines. Changes in factor markets can be accommodated by means of changes in factor intensities on given isoquants. All changes in isoclines and isoquants engender some switching costs
Conclusion
Much empirical and theoretical work has made it possible to appreciate the strong localized character of technological change and the role of path dependence in the determination of its rate and direction.
Such analysis has paid much attention to the factors that localize technological change in the technical space, because of the role of irreversibility of the existing stock of fixed capital and the effects of learning in the accumulation of the competence and technological knowledge that are
Acknowledgements
The financial support the European Union Directorate for Research is acknowledged. This work has been developed, within the context of the Key Action ‘Improving the socio-economic knowledge base’, as a part of the project ‘Technological Knowledge and Localised Learning: What Perspectives for a European Policy?’ carried on, at the Fondazione Rosselli, under the research contract no. HPSE-CT2001-00051. Preliminary versions of this paper have been presented at seminars and workshops of the IDEFI
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