SID AND OUR UNDERSTANDING OF THE EVOLUTION OF INDUSTRIES .

ICRIOSThe Invernizzi Center for Research on Innovation, Organization, Strategyand EntrepreneurshipSIDAND OUR UNDERSTANDING OFTHE EVOLUTION OF INDUSTRIESFranco Malerba

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SID and the evolution of industriesThis topic is a long-standing area of interest for Sid.His interest derives from: His work with Dick Nelson His reading of Schumpeter The Theory ofEconomic Development (1934) andCapitalism, Socialism and Democracy (1950) His long-standing focus on the links between firm entry, growthand heterogeneity and the dynamics of industrial concentrationICRIOSThe Invernizzi Center for Research on Innovation,Organization, Strategy and Entrepreneurship3

Sid forcefully moved into the analysis ofindustry evolution in 1984Sidney G. Winter Schumpeterian competition inalternative technological regimes JEBO 1984 Focuses on Schumpeterian competition Draws a distinction between new firms and established firms Highlights the role of technological contextSid identifies two regimes: entrepreneurial and routinizedICRIOSThe Invernizzi Center for Research on Innovation,Organization, Strategy and Entrepreneurship4

In JEBO (1984) Sid writes the following:The addition of the entry model to the simulation modelpreviously used (i.e. Nelson and Winter, 1982) opens theway to comparison of simulated industry histories withactual industry histories, and perhaps, therefore, toexplanations of some quantitative patterns noted in thelatter. This present paper is only a beginning along thisline of enquiry. (Winter 1984, pg. 289)ICRIOSThe Invernizzi Center for Research on Innovation,Organization, Strategy and Entrepreneurship5

YEARSLATER ICRIOSThe Invernizzi Center for Research on Innovation,Organization, Strategy and Entrepreneurship6

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What are history-friendly models?History-friendly models are evolutionary models: firms areboundedly rational agents; their behavior is guided by routines;learning is a key process; heterogeneity of firms and theircapabilities characterize an industry.History-friendly models are agent based simulation models whichaim to capture in stylized form qualitative theories aboutmechanisms and factors affecting innovation and industryevolution. These mechanisms and factors are put forth byempirical research and appreciative theorizing.ICRIOSThe Invernizzi Center for Research on Innovation,Organization, Strategy and Entrepreneurship8

Why the need for history-friendly models?There are a lot of in-depth studies and histories of the evolution ofparticular industries which show:a) the importance of several factors (firms’ learning, capabilitiesand strategies, technology, demand, institutions ), thecomplex interaction among these factors and the role offeedbacks, dynamics and co-evolutionary processes.b) major differences across industries.On the basis of these studies, appreciative theories have beendeveloped regarding factors and mechanims at work in theevolution of industries.But there is the need to complement these appreciative theorieswith more formal and coherent models that explore, test andsharpen appreciative theories.ICRIOSThe Invernizzi Center for Research on Innovation,Organization, Strategy and Entrepreneurship9

How are these models different from the earlier-generationof evolutionary models?The first-generation of evolutionary models (Nelson and Winter,1982, Dosi et al. 1995, Winter et al. 2000 and many others) aim toshow that stylized economic phenomena can be generated byevolutionary processes.They are at a fairly high level of generality, aggregation andabstraction and aim at a rough consistency with stylizedcharacterization of economic phenomena.Earlier generation of evolutionary models do not focus on thespecificities and differences in industrial contexts, on the role ofthe variety of actors that affect innovation and on the complexevolution of industries. History-friendly models do.ICRIOSThe Invernizzi Center for Research on Innovation,Organization, Strategy and Entrepreneurship10

How to develop a history-friendly modelStep 1. Study of the characteristics of the phenomenon underexaminationIdentification of the main features to be analyzedDevelopment of the appreciative theoryStep 2. Building of the modelStep 3. Running and calibration of the model, examination of theresults and sensitivity analysisStep 4. Test for different outcomes by making changesin the parameter values of some key variablesICRIOSThe Invernizzi Center for Research on Innovation,Organization, Strategy and Entrepreneurship11

Factors affecting the evolution of specific industriesfrom the 2016 bookThe computer industry (1950-1985) Cumulativeness and increasing returnsalong different product trajectoriesTechnological and market discontinuitiesBandwagon effects in demandEmergence and consolidation of concentration in some productsegments, entry and competition in others, depending on the levelof bandwagon effects.ICRIOSThe Invernizzi Center for Research on Innovation,Organization, Strategy and Entrepreneurship12

Industry Specificities (2)The pharmaceutical industry (from the early period to molecularbiology) Low cumulativeness oftechnological advance Technological regimeswith IPR and imitation Fragmented demandGeneration of low level of overall concentration, with higher levelof concentration in individual market segments.Coexistence of large innovators and small imitators.ICRIOSThe Invernizzi Center for Research on Innovation,Organization, Strategy and Entrepreneurship13

Industry Specificities (3)The co-evolution of the semiconductorand computer industries (1950s-1985) High technological opportunity Major technological and marketdiscontinuities Vertically linked industriesSpecialization and verticalintegration as co-determinedby the dynamics of capabilities,technology and firm sizein the upstream and downstreamIndustriesICRIOSThe Invernizzi Center for Research on Innovation,Organization, Strategy and Entrepreneurship14

So, are history-friendly models suitableonly for examining the evolution of specific industries?No.History-friendly models may be used also to identify and examinegeneric mechanisms that drive industry evolution:- firm growth and changing industry structure- innovation and increasing returns- technological regimes and demand regimes- .and to explore more general issues relevant for broader contexts orthat cut across different industries:- entry- public policy .ICRIOSThe Invernizzi Center for Research on Innovation,Organization, Strategy and Entrepreneurship15

Which way forward?Here is my set of idyosincratic challenges Use HFMs to Investigatethe evolution of other industries-Traditional industries-Services . Examine the working of sectoral systemsThis means looking at the co-evolution of- knowledge and technology- actors (focal firms, users, universities.)- and institutionsICRIOSThe Invernizzi Center for Research on Innovation,Organization, Strategy and Entrepreneurship16

The way forward (2) Examine the performance of alternative firm strategies in theevolution of an industry Look at the co-evolution of two verticallyrelated industriesICRIOSThe Invernizzi Center for Research on Innovation,Organization, Strategy and Entrepreneurship17

The way forward (3) Link the emergence and performanceof spinoffs to their sectoral contexts Examine the catching-up by firmsfrom emerging economies in specificindustriesICRIOSThe Invernizzi Center for Research on Innovation,Organization, Strategy and Entrepreneurship18

And so many other interesting topics to be examined byhistory-friendly models!ICRIOSThe Invernizzi Center for Research on Innovation,Organization, Strategy and Entrepreneurship19

These challenges can be met if we follow Sid’s fundamental principlesof evolutionary economics1. Realism2. Dynamic first3. No free calculation4. Firms are profit seeking5. Innovation is always an option6. Firms are historical entities7. Firms are repositories of productive knowledge8. Progess is co-evolutionary9. Anything can happen for a whileICRIOSThe Invernizzi Center for Research on Innovation,Organization, Strategy and Entrepreneurship20

Bandwagon effects in demand Emergence and consolidation of concentration in some product . and computer industries (1950s-1985) High technological opportunity . by the dynamics of capabilities, technology and firm size in the upstream and downstream Industries . ICRIOS 15 The InvernizziCenter for Research on Innovation, Organization .