Incentives and Pressures – Innovation

National demand and Competitive Rivalry:

Patterns of national demands: Those concerned to explain international patterns of innovative activities have long recognized the important influence of local demand and price conditions on patterns of innovation in local firms. Strong local demand pull for certain types of products generates innovation opportunities for local firms, especially when the demand depends on face to face interactions with customers.

In the Table we study the main factors that influence local demands for innovation and give some examples.

Factors influencing national demands for innovations:

Local buyers’ tastes>>>

1) Quality food and clothing in France and Italy
2) Reliable machinery in Germany.

Private investment activities:

1) Automobile and other downstream investments stimulating innovation in computer aided design and robots in Japan, Italy, Sweden and Germany.

Public Investment activities:

1) Railways in France.
2) Medical instruments in Sweden
3) Coal mining machinery in the UK ( < 1979).

Input prices:

1) Labor saving innovation in the USA
2) Europe – USA differences in automobile technology.
3) Environmental technology in Scandinavia
4) Synthetic fertilizers in Germany.

Local natural resources

1) Innovations in oil and gas mineral ores, and food and agriculture in North America, Scandinavia and Australia.

In addition to the obvious examples of local buyers tastes we identify:

Local (private and public) investment activities create innovative opportunities for local suppliers of machinery and production inputs where competence is accumulated mainly through experience in designing building and operating machinery.

Local production inputs prices, where international differences can help generate very different pressures for innovation (e.g. the effects of different petrol prices on the design and related competencies in automobile in the USA and Europe). High prices can also generate pressure for substitute products, like synthetic fertilizers in Germany at the beginning of the twentieth century.

Local natural resources which create opportunities for innovation in both upstream extraction and downstream processing.

A more subtle but increasing significant influence is the role of social concerns and pressure about the environment safety and governance. For example, nuclear power as a technological innovation has evolved in very different ways in countries like the USA, UK, France and Japan. Similarly innovation in genetically modified crops and foods has taken radically different paths in the USA and Europe mainly due to public concerns and pressure.

Competitive rivalry:

Innovation is always difficult and often upsetting to established interests and habits so that local demands by themselves do not create the necessary conditions for innovation. Both case studies and statistical analysis show that competitive rivalry stimulates firms to invest in innovation and change since their very existence will be threatened if they do not. A comparison by Lacey Thomas of public policies towards the pharmaceutical industries in Britain and France has shown that the former was more successful in creating a demanding local competitive environment conducive to the emergence of British firms amongst the world leaders. German strength in chemicals is based on three large and technologically dynamic firms BASF, Bayer and Hoechst rather than on one super large firms. Japanese strength in consumer electronics is based on numerous technologically active firms rather than a few giants. Relatively smaller size also reduces the severity of the task of management maintain corporate entrepreneurship. This is because managers can spend more time familiarizing themselves with the innovative potentialities of the various businesses and can thereby see the dangers of managing divisions purely through financial indicators.

Thus although corporate policy makers in large firms might often be tempted in the short term to avoid strong competition — and to reap extra monopoly profits – by merging with their competitors the long term costs could be considerable. Public policy makers should be persuaded by the evidence that creating gigantic firms does not increase innovation quite the contrary and therefore take countervailing measures. Lack of competitive rivalry makes firms less fit to compete on global markets through innovation.

Source: Managing Innovation