Simulation models of technological innovation: A Review

The use of simulation modelling techniques in studies of technological innovation dates back to Nelson and Winter''s 1982 book "An Evolutionary Theory of Economic Change" and is an area which has been steadily expanding ever since. Four main issues are identified in reviewing the key contributions that have been made to this burgeoning literature. Firstly, a key driver in the construction of computer simulations has been the desire to develop more complicated theoretical models capable of dealing with the complex phenomena characteristic of technological innovation. Secondly, no single model captures all of the dimensions and stylised facts of innovative learning. Indeed this paper argues that one can usefully distinguish between the various contributions according to the particular dimensions of the learning process which they explore. To this end the paper develops a taxonomy which usefully distinguishes between these dimensions and also clarifies the quite different perspectives underpinning the contributions made by mainstream economists and non-mainstream, neo-Schumpeterian economists. This brings us to a third point highlighted in the paper. The character of simulation models which are developed are heavily influenced by the generic research questions of these different schools of thought. Finally, attention is drawn to an important distinction between the process of learning and adaptation within a static environment, and dynamic environments in which the introduction of new artefacts and patterns of behaviour change the selective pressure faced by agents. We show that modellers choosing to explore one or other of these settings reveal their quite different conceptual understandings of "technological innovation".economics of technology ;

The Self-Organisation of Innovation Networks

This paper explores the self-organising principles of horizontally-integrated innovation networks. It isshown that such networks can self-organising in environments where the co-ordination and production ofnew knowledge is itself a complex, dynamic and highly non-linear processes. The paper argues thedevelopment of a self-organisation perspective of innovation networks has two advantages. First, itprovides a general framework of dynamic systems in which different strands of a highly fragmentedliterature can be drawn together. Second, formal self-organisation modelling techniques can provideinteresting new insights into the micro-macro processes driving dynamic innovation systems.Section 1 of the paper identifies the four key principles of self-organisation: local interaction, non-linearity,thermodynamic openness and emergence. Section 2 discusses important complementarities between self-organisationtheory and the ‘new’ theory of innovation, with the latter’s emphasis of the systemic nature ofknowledge production within innovation networks containing multiple private and public institutions thatare connected in highly complicated and non-linear ways. This paves the way for a formal model of self-organisinginnovation networks presented in section 3. Section 4 discusses the main properties of theoutputs generated by the model and its novel insights, section 5 summarising and considering the potentialadvantages for current and future research offered by the self-organisation approach.research and development ;

Back from the brink: Microsoft and the strategic use of standards in the Browser Wars

The browser wars are probably the best-chronicled standards competition in recent history. Yet the standard lock-in model does not readily account for the dramatic change in fortunes of Microsoft. At one time it seemed that Microsoft would be go the way of IBM before it and fail to catch the next technological wave in the computer industry. However Microsoft managed to capture the browser market, overturning Netscape''s initial domination of the market. In seeking to understand this dramatic return of events, the paper begins by outlining the key elements of the Arthur model. This is followed by a historical narrative of the browser wars that highlights three aspects of this technological competition; firms'' strategic use of standards, users'' considerations of initial set-up costs, and the degree of interconnectivity between product markets. The paper finally considers how the standard lock-in model may be extended in order to encompass these dimensions.economics of technology ;

Technological diffusion, welfare and growth: technological succession in the presence of network externalities

The paper examines the conditions under which technological successions can occur in the presence ofnetwork externalities. A multi-agent model is developed in which the product designs offered by firmsco-evolve with consumer preferences. Firms compete though product innovation. The modelincorporates a modified genetic algorithm (GA) in which imitation is conducted via a process ofselective transfer (a one-way crossover) and internal R&D is conducted via selective mutation.Following an initial period in which old technology firms develop their designs and networkexternalities accrue, a technological shock occurs in which new technology-based firms enter themarket. The findings of the model indicate that a necessary condition for a technological successionare the existence of at least one consumer group that champions the new technology, developing newpreferences for its characteristics. Further, the introduction of novel characteristics are have a greaterbearing on the probability of a succession than incremental gains in characteristics offered by the oldtechnology. Third, the analysis identifies an inverse relationship between time the probability of atechnological succession.economics of technology ;

Knowledge-intensive services and international competitiveness: a four country comparison

The nature and consequences of services innovation remains a woefully under-researchedtopic. The paper calls into question two statements that are frequentlyrepeated in the political-economic discourse on services. The first concerns thesuggestion that Germany is a ‘services laggard’ that needs to restructure its domesticeconomy if it is to remain internationally competitive. By contrast, the UK is frequentlyheld up as an example of a successfully restructured ‘services economy’. The paperdraws an important distinction between the quantity of services in a domestic economyand the degree of connectivity between services and other economic activities. Thelatter, it is argued, is far more important in determining the size of spillovers fromservices innovation enjoyed within a domestic economy and, hence, to internationalcompetitiveness. Particular attention is paid to the role and impact of knowledge-intensiveservice sectors in this regard. In addition to the UK and Germany, data isdrawn from the Netherlands and Japan. Using these four comparative cases we explorethe distinction between a high representation of services in the domestic economy, andthe innovation spillovers facilitated by a high degree of connectivity between servicesand other economic sectors within a domestic economy.economic development an growth ;

Neo-Schumpeterian Simulation Models

The use of simulation modelling techniques by neo-Schumpeterian economists dates back to Nelson and Winter’s 1982 book “An Evolutionary Theory of Economic Change”, and has rapidly expanded ever since. This paper considers the way in which successive generations of models have extended the boundaries of research (both with respect to the range of phenomena considered and the different dimensions of innovation that are considered), and while simultaneously introducing novel modelling techniques. At the same time, the paper will highlight the distinct set of features that have emerged in these neo-Schumpeterian models, and which set them apart from the models developed by other schools. In particular, they share a distinct view about the type of world in which real economic agents operate, and a invariably contain a generic set of algorithms. In addition to reviewing past models, the paper considers a number of pressing issues that remain unresolved and which modellers will need to address in future. Notable amongst these are the methodological relationship between empirical studies and simulation (e.g. ‘history friendly modelling’), the development of common standards for sensitivity analysis, and the need to further extend the boundaries of research in order to consider important aspects of innovation and technical change.macroeconomics ;

Factors affecting the adoption of intranets and extranets by SMEs: a UK study

The adoption of intranets and extranets involve major organisational innovation. Intranets alter the flows and content of internal communications, while extranets alter communications between the firm and its clients and suppliers. The paper identifies a number of potential factors that may affect adoption. These include internal and external business drivers, the role of the CEO/owner, firms’ absorptive capacity, firm size amongst SMEs, and business activity. Neither the relative size nor the business activities of SMEs have been considered in previous studies. Logit regressions are run on factors influencing the adoption of intranets and client extranet for a sample of 164 UK SMEs. The findings challenge two oft-stated views. First, that ICT adoption in SMEs depends on the CEO/owner being the ICT decision-maker. The findings clearly indicate that adoption is positively related to firm size. Larger sized SMEs firms have more complex organisational structures in which a specialist manager – typically holding the title ‘IT Manager’ – is the key decision-maker on ICT investments. Adoption depends on the quality and drive of these managers, not the CEO/owner. Second, the myth that services are technological laggards is clearly exposed. Knowledge intensive service firms, not manufacturing firms, are the champions of extranet technologies in this sample. In addition, both knowledge intensive service and manufacturing SMEs are key champions of intranet adoption. Expansion of national, not global, market share is the most important strategic objective identified in the study. The ability to integrate previously separate ICT systems is another important factor for intranet adopters. The results differ with respect to external customer and competitor pressure. These are found to be important in intranet adoption but not in extranet adoption. Only very weak support can be identified for the importance of absorptive capacity. A clear problem remains with regards to identifying a clear set of instruments with which to test for absorptive capacity.economics of technology ;

Networks, Noise and Navigation: Sustaining Metcalfe’s Law through Technological Innovation

The paper examines the relationship between network externalities and the value ofthe World-Wide Web. It is shown that value depends on two offsetting effects. First,as the Web grows in size, so existing users gain from the additional content providedby new users. This is the standard concept of a network externality. However, at thesame time, a large and expanding network can suffer from congestion. Congestioncan manifest itself in the time taken to download information from the Web. But anarguably more important problem is navigating the very large number of webpages onoffer and to identify the particular page containing information that is of interest.These navigation issues have serious implications for the continued growth of theWeb, as described by Metcalfe’s Law.economics of technology ;

Empirical Validation of Agent Based Models: A Critical Survey

This paper addresses the problem of finding the appropriate method for conducting empirical validation in agent-based (AB) models, which is often regarded as the Achilles’ heel of the AB approach to economic modelling. The paper has two objectives. First, to identify key issues facing AB economists engaged in empirical validation. Second, to critically appraise the extent to which alternative approaches deal with these issues. We identify a first set of issues that are common to both AB and neoclassical modellers and a second set of issues which are specific to AB modellers. This second set of issues is captured in a novel taxonomy, which takes into consideration the nature of the object under study, the goal of the analysis, the nature of the modelling assumptions, and the methodology of the analysis. Having identified the nature and causes of heterogeneity in empirical validation, we examine three important approaches to validation that have been developed in AB economics: indirect calibration, the Werker-Brenner approach, and the history-friendly approach. We also discuss a set of open questions within empirical validation. These include the trade-off between empirical support and tractability of findings, the issue of over-parameterisation, unconditional objects, counterfactuals, and the non-neutrality of data.Empirical validation, agent-based models, calibration, history-friendly modelling