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Advanced purchasing, spillovers and innovative discovery

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Abstract

Advanced product development distinguishes itself by being surrounded by a “cloud of technology spillovers” available to external users in proportion to their competence to commercialize them. The local capacity to commercialize spillovers is experience based and hence more narrow than the range of innovations. The cloud will therefore be incompletely explored. While the value of the cloud to society may be greater than the development investment, the value captured by the producer is often not sufficient to make the product development privately profitable. The producer faces the property rights problem of how to charge for the dual product it develops, the product itself and as much as possible for the technology cloud. The public and private customers, however, appreciate the situation differently. While the former appears in the double customer role of being interested in both the product procured and the spillover benefits to society, the latter is not interested in paying for spillovers that only benefit society. Marketing the product, therefore, involves the ability to present a credible case for the economic value to society of the spillovers. To do that, a theory is needed that demonstrates both the user value to the customer, and the entrepreneurial capacity of the economy to commercialize the spillovers. The theoretical argument is illustrated with the case of downstream industrial business formation around Swedish military aircraft industry.

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Notes

  1. I define production to cover all value added creation in a firm, including product development. Manufacturing means factory production. Technology, furthermore, is used in the original Greek meaning of knowledge about techniques.

  2. Eliasson (2006) makes such an advanced work environment a unique competitive advantage of the industrial economies over the emerging low wage economies.

  3. For early surveys documenting the magnitudes involved, the related differences between estimated social and private rates of return and the corresponding underinvestment in private R&D, see Mohnen (1996), Eliasson (1997), Jones and Williams (1998).

  4. Mellander and Ysander (1990) use a similar method when they estimate productivity in a service sector without having access to output data. The key is the assumptions they make about the production system, that is specified such that the model has a unique neoclassical external equilibrium.

  5. For the nice mathematics behind this, see Jones (1995) and Jones and Williams (1998)

  6. See further Eliasson (2010, Technical Supplement S2).

  7. Or today, perhaps, rather the “Chinese way”.

  8. Competence bloc theory was conceived during my extensive interaction with industry people when working on Eliasson (1995), and together with my daughter on Eliasson and Eliasson (1996), where it was also first formulated. The currently most complete presentations can be found in Eliasson (2005:Ch I), Eliasson and Eliasson (2005, 2009). There is not space here to explain how a Schumpeterian type creative destruction process results in economic growth and ultimately determines the spillover multiplier. For that, see Eliasson (1996a:37ff). This is also the way endogenous growth occurs in the Swedish micro (firm) to macro model (Ballot and Taymaz 1998; Eliasson 1977, 1991a; Eliasson et al. 2004, 2005) that I use to explain how to aggregate dynamically from micro spillover cases to macro.

  9. As argued by Day (1986), this latter interdependence of demand and supply poses difficult methodological problems in economic theory.

  10. Again, to anticipate the innovation policy discussion below, there will always be a general policy argument for supporting the development of local commercialization/receiver competence to capture spillovers from public and private procurement. It is more difficult to argue generally for more advanced public purchasing, since it means arguing for a large public sector and it is by no means clear that the public purchaser is more competent as a customer than is the corresponding private one. Only if the market is not responding to a private demand, or if the product is a clear public good, will there be a rational argument for a representative public customer to step in, for instance in defense procurement. We leave this difficult issue at that here.

  11. A technical definition of the innovator makes most economic sense. It has its origin in von Mises (1949). On this, I prefer to think in terms of innovations as being generated by a technology system (Carlsson 1995) or a technology production function (Griliches 1979, 1984, 1986).

  12. cf the Griliches (1969) proposition about, and Gunnarson’s et al. (2004) results on a capital-skill complementarity.

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Authors and Affiliations

  1. KTH, 10044, Stockholm, Sweden

    Gunnar Eliasson

  2. The Ratio Institute, Stockholm, Sweden

    Gunnar Eliasson

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  1. Gunnar Eliasson
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Correspondence to Gunnar Eliasson.

Additional information

This paper draws directly on Eliasson (1995), the industrial policy discussion in Eliasson (2000) and later complementary interviews and case analyses.

Earlier versions of parts of this paper have been discussed at a Ratio Institute seminar in Stockholm, at SNF in Bergen, in my seminar at the Rio Conference of the Joseph A. Schumpeter Society 2008 and in a seminar at Case Western Reserve University, Cleveland in 2009. Very useful comments from Carl-Henrik Arvidsson, Ole Bjerrefjord, Pontus Braunerhjelm, Bo Carlsson, Richard Day, Per Heum, Dan Johansson and Nils Karlson are acknowledged.

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Eliasson, G. Advanced purchasing, spillovers and innovative discovery. J Evol Econ 21, 121–139 (2011). https://doi.org/10.1007/s00191-010-0194-0

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