Routinized innovations - dynamic capabilities in a simulation study

Already Joseph Alois Schumpeter (1942) emphasized that innovative activities of firms are to be considered as active and intended search processes for new technological possibilities and opportunities rather than solely accidental events. A prominent characteristic of this process, emphasized by modern innovation theory, is the unpredictability of the respective research results because of the inherent uncertainty of innovations. On the one side, firms try to find new technical solutions in their production process with ex-ante not-anticipated consequences. On the other side, new discoveries external to a firm often open up totally new combinations of different and seemingly unrelated technology fields. Therefore, modern innovation theory has to dismiss with the neoclassical vision of perfectly informed, rational actors able to optimize their behaviour. Innovative activities are characterized by imperfect information and heterogeneous capabilities of firms. There is not only one practiced technology and one production set, there even exist 'fuzzy edges' between different solutions. The concept of 'procedural rationality' (Simon, H. (1976), Dosi, Egidi (1991)) seems to be better suited to deal with the phenomenon of innovations in such a complex process. One approach based on a concept of limited rationality, is the evolutionary theory of Nelson and Winter (1982). According to this theory, firms don't optimize but apply certain 'routines' to make their decisions. Because of the intrinsic uncertainty surrounding innovative endeavours, the behaviour of firms is strongly patterned by their routines. The approach in the proposed paper investigates different routines which allow firms to improve their technologies and/or to keep up with the overall technological development. Thus research proceeds by the application of routines guiding the decisons of firms whether to struggle alone, learn from external sources or solely imitate most successfull technologies. Central to our approach is the existence of technological spillovers which are a key concept in evolutionary economics. In an evolutionary development the cumulativeness of technological progress and the different capabilities of the actors involved imply that firms do not explore the whole technological opportunities, but normaly improve and develop upon their existing capabilities. This search behaviour yields to defined 'technological trajectories' (Dosi (1988)) which, however, do not allow for a continuous progress lasting forever. Moreover, their technological potential decreases with increasing progress. This'fishing out' of potentials does not have to last forever but one may observe that they are refreshed and updated. This can be interpreted that specific technologies are again and again positively influenced by their environment. An important source of such effects are technological spillovers. Those can come from other firms, but also from universities or research institutes. Our approach considers technological spillovers not like traditional economic theory as primarily incentive-reducing, but as ideas-creating. Additionaly, we want to take account of the fact that technological spillovers - again contrary to some traditional approaches - cannot easily be adopted by imitators but that they have to satisfy certain prerequisites and technological capabilities. In this respect, the concept of 'absorptive capacity' which puts a firm in the position to understand and adopt know-how generated elsewhere gains special importance (Cohen/Levinthal (1989)). According to Freeman (1982) one possible approach to such a theory is to look at the various strategies open to firms. On this basis our paper is concerned with the routine-guided innovative behaviour of firms. These firms derive different R&D-strategies from their specific routines: the absorptive strategy where the capacity to use technological spillovers plays a central role, the conservative strategy which relies only on own R&D endeavours, and the imitative strategy, which, contrariwise, relies not on own research endeavours but tries to catch up by imitating the respective best technology. Additionaly, firms decide whether 'to exploit' their technological opportunities by improving their production processes or 'to explore' for better alternatives by trying to introduce new products, thereby facing the possibility of serious failure. Our approach does not look for an equilibrium solution, which in reality is unlikely to be attained, but focusses on the long run performance of different strategies. Therefore, in a simulation study, we investigate the fittnes of these modes of behaviour in different scenarios. As one of the most important results we find that in scenarios characterized by strong technological competiton and low appropriability the absorptive strategy is very likely to dominate other strategies in the long run. In a scenario with less severe competition and stronger intellectual property rights, external learning potentials of firms are responsible for less clear results. Our simulation study, therefore, emphasizes the importance of absorptive capacities for 'external learning'