General Purpose Technologies "Engines of Growth?"

Whole eras of technical progress and economic growth appear to be driven by a few key technologies, which we call General Purpose Technologies (GPT's). Thus the steam engine and the electric motor may have played such a role in the past, whereas semiconductors and computers may be doing as much in our era. GPT's are characterized by pervasiveness (they are used as inputs by many downstream sectors), inherent potential for technical improvements, and innovational complementarities', meaning that the productivity of R&D in downstream sectors increases as a consequence of innovation in the GPT. Thus, as GPT's improve they spread throughout the economy, bringing about generalized productivity gains. Our analysis shows that the characteristics of GPT's imply a sort of increasing returns to scale phenomenon, and that this may have a large role to play in determining the rate of technical advance; on the other hand this phenomenon makes it difficult for a decentralized economy to fully exploit the growth opportunities offered by evolving GPT's. In particular; if the relationship between the GPT and its users is limited to arms-length market transactions, there will be "too little, too late" innovation in both sectors. Likewise, difficulties in forecasting the technological developments of the other side may lower the rate of technical advance of all sectors. Lastly, we show that the analysis of GPT's has testable implications in the context of R&D and productivity equations, that can in principle be estimated.

Vertical Integration and Market Structure

Contractual theories of vertical integration derive firm boundaries as an efficient response to market transaction costs. These theories predict a relationship between underlying features of transactions and observed integration decisions. There has been some progress in testing these predictions, but less progress in quantifying their importance. One difficulty is that empirical applications often must consider firm structure together with industry structure. Research in industrial organization frequently has adopted this perspective, emphasizing how scale and scope economies, and strategic considerations, influence patterns of industry integration. But this research has paid less attention to contractual or organizational details, so that these two major lines of research on vertical integration have proceeded in parallel with only rare intersection. We discuss the value of combining different viewpoints from organizational economics and industrial organization.

Do Entry Conditions Vary across Markets?

macroeconomics, entry conditions

Market Segmentation and the Sources of Rents from Innovation: Personal Computers in the Late 1980's

This paper evaluates the sources of transitory market power in the market for personal computers (PCs) during the late 1980's. Our analysis is motivated by the coexistence of low entry barriers into the PC industry and high rates of innovative investment by a small number of PC manufacturers. We attempt to understand these phenomena by measuring the role that different principles of product differentiation (PDs) played in segmenting this dynamic market. Our first PD measures the substitutability between Frontier (386-based) and Non- Frontier products, while the second PD measures the advantage of a brand-name reputation (e.g., by IBM). Building on advances in the measurement of product differentiation, we measure the separate roles that these PDs played in contributing to transitory market power. In so doing, this paper attempts to account for the market origins of innovative rents in the PC industry. Our principal finding is that, during the late 1980's, the PC market was highly segmented along both the Branded (B versus NB) and Frontier (F versusNF) dimensions. The effects of competitive events in any one cluster were confined mostly to that particular cluster, with little effect on other clusters. For example, less than 5% of the market share achieved by a hypothetical entrant would be market-stealing from other clusters. In addition, the product diffe- rentiation advantages of B and F were qualitatively different. The main advantage of F was limited to the isolation from NF competitors it provided; Brandedness both shifted out the product demand curve as well as segmenting B products from NB competition. These results help explain how transitory market power (arising from market segmentation) shaped the underlying incen- tives for innovation in the PC industry during the mid to late 1980s.

Information Technology, Workplace Organization and the Demand for Skilled Labor: Firm-Level Evidence

Recently, the relative demand for skilled labor has increased dramatically. We investigate one of the causes, skill-biased technical change. Advances in information technology (IT) are among the most powerful forces bearing on the economy. Employers who use IT often make complementary innovations in their organizations and in the services they offer. Our hypothesis is that these co-inventions by IT users change the mix of skills that employers demand. Specifically, we test the hypothesis that it is a cluster of complementary changes involving IT, workplace organization and services that is the key skill-biased technical change. We examine new firm-level data linking several indicators of IT use, workplace organization, and the demand for skilled labor. In both a short-run factor demand framework and a production function framework, we find evidence for complementarity. IT use is complementary to a new workplace organization which includes broader job responsibilities for line workers, more decentralized decision-making, and more self-managing teams. In turn, both IT and that new organization are complements with worker skill, measured in a variety of ways. Further, the managers in our survey believe that IT increases skill requirements and autonomy among workers in their firms. Taken together, the results highlight the roles of both IT and IT-enabled organizational change as important components of the skill-biased technical change.

Reallocating innovative resources around growth bottlenecks

Economy-wide increasing returns to scale embodied in a general purpose technology (GPT) and its applications are often a key source of long-run growth. Yet the successful exploitation of increasing returns calls for coordination on a particular technological direction, reducing flexibility and choice ex post and potentially creating a growth bottleneck. When the bottleneck is controlled by a single firm, the resulting entry barriers reduce the ability of demanders to choose superior, alternative technologies. We examine how such a growth bottleneck can eventually be overcome under certain key conditions. Demand must be fundamentally diverse so that the original GPT does not serve all demanders. Firms barred from entry into the primary GPT market can then reallocate innovative resources to create new markets to meet the unserved demand. The demand in these new markets must be valuable enough (even if not as valuable as in the primary GPT market) to generate a positive-feedback cycle that results in considerable technical advance in the alternative GPT. This ultimately can lead to indirect entry by the alternative GPT into the original GPT market if and when it becomes strong enough to compete with the original GPT. This sequence of (i) increasing returns to scale around a GPT, (ii) reallocation of innovative resources around growth bottlenecks, and (iii) indirect entry has growth implications. A large contribution to growth follows the exploitation of increasing returns to scale in the original GPT. Much later, another large contribution to growth follows when demand is finally met by an alternative, competitive GPT. Between these two periods falls a period of lesser contributions to growth due to the dominant firm bottleneck. The market-based resolution of the bottleneck is not merely a theoretical possibility. We illustrate the role of this sequence in the two most important technologies for automating white-collar work of the past 50 years