Innovation Policy

A seminar for BA students (5 t h and 6 t h semester)

Course Book Summer term 2012

Prof. Dr. Tobias Kronenberg *

Phone: +49 234 32 10816. E-mail: tobias.kronenberg@hs-bochum.de.

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Introduction
Welcome to the seminar Innovation Policy. As you have undoubtedly noticed already, the working language in this seminar is English. If English is not your native language, do not worry you are not alone. Most of the participants in this seminar, including the professor, share your lot and sympathize with you. This means that you will not be expected to speak English flawlessly. In class, you will be encouraged to participate in the discussions even if your language skills are not (yet) topnotch. However, you will be expected to write a term paper of about 12 pages and to deliver a presentation on the same topic in class. The seminar thus serves two purposes: First, you will have an opportunity to improve your language skills. Second, and more importantly, you will learn a lot about innovation policy. Innovation policy is an extremely important topic for all students of economics and business administration because in your future career you will need to know how innovations are generated, how they affect the economy and how you can react to them. If you find yourself leading a company, you will have to continuously produce or at least adopt innovations in order to stand your ground against your competitors. If you work in the public sector you will discover that the government also has an interest in promoting innovations or in some cases, perhaps, discouraging certain innovations. And even if you simply think from the consumers point of view you may find your life affected by all sorts of innovations on a daily basis.

Organization
The seminar is a weekly event. This means that you are expected to attend it every week. During the introductory meeting we will come together to get acquainted with each other. The professor will explain the layout of the course, including the relevant dates and deadline (Table 1), and present the table of topics (Table 2). Students may then choose a topic they would like to work on. In order to ensure a fair and efficient process of topic allocation, the following procedure will be adopted: Within three days, each student chooses three topics and communicates those choices via e-mail to the professor. The professor then allocates one topics to each student. If you do not send an e-mail within three days, you will be assigned one of the remaining topics. At the second meeting the topic allocation will be discussed. As students need some time to prepare, no presentations will be scheduled for the second and third meeting. Instead, the professor will deliver lectures in order to refresh everyones memories of microeconomic and macroeconomic basics. These basics will later be needed in order to discuss the incentives for innovation generation and the effects of certain policy measures.

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Table 1: Dates and deadlines 25/03/13 28/03/13 01/04/13 04/04/13 08/04/13 15/04/13 22/04/13 29/04/13 06/05/13 08/05/13 13/05/13 20/05/13 27/05/13 03/06/13 08/06/13 10/06/13 Introductory meeting Seminar organisation Students choose three topics out of the list and send their choices to the professor by e-mail. No meeting (public holiday) Professor announces topic allocation via e-mail. Lecture: The basics of microeconomics and macroeconomics Lecture: The basics of innovation economics Presentation #1 Presentation #2 Presentation #3 Presentation #4 Presentation #5 Presentation #6 Students submit the term paper (first version). Presentation #7 Presentation #8 No meeting (public holiday) Presentation #9 Presentation #10 Presentation #11 Presentation #12 Professor announces grades for the term paper. Presentation #13 Presentation #14 Presentation #15 Presentation #16 Presentation #17 Presentation #18 Presentation #19 Conclusion of the seminar Optional: Students submit the term paper (revised version). Professor announces final grades.

17/06/13 24/06/13

30/06/13 15/07/13

Contents of the seminar

When we talk about innovations, we usually talk about technology1. Certain technological innovations affect human societies in all kinds of ways, but since we are situated at an economic faculty, we are mostly interested in the effect of technological innovations on the economy. That is, we want to find out how technological change affects the way in which households and firms go about their daily business of consuming and producing goods and services. However, as we shall see, the causal relationship runs in both directions: technology affects the economy, but the economy in turn determines which kind of technological progress is made. Generally, innovations do not fall like manna from heaven, they are developed by individuals with a profit motive. The forces of supply and
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Innovations may also be social, cultural, institutional or organizational. The seminar, for example, was an innovation when it was introduced in the university system in addition to the more traditional lectures. However, in this seminar we will focus on technological innovations such as the steam engine, the computer, and the light bulb.

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demand, constrained and influenced by the historically developed social and economic institutions, generate opportunities to earn profits for those who develop successful innovations. These opportunities are then exploited by inventors, entrepreneurs, or just plain managers. In this fashion, economy affects technology, but technology affects economy as well. To start off, we will explore the relationship between technology and economy from a historical perspective. Beginning with the 18th century, we will revisit the history of the capitalist economies by identifying techno-economic paradigms and paradigm shifts. We will see that economic development has not always been the smooth process described by the Solow-Swan growth model (which you know from basic macroeconomics) but has been characterized by long waves and the clustering of innovations. In order to highlight the importance of innovations, we will explore a number of case studies on selected key innovations. In the second part, we will study the role of private enterprises and their incentive to produce innovations. One presentation deals with the question: Who rewards the innovator? Certainly mankind has benefited tremendously from innovations such as the wheel and the printing press, but are you sure that the persons who developed these technologies have benefited as well? This question will lead us to the next topic, the potential conflict between competition and innovation . We know from basic microeconomics that firms in a perfectly competitive market cannot make economic profits, at least in the long run. Innovations turn out to be a way of escaping the law of zero profit and enabling the innovator to make substantial economic profit if the circumstances are right. Furthermore, we have learned in basic microeconomics that monopoly power is a bad thing because it undermines competition and leads to a social welfare loss, but this finding may be turned on its head as soon as we study the incentive to innovate from a monopolists point of view and find that, perhaps surprisingly, a monopolist may have a larger incentive to produce innovations compared to a firm operating under perfect competition. In the third part, we move from the private sector to the public sector and examine the case for public R&D. As we make a distinction between basic research and applied research , we will see that the private sector tends to focus on the latter because it yields profits in the marketplace, but basic research is likely to be underprovided by the market and should be performed or supported by the state. We will also examine the role of the state in the development of key technologies like space flight and the internet. A further aspect in the discussion of innovation policy is the relationship between technology and trade because the state of technology determines a countrys capacity to produce and export high-tech goods. Having seen that governments can apply innovation policy to improve economic performance, we will discuss whether this is always desirable, as in some cases economic performance may clash with ethical considerations. For example, patents on medicine are supposed to reward pharmaceutical companies for the effort they put into R&D. This is not a bad idea, but as patent owners they are monopolists and may charge excessively high prices for their products. People who suffer from a terminal disease may lack the purchasing power to buy the cure, and some people have questioned whether this is acceptable from an ethical point of view. Ethical considerations have also led to controversy around innovations like genetically modified crops. More recently, the development of the internet and the ease of (illegal) information dissemination have given rise to criticism of the existing regulations concerning copyright on texts and software; we will discuss the case of Aaron Swartz to illustrate some of the associated problems. Considering the German governments highly ambitious goals for climate policy, there is an urgent need for environmental innovation, which will be discussed in the fifth topic block. In search of clean energy, the government has made available public funding for different energy sources . This includes a relatively new technology called partitioning and transmutation (P&T). Although P&T is not yet an issue in the media, it may become a highly controversial topic in the future because it is related to nuclear waste. Another important topic in this field is the development of electric cars and other vehicles with the aim of providing mobility with reduced environmental side-effects. Aside from the new P&T, which may become controversial in the future, some innovations are already under attack for a variety of reasons, so we will discuss the question whether all innovations 4

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are desirable. While governments should generally promote innovations, perhaps there are some innovations which should be actively discouraged through legislation, for example the use of embryonic stem cells in medicinal research. Another example is the proliferation of nuclear weapons resulting from certain innovations. Depending on the number of participants in the seminar, we may also examine other selected technologies such as PID or cloning techniques. Finally, we will turn to the diffusion of selected technologies. This is an important topic because the innovation itself although interesting from a scientific viewpoint is not always economically relevant. It becomes economically relevant only when a certain degree of diffusion (i.e. market penetration) is achieved. History is full of innovations which never made an economic impact because they never achieved a sufficient degree of diffusion. Then again, some technologies that never made a serious economic impact may yet do so in the future, for example the fuel cell. Table 2: Topics No. Title 1 Techno-economic paradigms and paradigm shifts Definition of a TEP Paradigm shifts in the history of capitalist economics Is the next paradigm shift happening now and what will be the results? 2 Long waves and the clustering of innovations Why are there clusters of innovations? How do they affect economic growth? Is the current economic slowdown purely a result of bad financial markets, or is there a technological dimension to it? 3 Selected key innovations Depending on the number of participants, several case studies are possible, for example the steam engine, the printing press, the computer, the light bulb and so on. In each case there should be a connection with today. For example: Why did the light bulb replace earlier technologies? Which technologies may replace the light bulb in turn and why? 4 Who rewards the innovator? Depending on the number of participants, several case studies are possible, for example the inventor of the Walkman. 5 Competition and innovation: static versus dynamic efficiency Monopoly power is bad and should be countered through competition policy But many monopolists are monopolists because they have made an innovation! The prospect of earning monopolistic profits provides an incentive to generate innovations. Too much anti-monopoly regulation destroys that incentive. Is the extent of anti-monopoly regulation in Europe too high, too low or just about right? 6 The incentive to innovate from a monopolists point of view A firm with monopoly power does not fear competition. Or does it? What determines the incentive to generate innovations? 7 Basic research and applied research Does the market provide too much applied research? Which instruments can be used to foster basic research? 8 Development of key technologies A number of key technologies were not developed by private firms but through public (often military) research. Examples include spaceflight and the internet. If public research had not developed these technologies when it did, would they be available today? Depending on the number of participants, several case studies are possible. 5

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9 Technology and trade Krugmans North and South model When industries leave Germany/Europe for Asia, should we try to stop them? When will China become a true innovator? Patents on medicine Is it ethical to let people die if they cannot afford the medicine they need? Who can make that decision? If we do not allow pharmaceutical companies to charge monopoly prices, how can they be compensated for the cost of developing new medicine? Genetically modified crops Why is there resistance against genetically modified crops? Should governments intervene or let the markets decide? The case of Aaron Swartz Does the internet change how we think about intellectual property rights? Is it necessary to reform legislation with respect to intellectual property rights? Why are some economics professors angry with JSTOR and the publishing companies? Public funding for different energy sources Why do governments spend so much money on funding different energy sources? Which energy sources should receive more/less public funding? Partitioning and transmutation of nuclear waste How can nuclear waste be safely handled? Does it make sense to treat the waste in partitioning and transmutation plants? What would be the economic effects? Electric cars and other vehicles Why do cars run on gasoline while trains run on electricity? Would it make sense to make more cars run on electricity? Which kind of infrastructure would be needed for that and who should pay for it? Embryonic stem cells Is it ethical to use stem cells from human embryos in research? What is the economic effect of prohibiting/allowing this kind of research? Proliferation of nuclear weapons What is the relationship between nuclear energy and nuclear weapons? Does nuclear energy increase the danger of proliferation? What can be done against the proliferation of nuclear weapons? Are the currently available safeguards sufficient? Other selected technologies (PID, cloning) Depending on the number of participants, several case studies are possible. The case studies should deal with the ethical and economics aspects of controversial technologies such as PID or cloning. How to promote the diffusion of (various technologies) Depending on the number of participants, several case studies are possible. The case studies should address the problem of technology diffusion and instruments that can be used by private companies or public agencies to speed up the diffusion process.

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Grading
In this seminar we are going to study the relationship between technology and the economy, the conditions for a successful innovation process, and the instruments that governments can employ to promote innovative behaviour. Furthermore, we will discuss the social, economic and ethical aspects of selected innovations, including controversial technologies such as genetically modified crops and 6

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embryonic stem cell research. Many of these issues raise questions which cannot be answered in simple terms like yes and no or true and false. Therefore, there will be no final exam. Instead, you will get a grade for your presentation, your term paper, and your participation in class. The final grade is calculated from the individual grades as follows: Presentation (40%) Term paper (40%) Participation in class (20%)

An additional requirement is that you must obtain a passing grade (4.0 or better) for each of the three components. Further details for the individual components are given below.

Presentation
Your professor needs time to prepare himself for your presentation. Therefore, you should send him your PowerPoint slides by e-mail the day before your presentation (23:59 is OK, 0:00 or later is not OK). If you send your slides later than that, your grade will be affected. The presentation should have a length of roughly 40 minutes. If you want to deal with your topic in sufficient depth, your presentation should not be shorter than 30 minutes. On the other hand, since our overall time budget is limited, each presentation should not take longer than 45 minutes. Exceeding the limit of 45 minutes will affect your grade in an undesirable direction. The presentation, like the term paper, should include a conclusion based upon your own reasoning. The type of conclusion may depend on your topic. You should justify your conclusion by means of logical reasoning and/or empirical evidence. Bonus points are awarded if you manage to apply economic theory (which you have learned in microeconomics and macroeconomics) to your topic and use it to justify your conclusion. Be prepared for questions! The professor and your fellow students may try to attack your conclusion; you should be able to defend it with convincing arguments. Showing videos is allowed, but you should select them carefully. The audience does not want to watch 40 minutes of videos; they want to hear you explain your topic. Use videos carefully, they should not distract from your talk. Furthermore, as a presenter you are responsible for making sure that the required equipment (loudspeakers etc.) is installed and functioning. Keep in mind that if the internet connection breaks down (as sometimes happens) you cannot access YouTube, so you should consider downloading the video or preparing some sort of backup plan. After each presentation, there will be time for discussion (45 minutes). As participation in class affects the final grade, every student has an incentive to participate in the discussion (see below). The presenter, of course, should also participate in the discussion and should be able to answer questions related to his or her topic.

Term paper
In addition to your presentation you are expected to write a term paper on the same topic. This paper should have a length of roughly 12 pages. There are no specific requirements for the layout, but it should follow the usual conventions (font size 11 or 12). You should not try to squeeze an excessively long text into 12 pages by altering the layout. If your text is too long, you should reduce 7

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the number of words. Generally, this procedure also leads to an improved text which is easier to follow for the reader. The general guidelines for writing an academic paper apply. This includes especially the rules for proper academic citation. Do not plagiarize! The penalty for plagiarism is immediate expulsion from the seminar with a failing grade (5.0) and a message to the exam committee. All term papers will be checked for plagiarism by fully automated and very efficient software. In order to facilitate these checks, please submit your paper as a MS Word document by sending an e-mail to the professor. Hard copies are not required. In order to avoid involuntary plagiarism, you are free to ask your professor about the rules of academic citation at any time during the seminar. Aside from these obvious considerations, it is important that your paper is well-structured. A typical structure looks like this: 1) 2) 3) 4) Introduction Literature survey Discussion Conclusion

Depending on your topic, you may develop an alternative structure, but the sections introduction and conclusion should always be included. It is also a good idea to split the paper into a part in which you summarize the relevant literature (here: literature survey) and another part in which you discuss the available literature and apply it to your topic (here: discussion). For example, if your topic is speculative bubbles and financial crises you may find an influential paper from 2007 arguing that speculative bubbles are a thing of the past because todays financial markets are far too efficient for them to occur. This belongs to the literature survey. In the discussion, you may then evaluate that claim in the light of what happened in 2008 and later. An additional requirement is that your term paper should include a reasonable amount of your own independent reasoning. You are not expected to merely collect thoughts of other authors. You are expected to collect information, data, and arguments from other sources and to make up your own mind about the topic or question at hand. You can begin to develop your own thoughts early in the paper, but be careful to differentiate your own thoughts from those of others. At the latest, you should provide your own opinion in the section titled conclusion. Since you are here to learn how to write a good paper, you will have the chance to hand in a revised version. For the first version, you will receive a grade and a number of comments and suggestions. If you decide to submit a revised version based on those comments and suggestions, you may get an improved grade for the revised version.

Participation in class
As noted above, all participants are encouraged to participate in all discussions. Your participation will be graded and will affect your overall grade. Students who are not present cannot participate. Therefore, to obtain a passing grade (4.0 or better) you must participate regularly. If you miss more than 25% of the meetings you will not obtain a passing grade . Discussions in class require tact and respect. This includes arriving on time and paying attention to what your fellow students are saying. Keep in mind that your fellow students may be nervous when it is their turn to present. If you enter the room while somebody is presenting you may distract them and lower their concentration. Being 8

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late is therefore considered impolite and may, if repeated, affect your grade. Food should not be consumed in class. Drinks are allowed as long as they do not distract peoples attention.

Final Remarks
Some readers may think as this point this sounds like a lot of work. Thats true. Participating in a seminar and analysing a topic in depth is indeed a lot of work. But work can be fun, too, if done properly. Moreover, you can learn some very useful skills that will serve you well in your future career: speaking, reading and writing in English, gathering information and literature, analysing a problem, forming your own opinion and convincing others that your opinion is sound. Speaking of literature there will be a literature list including a couple of references for each topic. These references are meant to help you get started with your research, you are encouraged to find more literature. This course book, along with other seminar-related material, will be available at MeineBO for the duration of the course.