Decomposing technological change at the twilight of the twentieth century: evidence and lessons from the world's largest innovating firms.

SUMMARY

The present-day economy, characterised by a pattern of steady technological and organisational change, has its roots in the so-called information revolution of the late twentieth century. As this unique period of recent history recedes, the benefits of hindsight make it possible to deliver new perspectives on what really happened across industries facing rapidly mutating global competitive settings. This paper provides an analysis of the transformations that occurred in a collection of technological capabilities nurtured by industrial sectors as represented by nearly 500 of the world's largest industrial corporations during the 1980s and 1990s. Using structural decomposition analysis it shows how industries adapted under the strain of radical shifts in the technological context with varying degrees of success.

KEY WORDS

structural decomposition analysis; patent indicator; manufacturing sectors

1. INTRODUCTION

The last decades of the twentieth century were turbulent for the capitalist economic system. These dramatic, hectic times were characterised by the twin phenomena of global competition and technological revolution. How industries reacted to, adapted to, and took advantage of these intertwined and unfolding transformation processes remains a poorly understood question.

This paper attempts to exploit the advantages of fresh hindsight to shed some light on the knowledge dynamics of broadly defined industries as characterised by the world's largest innovative companies over the course of the 1980s and 1990s. As time moves on and we gain distance from this defining period of recent history it becomes pertinent to uncover new insights into what really happened across industries in dynamic markets in the wake of rapidly mutating knowledge bases. To this end, we mobilise data pertaining to over half a million patents by 463 globally oriented and technologically active US, European and Japanese firms. To this raw material we apply a well known technique traditionally applied in the field of empirical international economics, but still largely under-utilised in the context of neo-Schumpeterian analysis of technological capabilities: structural decomposition analysis.

What we observe is evidence of a strongly stylised fact of contemporary industrial change that has been captured in a number of other investigations (e.g. Granstrand et al., 1997; Cantwell et al., 2004): the knowledge base of large manufacturing companies across industries has become more complex over time (Cantwell and Fai, 1999) and the management of innovation itself has become more complex. The sources of this complexity are attributed to the ever-increasing levels of technical sophistication in products (Brusoni et al., 2001) processes and the need to coordinate transnational networks of highly heterogeneous and dynamic component suppliers (Mendonca, 2005). Notwithstanding, what we begin to unveil are industry specific patterns of response to the new technological challenges. Using structural decomposition analysis (SDA) we are able to identify information and communication technologies (ICTs), New Materials, and Pharmaceutical & Biotechnology as the most subversive technologies to challenge the a priori industrial knowledge profiles. We are also able to assess the extent to which different industries facing this shifting technological landscape responded by internally nurturing those disruptive new technologies.

The next section sets the basic theoretical underpinnings upon which this research rests. Section 3 describes the data, section 4 the methodology, and section 5 discusses the results. The novelty of paper consists in the application on the SDA method to unpacking the technology diversification phenomenon (subsection 5.1), and in the specific application of the method to the technology fields (subsection 5.2). Section 6 offers some concluding comments.

2. TECHNOLOGY STRATEGY FOR SCHUMPETERIAN SELECTIVE ENVIRONMENTS

Simply stated this paper sees the large global innovating industrial firm as a system of technologies evolving in different directions and at different rates. Building on Freeman's (1987) and Lundvall's (1992) systemic view of technical change, we assume that innovative business organisations may be regarded as open systems of innovation. For the strict purposes of this paper, a corporate innovation system will be understood as the intertwined set of activities and interactions that allow the organisation as whole to develop new technologies, products, markets and new ways of conducting business.

This general framework is given empirical substance by a body of applied work which has denoted the major business organisations of the contemporary economy as multi-technological corporations. The key observation in this literature, pioneered by Granstrand and Sjolander (1990) and Patel and Pavitt (1994), is that modern industrial firms are characterised by internal variety in their technological capabilities, harbouring technologies that go well beyond those directly related to their major product lines. It follows that large, technologically competitive manufacturing firms typically develop an array of distributed competences, rather than concentrating exclusively on core competences as a source of advantage in international markets (Granstrand et al., 1997). Companies have maintained higher levels of technological diversity than product diversity in the past century (Gambardella and Torrisi, 1998; Andersen and Walsh, 2000; Piscitello, 2004), and this trend seems to have deepened under the impact of the technologies of the information age (Fai, 2003; Mendonca, 2006).

At the same time, research on technological diversification has stressed that the composition of corporate technological capabilities is complex but still is stable, and that the direction of search follows path-dependent dynamics demarcated by the fields of knowledge required by their primary product focus, i.e. chemical firms will tend to search in chemical technologies--industry matters (Patel and Pavitt, 1997). This strong association of core technologies with specific industries indicates path-dependency in the evolution of an industry's technological trajectory and has led to claims that creative accumulation prevails over creative destruction at the level of the firm, i.e., inside the organisation the emergence of new technological fields are linked to established ones in a complementary fashion and evolution in technological mastery takes a long time to establish (Granstrand, 1998; Pavitt, 1998).

However, our findings suggest much more than conservative accumulation along given trajectories seems to be happening when business organisations face historically unique, technologically turbulent, and fast changing competitive environments. In fact, the technological profiles of industries may be idiosyncratic, but changes may be more dramatic than previously though. There are indications that the scope of corporate technological diversification in the late twentieth century turned out to be significantly greater than earlier periods (Fai and von Tunzelmann, 2001a, 2001b). In particular, the rising tide of ICTs, biotechnologies and other new technologies may be said to have affected all industries, although to different degrees (Mendonca, 2004) being felt both in 'high-tech' and 'low-tech' sectors (Gambardella and Torrisi, 1998; von Tunzelmann 2003). In other words, whilst the broader technological environment faced by all industries was changing radically at the end of the twentieth century, firms too were internally changing their technological profiles.

This paper attempts to cast some light on how different industries reconfigured their knowledge profiles (measured by their patent portfolios) against, or in line with, the movement of structural change occurring in the broader technological environment. We broadly interpret the development of economically relevant technological knowledge through the resource-based or capability-perspective, but tentatively extrapolate from the firm to the industry level. Multi-technology studies have found (e.g. Patel and Pavitt, 1997) that large innovative firms in the same principal product areas seem to be characterised by similar technological profiles. Thus, in this exploratory industry level study we will broadly assume that individual firms in the industry tended to adapt themselves in roughly the same way to technological opportunities. Within firms, intangible idiosyncratic competitive assets emerge as a result of organizational processes that build on, and attempt to go beyond, previously accumulated cognitive capabilities (e.g. Teece et al., 1997; Winter, 2003). Within industries, we assert that intangible idiosyncratic industrial assets emerge as a result of inter-organizational and inter-institutional processes that build on, and attempt to go beyond, previously accumulated cognitive capabilities.

The phenomenon to be addressed is the evolution of industrial knowledge distribution and their adaptation in a fast moving knowledge landscape (shaken by a technological revolution). We wish to examine the evolution of industries in the context of a shifting knowledge landscape in which different technologies develop in different ways at different speeds. We would hypothesise that the distribution of the technology portfolios within corporations is being skewed by the attractiveness of certain fields such as ICT, Pharmaceutical and Biotech and New Materials, in spite of all the inertia that derives from the slow and localised learning processes that normally take place in firms and this is reflected at the industry level.

3. DATA