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The
Knowledge Driven Economy On 27 January
1999, CEPR held a conference with the UK’s Department of Trade and
Industry (DTI) on the economics of the knowledge driven economy. The
starting point for the discussion was the UK government’s
Competitiveness White Paper published at the end of 1998, Our
Competitive Future: Building the Knowledge Driven Economy. The
conference was opened by Lord
Sainsbury (Under Secretary of State for Science), and the central
messages of the White Paper were presented by David
Coates and Ken Warwick (both
DTI). The
conference explored the meaning of the knowledge driven economy; what
the growing importance of knowledge implies for industrial structure,
for national economic performance, and for the sources of competitive
advantage for both firms and nations; and how government policy should
be directed towards building UK capabilities, facilitating collaboration
within and between businesses, and encouraging competition. The White
Paper defines the knowledge driven economy as ‘one in which the
generation and the exploitation of knowledge have come to play the
predominant part in the creation of wealth. It is not simply about
pushing back the frontiers of knowledge; it is also about the more
effective use and exploitation of all types of knowledge in all manner
of economic activity’. The document goes on to describe four
structural forces driving economic transformation: revolutionary changes
in information and communications technology (ICT); rapid scientific and
technological advance; increasingly global competition; and shifting
consumer demand. So how does
the knowledge driven economy differ from its predecessors? Keynote
speaker Professor Joseph Stiglitz
(World Bank) argued that knowledge has fundamentally different
characteristics from ordinary commodities and these differences have
crucial implications for the way a knowledge economy must be organized.
Most importantly, knowledge is a global public good: it is ‘infinitely
expansible’ or ‘non-rival in consumption’. Stiglitz noted that
Thomas Jefferson captured this idea best when he wrote: ‘He who
receives an idea from me, receives instruction himself without lessening
mine; as he who lights his taper at mine, receives light without
darkening me’. What Stiglitz
called ‘the scarcity-defying expansiveness of knowledge’ is the root
of its other important defining features. Once knowledge is discovered
and made public, there is essentially zero marginal cost to adding more
users; ideas and innovations have extensive externalities, their
benefits typically extending well beyond those who first put them
forward; and it can be difficult to exclude other potential users of
knowledge through intellectual property rights. What is more, there is
an inherent ‘unknowability’ in knowledge: it is like an experience
good, which consumers find hard to value unless they have used it
before. Danny Quah (London School of Economics and CEPR) outlined what he
saw as different in the knowledge driven economy or, as he preferred to
call it, the weightless economy. First, there is a proliferation of
knowledge products that share the infinite expansibility and related
characteristics of knowledge. Of particular importance is Information
Communication Technology (ICT), which includes the internet;
intellectual property, including not only patents and copyright, but
also branding, development of images, advertising, trademarks and logos;
and libraries and data bases, both silicon-based electronic compilations
of information and bio-technology or carbon-based forms. What is
central about the new technology, Quah suggested, is that it brings
consumers ever closer to the chalk face of technological development. In
the traditional industrial economy, knowledge is the first point in a
chain running through intellectual property protection in the form of
patents and then into machinery and manufacturing for producing goods
for consumers. In the knowledge economy, the chain disappears and
consumers and knowledge producers interact directly with each other.
This is the real ‘death of distance’: not in the sense that ICT
reduces the importance of physical geography but as a closing of the gap
between knowledge producers and consumers. The impact of
the new technologies on industrial structure was explored by John Kay (Said Business School, Oxford University), who pointed out
some fallacies in much contemporary analysis. For example, it is feared
that with a strong system of intellectual property rights, the
characteristics of knowledge imply ‘winner-takes-all’ markets and
hence concentration into a relatively small number of global players,
the ‘superstars’. In addition, many believe that market dominance
and commercial success will be based on those who control standards
and/or the delivery processes. Making a
comparison with the impact of the printing press on the dominant
position of the Roman Catholic Church, Kay contended that, on the
contrary, the expansion of the knowledge driven economy will create a
proliferation of material, firms and activities at all points and at all
levels, suggesting that no one can expect to enjoy continued control of
these markets. There may be temporary monopolies but they cannot last.
And it is misconceived to think that the key lies in greater horizontal
diversification, in vertical integration or in being at the point of
delivery of the product: the low cost and ease of access to the delivery
mechanism mean that rents are driven down at the delivery level and
instead migrate back up the value chain to those with genuinely scarce
factors and competitive advantages. Kay explored
the changing nature of competitive advantage during the twentieth
century. He noted that there has been a shift from competitive
advantages based on market position, size and power to competitive
advantages based on the incorporation of knowledge into no longer
important raw materials. Knowledge-based competitive advantages, some of
which may enable temporary monopolies, include: the power of brands as
signals of reputation; standards like Microsoft’s operating systems or
the English language; innovations protected through patents, copyrights
or secrecy as with Merck or Coca-Cola; or simply a reputation for
innovation, such as Sony enjoys. Equally important as sources of
knowledge-based competitive advantage are what Kay called the internal
and external architecture of firms: the networks of trust,
knowledge-sharing and information processing both within and between
organizations. Networks and
geographical clusters of firms are a particularly important feature of
the knowledge driven economy. John
Cantwell (Reading University) claimed that firms are finding it more
and more necessary to work with other firms in technology-based
alliances. The costs of research and development (R&D) are rising
and firms often find it beneficial to spread costs among themselves.
Meanwhile, as consumers become more sophisticated and the goods they
demand more complex, R&D is having to draw on a wider range of
technologies and a broad array of inputs. Many larger multinational
firms are becoming ‘multi-technology corporations’, locating
themselves around centres of excellence in different countries. But why are
clusters important if ICT supposedly diminishes the role of physical
geography? The answer seems to be that although the internet is
certainly effective at spreading information around the world, it is not
so effective at spreading understanding. Firms ‘co-locate’ because
it is a better way of sharing such understanding. One key activity that
is dependent on face-to-face contact is hiring new people. Firms in a
cluster benefit from a vibrant labour market, and repeated contact helps
build up relationships of trust with potential collaborators. These
considerations seem to be particularly important for high-tech smaller
firms, as Alan Hughes
(University of Cambridge) demonstrated. Of course,
given the nature of knowledge, not all the benefits of a new idea flow
to the company whose research department has developed it. It is
difficult to protect new ideas, particularly basic research, which is
often unpatentable, and the researchers involved may move to a
competitor. This is where the justification for government involvement
in the knowledge economy begins: left to their own devices, businesses
will not invest as much in R&D as might be beneficial for the
country as a whole. Joseph Stiglitz argued that there needed to be real
recognition of the fact that knowledge is a global public good. If
everybody is doing applied research, taking ideas out of the basic
knowledge pool and converting them into patentable innovations, there
must be more cooperation in enhancing the supply of basic research. Stiglitz
suggested that governments should not be engaged in picking winners but
in trying to identify important externality-generating research
projects. In his view, governments have had a remarkable record of doing
this successfully and in ways that have had really profound effects on
the economy. For the United States, these include support of
agricultural research in the nineteenth century economy, which led to
huge productivity increases; construction of the first telegraph line in
1842, which encouraged businesses to invest in expanding the network;
and the development of the internet. In each case, there was a large
difference between the initial benefits to the private sector of such
work and to the economy and society as a whole. Paul Stoneman (Warwick Business School) emphasized the value of
government support for basic research in giving a country the advantages
of technological leadership. Despite the fact that others ultimately can
make use of the knowledge developed, the first use of knowledge, or the
temporarily exclusive use of knowledge, can yield great benefits. An
individual country, in fact, may be much more prosperous than other
countries either because it uses more knowledge, or because it uses
knowledge more quickly than others. But as other countries use that
knowledge, the leader’s advantage tends to get whittled away. This raises
the question of what government actually should be doing in the
knowledge driven economy. Having demonstrated that firms should see
competitive strategy as the business of establishing a match between
their distinctive irreproducible capabilities and the competitive
environment in which they operate, John Kay argued that industrial
policy should be thought of in the same way. The contribution of
government is to recognise, understand and develop the distinctive
capabilities of a national economy and match these to the competitive
environment that a country faces. As both
Stiglitz and Stoneman indicated, an important part of developing a
country’s capabilities is the support of universities and graduate
education in basic science and technology. Investing in R&D does not
just lead to new ideas; it develops the expertise to understand what
researchers have been doing in other countries. Furthermore, spending on
a research budget creates the kind of technical skills in the workforce
that enable effective use of other people’s results. It is difficult
for a country to access the global pool of knowledge without its own
R&D experience. On the
broader role of education and training, Stephen
Nickell (London School of Economics and CEPR) presented a skills
profile of the United Kingdom: broadly level with the Germans and
Americans on the numbers of people with higher level skills; comparable
with the United States but well below Germany on the numbers who have
attained at least lower-level skills; but behind both on the numbers
with middle-level skills. Nickell suggested that it is at this skill
level, corresponding to further education, that the need for improvement
in the United Kingdom is greatest. He added that although US and UK
numbers are comparable for lower level skills, a great advantage of the
United States is that a far higher percentage of businesses operate at
‘best practice’, the most efficient way of doing any task. Stiglitz
emphasized the value to the knowledge driven economy of vibrant
financial markets, suggesting that one key to the success of Silicon
Valley is the large number of venture capital firms, which provide not
only capital but also know-how and managerial skills. Other conference
participants focused on the potential advantages of capital markets
encouraged to focus more on the long-term and tax measures that might
achieve such an aim. The goal of providing a stable environment for
investment was also raised, including the benefits of macroeconomic
stability. And Danny Quah stressed the importance of consumers, noting
that according to some economic historians, fourteenth century China was
an industrial revolution waiting to happen with the supply side of
technology fully in place. Yet tight control by the state prevented the
emergence of a sophisticated demand base and dramatically stifled
growth. The issue of
competition policy, particularly in relation to intellectual property
rights, looms large in the knowledge economy. Quah described the basic
trade-off for society: ex-post
social efficiency outcome, where everyone enjoys access to the benefits
of new ideas, versus ex-ante
incentives for firms to produce knowledge and new knowledge products. If
firms are unable to appropriate a significant part of the rents from
their research efforts, why should they conduct research in the first
place, he asked. Yet a strong intellectual property rights system offers
the potential for monopoly power, which even if temporary, may not be
desirable for society. Altough
commending the White Paper’s coverage of important public policy
issues, Stiglitz was concerned that its discussion of collaboration and
cooperation between firms may have underplayed the danger of collusion,
where firms can work together to raise prices and reduce effective
competition. He viewed the need to develop safeguards that encourage
constructive knowledge-creating cooperation without tacit or explicit
collusion as one of the real challenges for government in the knowledge
driven economy. In contrast with Kay’s perspective, he was worried
about the potential for new technology to undermine competition through
increasing returns to scale, ‘winner-takes-all’ and ‘lock-in’
effects. Others were
less concerned. On the dangers of collusion, Alan Hughes reported survey
results showing that the forms of collaboration undertaken by high-tech
firms are much more likely to involve sharing R&D, knowledge and
information systems, rather than entering into arrangements to keep
current customers. John Cantwell also took the view that, in a framework
of ‘Schumpeterian competition’, the benefits of technological
cooperation are quite distinct from the effects of market-based
collusion and price-fixing. John Kay
pointed out that past concerns about monopoly have turned out to be
unfounded. For example, in the 1930s, there were many worries about
monopoly capitalism and what the new industrial economy was going to do
to competition. As it turned out, technology changed, the scale of
operations went down, transport costs fell, markets became global and
the number of monopolies probably decreased rather than increased. However,
Stiglitz argued, it is possible that today’s powerful corporations may
have learned from the past, seen how monopolies were destroyed and
determined to use anti-competitive practices to make sure it does not
happen again. Of course, competition will have its day, but the question
is the length of time monopoly power exists, the speed of innovation and
the consequences of what happens in the interim. In this respect,
Stiglitz agreed that a Schumpeterian model of competition was more
appropriate than the traditional Arrow-Debreu model. Paul Seabright (Cambridge University and CEPR) raised the question
of whether there is a case for systematically favourable treatment by
regulators of mergers and/or joint ventures in high-tech industries on
the basis of the scale economies in information-intensive processes and
the weak character of many intellectual property rights. He concluded
that, while such an idea has some sense analytically, there would be a
danger of strategic manipulation of innovation by firms. For example,
firms might exaggerate the character of an alliance, making it seem more
high-tech than it really is. Seabright added that competition
authorities need to develop an understanding of the benefits and dangers
that can come from joint ventures as opposed to mergers, since the
former organizational form is becoming increasingly important. The last
session of the conference, chaired by
John Battle (Minister for Energy and Industry), featured a panel
discussion on the future challenges for government, industry and the
academic community. Among a broad range of issues raised were: the
widespread need for better measures – of human capital, of firms’
intangible assets and of the growth of total factor productivity; the
related possibility of benchmarking the United Kingdom’s innovative
progress; the fact that on some measures, such as the proportion of
high-tech exports in total exports, and revenues from patents and
royalties, the United Kingdom is already performing well as a knowledge
economy; and the impact of organizational structures on knowledge
generation, particularly the contrast between Japan’s hierarchical
structures, which are good at incremental innovation, and the flatter
and more individual structures of the United States, which are better at
generating and exploiting radical ideas. Finally, in terms of policy, for both government and industry, many conference participants emphasized the importance of establishing a culture of creativity. Pluralism, openness, competition and a willingness to experiment are vital to the generation and creative use of knowledge. And, as Stiglitz concluded, the government has an important role in facilitating these changes: for example, through the provision of education, by encouraging creativity and risk-taking, and by helping to develop institutions, including introducing the appropriate regulatory and tax environment. |