ON THE DETERMINANTS AND DYNAMICS OF THE INDUSTRY LIFE CYCLE

Transcription

1 1 ON THE DETERMINANTS AND DYNAMICS OF THE INDUSTRY LIFE CYCLE Per Paolo Savo, Andres Pyka*, Jacke Kraff INRAUMR GAEL, Unversé Perre MendèsFrance, PO Box 47, Grenoble, Cedex 9, France, and I2C CNRS GREDEG, Sopha Anpols, France. *Unversy of Bremen, Economcs Deparmen, Char n Economc Theory, Hochschulrng 4, D28359 Bremen. pyka@unbremen.de I2C, CNRS GREDEG, Sopha Anpols, France. jacke.kraff@gredeg.cnrs.fr Frs draf. Please do no quoe whou he auhors permsson,

2 2 ON THE DETERMINANTS AND DYNAMICS OF THE INDUSTRY LIFE CYCLE 1) INTRODUCTION Per Paolo Savo, Andreas Pyka, Jacke Kraff. The dscovery of he ndusry lfe cycle (ILC) has been one of he mos mporan developmens n ndusral dynamcs of he las weny years. A large number of secors have been found o follow a smlar developmen pah, gong hrough he same seres of sages whch can be descrbed as a lfe cycle. Ths bologcal meaphor means ha hose ndusral secors followng an ILC go from brh o youh o maury n some sense as a bologcal organsm. Ths analogy canno be carred any furher and here s no need foe he sages of a bologcal organsm o be he same as he sages of an ILC. Wha s mporan s ha many ndusral secors follow he same sages n he same order. Gven ha an ILC s followed by many bu no by all he secors, a very mporan queson arses concernng he deermnans of and he condons under whch an ILC can occur. The leraure has provded a number of answers o hs queson. In wha follows of hs paper we are gong o revew hese answers and o reconsder he naure and exsence of he ILC n he conex of a model of economc developmen by he creaon of new secors. As wll urn ou, our explanaon of he naure and exsence of he ILC does no concde wh hose prevously presened n he leraure, alhough s no exclusve of hem. In he res of hs paper we revew he leraure on he ILC, dscuss he ILC phenomenon by means of our model of economc developmen by he creaon of new secors and propose our nerpreaon of he naure and dynamcs of he ILC. 2) ON THE CONCEPT OF ILC. The concep of ndusry lfe cycle (ILC) has had a number of precursors whch dd no use he same name bu mpled ha some echnologes could be expeced o follow a cyclcal behavour gong hrough a seres of sages. Relevan examples of hese conceps would be domnan desgns (Abernahy, Uerback, 1975), echnologcal regmes (Nelson, Wner, 1977), echnologcal paradgms (Dos, 1982), echnologcal gudeposs (Sahal, 1985), produc lfe cycle (Vernon, 1966, Gor, Klepper, 1982). Durng he 1990s some scholars sared usng he expresson ndusry lfe cycle. Such a concep could be dfferen from he prevous ones, and n parcular from he produc cycle, f an ndusral secor were no o concde wh he se of frms producng a common even f dfferenaed produc. As wll urn ou, all he secors for whch a lfe cycle was observed are mplcly defned by her produc. Thus, we wll see ha he ILC s no so dfferen from a produc lfe cycle, as he name ILC would have led us o suppose. However, he scholars who conrbued o he sudy of he ILC dd no only change name bu mproved consderably our undersandng of he problem. The ILC s usually governed by he exsence of sx regulares or prncples of evoluon: producon ncreases n he nal sages and declnes n he fnal sages; enry s domnan n he early phases of he lfe cycle and s progressvely domnaed by ex. A massve process of ex (a shakeou) occurs n he fnal sages of he lfe cycle; marke shares are hghly volale n he begnnng, and end o sablze over me; produc nnovaon ends o be replaced by process nnovaon; frs movers generally have a leadershp poson whch guaranees her longerm vably; produc varey dsappears over me, as a domnan desgn emerges.

3 3 Amongs hese he mos mporan regulary found n all cases of ILC concerns he me pah of he number of frms. When he secor s frs creaed usually by a radcal nnovaon, consued by a compleely new objec, he number of frms grows from zero o a maxmum and hen sars declnng owards a much smaller value. The pon a whch he maxmum number of frms s aaned and afer whch sars declnng s called he shakeou. Of course, he maxmum number of frms or he lower value aaned n he maury phase vary consderably amongs ndusral secors, bu he overall paern remans he same. The oher regulares are presen n some bu no necessarly n all he cases of ILC observed. Jovanovc and Tse (2006) also sress ha whle mos ndusres face a shakeou where he number of frms declnes, he ndusry oupu generally connues o rse, suggesng a reallocaon of capacy beween ncumbens and enrans. In ndusres where echnologcal progress s rapd, hey also show ha he shakeou of frms ends o occur sooner, and concdes wh he replacemen of obsolescen capal. In spe of hese nersecoral varaons he concep of ILC s que a powerful organzng framework for ndusral dynamcs. The mos mporan problem arsng from he observaons and sylzed facs abou he ILC s o explan why and how such a phenomenon occurs. A number of answers have been gven n he leraure. SHAKEOUT AND DOMINANT DESIGN Uerback and Suarez (1993) develop an analyss of shakeou whch s derved from he radonal Schumpeeran hypohess on he R&D advanage of large frms. Large frms are generally engaged n mporan R&D programs whch generae new producs. When a large frm selecs one of hese new producs and decdes o launch on marke, hs large frm mus face a hgh level of uncerany affecng boh he condons of demand and supply. On he demand sde, uncerany comes from he fac ha he frm does no know he deals of cusomers preferences, preferences relaed o he varous possble characerscs of he produc. On he supply sde, he condons of producon are also hghly unceran and may evolve over me. Dfferen producers can hus expermen wh varous produc nnovaons havng dsnc characerscs, and mplemen dfferen processes of producon. These alernave producers engage n a process of compeon. Over me, however, uncerany decreases and selecon operaes. On he demand sde, uncerany decreases once cusomers of he new produc have esed he alernave characerscs, and acqured experence on wha hey expec from he new produc, whch characerscs are more adaped o her personal ase and usage. Evenually cusomers selec a seres of produc characerscs and demand becomes more predcable. On he supply sde, rval producers learn over me and accumulae experence on wha cusomers prefer. In me hey also selec a seres of producon echnques whch are adaped o low cos producon. Snce uncerany decreases, he shakeou appears as an endogenous phenomenon. Produc nnovaon dmnshes because mos of he acors (producers and cusomers) are naurally orened owards he producon and consumpon of a sandardzed good. The progressve emergence of a domnan desgn nvolves hgher barrers o enry whch correspond o nvesmens by ncumbens n process nnovaon. Enry s hus lmed, and less effcen ncumben frms ex he ndusry. SHAKEOUT AND TECHNOLOGICAL SHOCK Accordng o Jovanovc and MacDonald (1994) he new ndusry s creaed by an nnovaon. Durng he subsequen evoluon of he ndusry some ncumben frms creae a refnemen nnovaon, whch gves hem a compeve advanage wh respec o her compeors. In her model he shakeou s deermned by he ex of he frms whch canno develop or learn he refnemen nnovaon. Frms whch had no enered he ndusry are ncapable of

4 4 developng or mang he refnemen nnovaon. These auhors propose a vson of he shakeou very dfferen from Uerback and Suarez explanaon, based on domnan desgn. For hese auhors he shakeou s generaed by an exernal echnologcal shock, exogenous o he ndusry. The frs echnologcal shock ses n wh he developmen of he new produc beng launched on he marke. Enry s smulaed by he emergence of new prof opporunes relaed o hs new echnology/new produc. Subsequenly here s a progressve reducon n prof margns and he ndusral srucure sablzes wh a lmed number of frms n he ndusry. A hs sage, whch corresponds o he maury of he ndusry, a new echnologcal rajecory emerges and agan smulaes he process of enry, smulaneously nvolvng an adjusmen of ncumben frms. The process of adjusmen s drven by a sochasc process and only a few frms survve hs exernal shock. The shakeou hus elmnaes frms whch faled o adap hemselves o he new echnology. SHAKEOUT, TIMING OF ENTRY, AND COHORTS OF ENTRANTS In Klepper (1996) he ndusry s creaed by a major nnovaon. Frms n he ndusry are capable of carryng ou R&D, of developng produc and process nnovaons, of monorng and mang her compeors ec. In Klepper s models wha deermnes he cyclcal behavour s he presence of ncreasng reurns. As a consequence Klepper relaes he shakeou o he mng of enry. The reference s, here agan, he Schumpeeran hypohess on he relaon beween frms sze and R&D capacy. Bu he novely s ha hs hypohess s dscussed on he bass of a fner dsncon beween dfferen ypes of frms, whch can be ncumben, new enrans or laecomers. Process nnovaon decreases he average coss of large frms, whch are he major acors of hs ype of nnovaon. However, some key elemens may erode he advanage of larger frms. For nsance, large frms have o cover specfc coss, such as expanson coss, whch lm her growh. The acvy of R&D can also exhb decreasng reurns o scale over me. Due o hese dfferences early enrans can develop process nnovaons, somemes much beer han ncumbens or laecomers. Early enrans can hus enjoy a leadershp poson n process nnovaon snce ncumbens have o deal wh oher problems relaed o her large sze and laecomers have o concenrae on produc nnovaon whch allows hem o grow o a mnmum sze n order o survve. The mng of enry s hus a major deermnan n he formaon of a compeve advanage of early enrans relave o ncumbens and o laecomers. Ths mechansm provdes an alernave explanaon of he shakeou. Each of hese explanaons s based on dfferen varables. Furhermore, some of he explanaory conceps, such as he domnan desgn, are no easly measurable. As a consequence for he momen no proper comparave esng of hese dfferen explanaons has been carred ou. Klepper and Smons (2005) esed he dfferen hypoheses bu her resuls for he dfferen ndusres nvesgaed (auomoble, res, penclln, elevson) are hghly conrased, and no general concluson can be drawn. Furhermore, hese dfferen hypoheses are no necessarly muually exclusve. I s no mpossble ha dfferen varables are capable of deermnng cyclcal behavour n a gven sysem. If hs were he case he effecs of cyclcal varables could be combned magnfyng he cyclcal behavour due o each varable. We wll come back o hs dscusson laer on n he paper afer havng nroduced our model of economc developmen by he creaon of new secors. 3) ILC n EVTEFI In hs model he economc sysem s consued by an endogenously varable number of secors. A secor consss of he collecon of frms producng he dfferenaed produc

5 5 descrbed by a dsrbuon of models n servce characerscs space (Savo, Pyka, 2004a, 2004b). Each secor s creaed by a major nnovaon. The nnovaon self gves rse o wha we call an adjusmen gap, correspondng o he sze of he poenal marke esablshed by he nnovaon. The erm adjusmen gap s due o he fac ha a he begnnng of he ILC hs marke s only poenal, because neher he requred producon capacy nor he demand exss. As boh of hese are creaed he adjusmen gap s gradually closed, leadng o he sauraon of he marke. A secor s here defned as he collecon of frms producng he same even f (hghly) dfferenaed produc. The secor s esablshed by he frs enrepreneur who creaes a frm o explo he nnovaon n order o acheve a emporary monopoly. If he nnovaon s successful maors ener hus rasng he nensy of compeon. The number of frms whn each secor s deermned by he balance beween enry and ex. As mang frms keep enerng he nensy of compeon rses unl any furher enry s dscouraged and ex sars akng place. In hs process he once new and nnovang secor becomes a par of he crcular flow (Schumpeer, 1912, 1934), or of he rounes of he economc sysem. The mauraon of preexsng secors nduces he creaon of new ones, as enrepreneurs observe he declnng ably of he maurng secor o creae profs and shf her nvesmen o new and promsng nches, some of whch wll n urn gve rse o new secors. In hs model economc developmen occurs manly by he creaon of new secors. As wll be seen laer, he number of frms n each secor rses rapdly a frs, reaches a maxmum and hen falls, somemes o a very low number. Employmen follows a smlar me pah, rsng n he emergence phase, reachng a maxmum and hen fallng. Ths may no enal an absolue fall of employmen n a secor, bu enals a fall n employmen per un of oupu. Ths me pah s parly he resul of he assumpon ha employmen per un of oupu falls wh ncreasng oupu sze, an assumpon whch has a srong emprcal backng. Due o, he emergence of new secors, he hgh raes of growh of oupu and employmen of emergng secors n her early sages can compensae for he declnng ably of older secors o creae boh of hem. Ths compensaon allows he economc sysem o avod he boleneck ha would be generaed by he mbalance beween connuously growng producvy and saurang demand 5Pasne, 1981, 1993). In hs process he dversy (or varey) of he economc sysem grows f he number of new secors creaed s greaer han he number of hose whch become obsolee. Srucural change s hen a he hear of hs model of economc developmen. Compeon plays a very cenral role n hs model for wo reasons: frs, he balance beween emporary monopoly and ncreasng nensy of compeon has a grea mpac on he dynamcs of he secor; second, compeon s boh nra and nersecor. In fac, n hs model as n any real lfe economc sysem, wo ypes of compeon, called Schumpeeran and classcal compeon, coexs whle beng very dfferen. Schumpeeran compeon consss of dong somehng dfferen, and somehow beer, han wha everyone else s dong, for example by creang a radcal nnovaon. The objecve of hs ype of compeon s o acheve a emporary monopoly, ha s, he oppose of compeon. If hs were he only ype of compeon, he creaon of a secor would lead o a lmed amoun of economc developmen. However, enry by mang frms nroduces he second ype of compeon. Classcal compeon consss of dong he same hng as everyone else s dong, bu more effcenly. The addon of classcal compeon o Schumpeeran compeon allows he economc sysem o explo more rapdly he full economc poenal of he new secor. Inersecor compeon exss when dfferen secors supply some common servces, as for example n he case of ralways companes, arlnes and bus companes. The nensy of

6 6 compeon perceved by each frm whn a secor s hus he combnaon of nra and nersecor compeon. Ths concepual framework allows us o develop a measure of nensy of compeon whch can n prncple be emprcally useful. Ths measure akes no accoun he nfluence of he naure of oupu on compeon. If frm s oupu were homogeneous, frms could dffer only for her relave effcency, leadng o he dfferenal possbly o charge a lower prce or o have a hgher prof rae. If frms dffer also for he naure of her oupu, whch can occur when he naure of he oupu s heerogeneous, a greaer dversy of compeve sraeges can be adoped. I becomes possble o creae an oupu whch s dfferen, and no exacly or no a all comparable, wh ha of any oher frm. Ths form of compeon s essenally dfferen from compeng o produce more effcenly he same ype of oupu. Elsewhere (Savo, Kraff, 2004; Savo, Pyka, 2006) we called he former Schumpeeran compeon and he laer classcal. In Schumpeeran compeon enrepreneurs compee by aempng o be frs n developng a new produc, dfferen from anyhng whch exss, n order o acheve a emporary monopoly, whle n classcal compeon frms aemp o replcae wha her compeors are dong, bu beng more effcen. Thus, Schumpeeran and classcal compeon are really wo opposes, n he sense ha he former aemps o avod he laer. In realy, he exsence of hese wo ypes of compeon s he resul of wo forces conrbung o economc developmen: effcency and creavy. The former leads o classcal compeon and he laer o Schumpeeran compeon. In our model relave effcency can be measured by un coss and creavy by he rse deermnes n dversy/varey. These wo forces are jonly nvolved n economc developmen and hey have a complemenary relaonshp, as descrbed n he followng wo hypoheses: Hypohess 1: The growh n varey s a necessary requremen for longerm economc developmen. Hypohess 2: Varey growh, leadng o new secors, and producvy growh n preexsng secors, are complemenary and no ndependen aspecs of economc developmen. These wo hypoheses can be jusfed by he mbalance beween producvy growh and demand growh (Pasne, 1981,1993). If producvy keeps ncreasng all he me whle he demand for new goods and servces reaches a sauraon pon, an mbalance arses. If he economy were consued by a consan se of acves, n presence of growng producvy would become possble o produce all demanded goods and servces wh a decreasng proporon of he resources used as npus, ncludng labour. Ths mbalance would hen consue a boleneck for economc developmen. The addon of new goods and servces o he economc sysem, ha s, a change n composon leadng o a growh n varey, can be a form of compensaon for he poenal dsplacemen of labour and of oher resources. Varey growh s hen requred for he long erm connuaon of economc developmen. On he oher hand, new goods and servces can only be generaed by means of search acves. The resources requred for hese acves can only come from he ncreases n producvy n preexsng secors n a way smlar o wha happened durng he process of ndusralsaon. Then producvy growh n agrculure creaed he resources requred for ndusralsaon (Kuznes, 1965). Smlarly producvy growh n preexsng secors creaes he resources requred for search acves and hus for he generaon of new producs and servces. In a Schumpeeran fashon, he growng producvy of he rounes consung he crcular flow creaes he resources requred for nnovaon, whou whch economc developmen would come o a hal. In hs paper he number of secors exsng n our arfcal economc sysem

7 7 a a gven me wll ac as a proxy for varey. Thus, condons leadng o a faser rae of creaon of new secors wll enhance he rae of varey growh. I s o be noed ha he prevous hypohess N 2 can be consdered as he complemenary of effcency and creavy. Whereas n older models economc growh was mplcly based only on ncreasng effcency, our model aemps o show ha creavy, as represened by he ably of he economc sysem o creae new goods and servces, s an equally mporan deermnan of economc developmen. Thus, he process of economc growh s no due only o a quanave change n whch he ncreasng effcency of gven processes provdes an ncreasng quany of goods and servces a consan resources and composon. On he conrary, n our vew growh and developmen are ransformaon processes whch generae boh qualave and quanave change, hese wo aspecs beng combned n such a way ha any nsance of qualave change provdes he scope for furher quanave mprovemens. Creavy s he resul of search acves, whch are a general analogue of research and developmen (Nelson, Wner, 1982). They can be defned as all he acves whch explore he exernal envronmen lookng for alernaves o he presenly used rounes. They can encompass R&D bu also oher acves such as desgn, consrucon of scenaros ec, whch are no normally ncluded n R&D. In fac, s possble o dvde all economc acves no rounes and search acves. In our model search acves can be fundamenal or secoral. Fundamenal search acves are carred ou o sudy he exernal envronmen, n boh s physcal and socal dmensons, whou pursung necessarly an ndusral applcaon bu beng manly curosy drven. In prncple hey can affec all ndusral secors, alhough no n he same way. Fundamenal search acves can have wo ypes of effecs on ndusral secors: frs, hey can lead o radcal nnovaon, hus speedng up he creaon of new secors; second, hey affec dfferenally secoral search, havng an mporan effec on scence based secors and a less mporan mpac on more radonal ones. Secoral search acves affec manly one secor and end o be more appled. They are drven by demand, bu nfluenced by fundamenal search acves. In hs model employmen s due o he creaon of new frms and o her labour nensy durng he lfe cycle. Labour nensy s obaned by he very smple assumpon ha labour per un of oupu falls wh ncreasng oupu sze. The model compues boh secoral and aggregae employmen (Fg 4). A very neresng resul of hs model s ha even when secoral employmen falls, for example durng he maure phases of he lfe cycle, aggregae employmen can keep growng f here s an adequae coordnaon of he declne of older secors and of he emergence of new ones. Ths allows o overcome he mbalance denfed by Pasne (1981, 1993). The emergence of new secors compensaes for he growng nably of older secors o creae employmen. 3.1) THE STRUCTURE OF THE MODEL. In he model each secor s descrbed by an equaon specfyng he dynamcs of enry and ex of frms no and ou of he secor. N = k1 FA AG IC MA (1) Where k 1 s a consan dependng on he condons deermnng enry, such as barrers o enry, bureaucrac obsacles o he creaon of new frms ec, N s he change n he ne number of frms n secor n perod, FA s fnancal avalably, AG s he adjusmen

8 8 gap for secor, IC s he nensy of compeon n secor, and MA s he number of mergers, acqusons and falures n secor. From now he subscrp wll be negleced for all smulaneous erms, snce all erms excep he consans are funcons of me. The erms wh a posve sgn descrbe enry and hose wh a negave sgn ex. Each of he erms of Eq 1 has an explc form. For example: AG = D, D (2) Max IC N N o = kc (3) N + RII NTo MA = k RA 1 9 N (4) AG D Y Y 0 = D (5) 0 0 p { 1+ exp[ k18 k19 ( SE SE )]} Where D Max, s he maxmum value of demand n secor, and D s he nsan value of demand; k IC s a consan dependng on he general condons deermnng compeon, such as rules lmng ancompeve behavour, and R II s he rao of ner o nrasecor compeon; RA s reurns o adopon; Y are he servces suppled by he produc of secor, Y s produc dfferenaon, p 0 s nal prce, k 18 and k 19 are wo parameers affecng he rae of growh of demand, SE and SE 0 are search acves a mes and zero. As n a logsc equaon, he wo parameers k 18 and k 19 have he funcon of delayng he sar of he developmen (k 18 ) and deermnng he rae of growh (k 19 ) of demand. Search acves can be secoral or fundamenal. The oal moun of search acves s he sum of he wo: + SE = SEF SE (6) o 0 l k4 [ 1 exp( k5 Dacc SE = SE )] (7) Where SEF, or fundamenal search acves, s he resul of nvesmen, ogeher wh physcal capal and educaon. SEF = share _ rd Toal _ Invesmen (8) Where share_rd s he share of he oal nvesmen (Toal_nvesmens ) nvesed n fundamenal search acves. The remanng funds are nvesed eher n human or physcal capal. The descrpon of he mos ypcal resuls of EVETFI follows. EVETFI can predc among ohers he evoluon of he number of frms, of oupu, of demand, of he nensy of compeon ec. Here we wll focus on he aspecs whch are more relevan for he dscusson of he ILC. Of course, he frs aspec o be consdered s he evoluon of he number of frms, an example of whch s shown n Fg. 1.

9 Fg. 1. Evoluon of he number of frms n he dfferen secors of he economc sysem Fg 2. The adjusmen gap AG Fg 3. Inensy of compeon IC

10 Fg. 4. Aggregae employmen As can be seen from Fg. 1, he number of frms n each secor frs rses, hen reaches a maxmum, and subsequenly sars declnng. The acual shape of he N () curve can vary dependng on he values of a number of parameers. However, under mos crcumsances he general shape of he curve (rse, maxmum and fall), remans he same as n Fg 1. In oher words, he me pah of he number of frms n each secor descrbes a lfe cycle exremely smlar o he one whch has been observed n he leraure. The adjusmen gap, AG, rses durng he nal perod of he secor s lfe and subsequenly falls o a lower and consan value (Fg. 2). The rse n AG and he fac ha he adjusmen gap does no fully close are explaned by he mprovemen n boh produc and process echnology whch mproves he performance of he produc and reduces he un cos of he servces suppled. Improved and more accessble producs expand he populaon of poenal buyers whle he delay of qualave sauraon deermned by he mprovemen n he servces suppled prevens AG from fallng o zero. The nensy of compeon IC follows a pah smlar o ha of he number of frms, rsng unl reaches a maxmum and hen fallng (Fg 3). The fnal value of IC s deermned by he balance beween nraand nersecor compeon. The curve for aggregae employmen s he envelope of he secoral employmen curves. Employmen whn each secor follows closely he paern of frm creaon, rsng or fallng wh he number of frms. The aggregae employmen curve (Fg. 4) depends on he shapes of secoral employmen curves and on her relave poson, whch s deermned by he delay beween he creaon of wo subsequen secors. To he exen ha he creaon of new secors s one of he man drvng forces of economc developmen, such delay can be nerpreed as a form of neremporal coordnaon. The overall macroeconomc employmen profle can be characerzed by s level and s rae of growh. These wo properes can be measured by he nercep and by he slope of he lnearzed employmen rend (LET), a sragh lne ha bes fs he employmen rend (Fg. 4). I s hen possble o sudy he nfluence of several varables on he rae of growh of employmen by plong he LET for dfferen values of he varables and parameers suded. 3.2) ILC AND THE EVTEFI MODEL I s o be noed ha our man movaon o creae hs model dd no have any explc relaonshp o he exsence of an ILC. The EVTEFI model was creaed o es hypoheses 1 and 2 above. Thus, s man objecve was relaed o he analyss of srucural change n economc developmen. No explc nenon or assumpon whch would necessarly lead o he exsence of a lfe cycle was conaned n he model. The ILC s here obaned as a consequence of he behavour of nensy of compeon and of demand. The frs enrepreneur funds a frm o explo an nnovaon n order o acheve a emporary monopoly.

11 11 If he frm esablshng he new secor s successful mave enry follows (a Schumpeeran bandwagon) leadng o a rse n he nensy of compeon. Gven ha he emporary monopoly,.e. he absence of compeon, was he nducemen o ener, he evoluon of he secor wll gradually reduce such nducemen. As he secor evolves by mave enry, he rsng nensy of compeon makes ncreasngly smlar o already esablshed secors, whch consue he rounes of he economc sysem, or, n Schumpeeran erms, s crcular flow. A cyclcal paern can hen be orgnaed by he very same process ha gves rse o he new secor. As mave enry occurs he nducemen o any furher enry falls gradually unl ex predomnaes over enry. A hs pon we expec he number of frms o sar fallng, or he shake ou o occur. In Schumpeeran erms he shake ou concdes wh he ranson from he nnovave sae o he roune/crcular flow sae of he secor. The evoluon of he adjusmen gap, or of marke sze, provdes a furher explanaon of he exsence of a lfe cycle. The enry of frms no a secor s deermned by he sze of he adjusmen gap AG. I s o be observed ha he adjusmen gap s he expeced, or poenal, sze of he marke esablshed by he new secor. Snce he marke s empy a he me of he creaon of he new secor, n he long run we expec AG o fall o low values, and even possbly o zero, correspondng o he achevemen of marke sauraon. A fallng AG leads o a fallng rae of enry of frms no he secor, furher conrbung o he ne ex of frms from he secor. The rend owards marke sauraon hus renforces he effec of he growng nensy of compeon n ransformng he secor from an nnovave o a maure one. Gven s mporance n he dynamcs of our model he concep of marke sauraon deserves a more dealed dscusson. A marke can be consdered sauraed when all prospecve buyers of he goods or servces suppled by marke do no wsh o buy any more of hese goods or servces excep for replacng he ones whch wear ou and are no longer usable. Or, a leas, hs would be he defnon of marke sauraon n a world whou produc nnovaon. In a marke characerzed by connuous produc nnovaon purchasng behavour s no solely deermned by he physcal obsolescence of producs. As new versons, or models, of each produc are connuously nroduced new purchases can occur even before he produc becomes physcally obsolee. Such new purchases can be drven by he hgher level of servces suppled by he mos recen versons of he produc (Savo, Mecalfe, 1984; Savo, 1996) relave o he prevous ones. Ths has he mporan consequence ha sauraon has o be defned n boh quanave and qualave erms. A secor s quanavely sauraed when only replacemen purchases of he consan ype of oupu produces, even f possbly wh ncreasng effcency, can occur. A secor s qualavely sauraed when he produc echnology of s oupu sablzes afer havng mproved very consderably durng he prevous evoluon of he secor. Quanave sauraon can occur for homogeneous producs affeced a bes by nnovaons n process echnology bu no n produc echnology. The possbly of quanave sauraon depends on he exsence of a low or decreasng prce elascy of demand for producs wh qualavely consan feaures, whch supply a consan level of servces. Quanave sauraon s mpossble o avod n a world endowed wh growng effcency bu consan oupu feaures. Qualave change n produc echnology, n he form of new or mproved servce characerscs (Savo, Mecalfe, 1984; Savo, 1996), avods quanave sauraon and can delay ndefnely qualave sauraon. In oher words, f produc nnovaon keeps mprovng producs servce characerscs and f ncome consrans perm, purchases of exsng producs can keep occurrng a a rae and wh a value hgher, and possbly a lo hgher, han f he produc had been homogeneous and wh unchangng servce characerscs. Pung dfferenly, n value erms he onse of sauraon can be delayed consderably (or ndefnely?) by produc nnovaon leadng o enhanced servce characerscs. The prevous consderaons mply ha he adjusmen gap s no necessarly gong o close or ha, f were o do so, could do n a very long me. Thus,

12 12 marke sauraon could ake place n volume bu no necessarly n value, and f boh were o occur hey would no occur smulaneously. The dsncon beween quanave and qualave sauraon s closely relaed o he wo basc forces operang n economc developmen, effcency and creavy. Quanave sauraon would exs n a world n whch frms and ndusral secors oupu are consan and all ha can vary n he course of me s he growh n producon effcency. The possbly of qualave sauraon comes no exsence when produc nnovaon can sar changng he performance of producs n he form of he servces ha hey can supply o her users. Changng oupu varey, followng from produc nnovaon and beng he expresson of creavy, delays he onse of qualave sauraon. In he prevous par of hs paper we have already shown ha he EVTEFI model gves rse o an ndusry lfe cycle whch s manly drven by he nensy of compeon and by he dynamcs of demand. As we poned ou n he nal secon of he paper, he ILC models already publshed arbue he exsence of an ILC o oher varables rangng from he emergence of an mprovemen nnovaon, of a domnan desgn, or o ncreasng reurns o R&D. We do no specfcally nvesgae hese oher varables n our paper bu we wsh o sugges ha several varables can lead o a cyclcal behavour. The relevan queson hen s hen wha properes of he varables can gve rse o a cyclcal behavour?. A possble general answer o hs queson can be gven as follows. In order o behave cyclcally a varable mus have a me pah n whch frs grows and hen falls. Such behavour s sysemacally obaned when he me dervave of he varable (Y) depends on he produc of he varable self and of he dfference beween he maxmum and he nsan value of he same varable (Eq 9). In hs case we can expec he me pah of he varable o behave as f here were no lms o s developmen for very low values of he varable bu o sar feelng he effec of he lm when he maxmum value s approached. A ha pon he (Y max Y) par of he equaon wll approach zero and wll slow down he rae of growh of he varable. dy d = β Y ( Y max Y ) (9) We can observe ha n he evoluon of he capals economc sysem he growng complexy and heerogeney of producs sared occurrng a a mass level only afer wha could be consdered basc needs were sasfed for he majory of he populaon. Ths rend began n he early par of he XXh cenury n he US and laer reached all ndusralsed counres. The rend owards hgher qualy, more dfferenaed producs could be nerpreed as he naural endency of consumers becomng more affluen o choose beer f more expensve producs n preference o cheaper bu lower qualy ones. Ye, f producers had followed only he effcency roue and had connued o offer progressvely cheaper bu unchanged lower qualy sandardzed producs, he declnng propensy of consumers o allocae more of her growng ncome o he same ype of sandardzed producs could have led o he mbalance denfed by Pasne (1981, 1993) and o a boleneck n economc developmen. To he exen ha he exsence of an ndusry lfe cycle s caused manly by he growng nensy of compeon and by he paral or oal closng of he adjusmen gap, we can expec all he varables whch nerac srongly wh eher IC or AG o have a poenal effec on he exsence, shape and duraon of he ndusry lfe cycle. In he followng secon of hs

13 13 paper we descrbe a seres of expermens whch we carred ou wh our model o sudy he nfluence of several varables on he ILC. 3.4) EXPERIMENTS WITH THE EVTEFI MODEL. In hs secon an expermen consss of a seres of model runs wh varable values of a parcular model parameer. In urn such parameers affec model varables. Each expermen wll hen be descrbed by he varable and by he parameers whch are changed. In each case he resuls of he expermen wll conss of he graphc represenaon of he behavour of relaed varables. Thus, n each expermen here wll be one affecng and one or more affeced varables. For example, n he frs wo expermens we vary wo consans, called k 4 and k 5 respecvely, boh of whch affec he me pah of secoral search acves SE (Eq 6). We know ha SE affecs drecly several oher varables, such as he level of servces Y suppled by a gven produc model, he exen of produc dfferenaon Y, prce p, secoral oupu Q, ec, and ndrecly oher varables such as demand, adjusmen gap, nensy of compeon ec. From Eq 6 we can see ha k 5 deermnes he rae a whch SE rses from s nal value o a lmng value ha reaches n he long run whle k 4 deermnes he lmng value self. Ths s based on he assumpon ha as a echnology maures secoral search acves are gong o grow a a decreasng rae. In oher words, n he long run secoral search acves can be expeced o run agans decreasng reurns. In each expermen here wll be boh mcroeconomc and macroeconomc affeced varables. Amongs he macroeconomc affeced varables he rae of growh of employmen wll play a parcularly mporan role because wll be used as an ndcaor of he performance of he economc sysem. EXPERIMENT 1. VARYING THE PARAMETERS, K 4 AND K 5, DETERMINING THE RATE OF GROWTH OF SEARCH ACTIVITIES WITH DEMAND. We begn our seres wh wo expermens (N 1 and N 2) n whch he wo parameers, k 4 and k 5, affecng he me pah of search acves are vared. Snce secoral search acves are demand drven, hese wo parameers deermne he rae a whch hey grow for a gven paern of accumulaon of demand. The SE curve ncreases from he begnnng a a decreasng rae (Eq 6). k 4 and k 5 deermne boh he rae of growh and he maxmum level aaned by SE. Once more we observe ha n EVTEFI search acves nfluence many aspecs of our arfcal economc sysem. Hence we expec ha by varyng k 4 and k 5 we are gong o affec several aspecs of our arfcal economc sysem. Gven he form of Eq 6 we expec k 4 o affec preferenally he maxmum level aaned by SE and k 5 he rae a whch grows. Snce n hs paper our man concern s he ILC we wll focus predomnanly on he curves showng he change n he number of frms n each secor n he course of me. To dsplay he resuls wh greaer clary we wll smply show he varaon n he number of frms N () for one secor, n hs case he second. Of course, he resuls are ndependen of he secor we choose. In he case of he frs expermen we show he effecs of changng parameer values on several varables. For he oher expermens, gven ha he same procedure wll be followed, we wll need o supply less complee resuls. VARYING K 4.

14 Fg 5. Effec of varyng k 5 on he number of frms n he 2 nd secor k5 = k5 = k5 = k5 = k5 = Fg 6. Effec of varyng k 5 on he adjusmen gap of he 2nd ndusral secor k5 = k5 = k5 = 0.01 k5 = k5 = Fg. 7. Effec of varyng he parameer k 5 on he servces Y suppled by he oupu of he 2nd ndusral secor

15 Fg 8. Aggregae Employmen for dfferen values of he parameer k k5 = k5 = k5 = 0.01 k5 = k5 = Fg.9. Effec of varyng he parameer k 5 on employmen n he 2 nd secor Lnear (0.005) Lnear (0.0075) Lnear (0.025) Lnear (0.01) Lnear (0.0125) Fg 10. Lnearzed employmen growh

16 Fg. 11. Effec of varyng k 5 on ncome growh labour growh raes k 5 ncome growh raes Fg 12. Effec of varyng k 5 on ncome and employmen growh. Several aspecs of he arfcal economc sysem are affeced by changng k 5 : The me of creaon of new secors, or equvalenly, he rae of creaon of new secors. By rasng k 5 new secors are creaed more rapdly or a earler mes. Ths s shown for he number of frms (Fg 5), for he adjusmen gap AG (Fg. 6), for he servces Y suppled by he oupu of he secor (Fg. 7), for aggregae (Fg 8) and secoral (Fg 9) employmen. A possble excepon occurs for he hghes values of k 5, where an nverson of he above rend s observed n some cases. In all hese fgures he maxmum value aaned by he varable or he area under he curve fall wh ncreasng values of k 5. The slope of he lnearsed employmen rend (LET) rses movng from negave o posve values as k 5 s ncreased whle smulaneously s nercep falls (Fg. 11). Income grows faser han labour when k 5 s ncreased even n ranges of k 5 n whch raes of employmen growh are negave. On he whole hs expermen shows ha he general effec of rsng values of k 5, whch are expeced o rase he rae of growh of secoral search acves, consss of a faser rae of creaon of new secors bu also of a smaller scope of each secor. The laer aspec s due o he lower maxmum value aaned by he varables (ex. he maxmum secoral employmen n Fg 9) or by he reduced area under he curves (number of frms n Fg 5 and adjusmen gap n Fg 6). These wo oucomes of he rsng rae of growh of search acves have conrasng effecs. The hgher rae of creaon of new secors can be expeced o conrbue posvely o he developmen of he economc sysem whle he fallng scope of each secor can be expeced o have he oppose effec. Ths rade off seems o be manfesed n he LET shown

17 17 n Fg 10, we can see ha by ncreasng k 5 he slope of LET curves rses whle her nercep falls. Ths resul could be nerpreed by sayng ha rsng raes of growh of secoral search acves reduce shor erm employmen levels n order o rase long erm employmen growh raes. VARYING K k4 = 5 k4 = 7.5 k4 = 10 k4 = 12.5 k4 = 14 Fg. 13. Effec of changng k 4 on he number of frms n he 2 nd secor k4 = 5 k4 = 7.5 k4 = 10 k4 = 12.5 k4 = 14 Fg 14. Effec of changng k 4 on aggregae employmen Lnear (k4 = 5) Lnear (k4 = 14) Lnear (k4 = 12.5) Lnear (k4 = 10) Lnear (k4 = 7.5) Fg 15. Effec of changng k 4 on he lnearzed employmen rend

18 k 4 ncome growh raes laour growh raes Fg 16. Income vs employmen growh by changng k 4 The mpac of k 4 seems o be much more dramac han ha of k 5. For dfferen values of k 4 he curve for he number of frms (Fg. 13) changes shape o such an exen ha n some cases becomes dffcul o alk of a lfe cycle. Ths s rue n parcular for low values of k 4, for whch becomes dffcul o denfy a shake ou. Conversely, by reducng he value of k 4, ha s by reducng he rae of growh of secoral search acves wh he growh of demand, he lfe of he secor becomes so long as o render he concep of lfe cycle rrelevan. Even before aempng o nerpre hese changes n erms of her underlyng causes, hs expermen provdes a graphcally srkng llusraon of he way n whch some facors can deermne no only he shape of he ILC bu s very exsence. Equally neresng are he effecs of k 4 on aggregae employmen (Fg. 14), on he lnearzed employmen rend (Fg 15) and on he relaonshp beween employmen and ncome growh (Fg 16). In all hese cases we observe a pronounced non lneary n he effecs of k 4 on he varables nvesgaed. Thus, he rae of growh of aggregae employmen (Fg 14) and he slope of he lnearzed employmen rend (Fg 15) frs ncrease and hen fall as we gradually rase he value of k 4. Ths nonlneary becomes even more graphcally evden n Fg 16, showng ha ncome grows faser han employmen as we sar rasng k 4, bu sars fallng for hgher values of k 4. EXPERIMENT N 2. VARYING THE PARAMETERS DETERMINING THE GROWTH OF THE SERVICES Y I SUPPLIED BY THE PRODUCT OF SECTOR I. In he prevous expermen we suded he nfluence of search acves on he dynamcs of he ILC. Ths expermen ams a sudyng he effec on ILC of anoher varable, he servces suppled by he produc of he secor. Such servces affec demand, one of he wo man facors, ogeher wh IC, whch deermne he cyclcal behavour of ndusral secors. The rae of growh of he servces Y s self deermned by search acves accordng o, equaon 10: Y 0 1 = y + (10) 0 1+ exp[ k k ( SE SE )] Where k 14 and k 15 are he parameers conrollng he sarng me and he rae of growh of he servces Y suppled by he produc of secor.

19 19 VARYING K k14 = 0.1 k14 = 0.5 k14 = 1 k14 = 1.5 k14 = 2 Fg 17. Effec of k 14 on he number of frms n he 2 nd secor k14 = 0.1 k14 = 0.5 k14 = 1 k14 = 1.5 k14 = 2 Fg 18. Effec of k 14 on Y n he 2 nd secor k14 = 0.1 k14 = 0.5 k14 = 1 k14 = 1.5 k14 = 2 Fg 19. Effec of k 14 on employmen n he 2 nd ndusry Lnear (k14 = 0.1) Lnear (k14 = 2) Lnear (k14 = 1.5) Lnear (k14 = 1) Lnear (k14 = 0.5) Lnear (k14 = 2.5) Fg 20. Effec of k 14 on lnearzed employmen rend

20 Lnear (k14 = 2) Lnear (k14 = 1.5) Lnear (k14 = 1) Lnear (k14 = 0.5) Lnear (k14 = 0.1) Fg 21. Effec of k 14 on lnearzed ncome rend VARYING K k15 = 0.1 k15 = 0.25 k15 = 0.5 k15 = 0.75 k15 = 1 Fg 22. Effec of k 15 on he number of frms n he second secor k15 = 0.1 k15 = 0.25 k15 = 0.5 k15 = 0.75 k15 = 1 Fg 23. Effec of k 15 on he developmen of Y n he 2 nd secor Lnear (k15 = 0.25) Lnear (k15 = 0.5) Lnear (k15 = 0.1) Lnear (k15 = 0.75) Lnear (k15 = 1) Fg 24. Effec of k 15 on he lnearzed employmen rend

21 Lnear (k15 = 0.25) Lnear (k15 = 0.5) Lnear (k15 = 0.1) Lnear (k15 = 0.75) Lnear (k15 = 1) Lnear (k15 = 1.5) Fg 25. Effec of k 15 on ncome rends The resuls of hs expermen can be summarsed as follows: Increasng k 14 n he range : Delays he creaon of new secors Reduces he maxmum number of frms n each secor Reduces boh he rae of growh and he lmng value of he servces Y suppled by he produc of secor Reduces he nercep (level) of he lnearzed employmen rend (LET) for lower values n he k 14 range bu (nonlneary) he LET sars growng agan for hgher values of k 14. Income growh falls regularly wh rsng values of k 14 Increasng k 15 n he range : Reduces he rae of creaon of new secors n he lower par of he k 15 range and ncreases n he upper par of he k 15 range (nonlnear effec). Increases he maxm number of frms n each secor all he me Rases boh he rae of growh and he lmng value of he servces Y suppled by he produc of secor For lower values n he k 15 range leads o a rse n he nercep of he lnearzed employmen rend and for hgher values of k 15 leads o a fall n he slope and possbly n he nercep of he lnearzed employmen rend (nonlnear effec). Rases he slope of he ncome rend all he me On he whole we can see ha he effecs of k 14 and of k 15 on he ILC are que conrasng and almos oppose. Ths was o be expeced gven ha k 14 deermnes he delay n he sar of Y whle k 15 deermnes he rae of growh of Y. Thus, ncreasng k 14 s lkely o slow down he rae of creaon of new secors whle rsng k 15 values are lkely o ncrease he scope (sze) of new secors. Thus, he number of frms, he maxmum level of Y, he slope of he lnearzed employmen rend and he ncome rend are generally negavely affeced by a rsng k 14 and generally posvely affeced by a rsng k 15. However, whle hese expecaons are largely confrmed non lnear effecs appear. Examples of hese non lneares are found n he effecs of boh k 14 and k 15 on he lnearzed employmen rend and on he number of frms n each secor. The exsence of such non lneares s due o he srongly neracng naure of he EVTEFI model. Mos varables nerac wh oher varables n he model. For example, when a change s nroduced no he model whch speeds up he rae of creaon of new secors, rases smulaneously he nensy of ner secor compeon. Ths may lead o a faser

22 22 creaon of secors creang less employmen per un of oupu. Trade offs of hs ype are lkely o lead o non lnear effecs. 4) SUMMARY AND CONCLUSIONS. In hs paper we used a model of economc developmen by he creaon of new secors, called EVETFI, o sudy he condons of exsence and he facors affecng he sably, shape and duraon of he Indusry Lfe Cycle (ILC). In he EVTEFI model he economc sysem consss of an endogenously varable number of ndusral secors. The emergence of new secors s deermned by he condons of exsence of ncumben ones. Each secor, defned as he se of frms producng a common even f hghly dfferenaed oupu (produc or servce), esablshed by an enrepreneur foundng a frm o explo an nnovaon nduced by he expecaon of a emporary monopoly. Ths nducemen o enry s gradually eroded by he enry of mang frms whch rase he nensy of compeon o such hgh levels as o make any furher enry unneresng. Ths process leads o a fall n ne enry and hen o a shake ou. The evoluon of demand renforces hese cyclcal feaures. The nnovaon gvng rse o he secor esablshes a poenal bu nally empy marke whose sze s measured by he adjusmen gap AG. Raes of enry, whch are drven by he adjusmen gap, rse or declne wh he value of AG. In he long run demand for he oupu of any secor has an upper bound. As a consequence he raes of enry are evenually gong o declne even f hey can rse n earler perods of he ILC. As he fallng nducemen o enry deermned by demand renforces ha of he nensy of compeon, he ILC moves owards greaer ndusral concenraon by he processes of falures, mergers and acqusons. Thus, n our model he ILC occurs as a naural consequence of he dynamcs of compeon and of demand. I s o be noed ha he EVTEFI model was no desgned o prove he exsence of he ILC bu raher o es wo hypoheses abou he relaonshp beween varey and economc developmen. In a general sense he model confrms hese wo hypoheses snce shows ha, even when employmen whn a secor ends o fall, aggregae employmen can sll grow provded ha he emergence of new secors compensaes for he fallng ably of older secors o creae employmen. In he EVTEFI model many varables are srongly nerdependen. Thus, even f compeon and demand are he man facors drvng he ILC, oher varables can affec he exsence, shape and duraon of he ILC. In he paper we carry ou expermens o sudy he effec of oher varables on he ILC. The wo varables ha we chose are search acves, whch are very ubquous n he EVTEFI model, and he servces suppled by he oupu of he secor Y. The servces Y deermne demand and are hemselves deermned by search acves. In he expermens we vary he wo parameers of he logsc equaons represenng search acves and he servces Y. In each expermen we sudy he effec of hese varables on he number of frms n each secor N, on he adjusmen gap AG, on he rae of growh of employmen and of ncome. The resuls of hese expermens show ha ncreasng he rae of growh of search acves ends n general o accelerae he creaon new secors bu also o reduce her sze. Furhermore, we know from he srucure of he model ha rasng he rae of creaon of new secors can ncrease he nersecor nensy of compeon. The acual mpac of he parameers affecng search acves on he ILC depends on a seres of rade offs, such as for example ncreasng he number of secors bu reducng her sze. Unsurprsngly we fnd a number of non lnear effecs. For example, rasng he value of k 4, a parameer affecng he maxmum sze of search acves, he rae of employmen growh frs rses and hen falls.

23 23 The resuls of hese expermens show ha boh search acves and he level of servces suppled by he secor s oupu Y have a srong effec on he exsence, shape and duraon of he ILC. In parcular hey show ha f marke sauraon could be ndefnely delayed by connuous produc nnovaon, he curve for he number of frms n he secor would become so long as o elmnae he shake ou and o render he concep of ILC meanngless. Ths confrms our general hypohess abou cycle nducng varables. In order o be able o mpar a cyclcal behavour on an economc sysem a varable mus have an upper bound. In hs case he me pah of he varable wll resemble ha of a boundless one for very low values bu wll sar beng affeced by he upper bound as grows. A prooype of hs dynamcs s gven by he logsc equaon (Eq 7). Thus, we can expec he cyclcal behavour o be more pronounced he faser and he more complee he process of marke sauraon and he hgher he nersecor nensy of compeon. Boh of hese condons lead o a very rapd shake ou wh a drasc fall n he number of frms. Conversely, f boh of hese condons do no apply or f hey are very weak, he shake ou s very lmed or non exsen and he lfe cycle dsappears. In he expermens descrbed n he paper we sudy he effec of search acves and of he level of servces suppled by he secor s oupu Y on boh mcro ad macro economc varables. Amongs he former here are he number of frms n a secor and he adjusmen gap, amongs he laer he rae of growh of employmen and of ncome. In hs sense hese expermens are an exenson of prevous work n whch we showed (Savo, Pyka, 2005) ha mcro dynamcs has a profound mpac on macro dynamcs. The exsence, shape and duraon of he ILC can have a consderable mpac on he me pah of employmen and of ncome. Dependng on he combnaon of nersecor coordnaon and of he ILC he process of economc developmen can be characerzed by a smooh macroeconomc employmen growh profle or by a cyclcal one wh large flucuaons. Imporan polcy mplcaons are lkely o be hdden n hs message. The resuls of our model are no complee. We know ha many oher varables can affec he ILC. I would be mpossble o nclude hem all n a paper. In hs paper we waned o esablsh he prncples ha () he ILC can be creaed by he jon dynamcs of compeon and demand, () ha oher varables relaed o compeon and demand can affec he exsence, shape and duraon of he ILC, () ha he exsence, shape and duraon of he ILC can affec he macroeconomc dynamcs of he sysem. We consder ha we have esablshed hese prncples, alhough many furher expermens are requred for a full exploraon of parameer space. We conclude hs paper by makng a reference o he prevous leraure on he ILC. As we prevously poned ou, we do no use he same varables as any of he prevous papers o explan he exsence and he properes of he ILC. We do no consder he resuls of our paper ncompable wh hose already presen n he leraure. As we already poned ou, many varables can sasfy he condons requred o creae cyclcal developmen paerns. I s no mpossble ha all he explanaory varables so far used n he leraure renforce one anoher. An exended analyss amed a negrang all hese oher varables would requre modfcaons of our model, such as he ncluson of specfc frms and secor compeences. These exensons are n our plans and we are gong o deal wh hem n fuure papers. However, for he me beng we have demonsraed ha n an economc sysem nnovaon srucural change and ILC can be creaed by he jon dynamcs of wo exremely fundamenal varables such as compeon and demand.