Innovation and Industry Life Cycle: the Case of US Tire Industry ( )

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1 UNIVERSITA' DEGLI STUDI DI BRESCIA FACOLTA' DI INGEGNERIA Corso di laurea in Ingegneria Gestionale Tesi di laurea Specialistica Innovation and Industry Life Cycle: the Case of US Tire Industry ( ) Innovazione e Ciclo di Vita Industriale: il Caso dell Industria statunitense dei Pneumatici ( ) RELATORE: Prof. Francesco Lissoni CORRELATORE: Prof. Guido Bünstorf LAUREANDA: Chiara Bonomelli Matr Anno Accademico

2 I am always doing that which I cannot do, in order that I may learn how to do it Pablo Picasso

3 Acknowledgments Acknowledgments This research project would not have been possible without the support of many people. I would like to express my gratitude to my supervisor, Prof. Francesco Lissoni, whose expertise, understanding and patience added considerable value to my graduate experience. It is a great pleasure to thank also my co-supervisor, Prof. Guido Buenstorf, for having offered me the opportunity of working at Max Planck Institut on an exciting research project, which after 14 (largely enjoyable) months culminated in this thesis. Ich möchte mich recht herzlich bedanken mit meinen Freund in Jena (Marco, Karolina, Igor, Andrea und die "genovesi"), wir haben unvergessliche Zeit beim Arbeiten, Studium und Flower Power zusammen verbracht. Quasi (e dico quasi perché chi mi conosce lo sa) mi emoziono a pensar di dover salutare i miei compagni di università dopo tutte le giornate trascorse tra CAD, Ca Noa, ansie pre e post esame...beh non posso nominarli tutti, ma chiunque abbia condiviso almeno un pirlo al Jolly bar o un nettare dall immenso Beppe sa che lo sto pensando... Devo particolare riconoscenza anche alla mia famiglia e soprattutto a Nicolò (in attesa del processo beatificazione dopo questi mesi) per aver sopportato i miei periodi di stress, ansie e paranoie universitarie con infinita pazienza. iv

4 Table of Contents Table of Contents 1 Introduction Theoretical Background Introduction Discovery, knowledge, invention and innovation: basic notions Common classification of inventions and innovations Basic vs. derived inventions Radical vs. incremental innovations Disruptive vs. sustaining innovations Freeman/Perez taxonomy Henderson/Clark classification Product and process inventions Patents: a quantification of innovation The number of patents as quantitative measure for innovation Patent citations as a qualitative measure for innovation Limitations in patent analysis The idea of the innovation cycles Kondratiev and the long waves theory The destructive and supporting nature of innovation cycles Neo-Schumpeterians and Evolutionary theories Industry Life Cycle studies The Dominant design model - Abernathy and Utterback The Minimum Efficient Scale model Mac Donald and Jovanovic The Evolutionary model of Industrial Life Cycle -Klepper The Carree-Thurik model v

5 Table of Contents 3 The US Tire Industry Introduction A brief history of rubber Milestones before the 20th century The period The development of the US Tire Industry The 19th century foundations The beginning of the 20th century The 1910s The 1920s Product and Process famous innovations Historical product innovations Fundamental steps in process innovation Methodology Introduction Data collection USPTO classification Different steps of the reclassification process Tire Class [1, 0] Proxy Procedure Technological classification Use of citations Evidence and Trends Introduction Reclassification of the data Fields of tire inventions The dynamic pattern of tire inventions Product-design invention path Product patents: citations analysis Process inventions path Process patents: citations analysis Chemical inventions path A summary of the major findings vi

6 Table of Contents 6 Conclusion Summary in Italian language Introduzione Contesto teorico Scoperta, Conoscenza, Innovazione ed Invenzione Classificazioni di innovazioni ed invenzioni L utilizzo dei brevetti come approssimazione dell innovazione L'innovazione come fenomeno ciclico Il ciclo di vita industriale Il contesto storico: l industria dei pneumatici negli USA La gomma: l introduzione al suo utilizzo industriale Lo sviluppo dell industria statunitense di pneumatici Principali innovazioni di prodotto e di processo Metodologia Il dataset Il processo di riclassificazione Evidenze empiriche e risultati Riclassificazione del dataset L innovazione tecnologica nell industria dei pneumatici Conclusioni Risultati Limiti dell indagine e possibili sviluppi della ricerca Appendix A Appendix B Appendix C References vii

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8 Introduction 1 Introduction These pages conclude a research activity that I started in September 2009 during my stay at the Max Planck Institut für Ökonomik in Jena. The institute is part of the Max Planck Society for the Advancement of Science, Germany's largest and most productive research organization. I joined for 7 months the Evolutionary Economics Group, whose main branch of research focuses on the systematic transformations that economic institutions, production and consumption activities undergo over time. The general purpose is to explain the driving forces behind the historical transformations and the likely consequences for our economy. In a broader perspective, this field of research connects the type of evolution underlying man-made transformations to evolution in nature. The research group works with a variety of theoretical concepts and empirical methods. Particularly, I assisted Prof. Guido Buenstorf in his inquiry on Industrial Life Cycle dynamics, which, as a consequence, became also the focus of my dissertation work. I finished this research back to Italy, within the Department of Mechanical and Industrial Engineering (Università degli Studi di Brescia) under the constant supervision of Prof. Francesco Lissoni and the continuous support of Max Planck Institute staff. * * * 9

9 Introduction This research aims to appraise how different types of technological inventions appeared during the Tire Industry Life Cycle development. In particular, I re-evaluated from a totally new pool of data findings on Tire Industry Dynamics emerged from previous researches (see Klepper and Simons, Mac Donald and Jovanovic works). The procedure of patents analysis as proxy for innovation followed those exposed in literature in other studies; the novelty was the creation of a new classification based on USPTO (United States Patent and Trademark Office) class, which allowed me to split the set according to different inventions purposes. I aggregated data in time series and drew same paths explaining: the role of product innovations; the processes of acquiring and specializing technical knowledge; the dynamics of imitation and substitution in industries, according to the role of entrepreneurship in the development of firms and industries themselves. On a broader side, this work could be a useful pattern for future researches aimed to the evaluation of innovation impact using different patent classifications, which investigate the specific two ways link between different technological inventions and their industrial impact. * * * The dissertation is structured as follows. Chapter 2 can be divided in two broad branches according to the title: Innovation and Industrial Dynamics. In the first part the multiple definitions and possible classifications of innovations are displayed; in the second an historical overview of the Economic Cycle idea allows the reader to understand the foundations and the commitment leading the investigation with an Evolutionary Approach. In particular, in the end, I place special emphasis on specific Industry Life Cycle theories, sources of the basic hypotheses which directed my research. Chapter 3 introduces the reader to the historical context. The main events which influenced tire and rubber increasing consumption, the principal industrial changes in competition during the beginning of the 20th century are reported in order to refine the research basement with other empirical data. 10

10 Introduction Chapter 4 goes into detail on the methodology used to harvest information from USPTO classification and to create the time series of interest. It also describes the database structure built to organize the findings. Chapter 5 focuses on the discussion of the main results obtained in the end of the research project. It carries out a series of descriptive statistics aimed to support or reject the previous assumptions on the role of innovation in the tire industry. Chapter 6 summarizes the major findings and suggests other possibilities of research in this field of study. Chapter 7 includes a summary in Italian language, necessary to complete the dissertation work. Lastly, three appendixes are reported to add more technical information on the methodological choices and analysis comments. Appendix A lists all the USPC (United States Patent Classes) dropped by the first step of dataset cleaning; Appendix B shows the drawing of the most cited product patents in order to give to the reader more information to understand some technical findings; Appendix C shows the drawing of the most cited process patents for the same reasons above mentioned. 11

11 Theoretical Background 2 Theoretical Background 2.1 Introduction In this chapter the reader can find an overview of the theoretical literature that guided me in the analysis. I have chosen to present these concepts following the structure of the title, from the words invention and innovation to the concept of Industry Life Cycle. In the parts I focus on the notions of invention and innovation and their most common classifications; in 2.4 I discuss the relationship between inventions and patents, deepening the theories that support the choice of patents as a qualitative and quantitative proxy for innovation; in 2.4 I describe what milestones have marked the technological change of the 20 century; in 2.5, finally, I investigate more specifically four models concerning the Industry Life Cycle, upon which I will base my own research effort. 12

12 Theoretical Background 2.2 Discovery, knowledge, invention and innovation: basic notions In everyday life some of the above mentioned terms may be used interchangeably without giving rise to misunderstandings, although in economic studies each word refers to an exact concept. This implies that the choice of an expression rather than another is not arbitrary, but strictly linked to a well-defined meaning. In what follows I report the definitions proposed by Alfred Lorn Norman (1993). A discovery is a new increment to knowledge, which is commonly defined as understanding the behavior of observable natural phenomena as well as structure of logical relationship. Discoveries are the creation of new conjectures, the observation of new behavioral relationships and, more generally, finding out or ascertaining something previously unknown/unrecognized. Discoveries are made by providing observational evidences and attempt to develop a preliminary, rough explanation of some phenomena. Knowledge is the sum of all the factors that have the potential to influence human thought and behavior and that sometimes allow the explanation, prediction, and control of physical phenomena (Hall & Andriani, 2003 p.145). Knowledge can be partitioned into theoretical and empirical. Theorists tend to create models to clarify and forecast behavior; they adopt various approaches like qualitative models based on intuitions or mathematical models formulized on strong hypothesis and axioms. Empiricists, on the contrary, observe behavioral interactions; the methodology in this branch of research is still not common and unique, hence data collections can be obtained by controlled experiments or unstructured observations. Knowledge can be also tacit (uncodified) or explicit (codified). Tacit knowledge is acquired by experience and it is not easy to transmit because it is not formally structured. Explicit knowledge, otherwise, has been captured in a code or a language that facilitates communication; in addition, it does not explain only why things work, but also enables the prediction of the outcome of novel phenomena. Current knowledge can be synthesized as the sum of prior discoveries gathered through observations with previously acquired knowledge. 13

13 Theoretical Background An invention is a new manmade idea (it can be a new compound, device or process), whose economic value is still unknown. Inventions can be major that is created without the use of other existing invention, or derived with the purpose of refining one or more preexisting technologies. In any case the term invention is attributable only to new recipes (not found before in nature) that solve new or unsolved technical problems. An innovation is the creation or the implementation of new alternatives, which attain higher performances in a goal directed behavior (Norman, 1993). The idea of goal directed behavior guides the use of creativity and knowledge in order to get specific purposes. Furthermore, this focus on specific objectives is essential to make out detailed criteria that quantify the real worth of inventions. From an economic perspective, the most common example of goal directed behavior is the R&D effort to get higher profits; according to the revenue-goal only commercial inventions can be considered real innovations. However an innovation does not necessarily need to be based on inventions (i.e. organizational innovations); the creative activity can be considered just a special category among solutions which increase profit performances. The pioneer who began to lay the foundations in the delineation of these concepts was Joseph Schumpeter. For Schumpeter, the invention is something purely scientific, while the innovation is to do "something new" in the economic system: a new product, market or production process (Schumpeter, 1934). The interactions and interpenetrations among these activities are numerous and consequently it is hard to demarcate a clear boundary line between these definitions. First of all, I want to emphasize the key role of knowledge. The basic knowledge (built on theoretical and/or empirical results) is the starting and finishing point of every process of scientific progress. All previous discoveries and inventions generate the preconditions for conducing further research and innovation activities, which in turn will become part of what we consider acquired knowledge. The process seems linear as whether these events are strictly consequential, indeed most of the links are two ways. Discoveries frequently release opportunities for inventions, but the full economic development often requires additional discoveries invention-specific. The same correlation suits also for discoveries and innovations: a theoretical discovery can promote innovation in the 14

14 Theoretical Background practical application or, otherwise, a particular remunerative innovation could stimulate a new stream of research. Finally, discoveries, inventions and innovations frequently lead to a synergic accumulation of knowledge. The organization of the whole knowledge is usually structured and modular; thus an inventor does not need to comprehend all the theoretical background of a specific industry, because the process of invention requires just a branch of specific concepts. This modular specialization of technology greatly facilitates invention by limiting the necessary notions. Investigating the reverse implication, researchers identified a multiplier effect that helps knowledge accumulation. The major contribution was brought by Rosenberg (1982), who suggested that economics and technology influence the scientific development and vice versa. Basically, the mechanism establishes a positive cascading effect resultant by the introduction of an innovative technology that brought a significant increase in practical knowledge. In this context technical problems, difficult to overcome with incremental adjustments, can arise: this condition spurs the circle to restart from basic research and so on. 15

15 Theoretical Background 2.3 Common classification of inventions and innovations In the field of Economics of Innovation the investigation focuses primarily on innovations. The latter represent the valuable inputs that transform, more or less strongly, the economic environment. On the other hand, an innovation cannot be recognized ex ante among new technologies, because its economic potential is not yet known. In some researches the aim is exactly to build a proper classification of innovations; in these situations other sources of information have to be passed in review. The main contributors are patented inventions, which provide many data on the technological field and the context (year, place, inventor, assignee etc). In this approach, the innovations are a subset of inventions (innovations not based on inventions are not detected), hence classifications valid for inventions stands also for innovations. In the broad categories described in 2.2 innovations, inventions and discoveries are then easily separated. Within these groups huge differences among singular entities remain and it is therefore common to structure subgroups according to specific criteria. The discriminating parameters may be objective or based on subjective assumption Basic vs. derived inventions A typical objective criterion is the exploit of previous inventions. There are indeed (Meurer and Nard, 2005): Basic inventions created without the use of prior inventions; Derived inventions implemented by using one or more preexisting inventions. Anyway it is necessary that the result obtained works out a new technical problem or not yet solved. In turn derived inventions can be subdivided further into: Refinements inventions, they offer a solution in a different form that leads to a significant improvement compared with the pre-existing performance; 16

16 Theoretical Background Transfer inventions, they import in a new sector a prior invention drawing new and original results (allow a different use of the previous idea); Combination innovations, they achieve new and original results through coordination of new and original elements with means already known. An invention can be objectively placed in one of these sub-categories referring to the background of prior knowledge (e.g. prior patents citations) drawn by the inventor. In terms of "utmost importance", it could be a huge mistake estimating as innovation the inventions just in proportion to their contribution of additive knowledge. This deduction is sometimes verified due to the inverse entailment, in fact, those innovations recognized as radicals produce knowledge totally unexplored. The inference, however, cannot be bijective because there are many inventions that could revolutionize the way of operating, but they do not have any economic value once implemented. Other instruments are used to discern with more certainty innovation from simple inventions and they are explained in the chapter on patent analysis Radical vs. incremental innovations The distinction between radical and incremental innovation is a more subjective classification. It is difficult to assess who pioneered the incremental/radical dichotomy, partly because the concept was introduced by many authors often with different expressions but the same meaning. Abernathy and Utterback (1978) differentiated incremental from radical innovation, while Porter (1986) distinguished between continuous and discontinuous technological changes. Some scholars identify as discerning variable the amount of extra knowledge (Deward & Dutton, 1986) and define as radical innovations the technical processes with an high degree of new knowledge and incremental those with a low level. Hall and Andriani (2003) redraft the notion of radical/incremental on same reflections, moreover they take into account the role of knowledge more widespread. The new knowledge can be additive or substitutive. In incremental innovations, the core of the new technology builds upon the existing pool of individual skills, organizational routines, and general knowledge; in the radical ones, the knowledge has the potential to disrupt the prior state of the art and may require 17

17 Theoretical Background significant unlearning of existing skills, routines to develop new modus operandi. In their research the analysis on knowledge is two dimensions: the amount of new knowledge and the degree to which the knowledge is substitutive. Figure 2.1: The innovation plot (Hall & Andriani, 2003 p.149) Other researchers have instead stressed the importance on the effect of the introduction of the innovation in the economic environment (Freeman & Perez, 1988).Truly new products and processes, emerged from unpredictable departure from the "normal technological trajectory", were defined radical innovation. They are discontinuous events that cannot be attributed to the cumulative addition of incremental modifications or to some improvements to existing technologies. They are essential as potential springboards for the growth of new markets (radical product) or for big improvements in the cost and quality of existing products (radical process innovations). Incremental innovation has no dramatic effects on the economy and they often pass unnoticed and unrecorded. Their combined effect, on the contrary, is extremely important in the growth of productivity and in further product improvements, particularly in the period after a radical breakthrough. 18

18 Theoretical Background Summarily, two are the most common dimensions used to separate an incremental from a radical innovation: The Internal dimension refers to the knowledge and resources involved. An incremental innovation builds upon existing knowledge (competence-enhancing), on the contrary, a radical innovation requires completely new knowledge (competence-destroying). The External dimension differentiates the innovation on the impact upon the market competitiveness. An incremental innovation involves modest technological changes and the existing products on the market remain competitive, otherwise a radical innovation instead involves large technological advancements, rendering the existing products non-competitive or obsolete Disruptive vs. sustaining innovations The term disruptive technology was coined by Clayton M. Christensen in his article Disruptive Technologies: Catching the Wave co-wrote with Joseph Bower (Bower and Christensen, 1995) and refined in the book The Innovator's Dilemma (Christensen, 1997). This breakdown emphasizes the features described above. The categorization is based primarily on the concept of continuity. When a measurable trajectory of improvement has been established, two types of technology changes can appear: several innovations sustain the industry's rate of improvement in product performance (in terms to improvements of total capacity and product performances etc) and, by contrast, others disrupt or redefined the present trajectories. Disruptive technology and disruptive innovation are terms used to describe changes in ways that the market does not expect. It is significant to clarify how disruptive and radical are two definitions not perfectly symmetric. As a matter of facts radical innovations are not always disrupting. The automobile, for example, was a revolutionary innovation but not disruptive; this was much more the case of Ford T model, which we regarded as disruptive because it reduced dramatically the market for horse-drawn vehicles. 19

19 Theoretical Background Figure 2.2: Disruptive technology trajectory (Bower & Christensen, 1995 p. 49) Freeman/Perez taxonomy Four possible innovation categories have been identified by Freeman and Perez (1988). 1. Incremental innovations occur more or less continuously in any industry or service activity, but at differing rates depending upon a combination of demand pressures, socio-cultural factors, technological opportunities and trajectories. The single incremental innovation does not influence strongly the market; however, their combined effect is awfully significant and the cumulative impact can lead to an increase in productivity greater than radical innovations. Generally, the progressive evolution of incremental innovations on a technological trajectory is more or less predictable during the product life cycle. 20

20 Theoretical Background 2. Radical innovations are considered especially innovative products and processes. They are discontinuous events and they are typically results originating from breakthroughs in basic research or from specific searches for a technical solution to an identified market need. Over long periods of time, radical innovations may have dramatic effects on the dynamics of competition among companies. Sometimes they may even start the rise of an entirely new industry, in which they constitute the new technological system. 3. Systemic innovations are changes in technology affecting several branches of the economy and giving rise to entirely new industrial sectors. They are successful combination of radical, incremental, organizational innovations that involve many firms, forming the so called "clusters phenomena. They frequently guide to a proliferation of radical innovations that diffuse into the economy and generate a large number of minor refinement innovations ( bandwagon effect"). 4. New techno-economic paradigms represent changes in technological systems that correspond to the "creative gales of destruction" (Schumpeterian concept revised and refined by Freeman and Perez). This type of innovation transforms a vast array of economic activities, leading to a series of interrelated effects such as: drastic reductions in the general costs, strong improvements in products and processes characteristics, pervasive effects throughout the entire economy, etc Henderson/Clark classification Henderson and Clark (1990) also remarked that the incremental/radical dichotomy was not exhaustive to explain all the possible situations. They suggest to classify the technological knowledge required to develop new products (and consequently possible innovations) along two new dimensions: knowledge of the components and architectural knowledge (knowledge on the links between them). 21

21 Theoretical Background Figure 2.3: Henderson/Clark model (Handerson & Clark, 1990, p. 11) According to the Henderson-Clark model, an incremental innovation is based upon existing component and architectural knowledge. A modular innovation, indeed, requires new knowledge for one or more components, but the architectural knowledge remains unchanged. The opposite of modular innovation is the architectural innovation; this type has a great impact upon the linkage of components, but the knowledge of single components remains the same. Finally, when a certain innovation revolutionizes both component and architectural knowledge is defined radical innovation. In practice, distinguishing between incremental, architectural or modular innovations is not an elementary task especially from a strategic viewpoint; the companies must pay particular attention, because the competencies and strategies required for one type of innovation might not suit perfectly the others Product and process inventions Another key classification method relates to the aims pursued by the invention. A generic partition, applicable more or less to all industries, concerns product and process invention. Although the subdivision refers to "structural" properties, it is tricky allocate 22

22 Theoretical Background them correctly. The greatest contribution in the explanation of these concepts was given by Abernathy, Utterback and Suarez (Abernathy & Utterback, 1978; Utterback, 1994; Utterback & Suarez, ). Product innovation is defined as the development of new products, the changes in design of prior goods or the use of new materials/components in established products. It leads to a change in the physical characteristics of a product or the creation of a new one. Process innovation is a new approach in process reengineering, a change in the way a product or service is manufactured, created, or distributed. Another important approach is due to Pavitt (1984). Pavitt define as product the innovations used outside the industry that generate them and as process those used in the same sector. Relying simply on the definitions, the classification seems unproblematic, but unfortunately an innovation cannot be categorized in absolute. To better clarify the issue, I explain a dilemma faced during the division of my data. A tool used in the tire production process (e.g. a pump) is both product and process innovation simultaneously: a product in the market concerns inflating methods and a process for the tire industry. 23

23 Theoretical Background 2.4 Patents: a quantification of innovation The number of patents as quantitative measure for innovation Knowledge, invention and technical change are elusive notion, difficult to conceptualize and even harder to measure in a consistent, systematic way. The dimension innovation is therefore difficult to quantify in relation to the considerations discussed in the 2.1. Undoubtedly, all the tacit knowledge and "learning by doing" process are virtually impossible to summarize quantitatively in terms of aggregate data and thus they have to be studied on a case by case basis. The phenomenon sizeable at the macro level is rather the sheer inventive activity: the approximation variables for this dimension are patents. They are a direct outcome of the inventive process and, more specifically, of those inventions which are expected to have a commercial impact. They are a particularly appropriate indicator for capturing the proprietary and competitive dimension of technological change. Patents are classified according to their technological contents, by means of continuously updated international classifications. Thus they provide information not only on the rate of inventive activity, but also on its direction. A patent contains much information such as the identity and location of the inventors, inventor s employer and a technological thorough description. Obtaining a patent may involve an inventive non-negligible effort, because the prerequisites for patentability are: Novelty: the invention must not be part of the state of the prior art, for prior art is meant all that was available to the public before to the date of filing the patent application; Non obviousness: the inventive step for a person skilled in the technological field of the invention should not be so obvious from the state of the art; Industrial applicability: the invention must be manufactured or used in any kind of industry; Lawfulness: the invention must not be contrary to public policy and morality. 24