Conclusiones

These days, firms R&D activities are mainly focused on the development of new pro-cesses, products and services. In a globalised world it is more than ever from outstand-ing importance to enhance the own firm competitiveness not only for present market positioning but also for long term market survival. From this background, it is not astonishing, as highlighted by (Clark and Fujimoto, 1991) and (Tushman and Nadler, 1986) for instance, that engagement into innovation activities cannot be considered as a piece of work beyond the call of duty but rather than the crucial duty to ensure firms future existence. Thus, innovation activities exert a direct influence on market activity, and thus on market share development. Further it can be assumed that in-novation activities are directly linked to firm size and thus firm size also influences market activity.

From this background, the exploring of so called feedback processes between inno-vation, market share and firm size has gained much attention during the last years.

For many years, the effects of innovation and firm size and the relationship between market share evolution and innovation have been discussed in isolation.

As stated by (Cohen and Levinthal, 1989) on p. 1070, ”[a] methodological problem common to almost all the studies of the relationship between size and innovation is that they overlook the effect of innovation on firm growth (and hence, ultimately firm size). It is curious that the endogeneity of firm size, central to Schumpeter’s notion of creative destruction, has been neglected, while the simultaneity associated with creative destruction has been recognized in some studies of the relationship between innovation and market concentration. This lacuna probably reflects the profession’s primitive understanding of the determination of the size and growth of firms, and area of research that has just recently been revived.”

As mentioned before, there subsists a large body of literature covering the relation-ship between firm size and innovation, which are primarily focused on manufacturing

industries. These studies are heavily empirical based and are ambiguous with respect to the effects of firm size on innovation. For instance, (Mansfield, 1968) and (Schmook-ler, 1972) pointed out, that small firms tend to be more innovative than larger firms, whereas (Fisher and Temin, 1973) and (Vernon, 1974) found the contrary. (Kumar and Saqib, 1996) have found that the probability of engaging in R&D activities is positive correlated with firm size up to a certain threshold. Beyond this threshold R&D activ-ity is declining. On contrary, (Wakasugi and Koyata, 1997) found, that firm size and innovation activity are not direct linked. They highlighted, that hence larger firms are more aggressive to pursue their innovation efforts but the efficiency of innovation is not necessarily enhanced by a growing firm size. (Cohen and Klepper, 1996) differentiates between process innovation and product innovation and found that process innovation increases with firm size.

If we now turn the focus on the effect of market structure on innovation, in principle two different scenarios are cogitable: the first is, that a positive relationship between monopoly power and innovative activity can be assumed, the second is, that innovative activity suffers from monopoly power. The first as well as the second relationship is from an empirical view documented in a voluminous literature.¹ (Scherer, 1967) and (Levin et al., 1985) for instance found an inverted U-pattern between market structure and innovation. This reflects the fact, that insufficient market power hinders firms to reduce so called up-front R&D effort, whereas an increasing market power reduces the incentive to engage in further R&D effort.

The problem of the before mentioned empirical orientated branches of literature are, that endogeneity problems occur, that means, ex ante it is not clear whether first the innovative activity determines firm size or firm size determines activity and second, the innovative activity determines market structure or market structure determines innovative activity. The problem one is confronted with, are feedback processes not only within the two branches, but also between the two branches.

Further, learning activities and knowledge diffusion play an important role when exploring feedback processes between innovation, market share and firm size. As men-tioned by (Campagni, 1991), (Best, 2001), (Porter, 2000) and (Krugman, 1991) in a more spatial context, that inter-firm cooperation based on knowledge sharing can ex-plain the predominance of small firms in the market. Learning can be described as a cognitive process of attaining new capabilities, to cope with not only the economic but also with the physical and social environment.². Learning curves have both strategic

1See (Cohen and Levinthal, 1989) for a summary or more recently studies from (Nickell, 1996), (Nickell et al., 1997) and (Blundell et al., 1995) for instance which show unambiguously negative correlations between market structure and innovation.

2Refer to (Asheim, 1996).

and competitive implications for firms as mentioned by (Spence, 1981) and a more strategic dimension for planning decisions as highlighted by (Chand and Sethi, 1990).

Empirically, numerous studies have found that learning curves differ on the one hand on an inter-industrial level and on the other hand on an intra-industrial level. ³ Because innovations are produced by firms, knowledge is the presumption for this task. Thus knowledge is generated and transmitted in firms and between firms by human being, a micro view learning curve concept which is focused on personal learning seems to be appropriate. (Anderson and Schooler, 1991) for instance showed in psychological designed laboratory experiments that learning curves with diminishing returns are consistent with hyperbolic, square root, exponential and power functions. It is assumed that, knowledge generation depends first on not directly observable components such as talent, which is a proxy for the apprehension and second on the historically given stock of knowledge of an agent as highlighted by (Florida, 2002). Thus, knowledge generation can be interpreted as a separate production process in firms with input factors talent, grasp and of course time which is needed to accumulate knowledge. As mentioned by (Machlup, 1980) the creation and diffusion of knowledge is a core element of the production process and finally for the market structure in which the firm operates.

The aim of this study is to combine the effect of firm size, innovation and the effect of market structure on innovation with the effects of knowledge diffusion and learning. Thus this model is an extension of the work of (Mazzucato, 2000) in that way, as it explicit introduces a channel of knowledge diffusion, which is endogenously determined by learning activities. To integrate both aims, the so called replicator dynamics approach is disposed. The tool itself stems from evolutionary economics and is based on Darwin´s principle of natural selection. Particularly, on the basis of simulation experiments it will be investigated how learning and knowledge diffusion affect market structure. With this model it will be proofed whether and if yes learning activities need a dilution of one of the stylized facts regarding firm size dynamics which states, that early stages of an industry life cycle is characterized by instable market patterns.

The reminder of this chapter is structured as follows: In the first section a replicator dynamics model of market structure, innovation and firm size is introduced. After simulating the model it is expanded by the aspect of learning and inter firm knowledge transfer. Section four deals with the simulation of the before expanded model. In section five a conclusion of the derived results is given.

3Refer for instance to this topic on (Hayes, 1986), (Dutton and Thomas, 1984) and (Pisano et al., 2001).