Special issue on the evolutionary analysis of innovation

Abstract

Technological change and innovation are now at the core of economic analysis. In mainstream micro economics, firms' behaviour with regard to innovation is usually modelled as the decision on investment in research and development (R and D), which may either lead to increases in productivity, or product quality. In models of this kind, the traditional concept of pure competition loses its meaning because firms are able to differentiate their products, and thus the market structure becomes one of monopolistic competition, and profits no longer vanish in the long run (e.g. Scherer and Ross, 1990). In the analysis of economic growth, similar developments led to what is often called the 'revolution' of new growth theory. Here, the investment of firms in R and D leads to mostly positive externalities, and thus increasing returns to scale arise at the macro level (e.g. Romer, 1990). However, at the same time that these developments in mainstream economics were taking place, an alternative approach to the economic analysis of innovation and technological change was emerging. Contributors to this approach would argue that the toolbox of economic theory, with its strong emphasis on purely rational behaviour and equilibrium, is too restrictive to provide a useful analysis of the complicated phenomenon of technological change. The reason for this lies in the inherently uncertain nature of technological change. Thus, authors in this tradition would argue that firms may invest in technological search or R and D without having a clear expectation of the exact outcome of the process. Even a stylized representation of the investment decision in which firms are assumed to have an idea of the probability distribution of possible outcomes was often considered too restrictive (e.g. Dosi, 1988). Theorists in this tradition would thus argue that Simon's concept of ~bounded