COMPETITIVE INNOVATION WITH CODIFIED AND TACIT KNOWLEDGE*
| Date | 01 September 2009 |
| Published date | 01 September 2009 |
| DOI | http://doi.org/10.1111/j.1467-9485.2009.00491.x |
COMPETITIVE INNOVATION WITH
CODIFIED AND TACIT KNOWLEDGE
n
Tetsugen Haruyama
w
Abstract
R&D-based models of endogenous technical progress rest on a premise that
technical progress is driven by profit-seeking entrepreneurs. This literature led to a
dominant view that endogenous technical advance is not consistent with perfect
competition with constant returns to scale. Departing from this dominant
perspective, we demonstrate that technical progress endogenously occurs in a
perfectly competitive economy under constant returns to scale in rivalrous inputs.
Our result is based on a hypothesis that R&D creates codified and tacit knowledge
as joint products. Empirical and case studies are discussed to support the
hypothesis. Using the model, we demonstrate that stronger patent protection can
encourage or discourage R&D, depending on the size of an economy.
I Intro ductio n
Neo-classical growth models with perfect competition are silent on determinants
of technical progress. Motivated by this observation, R&D-based models of
endogenous technical progress were proposed as an alternative analytical
framework for long-run economic growth. Those R&D-based models rest on a
central premise that technical progress is driven by profit-seeking entrepreneurs,
and innovative activity is compensated by profits generated in an imperfect
product market. Importantly, this influential Schumpeterian approach implies
that endogenous technical advance does not occur in a perfectly competitive
economy with constant returns to scale. This conclusion is widely accepted
among policy makers, and behind policy discussion of intellectual property
rights.
1
This paper departs from this dominant Schumpeterian perspective, and
argues that profit incentives and monopoly power are sufficient but not
necessary for endogenous technical progress. We demonstrate that technical
progress endogenously occurs in a perfectly competitive economy under
n
The paper is partly based on Haruyama (2007). I am grateful to N. Mitani and Guido Cozzi
for useful comments.
w
Kobe University
1
For examples, see a series of books titled ‘Innovation Policy and the Economy,’ published
by MIT Press.
Scottish Journal of Political Economy, Vol. 56, No. 4, September 2009
r2009 The Author
Journal compilation r2009 Scottish Economic Society. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
390
constant returns to scale in rivalrous inputs. This result comes in stark contrast
with the landmark implication of R&D-based modelsof endogenous growth. Our
argument is based on the distinction between codified and tacit knowledge, and a
hypothesis that both types of knowledge are joint products of R&D activity.
2
Codified knowledge is detailed specifications of new technology, which is
codified in a written form (e.g. manuals and journals). An example is a source code
of a computer software. On the other hand, tacit knowledge is not (or even cannot
be)statedinanexplicitform.
3
But, it allows experts to obtain desired results
without reflecting on codified knowledge. That is, tacit knowledge is ideas of how
to efficiently implement codified knowledge and even create new codified
knowledge. An example is a software engineer’s programming ability developed
through accumulated experience.
4
In the joint product hypothesis, innovative
activity creates codified and tacit knowledge, the latter of which is embodied in
innovators. The next section discusses some examples that illustrate this hypothesis.
A defining characteristic of codified knowledge is non-rivalry. It ‘can be used
as often as desired, in as many productive activities as desired,’ as Romer (1990)
stresses. Because of this public-good nature, he argues that monopoly profits are
required to compensate R&D inputs. This is the aspect of innovative activity
that existing R&D-based models emphasize most. In a sense, tacit knowledge
also plays an implicit role in those models. For example, consider the model of
Romer (1990). R&D workers become more able to do research activity as new
codified knowledge is created.
5
This assumption is equivalent to saying that
researchers accumulate tacit knowledge, which is useful in applying existing
codified knowledge to create new codified knowledge. This is a plausible
assumption, given that any R&D activity is a learning process. However, an
assumption is made that tacit knowledge is a pure public good. It is non-
rivalrous in the sense that tacit knowledge instantaneously diffuses across all
workers at no cost without degrading its quality.
6
It is also non-excludable, since
it is not possible for R&D workers to prevent from others benefiting from their
2
See Polanyi (1966), who explicitly introduces the concept of tacit knowledge. Although
introducing tacit knowledge into the context of innovation is not new (Nonaka and Takeuchi,
1995), our novel contribution is that tacit knowledge is explicitly incorporated into a
Schumpeterian growth model to establish that endogenous technical progress occurs under
perfect competition.
3
A good example is how to ride a bicycle. People usually become able to ride a bicycle after
practices rather than reading instructions. It is because of difficulty conveying an idea of how to
ride a bicycle to other people in words.
4
The relevance of distinguishing two types of knowledge is illustrated by questionnaire results
reported by Jensen and Thursby (2001) regarding licensing university inventions to private
firms. University technology transfer officers think that 71% of the inventions licensed require
cooperation by the inventor for successful commercialization. Another relevant study is Darby
and Zucker (2003), who argue that new high-tech industries are created around universities
where inventing scientists work, because their active participation is essential for commercia-
lization. They base their view on the study of Mowery and Ziedonis (2001) who present evidence
consistent with it.
5
The stock of knowledge A
t
increases according to _
At¼dtRt;d>0 where R
t
is the number of
researchers. dtis R&D productivity that increases as new knowledge is created.
6
If tacit knowledge has a degree of rivalry in the Romer model, an identity or work historyof
researchers should matter. But it is not the case in his model.
COMPETITIVE INNOVATION 391
r2009 The Author
Journal compilation r2009 Scottish Economic Society
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