Chapter 3. Technical Change and Industrial Dynamics as Evolutionary Processes

This chapter reviews and integrates much of what has been learned on the processes of technological evolution, their main features, and their effects on the evolution of industries. First, we map and integrate the various pieces of evidence concerning the nature and structure of technological knowledge, the sources of novel opportunities, the dynamics through which they are tapped, and the revealed outcomes in terms of advances in production techniques and product characteristics. Explicit recognition of the evolutionary manners through which technological change proceeds has also profound implications for the way economists theorize about and analyze a number of topics central to the discipline. One is the theory of the firm in industries where technological and organizational innovation is important. Indeed a large literature has grown up on this topic, addressing the nature of the technological and organizational capabilities which business firms embody and the ways they evolve over time. Another domain concerns the nature of competition in such industries, wherein innovation and diffusion affect growth and survival probabilities of heterogeneous firms. The processes of knowledge accumulation and diffusion involve winners and losers, changing distributions of competitive abilities across different firms, and, with that, changing industrial structures. Both the sector-specific characteristics of technologies and their degrees of maturity over their life cycles influence the patterns of industrial organization—including size distributions, degrees of concentration, relative importance of incumbents and entrants, etc. This is the second set of topics which we address. Finally, in the conclusions we briefly flag some fundamental aspects of economic growth and development as an innovation-driven evolutionary process.