Demand-Pull vs Technology-Push Approaches

In the literature about technological change, two different approaches try to explain the causes of technological progress and innovation: demand-pull and technology-push. Jacob Schmookler was the first to introduce this formal distinction in the literature.

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Demand-Pull Approach

Demand-pull approach (Figure 1) states that the most important factors that lead to innovation and shape its direction are market-driven (Schmookler, 1966).

FIGURE 1:MARKET PULL

In particular, as the name suggests, consumers’ demand drives the technological change. Indeed, as explained by Dosi (1982), demand-pull theories implicitly assume that:

 In the market, there are a given number of goods (both final and intermediate) that satisfy some “needs”. However, as Dosi points out, the term “need” can be interpreted in two ways: by an anthropological point of view, needs are basic urgencies for either survival (e.g., eating) or merely fulfilment of the individual (e.g., communicating). Nonetheless, this kind of needs has no economic impact, since the means by which they are satisfied are not relevant; by the other point of view, needs just relate to the particular means of their satisfaction (e.g., Walkman, VHS, iPhone). This kind of needs has a great economic impact.

 Consumers’ demand reflects their preferences; therefore, they have utility functions that underlie the formation of demand curves (see the Bounded Rationality paragraph for a critique).

 When income is growing, demand of goods that are most desired by consumers will increase. Therefore, by a microeconomic point of view, this is equivalent to assume that relative prices of goods evolve too.

 Firms are able to “read” these market signals and to interpret the evolution of consumers’ needs67_.

 At this point, firms start the innovative process aimed to satisfy the consumers’ needs.

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It is clear that the latter approach is consistent with the neoclassical framework. Indeed, firms innovate according to market incentives, i.e. profits, after responding to market signals, i.e. relative prices movements (see Acemoglu, 2002). Moreover, this approach is developed in a general equilibrium framework where demand shifts lead to relative price adjustments and demands are generated by consumers’ utility functions.

Schmookler (1966) himself was the major supporter of this approach. Indeed, in his works (1966, 1974), he underlined the role of market forces in determining new technologies.

The empirical evidence on the importance of demand in innovation is not univocal. Schmookler (1966) provided empirical evidence confirming demand-pull approach based on a sample of manufacturing industry that was considered too small by Scherer (1982); the latter found that the impact of demand on innovation, by using industrial materials inventions as proxy, is not as noteworthy as suggested by Schmookler (1966) when the whole manufacturing industry is considered. However, after running other empirical tests he was able to conclude that demand-pull is an important factor that drives innovation. Franke and von Hoppel (2003) achieved the same result. Nevertheless, Langrist et al. (1972), Freeman (1974), Dosi (1982), and Verspagen and Kleinknecht (1990) rejected this conclusion. Mowery and Rosenberg (1979) made the most important critique to the demand-pull theories: they argued that in the literature much confusion has been made between the concepts of ‘needs’ and ‘demand’ and between ‘potential demand’ and ‘effective demand’. Consumers are not always aware of their hidden needs (e.g., until the invention of the Walkman, consumers never explicitly expressed their need to listen to music); therefore, hidden needs (those that Dosi (1982) considered having relevant economic impact, see above) underlie potential demand not effective demand. Nevertheless, firms are able to catch market signals from effective demand movement. Walsh (1984) further confirmed the latter hypothesis in the chemistry industry.

Demand-pull does not take into account the complexity and the uncertainty associated with the innovation process (Dosi, 1982, 1984); hence, empirical evidence that validates demand-pull approach still does not explain why and how technological discontinuities occur.

Science and Technology-Push Approach

Demand-pull approach considers indeed the demand-side of the market; meanwhile, the technology-push approach highlights the role of the supply-side factors.

Technology-push approach (Figure 2) states that advances in science and technology push and determine both innovation rate and its direction (Nemet, 2009).

FIGURE 2:TECHNOLOGY PUSH

As seen above, Schumpeter was maybe the “archeconomist” supporting the technology- push approach. According to Dosi (1982, 1984), the prominence of this approach must be attributed to some stylized facts characterizing innovative process:

 The increasing relevance of scientific inputs in innovative process.

 The increasing complexity of R&D activities, which has imposed a long-term perspective upon firms.

 The increasing amount of R&D investments (which can be exploited as proxy for the inputs of the innovative process) and innovation itself (measured by the number of new patents).

 The uncertainty affecting the inventive activity.

Walsh (1984) found that in the chemical industry the emergence of the most relevant product families was technology-push; Rosenberg (1994) identified a critical link between science and innovation (in particular, from labs to industries), underlining the importance of inter-industrial knowledge flows; Rothwell (2002) argued the existence of a “sequential” relationship between science and innovation.

It has been noted that, unlike the demand-pull approach, this approach can explain the birth of the technological paradigms. This could explain why the number of technology- push innovations is low; indeed, the most innovations are incremental, along technological trajectories, and not revolutionary (van den Ende and Dolfsma, 2002). Moreover, this also explain the high number of failures of technology-push innovations, since technological revolutions are much more uncertain (van den Ende and Dolfsma, 2002).

However, Dosi (1982, 1984) recognized that a strongly technology-push approach does not take into account economic factors (such as the market) that are able to shape the technological trajectories of the innovation progress. Therefore, as shown in the next

paragraph, a coherent combination of the two approaches is more suitable in explaining the emergence of the innovation.

Demand-Pull and Technology-Push Interactions

As pointed out above, demand-pull theories do not consider the importance of science and of technology, while technology-push theories of market factors (such as profitability). Mowery and Rosenberg (1979) stated that both demand-pull and technology-push are necessary, but not sufficient conditions for innovation and their coexistence must be accepted. Arthur (2007) as well suggested the same approach. Moreover, Pavitt (1984), Mowery and Rosenberg (1989), and Verspagen and Kleinknecht (1990) documented positive interactions effects between demand and supply-side factors in innovation processes.

In order to provide a more fitting theory of technological innovation, evolutionary economist have combined weaker versions of both approaches to include demand and supply-side factors.

Therefore, Dosi (1982, 1984, and 1988) summarized the evolutionary approach to innovation: technological paradigms affirmation and changes of technological paradigms themselves must be attributed to science development and technological knowledge in general. Hence, technological paradigms can be explained by a technology-push point of view, as technological revolutions have an intrinsically uncertain nature; market forces cannot explain paradigms in the early phase of their creation. This view was shared by an OECD (1992) report titled “new technological paradigm emerging from the techno- scientific breeding ground”.

However, market forces act, together with institutional and social factors, as selecting forces across the (simplistic) line science-technology-production. Indeed, Dosi stated that environmental factors (both economical, such as the market, and institutional, see below):

 Determine the rate of technological progress.

 Select among the set of the potential technological paradigms the one that better fits with the environment itself (for instance, the ones that better respond to profitability and marketability characteristics).

 Shape the exact trajectory of advance, but always “within the boundaries defined by the nature of technological paradigms” (Dosi, 1988, p.227).

Therefore, as Martin (1994) summarized, technology-push theories can explain the emergence of technological paradigms, while demand-pull theories (together with

institutional innovation) the development and the advances of the latter paradigms along established technological trajectories (i.e. incremental innovations).