High Investments in Technological Innovation - Research Proposal Example

Impact of Technological Innovation on Long Term Performance of an Economy Contents Introduction 3 Key Theories 3 Literature Review 4 Empirical Analysis 5 Conclusion 11 11 Reference List 12 Introduction Human wants in an economic system is always unlimited, but resources available to satisfy these wants are definitely limited. This is why the primary economic problem for any nation is to determine an appropriate mode of resource allocation in its economic system. National economy refers to an economic structure, where production, sales and consumption of various goods and services takes place within geographical boundary of the system (Porter, 1998). Over time, with development of science, technological innovation has reached to its zenith. In the contemporary world, growth of business organizations in an economy implies growth of the entire country as well. However, it should be considered that technological innovation is the underlying driving force, determining level of progress experienced in modern business organizations. This research paper will analyze the extent to which technological innovation can help in generating long run national economic growth (Lin, Cook and Burt, 2001). Key Theories In the present scenario, technological innovation is considered to be the driving force for productivity and growth in a nation. The term “knowledge based economy” has turned out to be a modern jargon in most economic systems. It is claimed by many scholars that the set of OECD developed nations in the world have significantly focussed on “the new growth theory”. The theory claims that knowledge based economy is more successful than traditional ones. It is stated by critics that “information society” proves to be more productive than other common forms of society. Privatization was considered as one of the most crucial pillars of economic success, along with globalization and liberalization, because private firms are primarily responsible for adoption and development of technology in a nation. Nonetheless, it cannot be ignored that it is the duty of the state and central government bodies in a nation to stimulate the level of technological innovation in their economy. This is executed by such authorities with the essence of trade, regulatory and economic policies. The performance or productivity of a national economy should always be judged from the value of its Gross Domestic Product (GDP). This measures value of all the final goods and services produced within the domestic territory of a nation at a particular point of time. However, performance of a country is also judged from other socio-economic indicators, like, employment rate, life expectancy and literacy rate. Literature Review Long back in 1911, the great economist, Schumpeter, stated “entrepreneur as innovator” in a country, who, according to him, had the power to make economic development. Nonetheless, in 1942, he stated that some of the innovative activities undertaken by entrepreneurs feed “creative destruction process” that disturbs the economic equilibrium of a nation (Rivera-Vazquez, Ortiz-Fournier and Flores, 2009). It was found empirically that entrepreneurs in several economies have significantly fostered the level of economic growth and living standards of individuals. In 1972, Mansfield stated that those firms, who had invested high amounts in research and development purposes, have progressed in a better manner than other firms that have not done so to the same extent. However, the economist, Solow, in 1956, had first introduced a special growth model that indicated growth of nation, stimulated with the help of technological innovation. In 1993, Nadiri had proved that technological modernization significantly helps in enhancing level of economic growth in a nation, with help of a Cob-Douglas Production function (Madsen, Neergaard and Ulhøi, 2008). Even so, in the model introduced by Nadiri, technological innovation was considered to be an exogenous variable. Verspagen in 1992 and Ruttan in 1997 tried to conduct a research for investigating the impact of technological innovation on growth rates of nations. In this analysis, the extent of technological innovation was considered to be an endogenous variable, which was determined by the contribution of profit maximizing agents (private business owners) (Kuran, 2013). However, the endogenous growth model, invented in the later stage, claimed that knowledge spill over, as well as level of technological substitution, are strong factors determining the level of growth in a national economic system. An empirical research was conducted by Poh Kam Wong, Yong Ping Ho and Eekko Autio in 2005(Wong, Ho and Autio, 2005). The three authors in the research work analyzed a cross-sectional data of 37 nations. With help of the data, the researchers had analyzed the impact of new firm formation and technological innovation on growth of nations separately. The researchers used a special Cobb Douglas Production function to make the analysis. Figure 1: Model Summary (Source: Wong, Ho and Autio, 2005) The above figure explains the model, which was used to analyze the empirical data, with help of a linear regression. The first result of the analysis claimed that technological innovation in a nation is directly proportional to rate of growth of GDP in a country. At the same time, the degree of entrepreneurship was also found to be positively related with rate of GDP growth in a nation. From context of the entire analysis, it was concluded that new business formation (degree of entrepreneurship) might not generate consistent economic growth in the long run. Yet, if existing firms in a country undertake special initiatives for making technological innovation, then it would surely generate economic growth in long run. From context of the literature analysis, it can be said that economists, who believed in exogenous growth models of nations, advocated that progress of a national economy is directly related its scope for technical modernization. However, economists who believed in endogenous growth models claimed that the gap between technological innovation and growth of nation is bridged with efficient and productive activities of entrepreneurs and government regulating bodies. Empirical Analysis The researcher will use sample data on certain macro variables for few nations in order to empirically prove consistency of the literature review. The four case countries, considered in the framework of the analysis, are UK, US, Japan and China. For the purpose of the analysis, the researcher considered time series data (collected from secondary authentic source of World Bank). The data collected was for 8 time dimensions (2004 to 2012). The variables that were considered are GDP growth rate, percentage of investment made in research and development purpose, percentage change in skilled labour employment opportunities and life expectancy (Pugel, 2007). It is very difficult to quantitatively estimate the level of technological development in a national economy. However, percentage of investment made in the country, (out of GDP) for research and development, may be termed as the scope of technological innovation taking place in a nation (McNally, 1995). If percentage of skilled labour force in a country increases, then it signifies a rise in the level of employment activities and hence, productivity in a nation. Moreover, if level of employment opportunities increases in a country, then it also enhances the level of living standards of individuals. Figure 2 (Source: World Bank, 2014) From the above graph, it can be observed that the curve is approximately inelastic, at the initial stage. This proves that the level of skilled employment generation in U.K. is not much influenced by technological innovation, during this point of time. This was the prolonged period, when economy of U.K. was affected by several recessionary trails due to the real estate price bubble in Europe. Figure 3 (Source: World Bank, 2014) The case study of U.S. shows that the level of productivity or skilled employment opportunities in the country has indeed improved with contribution of technological innovation. Figure 4 (Source: World Bank, 2014) Again for the case of China, steep positive slope of the curve indicates significant contribution of technological innovation in enhancing level of growth of the country. Despite having the largest population in the world, China is considered as an emerging nation, only with an active contribution of its technological invention level. Figure 5 (Source: World Bank, 2014) Japan is well-known all over for making high investments on technological innovation, since pre-globalization era. The above graph indicates that over time, rise in skilled labour employment in Japan has only been feasible with the assistance of its knowledge based economic system. Figure 6 (Source: World Bank, 2014) Figure 7 (Source: World Bank, 2014) Figure 8 (Source: World Bank, 2014) Figure 9 (Source: World Bank, 2014) From the figures 6, 7, 8 and 9, it can be claimed that level of domestic productivity of the three case developed economies (U.K., U.S. and Japan), have significantly improved with help of technological innovation, over time. However, it should be noted that growth of domestic product in a country also depends on other parameters. During global financial crisis, production capacities of these three nations had fallen due to recession in the market (low supply of money and law of aggregate demand). In figure 8, GDP of China is found to fall in the recent years. This might be due to its high population pressure and extensive dependence on developed nations in the global market. Figure 10 (Source: World Bank, 2014) The long run performance of a national economic system also depends on its quality of human capital. Health economists in the global market claim that productive human capital can always generate productive economic or financial capital for a nation. Life expectancy index shows the average number of years that an individual is estimated to live, at the time of his or her birth. Thus, stronger the health status of an individual, longer would be his or her life expectancy. From the above figure, it is evident that life expectancy of Japan is highest over time, followed by U.K., U.S. and China. This might be because high technological innovation in Japan has successfully enhanced quality of its healthcare delivery system. Perhaps, this is why economic productivity (skilled employment opportunities) of the nation is high and consistent over time, regardless of the era of recession. Conclusion From context of the above research work, it would be correct to state that technological innovation creates a strong impact on level of productivity in any national economy. However, it is true that when major developed and developing economies are considered, growths of the nations are unequal. This proves the fact that degrees of technological innovation across different nations are also different. From above analysis, it was established that among U.S., U.K., China and Japan, technological innovation is best in Japan. Therefore, the country experiences adequate productivity in both economic and non-economic parameters (Papalexandris and Galanaki, 2009). Reference List Kuran, E., 2013. Leader as storyteller. Industrial and Commercial Training, 45(2), pp.119 – 122. Lin, N., Cook, K. S. and Burt, R. S., 2001. Social Capital: Theory and Research. New Jersey: Transaction Publishers. Madsen, H., Neergaard, H. and Ulhøi, J. P., 2008. Factors influencing the establishment of knowledge-intensive ventures. International Journal of Entrepreneurial Behaviour & Research, 14(2), pp.70 – 84. McNally, K., 1995. Corporate venture capital: the financing of technology businesses. International Journal of Entrepreneurial Behaviour & Research, 1(3), pp.9 – 43. Papalexandris, N. and Galanaki, E., 2009. Leaderships impact on employee engagement: Differences among entrepreneurs and professional CEOs. Leadership & Organization Development Journal, 30(4), pp.365 – 385. Porter, M. E., 1998. Competitive Advantage: Creating and Sustaining Superior Performance. New York: Simon and Schuster. Pugel, T., 2007. International Economics. Noida: Tata McGraw-Hill Education. Rivera-Vazquez, J. C., Ortiz-Fournier, L. V. and Flores, F. R., 2009. Overcoming cultural barriers for innovation and knowledge sharing. Journal of Knowledge Management, 13(5), pp.257 – 270. Wong, P. K., Ho, Y. P. and Autio, E., 2005. Entrepreneurship, innovation and economic growth: from GM data. Small Business Economics, 24, pp. 335-350. World Bank, 2014. World Bank Data. [online] Available at: [Accessed 31 January 2014]. Read More