INDUCED
INNOVATION
MODEL
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INTRODUCTION
Induced innovation is a microeconomic hypothesis first
proposed in 1932 by John Hicks in his work The Theory of
Wages.
He proposed that "a change in the relative prices of the
factors of production is itself a spur to invention, and to
invention of a particular kind—directed to economizing the
use of a factor which has become relatively expensive
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"induced innovation" to include the process by which public
sector investment in agricultural research, in the adaptation
and diffusion of agricultural technology, and in the
institutional infrastructure that is supportive of agricultural
development, is directed toward releasing the constraints on
agricultural production imposed by the factors characterized
by a relatively inelastic supply.
Induced Innovation in the Private and Public Sectors
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A major controversy has centered around the existence of
a mechanism by which differences or changes in factor
prices affect inventive or innovative activity. This
discussion has been conducted entirely within the
framework of the theory of the firm.
INDUCED INNOVATION IN THE PRIVATE SECTOR
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It had generally been accepted, at least since the publication of The Theory of
Wages by John R. Hicks, that changes or differences in the relative prices of
factors of production could influence the direction of invention or innovation
In terms of this definition, it is entirely rational for competitive firms to allocate
funds to develop a technology which facilitates the substitution of increasingly
less expensive factors for more expensive factors
Using the above definition, Ahmad (1966) has shown that the Hicksian theory of
market induced innovation can be defended with a rather reasonable
assumption on the possibility of alternative innovations.
Suppose z at a point of time a firm is operating at a
competitive equilibrium, A or B, depending on the prevailing
factor price ratio, p or m, for an isoquant, uo, producing a
given output
this firm perceives multiple alternative innovations
represented by isoquants, ul, uI, ••• , producing the same
output in such a way as to be enveloped by a concave curve,
U (Ahmad called it an innovation possibility curve), which
can be developed by the same amount of research
expenditure.
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In order to minimize total cost for given output and given research
expenditure, innovative efforts of this firm will be directed towards ,
developing Y-saving technology (ul) or X-saving technology (u1 )
depending on the prevailing factor price ratio, p (parallel to PP) or m
(parallel to MM and MM’).
If a firm facing a price ratio, ro, developed a , X-saving technology (ul)
it can obtain an additional gain represented by the distance between M
and M' compared with the case that developed a Y-saving technology
(u1)'
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In this framework it is clear that, if X becomes more expensive
relative to Y over time in an economy the innovative efforts of
entrepreneurs will be directed towards developing a more X-
saving and Y-using technology compared to the contrary case.
Also in a country in which X is more expensive relative to Y than
in another country innovative efforts in the country will be more
directed towards X-saving and Y-using than in the other country.
INDUCED
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INNOVATION IN THE PUBLIC SECTOR
"induced innovation" in public sector agricultural research is similar
to the Hicksian theory of induced innovation in the private sector.
We extend the traditional argument by basing the innovation
inducement mechanism not only on the response to changes in
market prices by profit maximizing firms but also on the response by
research scientists and administrators in public institutions to
resource endowments and economic change
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We hypothesize that technical change is guided along an
efficient path by price signals in the market, provided
that
(a) the prices efficiently reflect changes in the demand
and supply of products and factors and
(b) there exists effective interaction among farmers,
public research institutions, and private agricultural
supply firms
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If the demand for agricultural products increases, due to the
growth in population and income, prices of the inputs for
which the supply is inelastic will rise relative to the prices of
inputs for which the supply is elastic.
if the supply of particular inputs shifts to the right faster than
others, the prices of these inputs will decline relative to the
prices of other factors of production.
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In consequence, technical innovations that save the factors characterized by an inelastic
supply, or by slower shifts in supply, become relatively more profitable for agricultural
producers.
Farmers are induced, by shifts in relative prices, to search for technical alternatives
which save the increasingly scarce factors of production.
They press the public research institutions to develop the new technology and, also,
demand that agricultural supply firms supply modern technical inputs which substitute
for the more scarce factors.
Perceptive scientists and science administrators respond by making available new
technical possibilities and new inputs that enable farmers to profitably substitute the
increasingly abundant factors for increasingly scarce factors, thereby guiding the demand
of farmers for unit cost reduction in socially optimum direction .
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In this public sector induced innovation model, the
response of research scientists and administrators
represents the critical link in the inducement mechanism.
Furthermore, we hypothesize that secular changes in
relative factor and product prices convey much of the
information regarding the relative priorities which society
places on the goals of research
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It appears reasonable, therefore, to hypothesize, as
a result of the interactions among the basic and
applied sciences and the process by which public
funds are allocated to research, that basic research
tends to also be directed toward easing the
limitations on agricultural production imposed by
relatively scarce factors.
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We do not argue, however, that technical change in agriculture is
wholly of an induced character. There is a supply (an exogenous)
dimension to the process as well as a demand (an endogenous)
dimension. Technical change in agriculture reflects in addition to the
effects of resource endowments and growth in demand, the progress of
general science and technology.
Progress in general science (or scientific innovation) which lowers the
"cost'of technical and entrepeneurial innovations may have influences
on technical change in agriculture unrelated to changes in factor
proportions and in product demand.
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(Nelson, 1959) Even in these cases, the rate of
adoption and the impact on productivity of
autonomous or exogenous changes in technology will
be strongly influenced by the conditions of resource
supply and product demand as these forces are
reflected through factor and product markets.
INSTITUTIONAL INNOVATION
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Extension of the theory of "induced innovation" to explain the
behavior of public research institutions represents an essential
link in the construction of a theory of induced development.
In the induced development model advances in mechanical and
biological technology respond to changing relative prices of
factors, and to changes in the prices of factors relative to
products, to ease the constraints on growth imposed by inelastic
supplies of land or labor.
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Neither this process, nor its impact, is confined to the agricultural
sector. Changes in relative prices in any sector of the economy act
to induce innovative activity, not only by private producers but also
by scientists in public institutions, in order to reduce the constraints
imposed by those factors of production which are relatively scarce
We further hypothesize that the institutions that govern the use of
technology or the "mode" of production can also be induced to
change to enable both individuals and society to take fuller
advantage of new technical opportunities under favorable market
conditions.
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A major source of institutional change has been an effort by society to
internalize the benefits of innovative activity to provide economic incentives
for productivity raising activity.
In some cases, institutional innovations have involved the reorganization of
property rights, in order to internalize the higher income streams resulting from
the innovations.
The modernization of land tenure relationships, involving a shift from share
tenure to lease tenure and owner-operator systems of cultivation in much of
western agriculture, can be explained, in part, as a shift in property rights
designed to internalize the gains of innovative activity by individual farmers.
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The process of transforming institutions in response to
technical and economic opportunities generally involves
time lags, social and political stress, and, in some cases,
disruption of social and political order. Economic growth
ultimately depends on the flexibility and efficiency of
society to transform itself in response to technical and
economic opportunities.
AN OPERATIONAL MODEL OF INDUCED
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INNOVATION IN AGRICULTURE
A clear requisite for agricultural productivity growth is the capacity of the
agricultural sector to adapt to a new set of factor and product prices.
These changes may arise as a result of the growth of demand pressing against
factor supplies or as a result of changes in factor prices resulting from shifts in the
supply functions for factor inputs
Adaptation by the agricultural sector to changes in factor-factor and factor-
product price ratios involves, in the perspective outlined in the previous section,
not only the movement along a fixed production surface but also innovations
leading to a new production surface
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For example, even if fertilizer prices decline relative to the prices of
land and farm products, increases in the use of fertilizer may be
limited unless new crop varieties are developed which are more
responsive to high levels of biological and chemical inputs than
traditional varieties.
For. illustrative purposes, the relationship between fertilizer use and
yield may be drawn, as in Figure 2, letting Uo and ul represent the
curve of "indigenous" and "improved" varieties respectively.
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For farmers facing Uo a decline in the fertilizer prices
r0lative to the product price from Po to PI would not be
expected to result in much increase in the level of fertilizer
use or in yield per unit area.
The full impact of a decline in the fertilizer price on fertilizer
use and output can be fully realized only if ul is made
available to farmers as a result of innovations leading to more
responsive crop varieties.
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Conceptually it is possible to draw a curve such as U in
Figure 2 which is the envelope of individual response
curves, each representing a different variety of the same
crop characterized by a different degree of response to
fertilizer.
Tile identify this curve as a "metaproduction function" or a
"potential production function.
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Our basic hypothesis that adjustments in factor
proportions, in response to changes in relative
prices, represent "non-neutral" movements along
the iso-product surface of a meta-production
function is further illustrated in Figure 3.
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U in Figure 3 represents the land-labor isoquant of the
metaproduction function which is the envelope of less elastic
isoquants such as Uo and ul corresponding to different types of
machinery or technology.
A certain technology represented by Uo (e.g., reaper) is created when
a price ratio, Po, prevails a certain length of time. when the price ratio
changes from Po to PI, another technology represented by UI (e.g.,
combine) is induced in the long-run, which gives the minimum cost
of production for po.
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The new technology represented by uI, which enables enlargement of
the area operated per worker, generally corresponds to higher intensity
of power per worker.
This implies the complementary relationship between land and power,
which may be drawn as a line representing a certain combination of
land and power L-A M_7
In this simplified presentation, mechanical innovation is conceived as
the substitution of a combination of land and power I-A M~ for labor
(L) in response to a change in wage relative to an index of labor and
machinery prices, though, of course, in actual practice land and power
are substitutable to some extent.
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the relation between the fertilizer-land price ratio and bio-chemical
innovations represented by the development of crop varieties which are
more responsive to application of fertilizers is illustrated in Figure 3. V
represents the land-fertilizer isoquant of the meta-production function,
which is the envelope of less elastic isoquants such as Vo and vI
corresponding to varieties of different fertilizer responsiveness.
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A decline in the price of fertilizer relative to the price of land from
ro to r1 makes it more profitable for farmers to search for crop
varieties which are described by isoquants to the right of vo. They
also press public research institutions to develop new varieties.
Through a kind of dialectic process of interaction among farmers
and experiment station workers a new variety such as that
represented by VI will be developed
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