The Theory of Innovation and Technological Change

Technological innovation is a fundamental driver of economic development and prosperity. It shapes economic evolution by creating new products and more efficient production processes. The ability to generate and exploit innovations will remain decisive for the future performance of firms, industries, countries, and the global economy.
This textbook is structured around the interaction between different levels of economic analysis. It adopts a consistent bottom-up approach, beginning at the level of the individual firm and its decisions regarding research and development (R&D). It then proceeds to the industry level, where firms interact strategically, and ultimately applies this competitive framework to analyze innovation processes in closed and open economies. This progression highlights how microeconomic behavior aggregates into industry dynamics and macroeconomic outcomes.
Both practical experience and empirical evidence point to two key criteria for appropriate innovation models. First, innovation should be treated as a dynamic and stochastic process driven by firms' R&D activities, which requires the use of appropriate tools from stochastic dynamic optimization. Second, models should capture the empirically relevant determinants of firms' R&D activities, as well as the resulting technological and structural changes in industries and economies. This necessitates an integrated micro-macro approach.
This textbook is the first to present dynamic and stochastic models of innovation and technological change within a fully consistent bottom-up framework. It complements and extends the existing literature by offering a unified and analytically rigorous approach to the study of innovation.

1 Preface

2 Innovation Management - The Firm Level
2.1 Optimal Control of a Development Project
2.2 Financial Constraints and Self-Financing
2.3 Rivalry and Market Uncertainty
2.4 Technological Uncertainty
2.5 Multi-Stage Innovation Projects
2.6 Uncertain Hazard Rates
2.7 Summary and Conclusion

3 Innovation Competition - The Industry Level
3.1 Standard Innovation Races
3.2 Multi-Stage Innovation Races
3.3 Market Structure and Innovation
3.4 Spillovers and Research Joint Ventures
3.5 Asymmetric Innovation Races and Technological Leadership
3.6 Sequential Innovation Races and Creative Destruction
3.7 Summary and Conclusion

4 Innovation Dynamics and Growth - The Country Level
4.1 Innovation, Quality Ladders, and Economic Growth
4.2 Technological Intermediates, Physical Capital, and Growth
4.3 Technological Coevolution of Industries
4.4 Education, Innovation and Scale-Invariant Growth
4.5 Quality-Upgrading and Variety-Expanding Innovations
4.6 Innovation-Imitation Cycles
4.7 Summary and Conclusion

5 Innovation and International Trade - The Global Level
5.1 Factor Endowment, Innovation, and North-North Trade
5.2 Transport Costs and International Trade
5.3 Product Adaptation to Foreign Markets
5.4 International product Cycles and North-South Trade
5.5 License Agreements
5.6 Multinational Firms and Foreign Direct Investment
5.7 Summary and Conclusion

6 Epilogue