Empirical+Evidence+against+Varieties+of+Capitalism’s+Theory+of+Technological+Innovation

** by Mark Zachary Taylor ** Summary by Annie Gillman 11/19/2010 Taylor is interested in the question of why some industrialized democracies innovated more, or better, than others. While he thinks this is a good question for political scientists to approach, he disagrees with the Variations of Capitalism theory of innovation that predicts that the extent to which nations let markets determine relations among firms, investors and labors is what determines the level of innovation--essentially, domestic political-economic institutionsare what matter. He challenges this theory by examining their large-N regression analysis, noting problems in assumptions, the bias created by the US outlier, and using better data for the dependent proxy variable for innovation (patents) to show they’re wrong. In sum “Predictions made by varieties of capitalism theory regarding national differences in technological innovation are not supported by the empirical data, and that the existing evidence depends heavily on the inclusion of a major outlier, the United States, in the class of liberal-market economies.”  · Central question which he is trying to address: How can one explain cross-national differences in innovative activity across the industrialized democracies? This is important because technological innovation determines growth, relative industrial power, and competitive advantage--these impact relationships among states too. Generally been addressed by sociologists and economics, but recently political scientists have started taking a crack at it with the new idea that political institutions are what matter  · Varieties of Capitalism Theory  o At it’s core Variation of Capital Theory is about observing how variations in degree to which nations use markets to coordinate economy explain comparative and international political-economic behavior. However firm, not state, is center of analysis, and key determinant is how the firm interacts w/ labor, investors, and other firms. Political-economic institutions impact these relationships.  o On one side, you have liberal market economies (LMEs) like US in which firms coordinate relations “through internal corporate hierarchies and external competitive market arrangements”; on the other hand you get coordinated market economics (CMEs) like Germany in which firms “tend to coordinate via nonmarket relationships, with greater dependency on relational and incomplete contracting, exchanges of private information within enduring networks, and a high degree of actor collaboration as opposed to competition or confrontation”  · VOC Theory of Technological Innovation  o Lots of interest around new VOC theory of innovation which holds that variance in political institutions is the primary cause of differences in national innovative behavior. Key claim of this theory: the more a polity allows the market to structure its economic relationships, the more the polity will direct its inventive activity toward industries typified by “radical” technological change. Conversely, the more a polity chooses to coordinate economic relationships via nonmarket mechanisms, the more it will direct its inventive activity toward “incremental” technological change.  o This theory matters in explaining why trade relations have not turned out as predicted by mainstream economic modeling. According to this theory, “domestic institutional structures can account for the different degrees of innovative effort and achievement between nations, and the production and trade relationships that subsequently develop. If VOC theory is correct, it would explain why nations maintain their innovative profiles in spite of strong pressures to change them, and why certain kinds of innovation-dependent production might tend to be concentrated in particular countries”  o Based on a differentiation between //radical innovation// which “entails substantial shifts in product lines, the development of entirely new goods, or major changes to the production processes” that is key for production in high- technology sectors and //incremental innovation// that is “marked by continuous but small-scale improvements to existing product which focuses on maintaining high quality in established good. For a number of reasons (listed on pg 606) VOC argues that LMEs are good at incentivizing radical innovation and CMEs are good at promoting incremental innovation, leading to different comparative advantages.  o lines and production processes,  · Testing the Varieties of Capitalism Claims: Taylor goes after Hall and Soskice, who have advanced the VOC innovation theory, by questioning their assumptions and using different data on patents to challenge their methodology. He finds a number of problems.  o VOC theory implicitly assumes that some industries are inherently characterized by radical innovation others by incremental innovation, and that these industries have been correctly identified. However, studies show that industry innovation depends not so much on their type but their maturity, finding that “most industries are typified by two successive waves of innovation: first a flurry of radical product innovations that eventually converge on a dominant product design, followed by a flurry of process innovations in manufacturing the product at lower cost”  o In supporting their claims, Hall and Soskice use only four years’ worth of patent data from only two countries, one of which, the United States, is an outlier by almost any measure.  o Hall and Soskice use only simple patent counts as their measure of innovation, hence frivolous patents are counted the same as highly innovative ones; nor do Hall and Soskice use any nonpatent measures of innovation  o To summarize: “The VOC theory does not appear to explain innovation as measured by patenting activity. Rather, the success of VOC theory in predicting innovation appears to depend on the inclusion of the United States, a major outlier, in the set of liberal market economies.”  · Additional Evidence: If you test their theory using scholarly journal arguments, as opposed to patents, as measurement of innovation, it also does not hold true  · Conclusions: <span style="background: none repeat scroll 0% 0% white; margin: 0.1pt 0in 0.1pt 1.5in; text-indent: -0.25in;"> o Don’t underestimate the role of th state in promoting innovation. “I would suggest that while the firm may be the key actor in capitalist economies, and the primary producer of goods and services, it is difficult to ignore the role of the state in innovation as strongly as VOC’s theory and classification system do Throughout the world, much useful innovation is the result of state-sponsored and statemanaged R&D, often originating in concerns with national security” <span style="background: none repeat scroll 0% 0% white; margin: 0.1pt 0in 0.1pt 1.5in; text-indent: -0.25in;"> o To better understand the political economy of comparative rates of innovation, future research should focus less on domestic institutions and more on international relations
 * Empirical Evidence Against Varieties of Capitalism’s Theory of Technological Innovation **