Adoption and innovation Who Adopts, Why and How?

ELP 2013

Overview of the Lecture

§  What is technology? What is technological adoption?

§  Examples of technological innovations §  How are new technologies developed? The

Innovation Process §  Who adopts and why? Theories of

Technological Adoption §  Adoption and Marketing

What is Technology? Definitions § Simply, technology (or innovations) is defined as “new

ways to achieve tasks.”

§ In economics, technology implies changes to the production function that alters the relationship between inputs and outputs, resulting in improved efficiency

§ In agriculture, this implies changes in productivity (e.g. yield) of agricultural inputs (e.g. seeds, water, fertilizers)

What is Technology? Types § We often distinguish between process innovations

(new procedures) and product innovations (Bt cotton).

§ Types of innovations include: ü Mechanical (tractors) ü Chemical (pesticides) ü Biological (improved seed varieties, GMOs) ü Managerial (integrated pest management) ü Institutional (water users’ associations)

Graphical representation of technological change Yield

Input (acre feet of water/hectare)

Traditional irrigation

Modern (Drip) irrigation

Production curve shifts up, i.e., more output per unit of water under modern irrigation

Water input

Rice yield under Traditional irrigation

Rice yield under Modern irrigation

1 1 1.252 1.9 2.3753 2.7 3.3754 3.5 4.3755 4 56 4.3 5.375

4

3.5

4.38

Graphical representation of technological change

Quantity

Price $/unit

Supply curve shifts right, that is lowers cost of supplying a given quantity, increases the quantity that can be supplied at a given price

Quantity

Average cost of producing under old technology

Average cost of producing under new technology

1 1 0.752 1.1 0.833 1.3 0.984 1.6 1.25 2 1.5 4

1.2

1.6

What is Technology? Timing •  In the short run, technologies are inflexible,

implying a fixed input-output ratios. •  In the longer run, investing in new technologies

can change the input-output ratios (and hence the production coefficients

•  For example, during the energy crisis, people slightly modified their cars, but the main response to higher price of energy was less driving. Later on, fuel-efficient cars were introduced.

Technological Innovation and Agriculture: Green Revolution §  Worldwide transformation of agricultural

production between the 1940s and 1960s §  Scientists created strains of maize, wheat,

and rice that are generally referred to as HYVs or “high-yielding varieties.”

§  These technologies included pesticides, irrigation projects, and synthetic nitrogen, pesticides

Other examples

§ Genetically modified seed varieties § Bt cotton, Bt corn, Roundup ready soy

§ New water technologies § drip irrigation, drip-fertigation

§ Better management techniques §  integrated pest management

§ No-till or low till agriculture

Other Examples

New Technology

Old Technology

Input-use efficiency

Impacts Additional cost

Chemical applicators

Aerial sprayer .90 vs .25 Input--pollution--

High

Improved cooking stoves

Traditional Wood stove

.60 vs .20 Wood -- Health++

Modest

Insulation Un-insulated homes

.7 vs ,2 Energy-- Modest

Yield

020406080100120140160

1850 1900 1950 2000 2050

Corn yield per acre did not change for 100 years, and then grew by 2% annually – an example of

biological innovation

An Example: Improved Water Technology

Technology Irrigation efficiency

Yield (cotton)

Fixed cost/yr

Traditional .6 1200 500

Sprinkler .8 1325 580

Drip .9 1400 650

An Example: Improved Water Technology

§  For example, increases in irrigated land have: –  Improved timing and spatial distribution of water

(reduced water usage), double cropping, and supply stabilization.

–  Improved crop yields – 17% of land worldwide which is irrigated produces 40% of the global food.

–  Increased value of cropland – the value of irrigated cropland is about $625/ha/year, as compared to $95/ha/year for rain-fed cropland and $17.50/ha/year for rangelands

`

Technological Innovation and Agriculture: What Impact? §  Increased global food production (2.8 times

the level of food produced in 1950) §  Cereal production more than doubled in

developing nations between the years 1961 – 1985.

§  Improved yields of specific crop varieties (corn, wheat, soybeans, cotton)

§  Slower expansion of cultivated land and reduced levels of deforestation

§  An increase in irrigated land over the past century

Technological Innovation and Agriculture: What Impact? §  Increased use of energy §  Negative environmental externalities

§  Eutrophication –fertilizer and pesticide run offs §  Impact of dams §  Monocultures have lead to pest-resistance, soil erosion

§  Social impacts But we need compare the relative impacts – what were the

alternatives and what its impacts would have been

How is a new Technology Developed?

The Innovation Process

The Innovation Process §  A new technology initially starts as a concept,

which can be inspired by reality. §  If a new technology emerges in response to

scarcity, need or economic and social conditions, it is often called an “induced innovation”

§  Examples of induced innovations include: –  Labor shortages è mechanized equipment. –  Drought conditions è improved irrigation. –  Energy crises è higher efficiency cars. –  Low farm prices è farmers’ cooperatives

The Innovation Process

§  The same technological solution is rarely optimal everywhere.

§  Typically, technological innovations adapt solutions to specific conditions. §  For example, a specific corn variety might be

appropriate in the US but not in the Ivory Coast in West Africa. Why?

§  A technology may have several versions to meet needs and capabilities of various users in a region – For example, the same technology might have “small”

v. “large” versions to meet individual farmers’ needs

The Innovation Process §  The entire innovation process involves five steps:

§  Initial idea and Research § Development (up-scaling, testing) § Production § Marketing § Adoption and Use

§  Experience with a product results in feedback and leads to improved innovations.

The Innovation Process Research

Patenting and Approval

Adoption

Development

Production

Marketing

Discovery

Who Adopts and Why? Theories of Technological Adoption § Technological adoption looks at the

process of who adopts (uses, purchases) a new technology, why they adopt and how they adopt.

§ The process of technological adoption and change is studied in economics, marketing, sociology, etc.

Who Adopts and Why? Theories of Technological Adoption

Who Adopts and Why? Theories of Technological Adoption

§  Factors that affect adoption §  Adoption v. diffusion §  Economic Models of Technological

Adoption ü Imitation model (adoption is a process of imitation) ü Threshold model (adoption is an economic choice that

depends on information, costs and benefits)

Factors that Affect Adoption §  Profits (Total Revenues-Total Costs)

ü The total cost of the new technology as compared to the expected benefits (revenues): Are profits positive?

§  Income and Access to Credit ü The level of income of the potential adopter determines

whether he/she can afford it, and how much he/she can afford to lose

§  Risk and uncertainty ü The impact of the technology on risk (ie, will the

technology increase crop yields but also increase variance?)

ü The risk aversion of the potential buyer (is the producer risk averse, risk neutral or risk-loving?)

ü Ie, higher-income individuals may be less risk averse.

Factors that Affect Adoption §  Market Access

ü Whether the new technology is available in the area ü Adoption may be slower at inaccessible locations

because of limited access to technology and high transportation costs

§  Education ü If a technology requires “extra” knowledge or

literacy, then adoption is less costly for those with higher levels of education

§  Size ü Some technologies have an increasing return to scale

– the more you use, the more you produce!

Factors that Affect Adoption §  Fit

ü Personal fit risk: Is the technology right for my needs?

ü Performance risk: How can I be sure it will work?

§  Governmental policies ü Government may enhance adoption through

policies such as price supports, extension, credit, insurance schemes, cost-sharing

ü Government may reduce adoption such as regulations, higher cost of inputs, or taxes

Timing of Adoption •  Sometimes it is worthwhile to wait and see and not

adopt immediately when benefits of technology exceed costs.

•  Cost of technology may decline over time. You should wait if the reduction in technology cost> than the cost of waiting.

•  When a technology has uncertain irreversible outcomes- waiting to learn more is prudent.

•  Waiting prevent the opportunity of learning and improving a technology- the gains from waiting should be compared to the costs.

Adoption v. Diffusion

§  Adoption is a decision by a specific individual to use a new technology.

§  Adoption is measured at the individual level (ie, did he/she use the product or not?)

•  Diffusion is aggregate adoption – ie, the overall use of the technology in society.

•  Diffusion is measured by the percentage of potential users in the market who actually adopt a technology.

The S-Shaped Diffusion Curve

Diffusion Rate

SaturationRate

Early adoption

Takeoff

Saturation

Time

Positive adoption, increasing rate

Positive adoption, decreasing rate

Constant, no change

Why the S-Shaped Diffusion Curve? •  The S-shaped diffusion curve distinguishes

among: – Early adopters: More educated, innovative

individuals who gain from technology. – Followers (takeoff): The majority of adopters who

see its success and want to join in. – Laggards (saturation): Less-advanced individuals

who either do not adopt or adopt very late and may lose.

The Imitation Model

§  This model asserts adoption is a process of imitation – an individual learns about a new technology by “word of mouth” or by observation

§  Adoption occurs after a “successful interaction” between a previous buyer and potential adopters

The Imitation Model

§  Therefore, the imitation model asserts that contact among individuals is the driving force behind adoption and diffusion, and will lead to an S-shaped diffusion curve

§  In this model, profitability of the new technology, its ease of use, and the likelihood of interaction will affect adoption.

Shortcomings of the Imitation Model §  It does not explicitly model the buyer’s

microeconomic decision-making process for adopting a new technology, which can offer key insights into different rates of adoption.

§  Potential adopters are assumed to be homogeneous, whereas heterogeneity can play a significant role in an individual’s decision to adopt.

The Threshold Model §  The threshold model incorporates three

elements into the adoption process: § Micro-level decision criteria or optimization behavior (ie,

profit maximization, utility maximization, improved well-being)

§ Heterogeneity among individuals (such as land size, location, land quality, and human capital)

§ Dynamic processes that make technology more attractive (such as learning by doing, learning by using, network benefits).

The Threshold Model

§  Each individual may decide to adopt a technology at time t, based upon a “threshold” level of heterogeneity that distinguishes adopters from non-adopters.

§  Diffusion in each period is therefore determined by aggregating over all agents who decide to adopt,

The Threshold Model: A Simple Example

§ Two producers, Joseph and Joanne, can choose between growing swamp rice (traditional technology) or irrigated rice (new technology)

§ They are both interested in maximizing profits (decision criteria)

The Threshold Model: A Simple Example §  They know that the technology will:

ü Increase yields but also increase risk (ie, higher variance)

ü Increase expected profits but increase costs (the new technology is more expensive)

§  Joseph’s farm is bigger than Joanne’s farm (source of heterogeneity)

Who will adopt?

The Threshold Model: A Simple Example

§  If: L = farm size (acres) Δπ = per-acre change in profits from the new technology per year ΔC = additional cost of irrigation technology per year

§  We know that the farmer will adopt if: ΔC < Δπ L

§  Why? The benefits of the technology (Δπ L) are less than the cost (C)

The Threshold Model: A Simple Example

§  If the producers’ farm size is L* = Δ C/Δπ, this is the “critical” or “threshold” farm size

§  What does this mean? §  If Joanne’s and Joseph’s farm size is greater than

L*, then they will use (buy, adopt) the new technology

§  If Joseph’s farm is > L* and Joanne’s farm is < L*, then Joseph will adopt and Joanne won’t.

§  And etc….

Other Examples of the Threshold Model §  Technology adoption of water-conserving

technology occurs: §  In sandy soils and hills where the traditional

technology is especially inefficient. §  Locations where the price of water is high. § With high-value crops.

§  High-yielding varieties are adopted when: §  They have high yield and cost effects. §  Farmers have access to credit.

Adoption and Marketing

§  Most adoption models have focused on the role of governmental policies on technological adoption

§  However, the private sector can play an important role in affecting adoption

§  In many cases, the private sector uses “marketing tools” to minimizing producers’ uncertainty about a product – specifically, their “personal fit” and “performance” risk

§  This has been addressed in “marketing” literature for non-agricultural technology – but not as much in “economic” literature for agricultural products

Adoption and Marketing Tools Marketing Tool Main Application Adoption Stage

Advertisements• Provide new information regarding

prices, availability, location, etc.• Form sensual attitude, goodwill.

• Awareness (stage 1)

Demonstrations or trade shows

• Enable consumers to try the productbefore purchasing, and thus reducepre-purchasing risks.

• Trade shows provide opportunity forside-by-side demonstrations andcomparisons.

• Trade shows facilitate interactionbetween sellers and buyers, andbetween users and potentialadopters.

• Information search andevaluating alternatives(stages 2 and 3)

• Trade shows may beused for feedback(stage 5)

Money-backguarantees

• Provide consumers with a returnoption and, therefore, reduceperformance and fit uncertainties.

• Purchasing decision (stage 4)

Warranties

• Provide consumers with guaranteesin the event of mechanical failure,thereby reducing reliability anddurability uncertainties.

• Purchasing decision (stage 4)

Marketing Tool Main Application Adoption Stage Renting andleasing

• Provide alternative to purchasing.Allows smaller farmers to use, anduncertain farmers to test, thetechnology.

• Alternative topurchasing decision(stage 4)

Providing credit • Reduces transactions costs andfinancial constraints to purchasing.

• Purchasing decision (stage 4)

Producttraining

• Increase the efficiency of use andconsumer satisfaction; reduceprobability of misuse.

• Increase consumer commitment to aparticular brand.

• Evaluating alternatives(stage 3)

Salespeople• Fit product offer and selling

strategy to consumer needs.• Build long-term relationship

(consumer-oriented selling).• Negotiate, bargain and pressure to

buy (hard sell).

• From productawareness through tothe purchasing decisionand follow-up (stages 1through 5)

Source: Heiman, McWilliams, and Zilberman (2000)

Adoption and Marketing Tools

Investing in innovation •  Innovation is a new ways to do things •  But the very nature of innovations, people do not

have sufficient incentives to invest in innovation activities (R&D): ideas are not exclusive and, once created, cannot be ‘used up’.

•  Two basic solutions to the incentive problem: – Public provision of R&D – Creation of private property rights over innovation:

intellectual property

Intellectual property and innovation •  Intellectual property refers to creations of the

mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce!

•  Intellectual property is divided into: !–  Industrial property, which includes inventions

(patents), trademarks, industrial designs, and geographic indications!

–  Copyright, which includes literary and artistic works!•  Patents and Copyrights give monopoly power to the

inventor/creator for a limited period of time. •  Patent provide incentive to come with new idea, but it

may be even more important as an inducement to develop the idea into an actual product.

Global agricultural R&D investments

Various types of research •  Research categories range from the most basic to

very applied: – Basic research

•  aim to understand phenomena •  discover solution to general problems

– Applied research •  target general knowledge or techniques to specific problems •  propose specific solutions

– Product development •  test and refine solutions •  investigate how to apply a new solution •  identify potential adopters

Division of Innovative Labor

Institutions and research •  Universities emphasize more basic research

–  promotion based on novelty of findings –  university research leads to discoveries sometimes

outside of the original field of investigation •  Start up emphasize discovery and applied research

– More knowledge will increase value of firm equity •  Large corporation emphasize applied research

– Want to improve products, gain market share, increase shareholder value

Different types of researchers are attracted to different research environments

Fame Fortune Freedom

University A B A+

Industry B A C

How university research impacts industry and agriculture

1.  Open Science: education, publications, conferences

2.  Collaboration: consulting, sponsored research, extension services

3.  Technology transfer: patenting, licensing 4.  Entrepreneurship: creating start ups,

technology ventures

Technology transfer and OTTs •  Technology transfer became popular as result of the Bayh-

Dole Act (1980) –  Previously, if a federal grant supported university research that

lead to a patented technology, the government owned it. –  Gave universities ownership and responsibility over such patents.

•  Patent rights remain with the university but are licensed to private companies who develop the technology

•  The organization within the university that manages this process is called the office of technology transfer (OTT)

•  When biotechnologies and organisms became patentable, it greatly enhanced the range of technology transfer activities at the university.

The ‘educational-industrial complex’

•  Historically, science based innovation is new (100 years). Led to independent labs (Thomas Edison) and company run research labs (Bell Labs).

•  Companies tend not to develop public sector (Open Science) innovations because no property rights.

•  The Bayh-Dole Act aimed to solve this. Yet many good innovations were still not taken up. (“Not invented here” problem.)

•  OTTs were started to help inventors team up with venture capital to start companies (Google, Amgen, Chiron, SUN Microsystems, Genetech)

•  University research is an essential part of the process of economic growth.

What do OTT’s do?

OTT time is spent on soliciting inventions, marketing technologies, and enforcing contracts.

Licensing terms •  Royalty sharing rules:1/3 to inventor, 1/3 to department,

and 1/3 to the university (or 50/50 inventor/university) •  Signing fees: may be taken in company stocks •  Performance incentives or ‘milestones’: rights under the

license lapse if sales fell below target •  Royalty amounts:

–  Calculated based on reported revenues, not reported profits. –  “25% Rule”: returns divided equally among (1) research/

invention, (2) development, (3) production, and (4) marketing –  Royalty for research 2.5% of revenues if expect profit margin to be

10%. –  Royalty share increase as expected profit margin increases. –  Royalty share increase the more value is provided by innovator.

Medical innovations predominate in technology transfer. Public universities are bigger in agriculture.

Technology transfer benchmarks

Source: Heher, Jan 2006

Patterns of earnings •  Major research universities dominant technology

transfer earnings. •  A small number of high value patents (Cohen-

Boyer, Axel, GatorAid, strawberries) drive most of the income.

•  Most major transfers are exclusive, but some non-exclusive transfers are very valuable as well.

•  Precision in design of contracts, specifying the exact set of rights transferred to the company, increases the gains from university innovations, and the efficiency of technology transfer as a channel of impact.