THE SOURCES OF TECHNOLOGICAL CHANGE

Classical economists such as Adam Smith and Karl Marx-both witnesses to the Industrial Revolution-focused on the central role played by market and industrial organization in technological and economic development. Thus, Smith explored the intertwining of market expansion, the division of labor, and productivity growth, while Marx was concerned with the "increasing organic composition of capital" (Dosi and Orsenigo, 1988, p. 14). Joseph Schumpeter picked up on these themes much later in his critique of the rise of economic models of perfect competition that focus on allocative efficiency within static equilibrium and treat technical change as exogenous to the economic system. For Schumpeter, economic growth and development are inevitably linked to technical and institutional change, for these are products not of small adjustments in factor prices but of the creation of entirely new combinations of those factors. Static equilibrium models are largely irrelevant to economic development in market systems, he argued, because price competition is not the primary source of innovation:

In capitalist reality as distinguished from its textbook picture, it is not [price] competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance)-competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives. [Schumpeter, 1950, p. 84.]

The precise relationship between market structure and technological innovation, however, has remained elusive. Whereas early Schumpeter, in his Theory of Economic Development (1934), focused on "heroic" individual innovators, later Schumpeter, in his Capitalism, Socialism, and Democracy (1950), recognized the increasing reality of large-scale organization and the role of "routinized" innovators. These themes have reappeared more recently in debates concerning the vitality of high-technology sectors of the American economy and the special role played by its smaller firms and venture capital markets. For some, small-firm entrepreneurial innovation is the well-spring of U.S. competitive strength, as reflected in the role of Silicon Valley in the development of

the electronics industry. George Gilder (1988, p. 54), a representative of this view, writes,

The secret of the U.S. success [in computers and semiconductors] was the very venture system that the critics condemn. It counteracted high capital costs by efficiently targeting funds, released energies that were often stagnant in large companies, attracted a crucial flow of inventive immigrants, and fostered a wildfire diffusion of technology that compensated for the lack of national coordination.

For others, this position is panglossian, for the technological and capital requirements of new product and process development have surpassed the scale of single firms, and especially small firms, to promote sustained innovation. Charles Ferguson (1988, p. 57) responds directly to Gilder's viewpoint by arguing,

Japanese, Korean, and even German competitors seem not to share America's passion for fragmentation and entrepreneurial zeal. U.S. industry falls victim not to nimble, small companies but to huge, industrial complexes embedded in stable, strategically coordinated alliances often supported by protectionist governments-exactly by the kind of political and economic structures that, according to the free-market entrepreneurship argument, give rise to stagnant cartels.

In Japan itself, the balance of opinion on this issue has shifted over the past ten years. The early 1980s saw a spate of white papers, academic treatises, and popular writings extolling the virtues of Silicon Valley start-ups, bewailing their absence in Japan, and advocating policies to rectify the situation. But by the latter half of the 1980s, emphasis was increasingly placed on technological "fusion" and the advantages large firms and interorganizational collaboration seemed to play in this process (e.g., Kodama, 1986).

Empirical analyses of the link between market organization and innovative activity have yielded mixed results. The variety of studies that have tested these relationships have failed to show consistent evidence for a systematic correlation between market structure or firm size, on the one hand, and rates of technological innovation, on the other (see, for example, Kamien and Schwartz, 1982; Mowery, 1986). However, aggregate measures, such as industry concentration ratios or firm size, mask more subtle relationships that define the innovative process and the incentives and constraints under which entrepreneurs actually operate.^[1] The relationship between industrial organization and technological innovation may not be a linear function of firm size because decen-

tralized, entrepreneurial firms and large-scale bureaucracies are each good at different things and the interaction among these advantages is complex.

Technological evolution and economic change in Japan has long been marked by the dynamic attempt to balance the advantages of firms and interfirm cooperation, as is increasingly the case in the United States with the proliferation of alliance forms. In rapidly changing environments, often what is needed is not only for firm-level organization to supplement atomized markets, but for interfirm-level organization to supplement firms. The importance of an ongoing interaction and an intimate familiarity among technology collaborators, as well as the peculiar public-goods character of information, raises the transactions costs associated with relying on arm's-length markets to govern transactions. At the same time, the uncertainties born of technological discontinuities in many sectors have ensured that no single firm can expect to be master of more than a fraction of its production inputs, and the diffuse demands of contemporary technological and market development have surpassed the capability of single firms to accomplish the required coordination of interdependent processes on their own. The tension between these considerations has been reflected in Japanese industrial development in the ongoing effort to combine the administrative benefits of larger firms and the entrepreneurial and flexibility benefits of smaller firms, as discussed below.