Baumol model
Baumol model is a framework for innovation in which he has focused on free market innovation. He has taken observation from the macro level and believes in free market (protection of copyrights) and technology trade. The five conditions necessary for the existence of a workable free-market economy are oligopolistic competition, routinization of innovation, productive entrepreneurship as opposed to rent seeking, rule of law for property rights & copyrights and technology selling or trading. These features are crucial for explanation of growth accomplishments of free market (Baumol, 2002). In the free market, there should be balance between protection & diffusion of knowledge and balance between first and second mover advantages.
Analysis & Critique
Baumol believes that free market is a key to innovation which represents a market mechanism in which he puts innovation at the centre of free market. He does not give the concept of repertoires but believes that engine of innovation is routinised. Baumol has considered innovation often equated with Research & Development to be the main factor behind economic growth which in his view would lead to sustained growth in long term. He in his analysis of capitalist growth focuses only on large oligopolistic firms. By making this distinction, he is subject to overlook few dynamics of different firms in the process of innovation based growth. The factors such as the mutual interaction and selection processes between different firms have not been considered (Fagerberg, 2002). It is true that size matters but Baumol has overemphasized the link between oligopolistic competition and innovation because routine driven path-dependence and intangible specialisation might constrain flexibility. A better approach could be that balances trade-off between size and flexibility.
Baumol assumed that the bulk of innovative activity is carried out by large oligopolistic firms and concludes to economy deriving its innovations from the routine activities of giant firms and from independent inventors or their entrepreneur partners (Baumol, 2005). Small or medium firms can also come up with important innovations especially in the early phase of technology for example, computer industry. Baumol model circles in the growth and maturity stage of the product life cycle where the operations performance objectives are speed dependability and cost dependability as evident from Figure 1 (See Appendix). The introduction and decline stage seems to be out of the circle of Baumol.
The model lacks historical depth and is an abstract model based on stylized view of capitalist dynamics failing to explain how these dynamics have evolved historically. As compared to Baumol, Schumpeter has considered two different approaches to organize innovation in the capitalist firms (Fagerberg, 2003). One approach was related to small or medium firms led by entrepreneurs and other was "collective entrepreneurship" or the term "routinized innovation" as used by him.
In 1920's when Benito Mussolini was trying to construct a corporatist economy in Italy, Keynes remained in the favour of capitalism and opposed laissez-faire ("free market") believing state has useful functions to play (Phelps, 2006). According to Phelps, corporatism constricts the engine of Baumol's free market innovation machine. The model restricts the actions of independent entrepreneurs in favour of a broader social framework for economic and business decisions which rob the innovation machine from the fuel that it requires from those entrepreneurs to produce economic growth (press.princeton.edu). We can argue that to a certain extent the concept of "routine-driven path dependence" and "free market" helps as a critique on Baumol's model of innovation. Path dependence at the individual, organizational and institutional level is further reinforced by the expectations of partners in economic exchanges and by political and social power structures (Mokyr, 2002). Mowery in his article highlighted the extent to which the development of Industrial R&D has been characterized by considerable path dependency (Mowery, 2009). But, innovation is uncertain and this has a major influence as argued in The Chain-linked Model (Kline and Rosenberg, 1986).
Just like any other model, we realize that there are strengths and weaknesses of Baumol's model. The model is related to economies of scale, transaction costs and beliefs that innovation is demand driven. This approach is somewhat justified as large firms can afford routinised innovation. But, there are issues of path dependency and open innovation Routinised innovation within Research & Development can be somewhat linked with closed innovation. Innovation can be seen as a "demand driven but supply constrained" activity (Mowery and Rosenberg, 2000). Here, the role of institutions comes in along with the supply of propositional and prescriptive knowledge. Path dependence is a special property of stochastic dynamical systems and none of the definitions of path dependence concern with the question of whether or not economic efficiency is attained (David, 1997). Paul David believed that innovation is a stochastic (random) process that leads to non-ergodic processes of development so Baumol is not compatible with him.
Baumol model does not apply to the case of China, yet China has experienced high level of growth in the last 20 years as evident from Figure 2 (See Appendix). The GDP (Gross Domestic Product) for China (8.4 % in 1990-98) is far away greater than that of Scandinavian, French or German legal systems.
Conclusion
It is evident that innovation plays a large role in activities of firms and this in turn can lead to growth. Modern economic growth can be said to be driven by intangibles and sustainable i.e by continuously developing propositional knowledge. This growth can be based on competitive advantage (innovative capabilities) and technology driven. Technological and innovation systems used in literature cast light on Baumol's findings that could have significant implications for modelling and future work in this field. However, innovation depends on interaction between a gallimaufry (heterogeneous mixture) of actors and is simply just not an isolated event in a firm.
