Kenneth L. Simons

Phone +1 518 276 3296
Fax +1 518 276-2235
Email simonk [at] rpi.edu

7. Inventor motivations
8. Merger and acquisition
9. Employee policies
10. Regulatory ratchet effects
11. Economic growth with dictatorships
12. Environment and technology
13. Global change models

Paid or for-credit positions are available for a few good RPI undergraduates, to help with research on industries and technological advance. If interested, please read about the positions, fill out an application form, and email or give me the form.

This new course is a research experience analyzing the economics of industries and growth of modern technologies.

Does this near-extinction look familiar?  Most industries that have been around for at least several decades have experienced some amount of shakeout, in which the number of companies drops off.  Shakeouts are no historical artifact; they happen all the time.  What's more, they happen despite rapid market growth.

A series of papers joint with co-author Steven Klepper probes the causes of industry shakeouts.  The papers explore some of the most fundamental issues of economics: competition in its raw form as it plays out over time.  They also help understand one of the most important issues in economics: technological change, which yields the bulk of economic growth.

Reference: Steven Klepper and Kenneth L. Simons, "The Making of an Oligopoly: Firm Survival and Technological Change in the Evolution of the U.S. Tire Industry," Journal of Political Economy, August 2000, vol. 108 no. 4, pp. 728-760.

Look familiar again?  Industry competitive dynamics usually are.  The same processes seem to be at work within and across different countries.  This recent study compared matched industries between the US and the UK to see if product-specific traits, rather than random events and the national environment, seem to explain competitive dynamics.  After years of tedious data collection, I expected and hoped to see some similarity across the two countries, but I was shocked how well the numbers matched up.

Industries with shakeouts had shakeouts in both nations, and the severity of the shakeout -- as measured by the % drop in number of companies -- was quite similar.  The timing of the peak in number of firms was often almost identical across the two countries.  And in each country the same industries were lacking in shakeouts (not all industries have shakeouts, and there are good reasons why not).

This tells something fundamental about how industries work.  There are driving mechanisms, that work the same in different environments, stem from underlying product-related characteristics such as the nature of the product's technology, and determine the overarching dynamics of how competition plays out in the market.  Of course there are international differences, particularly in terms of which country's producers win or lose when a market goes global.  But the differences are much less than we might have guessed.

Reference: Kenneth L. Simons, "Product Market Characteristics and the Industry Life Cycle."  Working paper, 2005.

When you're a company, it helps to be born with muscle.  That's one of the findings of a study of US radio producers when they began manufacturing televisions.  The firms were almost the only ones with the engineering know-how and other traits to succeed in this new market.  They set up new production lines relatively efficiently and began improving their products.  Improvement is a big deal in an industry with tight cost margins and with the repairman having to come every two months on average in the early days of television.  Some of the radio producers became the big firms, and out-innovated the others.  In fact, I counted all the manufacturing innovations I could catalog from industrial journals, and found that the big firms - born of the radio days - dominated innovation.  The market went through a big shakeout that wiped out most firms.

Too bad the US firms died their death too - they couldn't keep up in the face of international competition.  Japanese and other foreign firms entered US production with just as much brawn already in hand, and they had better products.  Transistor radios may have seemed cheap at first, but the transistor was key to lower-cost manufacturing and fewer breakdowns.  US companies ever after lagged 1-2 generations behind in their integrated circuits.  The last of the US heavyweights, Zenith, was acquired by Goldstar of Korea in 1995.

Reference: Steven Klepper and Kenneth L. Simons, "Dominance by Birthright: Entry of Prior Radio Producers and Competitive Ramifications in the U.S. Television Receiver Industry," Strategic Management Journal, October-November 2000, vol. 21 no. 10-11, pp. 997-1016.  

Why do industry shakeouts happen?  There are different ways to tell, but one way is to dig deeply into technological evidence.  This study does just that.  It's hefty, 3-4 times longer than the usual journal article, even after we trimmed it down.  It has to be so long because there's a lot to know about technological change in products with shakeouts.

This study uses a sample of four products, automobiles, tires, televisions, and penicillin, in order to look back over the long span of time at products we know had very severe shakeouts.  For each product, innovation in the product and manufacturing process are reviewed with tables of the major innovations and a systematic review of the means to quality and cost improvement.  For both product and process improvement, for all four products, the large producers dominated the lists of innovations.

Other products aren't like this.  What was going on here is unusual, systematic domination of innovation by the leading firms.  They're the only ones for whom it made sense to hire huge cadres of engineers and scientists and other smart people who made their companies' success.  The innovative process isn't glamorous; in fact it can be greasy and sweaty, but it's what beats the competition and earns profits.

Reference: Steven Klepper and Kenneth L. Simons, "Technological Extinctions of Industrial Firms: An Inquiry into their Nature and Causes," Industrial and Corporate Change, March 1997, vol. 6 no. 2, pp. 379-460.

Shakeouts have become a hot topic for research recently, and an increasing number of theories seeks to explain them.  This paper digs into the evidence to find out why they happen.  A companion piece to the above paper on technology and shakeouts, this paper emphasizes firm survival patterns.  Common theories of shakeouts involving technological change turn out to have sharply contrasting implications for which firms should survive and when they should exit.

The notion that a single innovation from outside an industry triggers the extinctions turns out to be an extinct idea.  Suppose firms had to adapt their product and manufacturing methods to the new technology, but once they adapted fine then they could be reasonable competitors.  Then there should be a temporary mass exodus, with a rise in the exit rate until the surviving firms are all ones that have adapted.  But that doesn't happen.  In general, the rate of exit doesn't rise in a shakeout.  Instead, new companies stop entering the market and steady competition continually drives out the less-profitable firms.

A popular idea of "dominant designs" in the product has also been applied to shakeouts.  But while dominant designs are an important concept, they don't seem cause shakeouts (arguments of dominant design proponents notwithstanding).  If firms had to get used to a dominant design to survive, eventually the survivors would be used to the design and the exit rate would decline.  This doesn't happen.  (And there's more evidence in the earlier technology paper.)

What does matter is constant innovation.  Using systematic compilations of information about firm innovation, this paper shows that survival is directly and massively related to constant innovation.

Reference: Steven Klepper and Kenneth L. Simons, "Industry Shakeouts and Technological Change."  International Journal of Industrial Organization, vol. 23 no. 1-2, February 2005, pp. 23-43.

There's a lot of talk about the internet changing the nature of competition.  From all the talk, you might expect such changes have had an effect already.  Yet few studies have checked for evidence of change.  I looked at the evidence, focusing on an industry in which disruptive competitive change is likely to have shown up relatively early.  The industry is IT consultancies in the United Kingdom, one of the leading countries at internet adoption.

Theories of disruptive technologies describe a real phenomenon, where upstart firms displace previous industry leaders.  Such theories imply that a disruptive technology increases opportunities for market entry, enhances the chances of survival and growth for entrants relative to incumbents, and causes a wave of exit of firms unsuccessful at the new technology.  I looked at actual entry and exit patterns to see if the predictions for disruptive technology are occurring yet.  I also checked which firms set up internet-related areas of business and whether they achieved enhanced survival and growth thereafter.

The findings through the year 2001 do not match the telltale signs expected if the internet has been a radical disruptive technology.  Perhaps, as Michael Porter argued in a recent Harvard Business Review article, the internet will not change the dynamics and strategies of business competition, but merely intensify them and make current strategic concerns all the more relevant.

Reference: Kenneth L. Simons, "Information Technology and Dynamics of Industry Structure: The UK IT Consulting Industry as a Contemporary Specimen."  Working paper, 2002.

Economic research has uncovered many oddities about entrepreneurs. Entrepreneurs would appear to be unrealistically optimistic, wishful thinkers, risk seekers, or just plain driven by their own interests. Moreover, human subject experiments suggest ordinary people - and by implication entrepreneurs - overestimate their own chances of success, and so enter markets despite predicting that entrants will typically lose money. Indeed real entrepreneurs do lose money, relative to what similar people make in corporate jobs. With all these findings, it would seem we should be pessimistic about the way entrepreneurs operate. Yet the empirical evidence on entrepreneurs has largely been based on aggregate patterns, and there has been little attempt to find out how much entrepreneurs respond to profit-related incentives.

The independent inventor is the quintessential entrepreneur, and perhaps the most important entrepreneur, since a substantial fraction of our society's new products have come from independent inventors. This study used data on advance estimates of profit-related characteristics of inventions, and matched the data to inventors' actual decisions whether to commercialize the inventions (and later whether to exit), as well as the inventors' stated reasons for their decisions. By using a very general yet simple theoretical model, we predict how inventors should behave if they respond rationally with profit-seeking motives. It turns out that the financial incentives really do matter in inventors' decisions, and in fact the evidence suggests independent inventors are averse to risk, just like most people.

Reference: Kenneth L. Simons and Thomas Astebro, "Entrepreneurs Seeking Gains: Profit Motives and Risk-Aversion in Inventors' Commercialization Decisions," working paper, 2007.

Plant productivity declines on average 1% or more per year before the average plant is acquired by a new owner, but beginning immediately after acquisition, productivity rises even more rapidly. That assessment of total factor productivity stems from a recent, massive study of nearly all Swedish manufacturing plants. The productivity shifts coincide with reductions in output and especially employment. The workforce of the average acquired plant shifts to involve more old-time employees, and the reductions in workforce tend to leave a slightly smaller percentage of women employees, non-native-born employees, and less-educated employees.

These conclusions provide new evidence on what goes on during the average plant or company acquisition. Detailed breakdowns by types of ownership change, including part- and whole-firm acquisitions and divestitures and related and unrelated diversifications, also provide a focused analysis of how the benefits and processes of ownership change vary according to the circumstances of acquisition. The very recent data from this study provide, apparently, the first plant-level evidence on ownership change and productivity in continental Europe, and one of the first analyses of ownership-change related fluctuations in composition of the workforce.

Reference: Donald S. Siegel, Kenneth L. Simons, and Tomas Lindstrom, "Ownership Change, Productivity, and Human Capital: New Evidence from Matched Employer-Employee Data in Swedish Manufacturing," in Producer Dynamics: New Evidence from Micro Data, University of Chicago Press for the National Bureau of Economic Research, forthcoming.

Why do some companies pay employees little at first but give them big salary increases in later years?  Could they afford to keep honest employees for life, and how?  How can they build up employees' skills to turn the good ones into top management?  And if they're bank employees, what keeps them from running off with the cash?

In this study I've teamed up with my colleague Andy Seltzer, an economic historian, for one of his studies on Australian banking.  Australian banks in the 1800s and early 1900s had to attract the few highly-educated school graduates, and keep them in the bank in the long term.  Steeply graded salary scales and big old-age pensions gave an incentive to stay with the bank.  Not all employees turned out to be geniuses, so while the best went on to top management, the rest became long-term clerks doing routine work in big city offices.  Promising employees were rotated through different jobs, and if they were good enough they wouldn't get stuck forever managing small rural branches.  The frequent job changes not only built experience; they also promoted honesty.  If someone else would inherit the books soon, cheating was hard, particularly with mandatory vacations when employees weren't allowed to step into the office.

This paper provides a chance to reflect on some fundamental facets of employee policy.  These policies won't all make sense for your modern company, but it's wise to reflect on how workplace policies like these and their alternatives affect a company.

Reference: Andrew Seltzer and Kenneth L. Simons, "Salaries and Career Opportunities in the Banking Industry: Evidence from the Personnel Records of the Union Bank of Australia," Explorations in Economic History, April 2001, vol. 38 no. 2, pp. 195-224.

Studies of environmental regulation have argued that regulators are better off with more power rather than less, for example by being able to tailor regulatory standards to specific types of firms or even to individual firms.  These views ignore the "ratchet" effect, whereby what the regulator finds out about firms leads it to increase regulation in future, sometimes causing firms not to use the best possible methods for fear of the dreaded ratchet.  This paper by Anthony Heyes and myself proves that ratchet effects can indeed apply to environmental regulation of firms, through a simple model of optimally behaving firms and a regulatory agency that works to optimize social welfare.  The ratchet effect means that the regulator would prefer not to have the ability to tailor standards for some industries, in order to achieve higher social welfare.  This is because "pooling" or "partial separation" equilibria may result in which some firms use inefficient technology in order to avoid heightened regulation.  Whether dread of the ratchet really matters depends on industry and technology characteristics, the relative social costs of pollution and output, and the actual (presumably non-optimal) behavior patterns of firms and regulators.  The paper’s contribution is that we need to pay attention to the ratchet, not ignore it, when planning environmental regulation of firms.

Reference: Anthony G. Heyes and Kenneth L. Simons, "Should Environmental Regulators Be Allowed to Tailor Standards?," working paper, 2003.

It is well known that some dictatorships achieve rapid economic growth while others suffer rapid decline. This study is apparently the first attempt to explain this phenomenon in a formal economic framework.  My colleague Michael Spagat and I teamed up to explain both rapid growth and decline in terms of optimal survival strategies for dictators in different circumstances.

Our model of economic growth involves a tricky dynamic optimization problem.  (Technically, it is not time-separable.)  We solved it computationally, using intensive sensitivity analyses around the range of plausible parameter values.  Our model dictatorships turn out to have bifurcation points, with a spiral of deterioration below the bifurcation and a too-rapid spiral of growth above the bifuraction.  The results fit with the limited available empirical evidence, and provide an explanation for the previously noted but unexplained high variance of growth rates among dictatorships.

Whether the theory truly explains what's going on we have no way of knowing given existing evidence.  But right or wrong, the methods taken here pioneer an approach useful for future models.

Reference: Jody Overland, Kenneth L. Simons, and Michael Spagat, "Political Instability and Growth in Dictatorships,"  Public Choice, vol. 125 no. 3-4, December 2005, pp. 445-470.
 

There's been a long discussion about the environment and growth -- do we need to slow growth to avoid famines or economic collapse?  Opponents of growth such as the Limits to Growth authors from the 1970s never came to agreement with proponents such as the late Julian Simon.  The lack of serious dialogue on the issue -- and the extent to which economists have let it lapse -- is unfortunate.  It's hard to think of more important issues than the healthy and enjoyable lives of the six billion (and growing) people on our planet.

My solution to the issue is to focus on environmental technology.  Both opponents and proponents of growth agree that appropriate use of environmental technology is crucial to the continuance of human lives and lifestyles as we know them.  And growth is continuing its way regardless of either camp.  So we need an alternative approach.

This paper shows such an approach theoretically, then examines how technologies have been changing in practice, and finally computes crude estimates of real-world technology benchmarks.

I define technology benchmarks: minimum amounts of specific environmental technologies required to allow a continued path of population and economic growth.  In a general model of economic growth and environment, I prove:  1. With no environmental problems, growth could continue indefinitely.  2. With environmental impacts, if we don't know the form of the impacts, economic output might fall below any desired level.  3. Environmental technology can ensure a desired minimum growth path.  Robust minimal technology paths are also defined, so that amounts of technology greater than or equal to the paths yield desired growth.  This accounts for feedback of environmental quality on growth.

Environmental technology progress is estimated by alternative measures in 1970-2004.  Crop yields typically have improved roughly 1-2% per year.  Pollutant emissions per unit of industry or agriculture typically have fallen 2% to 6% per year.  Metal and mineral extraction worldwide per unit of industry typically has fallen by about 3% per year.

To illustrate how technology benchmarks can be estimated using global change models developed by teams of scientists, the World3 model is used to estimate specific minimum environmental technology improvements.

Reference: Kenneth L. Simons, "Technology Benchmarks for Sustained Economic Growth."  Working paper, 2006.

Models of global change used to run on mainframe computers with thick, unreadable tomes (at best) for documentation.  The situation has been improving, because of software like my Beyond the Limits program.  This program makes the World3 model, developed in the 1970s by a team of scientists at MIT, available in user-friendly form.  The program includes extensive documentation of the model including click-able model diagrams, and it lets you make changes to the model and see the consequences of your changes.

I didn't develop the model, just this program.  View excerpts from the program or download a version for Macintosh computers.  A PC version is under development.

See also information about the Earth Systems Project in which the software was developed. The project also includes my program The Gaia Hypothesis and Daisyworld.

Reference: Kenneth L. Simons, "Beyond the Limits."  Computer software, 1997 (first version 1992).

For a full list of papers, see my papers and publications page.

The NIE organizes a range of activities, with typically 2-4 conferences per year: the main annual conference plus themed conferences.  The last conference that I ran, Challenges of Asian Technological Development, took place at the LSE on 31 May 2003.  For information on the Network's email list and on past conferences, see the NIE web site.

I was Chairman of the NIE in 2001-2003, but have now passed on the chairmanship to Michael Waterson, who will appreciate any ideas (email him) for the NIE and future conferences.