VIEWPOINT :: STRATEGY

Entrepreneurs are constantly on the look out for "new ways of doing things" and therefore, are responsible for technology and industrial growth, according to Joseph Schumpeter. Schumpeter, one of the most influential economists of the 20th century, espoused a theory in which the entrepreneur or the manager is the pivotal point for all developments. "They search for and invest in better technologies so as to maximize their profits."

In contrast, the Real Business Cycle (RBC) tradition considers technological change as a random shock impinging the economic system. This theory implies that managers have hardly any role to play in the trajectory of technology.

Professor Deepak K. Sinha and co-author R.S. Prakash studied the sugar industry in India and the US to validate which of these two contradicting theories actually influence industry growth. The authors chose the sugar industry to validate their hypothesis as

• The sugar industry uses a single critical raw material - sugarcane
• Long time-series data is available for this industry from various sources
• Worldwide the sugar industry has seen considerable technological advancements over time

The researchers defined the following two hypotheses based on the competing theories.

Hypothesis 1 - Technological changes in an industry appear as random shocks
Hypothesis 2 - Technological changes in an industry occur as a result of conscious choice of managers or firms in the industry

They subjected the data from the sugar industry to a Unit Root Test to study which of these two hypotheses is true for the data. A Unit Root Test is a common test that is used to identify whether or not a given time series data has a stochastic trend. If Hypothesis 1 were to be true, the time-series data on productivity for the industry will show a stochastic trend. If Hypothesis 2 were to be true, the time-series data will not show a stochastic trend.

Results

Analysis of time-series data for both the Indian and the US sugar industry reveal the absence of a stochastic trend. In other words, Hypothesis 1 does not seem to hold for the data analyzed. Further, independent evidence suggests significant technological advances in the Indian sugar industry during the same period. In summary, the authors' research does not support the RBC Theory of random technological shocks.

A limitation of this study is that data from a single input industry is used to test the implications of the two competing theories. A generalization of the findings would be stronger with supportive evidence from other industries that use multiple inputs.

Conclusion

The results provide no support for the technology shock view at the industry level over a long time horizon. This implies that the technology changes happen as a result of a conscious change made by entrepreneurs and managers.

The original article Technology Change: Random choice or conscious change by R. Sai Prakash and Deepak K. Sinha, appeared in The Journal of High Technology Management Research, Volume 19, Issue 1, 2008.