Technology is defined as ‘the sum of knowledge of the means and methods of producing goods and services’ (Penguin Dictionary of Economics). It is increasingly science based, encompassing things like chemistry, physics and electronics, and refers to the organisation of production as well as the actual techniques of production itself. Technological change leads to the introduction of new products, changes in the methods and organisation of production, changes in the quality of resources and products, new ways of distributing the product and new ways of storing and disseminating information. Technology has a very big impact upon the world of business in all of these areas and has an important effect on the level and type of investment that takes place in an economy and therefore the rate of economic growth (for a fuller discussion of technology,).
There have been massive changes in technology in the past ten years. This section will consider a few of these and assess their impact upon business and the economy.
Developments in information technology have had the effect of transforming existing business activities as well as creating entirely new ones, involving the collection, handling, analysis and transmission of information. There has been a massive increase in the demand for information, and, on the supply side, continued advances in the miniaturization of components. These will continue even when the capabilities of the silicon chip have been exhausted, with the development of superconductors and optronics. There are also the advances in the computing area such as the development of new languages and artificial intelligence.
Advances in information technology have many impacts upon business. They are creating new products and making old products more profitable to produce through things like computer-aided design (CAD). The effects they are having on the different functions carried out by businesses can easily be seen:
Other technological developments
These are the new emerging industries which are creating new products and making old products more profitable to produce. It has been estimated that the output of these emerging industries is 20 per cent for consumption within the industries themselves, 20 per cent for final consumption and 60 per cent for consumption in the traditional industries.
Technology and investment
The second input into the production process after people is capital. In economics, capital has a special meaning; it refers to all man-made resources which are used in production. Capital is usually divided into working capital and fixed capital. Working capital consists of the stocks of raw materials and components used in producing things. Fixed capital consists of buildings, plant and machinery. The main difference between the two is that fixed capital gives a flow of services over a long period of time, while working capital needs to be replaced on a regular basis. Because of its nature, working capital is much more mobile than fixed capital (i.e. it can be used for other purposes much more easily). Capital is a ‘stock’ of goods used in the production process, a stock which is continually being used and therefore needing to be replaced. This stock provides a flow of services for the production process.
Capital includes a wide diversity of items, including factory premises, machinery, raw materials in stock, transport vehicles and partly finished goods. As well as these, there is what is often called ‘social capital’, which refers to capital that is owned by the community such as schools and hospitals. There is also spending on the infrastructure, which is important to all businesses rather than being linked to one particular business. The main components of this are transport, energy, water and information. The transportation system is obviously very important to a developed economy. Road, rail, air and water are used to transport goods, services and raw materials. The capital stock in transport in the UK was £186.5 billion in 2004 (in 2002 prices). The same is true for energy and water; both are used by industry in great quantities, and a good infrastructure in these is essential. The information distribution system is also part of the infrastructure and would include telephone systems and the post.
Table shows the capital stock of the United Kingdom in 1996 and 2004 by industry. The level of capital stock increased over the period by 23.9 per cent, but there are marked differences between industries, ranging from a growth of 93.9 per cent in post and telecommunications to a fall of minus 10.6 per cent in mining and quarrying.
The increase in the stock of capital over time is called investment. Investment will serve to increase the productive potential of the firm and the economy. Investment usually refers to the purchase of new assets, as the purchase of secondhand assets merely represents a change in ownership and therefore does not represent a change in productive potential. Investment is important for the firm as it is a mechanism for growth; it is an integral part of the innovation process and can have disastrous results for a firm if an investment goes wrong. Generally, the higher the level of investment in a country, the higher will be the level of economic growth.
Total or gross investment can be broken down into replacement investment, which is investment to replace obsolete or worn-out machines, and new investment, which is any investment over and above this. This includes investment by firms, individuals (in dwellings mainly) and governments. It can be seen that the level of investment is affected by the state of the economy. There was a fall in the level of investment in the early 1980s and again in the early 1990s, both of these as a result of the recession in the economy. The level of investment in 2004 represented 20 per cent of GDP.
There is an important relationship between investment and technological change which runs in both directions. Investment can form the basis for improvements in technology while improved technology which brings about new ways of producing goods will lead to greater investment. For private firms the main determinants of the level of investment will be the rate of technological change and the scope for extra profit as a result of these changes.
Innovation and technology
There are two types of innovation that can occur as a result of technological change: product innovation and process innovation. Product innovation is the development of new products, like the microprocessor, which will have far-reaching effects on business. New products impact upon the industrial structure of a country, as new industries grow and old industries disappear. This in turn will lead to changes in the occupational structure of the workforce, as we have seen. It has even had the effect of reducing the benefits large firms derive from economies of scale in cases where the technological change can be exploited by small firms as well as it can by large firms. Another example of product innovation which has affected the level of competition in the market is the development of quartz watches, which allowed Japan to enter the market and compete with Switzerland. Process innovation, on the other hand, refers to changes that take place in the production process, like the introduction of assembly-line production in the manufacture of cars. The two types of innovation are related, as the above examples show. The microprocessor (product innovation), which is a new product, has led to massive changes in the way that production and offices operate (process innovation).
Not all innovation is technological in nature; for example, changes in fashion in clothing are not technological. Innovative activity is important for all industry whether manufacturing or non-manufacturing. In some industries (e.g. pharmaceuticals, computers), innovation is essential if firms wish to remain competitive. A recent CBI survey of 408 companies in the UK found that the innovation activities of 84 per cent of the sample had been adversely affected by the economic slowdown post-September.
Research and development
Most, but not all, technological changes have occurred through the process of research and development (R&D). ‘Research’ can be theoretical or applied, and ‘development’ refers to the using of the research in the production process. Most research and development carried out by private companies is directed towards applied research and development. It is designed to develop new products and production processes which will render production more profitable. It is also aimed at improving existing products and processes. Most basic theoretical research carried out in the United Kingdom is financed from public sources and is under taken in places like the universities.
Table shows that the level of research and development expenditure in the UK in 2002 was £13 110 million, which represents around 2 per cent of GDP. It can be seen that there are wide differences in expenditure between industries, with manufacturing involved in a great deal more research and development spending than non-manufacturing. Even within the broad category of manufacturing there are wide differences, with chemicals accounting for more than a quarter of the expenditure. Table shows the sources from which R&D is financed. As can be seen the majority of R&D is financed by companies themselves. If R&D is split into civil and defence spending, it is clear that the government finances the majority ofdefence R&D, as would be expected.
Figure shows that the UK tends to fare badly in international comparisons of research and development spending.
In an attempt to increase the level of R&D spending, the UK government introducedR&D tax credits for small companies in the 2000 budget. This scheme was extended to all companies in 2002. The tax credits bring tax relief for R&D spending, but as yet the take-up rate has been very low.
Limits to technological change
Technological change has many effects on the economy and the environment and if uncontrolled can lead to problems, like high levels of unemployment or the exhaustion of natural resources. One area of concern is energy. The world’s stock of energy is finite and we are still heavily dependent upon fuel which was formed millions of years ago. The development of nuclear power again represents a finite source of energy, and also carries with it other problems like the disposal of nuclear waste and the possibility of accidents. For these and other reasons the scale of technological change needs to be controlled.
It is also the case that technological change can lead to high levels of unemployment in industries that are in decline. This type of unemployment often takes on a regional bias as the older traditional industries tend to be located in particular parts of the country. Technological unemployment is in some respects inevitable as in a changing world it would be expected that new industries would emerge and old industries die. The problem can be tackled by the government and industry through retraining, but what is also needed is a new and more flexible view of work where less time is spent working and more on leisure. Technological change can also give rise to the opposite problem of skill shortage in new industries, where particular skills are required. Technological change has not led to the massive increase in unemployment predicted by many in the 1970s and 1980s.
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