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THE DETERMINANTS OF TECHNOLOGICAL INNOVATION
Despite the apparent difficulties, there is a line of research that has attempted to discern the determinants of technological change. Jaffe et al (2000) identifies two major strands of thought regarding the determinants of innovative activity. The first category is called the “investment subject to market failure” approach and the second category the “evolutionary” approach.
The “investment subject to market failure” approach explains the determinants of technological innovation by assuming that firms undertake an investment activity such as R&D with the intention of producing a profitable new product, or to engage in profitable new processes. The investment decision that surrounds R&D has important characteristics that distinguish it from investment in equipment or other tangible assets (Jaffe et al, 2000, p10).
The first characteristic is that the outcome of investment in R&D is much more uncertain than that of average investment undertakings. The second characteristic is that the assets that are produced by the R&D process are specialised and intangible. The costs of the investment are sunk, and R&D can therefore not be used for collateral. These two characteristics of R&D make the financing of research activity through capital market instruments more difficult than would be the case for other investments. This could result in under-investment in research (Jaffe et al, 2000, p11). Apart from the problem of financing investment in R&D, the returns to R&D activities are difficult to keep from other parties that have not invested in the development (the so-called appropriability problem). It seems as if a significant portion of the social return to investment will accrue as “spillovers” to competing firms or to downstream firms that purchase the innovator’s products, or to consumers (Jaffe et al, 2000, p11). Both the problems of financing and appropriability raise the cost of R&D activities. Because the “investment subject to market failure approach” assumes that firms undertake R&D activity to maximise profits, these costs could reduce expected profits. It also implies, however, that the rate and direction of R&D activities should respond to changes in the relative prices that affect the profitability of firms. This holds important consequences for the effect that environmental policies could have on technological innovation. Since environmental policies implicitly or explicitly make environmental inputs more expensive, the hypothesis suggests an important pathway for the interaction of environmental policy and technology (Jaffe et al, 2000, p12). The second school of thought explains R&D activities of firms as an investment decision that takes place in reaction to an external event. The so-called “evolutionary” approach assumes that firms are “satisfying” rather than “optimising” and approach their strategy with regard to R&D in a way that is not pre-determinable, but rather event-driven. This approach towards R&D development also holds intriguing opportunities for environmental policies. In as far as a new environmental policy is seen as an “external event” that could provide new profit (or loss) opportunities, it should move firms to re-evaluate their current R&D activities (Jaffe et al, 2000, p12).
As hinted in the above discussion, the two approaches that are used to explain R&D development also suggest measures that can be implemented to induce technological innovation.
INDUCING TECHNOLOGICAL INNOVATION
Given the above theories, it is not surprising that environmentalists are among the main proponents of new and more stringent environmental regulations. These groups argue that increasing the stringency of environmental regulations provides an incentive for firms to develop new and less costly ways of reducing pollution. Some proponents argue that it could potentially result in entirely new methods of production which eliminate particular types of emissions and reduce the cost of production (Jaffe et al, 1997, p610).
Parry (2001) illustrates the benefits of potential technological innovation with a simple static model. In the traditional Pigovian analysis in which the state of technology for reducing pollution is taken as given, there is usually an upward sloping marginal cost curve for abating economy-wide emissions of a particular pollutant. This is shown by MAC in the figure below. The proportionate emissions reductions is denoted by “a” on the horizontal axes. The MAC curve usually reflects some combination of the extra costs to firms from using cleaner but more expensive inputs in the production process, the costs for operating technologies for treating waste emissions, and the efficiency cost of reduced final production. In addition to the MAC curve, there is a marginal benefit curve (MB). This curve reflects the environmental gains from incremental reductions in pollution, such as the health benefits from clearer air. The optimum amount of pollution abatement is a*, where MB and MAC intersect, and the welfare gain achieving this abatement is triangle 0bx.
FUNDING TECHNOLOGICAL INOVATION IN SOUTH AFRICA
As indicated above, R&D investment can be induced by well-designed regulatory policies. However, investment in research and development programs will require funding. The funds can originate from either the private sector or from the public regulator. As discussed above, the expected returns from investments in R&D activities is highly uncertain at the best of times. Apart from this uncertainty, it seems as if there are additional factors that inhibit investments in R&D activities in developing countries. Gilles et al (1992) indicates that developing countries have not yet succeeded in making the development of appropriate technology a dynamic force in their economic development processes. According to the researchers, one of the main reasons for the lack of technological improvement is the absence of competitive pressures. This absence reduces the incentives for firms to invest in technological innovation. Another reason for the lack of technological progress is that most governments of developing countries have not yet fully awakened to the need to promote local research and development. It seems further as if universities of developing countries are usually preoccupied with teaching, and official research institutes in various fields are often slow to be set up or these institutions experience severe staffing difficulties once they open their doors. Given this, it seems as if there is scope for policies that will promote investment in R&D in developing countries (Gilles et al, 1992, p213).
Analysis of South Africa’s Research and Development Strategy (2002) indicates that the country is no exception to the problem of low R&D that seems to plague the developing world. The R&D strategy of the Government mentions that South Africa currently suffers from an “Innovation Chasm” despite high proportions of private sector participation in some tertiary institutions and research councils. The Government is also acutely aware of the fact that technological innovation is needed for long-term economic growth and it states: “In many areas where South Africa is currently competitive, we do not have a capacity for local innovation and are dependent on imported know-how. This is not problematic in the short term. However, countries that make strategic innovation investments will inevitably attract new foreign direct investment and will eventually secure or supplant our current productive capacity” (Department of Science and Technology, 2002, p38).
1. INTRODUCTION AND BACKGROUND
1.1 Introduction
1.2 Objective of the study
1.3 Outline of the study
2. THE USE OF COAL AND CARBON POLLUTION
2.1 Introduction
2.2 An introduction to the South African coal industry
2.3 The structure of the coal industry
2.4 Coal consumption and the environment
2.5 Economic incentives for reduction of carbon pollution
2.6 Conclusion
3 THE SOUTH AFRICAN LABOUR MARKET
3.1 Introduction
3.2 South African unemployment: a description of the market
3.3 South African unemployment: voluntary or involuntary?
3.4 South African unemployment: the reasons
3.5 South African unemployment: suggested solutions
3.6 Conclusion
4 THE DOUBLE DIVIDEND HYPOTHESIS
4.1 Introduction
4.2 Defining a double dividend
4.3 The double dividend under partial equilibrium analysis
4.4 The double dividend under general equilibrium analysis
4.5 Requirements for attaining the second dividend
4.6 The double dividend: empirical findings
4.7 Conclusion
5 TECHNOLOGICAL INNOVATION, THE ENVIRONMENT AND ECONOMIC GROWTH
5.1 Introduction
5.2 Technological innovation and economic growth
5.3 The determinants of technological innovation
5.4 Inducing technological innovation
5.5 Funding technological innovation in South Africa
5.6 Conclusion
6 INTRODUCTION TO AN APPLIED GENERAL EQUILIBRIUM MODEL
6.1 Introduction
6.2 Introduction to general equilibrium modelling
6.3 A description of general equilibrium modelling
6.4 From a general equilibrium model to a computable general equilibrium model
6.5 Conclusion
7 REVIEW OF THE STRUCTURE OF THE ORANI MODEL
7.1 Introduction
7.2 The ORANI model and the equations for intermediate and primary factor inputs
7.3 A review of equations used for households and other final demand equations in ORANI
7.4 A review of pricing equations that relate commodity prices to costs in the ORANI model
7.5 A review of the market-clearing equations in ORANI
7.6 Additional equations for explaining gross domestic product and allocation of investment across industries
7.7 Conclusion
8 A CGE MODEL FOR SOUTH AFRICA: DATA BASE AND ELASTICITIES
8.1 Introduction
8.2 Description of the South African database that will be used for the model
8.3 Elasticities required for a CGE model of the South African economy
8.4 Conclusion
9 MODEL CLOSURES AND POLICY SHOCKS
9.1 Introduction
9.2 A suggested short-run closure for performing revenue neutral coal tax shocks on the South African economy
9.3 The proposed short-run policy shocks
9.4 A suggested long-run closure for performing revenue neutral coal tax shocks on the South African economy
9.5 The proposed long-run policy shocks
9.6 Conclusion
10 SHORT-RUN POLICY SIMULATION RESULTS
10.1 Introduction
10.2 A fifty percent tax on coal
10.3 A fifty percent tax on coal and lump sum transfer to low income households
10.4 A fifty percent tax on coal and decrease in the intermediate taxation of food and agricultural products
10.5 Conclusion
11 LONG-RUN POLICY SIMULATION RESULTS
11.1 Introduction
11.2 A fifty percent tax on coal: the long-run consequences
11.3 A fifty percent tax on coal that is used to fund technological change
11.4 The relationship between the tax on coal and technological innovation
11.5 Conclusion
12 LONG AND SHORT TERM RESULTS: CRITICAL POLICY IMPLICATIONS
12.1 Introduction
12.2 Environmental taxation and the environment
12.3 Environmental taxation and government revenue
12.4 Environmental taxation and the unemployment problem
12.5 Environmental taxation and the redistribution of welfare
12.6 Environmental taxation and external competitiveness
12.7 Conclusion
13 SUMMARY AND CONCLUSIONS
13.1 Introduction
13.2 The dual challenge of reducing CO2 emissions and solving the unemployment problem
13.3 The theories behind environmental taxation and unemployment
13.4 A general equilibrium model of the South African economy
13.5 Policy proposals and results
13.6 Conclusions and suggestions for further research
REFERENCES
APPENDICES
