ABSTRACT

This chapter attempts to formalize the idea of the focusing device in the process of technological change and examine how the focusing device affects patterns of economic growth. It describes the economic “clusters” where different kinds of technology components constitute a production system. The chapter discusses the o-ring production function and regards a final good firm as a cluster in which interconnected technology components are concentrated. It examines the effects of the advantages of backwardness, free mobility of technology components, and different feedback mechanisms on cluster growth and derives policy implications. When low-powered incentives for innovation are adopted within organizations or clusters, factor prices lead to erroneous information regarding the potential benefits of technology component innovation. The prospects for innovation rents can be resolved into demand forces and supply forces that determine the expected payoff for a successful inventive effort.