- 04 Jun 2019
Do innovation possibilities decline with technological age?
04 Jun 2019 - 5:00 pm - 6:00 pm
The question of whether to continue investing in a familiar technology or to shift to a new one continues to remain a vibrant research theme. Even though there is theoretical consensus that innovation possibilities decline with technological age, the empirical evidence is either inconsistent or inconclusive. In an effort to close the gap between theory and evidence, we report a study that sought to empirically address this question. We use well-level data on oil production technologies that are of different vintages – conventional drilling and completion technology that originates in the 1840s and unconventional drilling and completion technology that originates in the 1940s – to examine how innovation possibilities decline with age. Our approach offers three improvements over existing efforts. First, using data from one industry and examining coexisting technologies allows us to cleanly compare the innovation potential of the technologies without having to speculate about the cause of censoring. Second, crude oil being a commodity product helps rule out vertical quality differences that may be implicated in innovation investment decisions. Finally, we use the 2014 oil price crash as an exogenous shock to the incentive to innovate. We report three sets of results. First, we show that changes in aggregate cost are not a good proxy for innovation. Costs can increase or decrease for reasons unrelated to innovation. Second, we estimate the productivity impact of the oil price crash on conventional and unconventional technology wells and find that unconventional wells experienced significant productivity growth while the conventional wells did not. This lends strong empirical support to the diminishing returns to innovation possibilities thesis. Finally, because we are unable to directly observe investment in innovation, we explore the mechanisms behind the increase in productivity and identify the process innovation practices that are at work.
Technical University of Munich
TUM School of Management