The casualty of technology innovations in Kondratiev waves offers us valuable insights for prediction and investment decision-making. However, so far the needed cause and effect does not appear to be adequate. The combination of technology S-curve, Innovation adoption patterns, and Waves of Innovation theory offers us useful insights.
We all are familiar with ‘boom’ followed by ‘burst’ in the technology innovation space. Particularly, in the 1990s, dotcom gave a good lesson. These ups and downs are over a short period, say 10 or 15 years, though. However, in the Market Economy, the cyclic nature of growth occurs over a long period, say 60 or 100 years. Does technology innovation have a role in it? In 1925, Soviet economist Nikolai Kondratiev was the first to bring the observation to international attention that technology innovation has a role in major economic cycles of capitalism. Understanding of Kondratiev waves’ causes and effects is useful in academic discussion and highly important for making investment decisions. However, the detailed logical structure of the role of technology innovations in Kondratiev waves is not out of criticism yet. Moreover, the lack of causality doesn’t provide adequate insights for making predictions and taking investment decisions.
Presence of economic cycles
In Kondratiev waves, there are four major stages: prosperity (P), recession (R), depression (D) or crisis period, and improvement (I). From the investment point of view, entry at the improvement stage has a high possibility of producing an attractive economic return at the prosperity stage. For example, economic value creation out of information technology was at the improvement stage during the 1960s. By the 1990s, we entered the prosperity stage. Companies that made entries in the 1960s and 1970s made a significant fortune. It also has an economy-wide effect. For example, during the period of 1970-1990, the economic boom created from Silicon formed a very highly prosperous Silicon Valley. Prediction of the role of technological innovation in Kondratiev waves offers us insight for taking entry and exit decisions in the technology sector.
Relating technology life cycle with Kondratiev Waves
Typically, technology grows as an S-curve. Like living things, technological invention emerges in primitive form. For example, an electronic image sensor or Transistor was highly primitive at birth. As we know, technology invention itself does not make any contribution to producing economic value. The use of technology to innovate new products or processes, or improve existing ones leads to producing economic value. However, at the early stage, infant technologies are not suitable for profitable innovation. Despite infancy, high-potential technologies start drawing risk capital investment to advance them further, build a patent portfolio, form Startups, and experiment with product ideas. Although there is only a negligible number of customers at this stage, the economy starts experiencing positive contributions due to potential nurturing investment activities. In Kondratiev waves, this is the improvement stage.
With the further progression of emerging technologies, both product and process innovations benefit from offering better alternatives to existing products or completely new products. Gradually, innovations start penetrating deeper in the market segments, passing through early and late majority segments. Invariably, emerging technologies offer better versions at lower prices. Hence, the market and economy expand together. Moreover, due to the competition, this growth phase of technology innovation ramps up quickly. Consequentially, it leads to the rapid growth or prosperity stage in the Kondratiev waves. With the maturity of technology, the advancement of innovation, and its penetration in the market also starts slowing down. This slowing down phase is called the recession period Kondratiev waves. But why does such a slowdown lead to depression? To get the causality of this observation, we need to look into it from the perspective of the uprising of creative destruction and Disruptive innovation.
Effects around the inflection point of the uprising of the creative destruction wave
The Unified Theory of Innovation offers us insights into the effect of the uprising of the creative wave in offering better substitution.
Creative destructions for shedding light on the depression effect
Economic benefits from technology invention are harnessed in two major forms. The first one is to innovate completely new products. For example, technology invention for studying tissue response to the high-magnetic field led to the innovation of a completely new product—MRI imaging. However, the predominant mode of exploitation of technology invention is to replace the technology cores of existing products. Invariably, the substitutions of existing products due to the change of technology core emerges in primitive form. Due to the technology core’s continued advancement, some of the potential substitutions reach the inflection point.
The further investment in the mature technology core, forming the previous wave, starts evaporating at this inflection point. Customers also start deferring the new purchases. Instead, they keep waiting for further advancement of the substitution. Hence, at this stage, economic growth slows down to the recession, leading to the depression stage. Furthermore, the disruptive effect of the emerging wave on existing jobs and firms further contributes to the depression effect.
It seems that the technology life cycle alone does not offer adequate cause-effect relations in explaining the role of technology innovations in Kondratiev waves. We need to take into consideration of the effect of waves of creative destruction in offering the substitutions. Particularly, the effect at the inflection point of the emerging wave brings a unique insight in explaining the cause of the formation of recession, leading to depression in long-term economic cycles.
Level of implications of technology innovations in Kondratiev waves
In order to show economy-level implications, a large number of products should experience the transformational (substitutional) effect from emerging technologies. Both scope and scale of implications vary from technology to technology. For example, the invention of the transistor led to the transformation of a wide range of products. It also triggered the innovations of a few new products. On the other hand, the invention of electronic image sensor technology has a far smaller innovation scope.
Similarly, the steam engine’s invention affected most of the industrial productive activities in the 17th century. Subsequently, its implications at the economy level were highly visible. The invention of the internal combustion engine also experienced similar Economies of Scope and scale advantages. On the other hand, the invention of electrical technologies in the form of lighting, motors, and radio waves made significant economic growth implications, creating the 2nd industrial revolution. Furthermore, the transistor technology invention led to the formation of information technology, transforming a wide range of products.
To assess the level implications of technological innovations in Kondratiev waves, we need to assess economies of scope and scale effect on both the offering of substitutions of existing products and innovating completely new ones. On top of it, we should keep monitoring the uprising of creative waves for offering the substitutions for predicting likely implications on economic growth. Implications of creative waves will emerge in two different forms. The first one will manifest in slowing down investment in and dismantling of productive activities for the production and consumption of incumbent products around mature technology core. This will be followed by the creation of a larger market due to the uprising of a new wave around emerging technology core–in offering better substitutions, consuming fewer resources.
The causality of technology innovations in Kondratiev waves needs the perspective of the technology life cycle and innovation waves theory
As it has been explained, there is a strong role of inventions on technology innovations in Kondratiev waves. However, to draw insights, we should take into consideration of both the technology life cycle and the innovation waves theory. Otherwise, we will not be able to offer adequate clarity about recession, leading to depression. I hope such insights will positively contribute to the acceptance of long wave theory to the academic community. Moreover, it will offer insights to policymakers, development planners, startups, corporations, systematic innovation practice, and investors to cope with transformational effects, leverage unfolding opportunities, and determine optimum investment timing.