Growth theory concepts and applications

Economics of New Ideas and Innovations

This research paper discusses the economics of a new idea. Without new ideas and inventions, the economy might very well become stagnant or decline, as predicted by many early economists, who did not understand that impact that ideas and innovative technology had on global markets.

Technology is endogenous in the new growth theory, which holds that technology is a function of the capital and labor used to develop technology, the technology used in that process, and the economic environment. For the purpose of this paper, technology refers to the methods and tools that are used to generate with new ideas and more efficient ways of producing goods and services.

Ideas and technical innovations are crucial to the economy. If a country wants to grow, it must create an environment that encourages entrepreneurs and innovators to generate new ideas. Creating an economic environment that promotes ideas and innovations requires the establishment of institutions that enhance growth, open trade, and the protection of new ideas through patents.

The fundamentals of the new growth theory are similar to those discussed by Adam Smith and Joseph Schumpeter. According to Smith, businesses that want to maximize profit drive the idea of specialization. Specialization then leads to larger markets and even greater specialization. This idea is consistent with the new growth theory and endogenous technology. Schumpeter focused on the role of entrepreneurs and their innovations and the changes in technologies they bring to a business.

If we assume that technology is central to growth, countries will not necessarily converge if they do not create an environment that encourages entrepreneurs and innovators to generate new ideas. Countries with high levels of capital and technology, educated and healthy labor force, and institutions that promote innovations will continue to grow at a much quicker rate than countries that do not. Governmental policies, however, can help obtaining these elements that are necessary for growth. This paper will discuss these topics, in an effort to determine how new ideas stimulate the economy and how poorer countries can use ideas and technical innovations to converge.

Introduction

In recent years, researchers have shifted their focus to one of most important questions in economics: why are some nations richer than others (The Economist, 1996)? Poverty is seen as a global concern and the surest remedy for poverty is economic growth. While growth has created problems of its own (including pollution), these problems pale in comparison with the harm caused by the economic stagnancy of poor nations, which leads to wasted lives and suffering.

For many years, economics neglected the study of growth, as early researchers concentrated on other fields, such as macroeconomic policy. It was not until the 1980s, that significant interest was dedicated to the most important issue of all. However, the past decade has shown a major interest in growth. According to Robert Lucas of the University of Chicago, "the consequences for human welfare... -are simply staggering. Once one starts to think about them, it is hard to think of anything else (The Economist, 1996)."

Early economists considered these consequences. Adam Smith's classic 1776 book was titled, "Inquiry into the Nature and Causes of the Wealth of Nations." This book laid the foundation for many present ideas for understanding growth derive. Smith believed that the main driver of growth was to be found in the division of labor, in the accumulation of capital and in technological progress. He emphasized the importance of a good legal framework, within which the market could function, and he explained how an open trading system would enable poorer countries to catch up with richer ones.

In the early 19th century, David Ricardo introduced another concept crucial for understanding growth -- the idea of diminishing returns (The Economist, 1996). He revealed how additional investment in land yielded an even lower return, suggesting that growth would ultimately come to a halt -- although trade could prevent this for a while.

Robert Solow and Trevor Swan introduced the foundations of modern growth theory in the 1950s (The Economist, 1996). Their models described an economy of perfect competition, whose output increases in response to larger inputs of capital and labor. This economy heeds the law of diminishing returns: each new bit of capital generates a lower return than the one before it.

Combined, these ideas give the neoclassical growth model, as it is known, two important implications. "First, as the stock of capital expands, growth slows, and eventually halts: to keep growing, the economy must benefit from continual infusions of technological progress. Yet this is a force that the model itself makes no attempt to explain: in the jargon, technological progress is, in the neoclassical theory, "exogenous" (ie, it arises outside the model) (The Economist, 1996). The second implication is that poorer countries should grow faster than rich ones. The reason is diminishing returns: since poor countries start with less capital, they should reap higher returns from each slice of new investment. Theory into practice."

However, today, these theoretical implications do not seem to accord with the real world. A study that showed the average growth rates since 1870 of 16 rich countries for which good long-term data exist revealed that growth has slowed down since 1970 (The Economist, 1996). In addition, modern growth rates are above their earlier long-term average. This appears to challenge the first implication that growth will slow down over time. It may be that an acceleration of technological progress is responsible for this, but this should hardly console a neoclassical theorist, as it would mean that the main driving force of growth goes beyond the span of growth theory.

This leads to the second implication -- are poor countries catching up? It seems that poorer countries have tended to grow more slowly. Having arrived at neoclassical growth theory, however, economics dismissed the subject. It had a model that was theoretically reasonable, but did not seem to support the facts. Thus, economists were unclear on how to approach the subject. It took nearly three decades for the "new growth theory" to surface.

Modern economists have questioned the law of diminishing returns in the neoclassical model. If more capital does not yield a lower return than its predecessor, growth can continue indefinitely, despite technological progress. According to Romer (The Economist, 1996), if the idea of capital is broadened to include human capital (the knowledge and skills in the workforce), the law of diminishing returns may be obsolete. For example, if a firm that invests in a new piece of equipment also learns how to use it more efficiently, there may be increasing, not decreasing, returns to investment.

In many ways, new growth theorists can show how growth might persevere without technological progress. But they argue, why assume away such progress? A second strand of new growth theory attempts to put technological progress explicitly into the model. This has prompted theorists to question innovation. Why, for example, do companies invest in development? How do the innovations of one company affect the economy as a whole?

A further deviation from the neoclassical view follows. As a general rule, companies do not bother to innovate unless it thinks it can increase its competitive advantage and profit margin. However, this account is inconsistent with the neoclassical model's simplifying assumption of perfect competition, which rules out "abnormal" profits. Thus, the new growth theorists dismiss this assumption and assume instead that competition is imperfect. Instead, they concentrate on conditions under which businesses will innovate most productively: how much protection should intellectual-property law provide an innovator, for example? In many ways, it is apparent that technological progress has assumed a central place in economists' views about growth and ideas.

However, with the latest resurgence of interest in growth theory, the original neoclassical approach is seen as a good point of reference. For example, the new theory emphasizes human capital; arguably, this merely calls for a more subtle measure of labor than the ones used by early neoclassical economists (The Economist, 1996). Basically, it is argued that if factors of production (capital and labor) are properly measured and quality adjusted, the neoclassical approach yields everything of value in the new theory. This proves a basic theory in economics: the mainstream first takes affront at new ideas, then reluctantly draws on them, and eventually claims to have invented them in the first place.

This paper aims to address the issues surrounding existing growth theories, in an effort to determine why some nations are more advanced than others, what factors determine economic growth and how individuals, businesses and nations can increase productivity. The goal of this paper is to determine what impact new ideas and inventions have on the economy, as well as the extent to which these ideas should be protected against competition.

Literature Review

Neo-Schumpeterian Theory

Neo-Schumpeterian theory clearly focuses the study of economics of innovation on questions related to how and why the introduction and diffusion of new ideas with economic value changes the basis of competition. Biotechnology, for instance, has clearly affected the research and development (R&D) world and products of pharmaceutical companies, at the same time that it has opened up opportunities for small, specialized firms to sell knowledge and products connecting large firms and universities.

These days, more and more economists are questioning what sparks growth. Many of these new economists base their ideas on those of Joseph A. Schumpeter, an Austrian economist and Harvard University professor (Farrell, 1994). Like Schumpeter, these economists are concentrating on technology, innovation, and knowledge. "The one fact that comes from economic history is the ability of the human mind to break through barriers that weren't imaginable 50 years ago." says Joel Mokyr, economic historian at Northwestern University (Farrell, 1994).

In the past, mainstream economics have struggled with the question of what determines long-term growth. In the late 1950s, Nobel laureate Robert M. Solow of Massachusetts Institute of Technology suggested that increases in the economy's labor supply and capital stock only partially explained economic growth. He attributed the rest to technological change, but was unable to describe why.

The Schumpeterians take traditional economics to a new level, examining the driving factors of technological change (Farrell, 1994). These economists are concerned with how growth is changed by the support for technical innovation, educational institutions, and rewards to entrepreneurs for new ideas. A leading Schumpeterian is Paul Romer of the University of California at Berkeley.

Romer's Ideas of Economic Growth

According to Paul Romer, an economist at the University of California at Berkeley, new ideas, embedded in technological change, drive economic growth and enable us to escape the grim future economists often predict is in store for us (Kelly, 1996). The world, in Romer's eyes, is not defined by scarcity and limits on growth, but rather is a world filled with endless opportunity, where new ideas produce new products, new markets, and new possibilities to create wealth. "Old growth theory says we have to decide how to allocate scarce resources among alternative uses," stated Romer (Kelly, 1996). "New growth theory says, 'Bull*****!' We're in this world, it's got some objects, sure, but it's got these ideas, too, and all that stuff about scarcity and price systems is just wrong.'"

Romer was first recognized in the economics field in 1986, with the first in a series of innovative papers that revived the study of economic growth, which had been declining for decades. "Paul single-handedly turned it into a hot subject," according to MIT economist and Nobel laureate Robert Solow (Kelly, 1996). During the 1950s, economists had developed some simple models and concluded that technological change accounted for approximately 80% of economic growth. However, these economists failed to specify just what technology meant, and the model did not describe how to figure it out or encourage its development.

These early economists were more concerned with preventing another depression, so they did not concentrate on technology. Instead, they focused on preventing inflation and unemployment from overwhelming the economy. Still, as the Great Depression faded into history, economics students sought new challenges. Romer, who studied physics in college but passed up law school to concentrate on economics, became curious about what exactly drives economic growth.

For many years, mainstream economists expected growth in the industrialized countries to decline or at least stay the same. Anticipating diminishing returns - the idea that the growth provided by adding another farm, factory, or employee declines over time - economists predicted that the growth would end some day. However, the economy continuously defied the expectations of these economists, causing many people to doubt the validity of their predictions.

By the time Romer began studying economics, new economies to the East, led by Japan, were explosive. According to Romer: "I looked at the problem and said, 'This theory doesn't have any clothes on,' and proceeded to start work on it (Kelly, 1996)."

Romer's main contribution to economics is the construction of a model that exposes the important role ideas play in driving growth. Like many economists, Romer starts his project by dividing the world into two parts - physical objects and ideas. According to Romer, objects include everything around us, from large steel mills to carbon and oxygen atoms. Alone, these objects are scarce and subject to the law of diminishing returns. Thus, they are unable to drive economic growth. However, ideas can. Human beings, Romer believes, have a nearly infinite capacity to reconfigure physical objects by creating new ideas for their use. New ideas on how to increase, for example, the power of a hard drive, enable people to boost productivity, develop new opportunities for profit, and ultimately drive economic growth.

The best thing about ideas, according to Romer, is that they are nearly endless. "On the ideas side you have combinatorial explosion," he says (Kelly, 1996). "There's essentially no scarcity to deal with." For example, the number of possible bitstreams that can be turned into a CD-ROM comes to something in the range of 10 to the power of 1 billion, virtually ensuring that people will always find new software. "There isn't enough mass in the universe to make that number of CDs," he says.

Therefore, Romer believes that because the number of ways to rearrange an object and to create something of greater value is so vast, the prospects for economic growth are far greater than economists of the past even imagined.

To prove his point, Romer discusses a brainteaser (Kelly, 1996). Using chemical reactions, humans can reorder carbon and hydrogen into structures like new polymers and proteins. To test just how far this process can go, Romer imagines the chemical refinery of the future, which would be small and mobile enough to search out its own inputs, capable of maintaining a constant temperature, self-healing, and able to replace itself - all without human intervention.

However, Romer points out that this refinery already exists -- the milk cow (Kelly, 1996). He uses this example to show that if hundreds of millions of years of evolution can produce the milk cow, there must be an endless number of ideas for combining atoms that have not been discovered yet. For example, scientists are already changing the DNA of cattle, attempting to produce cows that secrete lactoserrin into their milk. Thus, the world has not even touched the surface of the infinite ideas that could change the economy.

Economically, new technologies like biotechnology help diminish the old image of diminishing returns. For this reason, traditional economists believe that growth has its limits. However, it seems that these new technologies create increasing returns, because new ideas, which generate new products, is generated through research. There is another benefit from increasing returns -- declining costs. A new idea that spawns a new product can make it easier and cheaper to produce new units. For example, including research costs, the first copy of Windows NT may have cost Microsoft $150 million. However, each copy produced after that was basically free.

According to Kelly (1996), "Early software pirates understood this property of software intuitively when they passed copies of WordPerfect or Lotus among friends. The reasoning was, why pay for something when it cost the company barely anything to produce? Here's where Romer ultimately runs afoul of classical theory. Old-school economics assumes that companies charge for a product exactly what it cost to manufacture or harvest the last unit. If that were the case, software firms would hand out their goods on every street corner."

However, when industries have high research costs and low production costs, they tend to lean toward a monopoly, which is best described as a situation in which companies charge more for their goods than what it cost to produce the last unit. "If you forced anyone in the world of ideas to sell their product at the cost of producing the last unit, they'd go bankrupt," says Romer.

According to traditional economists, monopolies are not supposed to occur, as competition is assumed to be perfect, meaning that many small firms compete against each other, but none is able to set prices; the cost of entry into the market is nothing; and prices reflect the cost of production.

However, when it comes to technology, this way of thinking is obsolete. Because the cost of research is so high, the price of market entry can be very high. As a result, large firms engage in brutal competition, and by simultaneously funding new discoveries while paying for old ones, they charge much more than the cost of production. The economics of monopolistic competition is the economics of today's technology age.

According to Kelly (1996), "But there's a big conundrum for monopolies and monopolistic societies. What price is the right price to charge for a new idea, for a new software tool? The classical notion of price-setting worked well. More often than not, demand equaled supply; and competition kept suppliers from charging more than consumers would pay. This classical understanding of pricing provided the ideological cover for market economies to flourish. For more than 200 years, laissez-faire economists have admonished kings and presidents - often bent on controlling the economy's mood swings - to simply set property rights and let the market determine prices. In effect, capitalism will take care of itself. But everyone assumed that monopolies would rarely arise. And if they did, most agreed, the government should step in."

Romer believes that if our goal is simply to encourage the production of new bitstreams, the prices should be very high. But, he questions what the right price is to ensure a new bitstream is used efficiently. "You can't overuse an idea. Anybody in the world who can benefit should be free to use it," says Romer (Kelly, 1996). "So the right price is zero."

To encourage economic growth, policymakers promote the development of new ideas -- or "nonrival goods," which are considered nonrival because everyone can use them simultaneously. Software is considered a nonrival good because many people can copy it endlessly and cheaply at the same time. This presents a significant economic problem to solve -- setting a high price to encourage research and ideas but a low price to encourage use.

The economic problem," Romer says (Kelly, 1996), "is really about configuring all our institutions so that we search efficiently through this space of possible ideas, finding better and better ones." Therefore, his technological economics becomes a set of policies for the technological age. He asserts that companies must receive some monopoly profits for coming up with these new ideas, as they take considerable risks. Without the incentive of making huge profits, companies would not bother to conduct such extensive research.

On the other hand, Romer also champions government funding for basic research and advocates revamping patent and copyright laws to limit monopolies on new technologies. The balance should provide enough incentive for companies to invent new technologies while enabling other individuals and companies to access the ideas that come from research.

The main point presented by Romer is that, in order to develop successfully, countries must be open to new ideas and utilize the benefits of the latest technologies. They must embrace free trade and encourage investment by large corporations. These companies bring the necessary knowledge of industrial organization, international markets, and product differentiation to allow developing nations to succeed economically. Romer's theory states that one of the greatest benefits of free trade is access to new ideas.

The Neoclassical Growth Model

Knowledge impacts the economy in several different ways. First, and perhaps most important to the practice of economics is that knowledge or innovation has long been thought of as the primary source for economic growth. If you think about it, how else did the current economic systems originally arise? The amount of literature on growth economics covering knowledge, new innovation, and technology is considerably vast, for that reason this paper's scope is limited to information that pertains to this paper.

In early economics, growth theory was primarily based upon the concept of decreasing marginal returns. The concept of decreasing marginal returns refers to the consequences of continually increasing inputs to the point where the additional input costs more than it returns to the production process. "When marginal returns keep falling until they are zero, long-run economic growth is only possible if some 'exogenous' factor is assumed to be present. This could, for example, be technical change that... is given by 'God and the engineers' (Verspagen, 1999)." If this exogenous factor does not exist, then we would witness a severe market failure. There would be no such thing as investment due to the absence of returns and according to economic theory, no growth.

This neoclassical growth model is criticized by economists, like Romer, because it fails to explain observed international differences in per capita income between nations. Aside from capital, the only determinant of per capita income in the model is the effectiveness of labor, A, whose exact meaning is not understood. Capital alone cannot be the explanation, as the required differences in capital per capita are too great to explain the observed differences in output per capita.

For example, output per worker in America is ten times greater than in India. "To see if capital per worker explains the difference, let A = 1 so k = K/AL = K/L. For f (k) = k?, ? is the elasticity of output with respect to the capital stock. Thus, accounting for a ten-fold difference in income per capita requires. If ? = 0.3, then kA/kB = 1,000. If ? = 0.5, then kA/kB = 100. But capital per worker in the U.S. is no more than 20 times larger than in India."

If capital fails to explain differences in income per worker (economic growth), then that leaves accumulated technology that enhances the efficiency of labor, A. However, the neoclassical model is incomplete, because the rate of increase in this technology, ?, is exogenous. Thus, many economists disregard this theory.

Modern growth research has focused on various endogenous devices to explain growth, particularly the role of the generation of knowledge and human capital. The key concept behind this endogenous growth theory is the accumulation of knowledge. As a production activity, knowledge must be produced like any other good through an economic activity (typically R&D).

According to Romer's model of endogenous growth, the economy is assumed to have two production sectors:

goods-producing sector, which uses human capital, knowledge and labor in the production process; and knowledge-producing sector, which uses the same factors to make additions to the stock of knowledge.

Capital and labor must be allocated between these two sectors. Still, the stock of knowledge is non-rival, as, once accumulated, the stock of knowledge is available for both sectors to use.

Evolutionary economists hold an interesting view of knowledge driven economic growth. They regard an idea as knowledge, rather than as marketable information. "It is not a commodity, but instead in embedded in a variety of learning processes and organizational structure which are specific to individuals, firms or institutions. Because of this embeddedness, it cannot be easily transferred (Blankenburg, 2000)."

Therefore, according to the evolutionary economist, it is not so much the information transfer that accounts for economic growth, but the ability to convert such an idea into something that grants some degree of utility or profit. Which implies that it is likely to involve cooperation from different sources of ideas because both views agree to the fact that knowledge is a public good. "To put it another way, this school of economics argues that positive feedback effects from cooperation (rather than negative spillovers between firms) are at the heart of the innovation process (Blankenburg 2000)."

Modern economists believe that improvements in productivity can lead to a faster pace of innovation and extra investment in human capital (Tutor2u Limited, 2003). Endogenous growth theorists argue that government and private sector institutions and markets must nurture innovation, and provide incentives for individuals to come up with new ideas.

There is also a central role for knowledge as a determent factor of economic growth. Endogenous growth theory predicts positive externalities and spill-over effects from the development of a high valued-added knowledge economy that is able to develop and maintain a competitive advantage in growth industries in the global economy.

The main points of the endogenous growth theory are as follows:

1. The rate of technological progress should not be taken as a given in a growth model - appropriate government policies can permanently raise a country's growth rate particularly if they lead to a higher level of competition in markets and a higher rate of innovation;

2. There are potential increasing returns from higher levels of capital investment;

3. Theory emphasizes that private investment in R&D is the central source of technical progress;

4. Protection of property rights and patents can provide the incentive to engage in R&D; and 5. Investment in human capital (education and training of the workforce) is an essential ingredient of growth (Tutor2u Limited, 2003)."

The basis of human capital is rooted in the theories of Theodore Schultz, an economist at the University of Chicago (Tutor2u Limited, 2003). Schultz produced his ideas of human capital in the early 1960s to explain the advantages of investing in education to improve agricultural output.

The logical next step was to expand this correlation between better education and improved productivity as a benefit for the entire economy. Schultz suggested that the yield on human capital in the United States economy was larger than that based on physical capital, such as new plant and machinery.

Gary Becker, the 1992 Nobel Prize winner for economics, supported the idea, explaining that expenditure on education, training and medical care could all be considered as investments in human capital. "They are called human capital," he stated (Tutor2u Limited, 2003), "because people cannot be separated from their knowledge, skills, health or values in the way they can be separated from their financial and physical assets."

International Trade and Growth

The most recent wave of research from the Schumpeterians moves away from the neoclassical growth model and instead focuses on the correlation between international trade and growth (Farrell, 1994). In traditional economic theory, the benefits from free trade to a large economy come mainly because consumers and businesses are able to pay lower prices for imports. However, this does little to increase growth over a long-term period.

Still, free trade may contribute more to the economy than conventional economics allows. Free trade encourages the spread of technology and industrial ideas, according to trade theorists like Gene Grossman of Princeton, and Elhanen Helpman of Tel-Aviv University, who have been influenced by the pioneering work of Paul R. Krugman of MIT. Trade also sparks growth by enabling access to larger markets (Farrell, 1994). On the other hand, barriers to trade tend to slow the rate of technological transmission, slowing down the potential economic growth of a protectionist country.

Beyond trade, this theory has many implications for economic policy. Governments, business, and universities play an important role in affecting the pace of innovation. Some Schumpeterians argue that governments should support commercial technology, especially in the service sector, as well as more industry collaboration to develop world-class products. "To achieve long-run success, economic policy must support the institutions that generate ideas and technological progress," according to Romer (Farrell, 1994). One way to do so is to protect intellectual property rights.

Intellectual Property Rights

Today's economy is an "idea economy (Boneuve, 2001)." Throughout history, economic growth has always been spurred by ideas, including ideas on electricity, steam engines, and mass production. Due to the increasing pace of innovation that comes from new ideas and the importance of information-based products that are easily diffused in perfect form over digital networks, the question of intellectual property has become an important one. The growing specialization of the American economy in the industry of innovation it means the economy is more specialized in the high-value-added role of developing and commercializing ideas. The notion of intellectual property and the economics of ideas is hence an important one. Goods based on ideas and have particular characteristics that distinguish them from ordinary goods, including (Boneuve, 2001):

Marginal costs of reproduction and distribution that approach zero;

Problems of transparency. In order to buy it I should know what the information or idea is; once I know it, in many cases, there is no need to buy it; and Non-rival possession. If you eat a sandwich, I cannot have it. But if you know something and I learn it, you still know it. Once I know it, I no longer have an incentive to pay you to teach me.

Combined, these characteristics make protecting ideas electronically a huge challenge. There are five basic debates that constantly surround intellectual property protection (Boneuve, 2001). The first debate centers on should be covered by intellectual property. The question comes in various forms (Boneuve, 2001): "Should our personal information-data about us as economic, social and indeed genetic beings should be covered. Should business models, such as the idea of an electronic auction, be covered? Should the look and feel of a computer screen be covered, as Apple argued in a court fight with Microsoft when Windows took on a texture similar tothat of the Macintosh? Should the description of the human genome be owned?"

The second debate centers on who should own the property right. "Do I own information about myself and anyone wanting to use that information or sell it to a user, must obtain my explicit permission? Or should the compilers of data bases, the banks, merchants and agencies who electronically track my activities own that information (Boneuve, 2001)?"

The third debate questions how strong or robust the coverage should be. In many cases, the instinct will be to resolve a problem by offering strong intellectual property rights when the problem should be solved by other means.

The fourth debate centers on the appropriate means of protection. Patents deal with invention with a specific, practical application, while copyrights deal with types of expression. "What is "software" used to control a robot or direct a web browser-expression or invention? Should intellectual property be protected with code, the digital architecture of the product itself? For example, the program can be set to self-destruct the fourth time it is installed, or copied music or photos could steadily degrade as copies are made. Or, should contracts between buyers and sellers, those complex agreements we all ignore when we rip open many software packages or click on past the restrictions required by a web site, shape the use of ideas and information (Boneuve, 2001)?"

The fifth debate comes from the belief that these matters can no longer be solved separately in each country, or completely by any one country. The global nature of the Internet calls for international cooperation, or at least international agreement on standards. According to Paul David, historian of technology at Stanford University, it takes a significant amount of time for an economy to restructure itself to take full advantage of the potential opened up by revolutionary ideas. David states that it took four decades for the American economy to take advantage of the productivity potential of the dynamo. Electric power became a reality in the 1880s, but it was not until the 1920s that there had been enough research on electricity-based technologies for companies to learn how to use electric power effectively and new inventions to generate significant benefits in industrial-sector productivity.

Similarly, enterprises are only starting to incorporate the power of software and the communication facility of the Internet into business practices. While this has occurred in a shorter period of time than the forty years taken for electricity, there has been a lapse from the time of greatly increased expenditure to measurable increased productivity.

For example, while Wal-Mart is not a company that is perceived as a leader of the Internet revolution, the company has been very successful at solving the problems of control and distribution needed to become a more efficient retailer. Wal-Mart's innovative efficiency advantage is largely attributed to its early investments in modern information technology and to research on how modern information technology contributes to economies of distribution. According to Wal-Mart founder Sam Walton (Boneuve, 2001):

Nowadays, I see management articles about information sharing as a new source of power in corporations. We've been doing this from the days when we only had a handful of stores. Back then, we believed in showing a store manager every single number relating to his store and eventually we began sharing those numbers with the department heads in our stores. We've kept doing it as we've grown. That's why we've spent hundreds of millions of dollars on computers and satellites-to spread all the little details around the company as fast as possible. But they were worth the cost. It's only because of information technology that our store managers have a really clear sense of what they're doing most of the time."