Innovation and Technology - Strategies and Policies

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					Innovation and Technology - Strategies and Policies
Innovation and Technology
Strategies and Policies
 Edited by

 Oliverio D. D. Scares
 Universidade Lusiada, Porto, Portugal

 A. Martins da Cruz
 Universidade Lusiada, Lisboa, Portugal

G. Costa Pereira
 Universidade Lusiada, V.N. Famalicao, Portugal

Isabel M.R.T. Scares
 Universidade Lusiada, Porto, Portugal


Albino J.P.S. Reis
 Universidade Lusiada, V.N. Famalicao, Portugal

 Material in the papers was presented at the
 Strategies and Policies Towards the XXI Century -
 20-24 March 1995, Universidade Lusiada, Porto, Portugal

 Sponsored by

 Cooperative de Ensino Universidade Lusiada
 Porto, Portugal

JNICT - Junta Nacional de Investigafao Cientifica e Tecnologica
Lisboa, Portugal

                                                  WKAP ARCHIEF

A C.I.P. Catalogue record for this book is available from the Library of Congress.

ISBN 0-7923-4435-9

Published by Kluwer Academic Publishers,
P.O. Box 17, 3300 AA Dordrecht, The Netherlands.

Kluwer Academic Publishers incorporates
the publishing programmes of
D. Reidel, Martinus Nijhoff, Dr W. Junk and MTP Press.

Sold and distributed in the U.S.A. and Canada
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All Rights Reserved
© 1997 Kluwer Academic Publishers
No part of the material protected by this copyright notice may be reproduced or
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retrieval system, without written permission from the copyright owner.

Printed in the Netherlands

To all members of the Universidade Lusiada:
                To the lecturers
                To the studems and their supportive families
                To the Universidade Lusiada personal and staff
                To the Institutions and Organisations that supported and will continue to lend
                their stimulus.

To all members of the Cooperativa Universidade Lusiada.
                                                                  Table of Contents

Preface                                                                             ix


The Environment: The Basic Resource
Anthony J. Fairclough                                                               1

Technological & Management Innovation as Partners for Economic Growth
Stephen C. James                                                                   21


Technologies of Time - and Location - Independent Telecooperation in Interactive
and Multimedia Applications
Jose L. Encamagdo, Stefan Noll and Ralph Peters                                    29

Evolution from Invention to Technological Innovation and Influence of "Objects"
on Economic Cycles and on Paradigms
Henry Benavides Puerto                                                             61


Merits and Short Comings of Energy Forecasts: Demand for and Price of
Crude Oil
Jean Masseron and J.P. Favennec                                                    77

Energy Policy: Fairy Tales and Factualities
Willem Van Gool                                                                    93

Energy Needs in the Next Century
John Ward                                                                          107

Nuclear Energy into the 21st Century
Geoffrey Paul Hammond                                                              125


Photonics for the Knowledge Age
M.J. Soileau                                                                   141

Science and Innovation as Strategic Tools for Industrial and Economic Growth
Carlo Corsi                                                                    149

The Culture of Innovation in Higher Education Processes
Sergio Russo                                                                   157

Trends of the Portuguese Scientific and Technological Development
F. Ramda Ribeiro                                                               167

Innovation and Ongoing Industrial Transmutation
Oliverio Delfim Dias Soares                                                    175


Photonics (Optoelectronics) in Medicine and Surgery for the 21st Century
David M. Harris                                                                183


R&D and International Trade: Government Intervention and the Role of
Supranational Authorities
Pedro Pitta Barros                                                             193

Technological Change and Management Education
Lluis Pages                                                                    205

Economics of Innovation and Learning
P. Cohendet, J.A. Heraud and E. Zuscovitch                                     211

Spillovers from Abroad - A Sectorial Assessment of the Impacts of Foreign
Direct Investment on Hungarian Industrial Development
Adam Torok                                                                     221

Innovation and Promotional Employment Strategies
Maria da Conceigao Pereira Ramos                                               233

Technological Innovation and New Management Instruments: The Technology
Management / Check-up for CAD/CAM Users
Maria Isabel Soares and Robert Schneider                                       255

                                           Science lies at the heart of the economic future

                                                      Robert May, Chief Scientist Adviser
                                                        to the British Government (1995)

Innovation and Technology - Strategies and Policies is a selection of contributions
focused on how a culture of innovation is producing a response to the global changes
affecting society.
         Humanity has never before attempted at the actual scale of efforts to take its fate
by integrating at such an impressive speed sciences, technologies, humanities and the
many other disciplines.
         The major evolutionary directions and the foreseen trends on: environment /
industry binomial; technology breakthroughs; energy planning; education and research
intangible investment requirements; health new technologies; economics and
management innovative strategies are presented in the book by leading world experts.
         The emergence of a world characterised by a background of generalised
globalization, delocalisation and rapid technology changes imposes innovative responses
at all levels: strategical, organisational and technological, by a combination of creativity,
technology and marketing.
         The purpose of the editors is to present science and innovation organised as
strategic tools for industrial survival, economic growth and education / training recasting
in a synergetic operative model where quality overexceeds the meeting of specifications
to become innovation in order to guarantee some uniqueness character toward industrial
or service leadership.
         This changing process is characterised by a change in a society from man-power
to man-knowledge along a chain: hardware — software -^ peopleware —                        >
knowledgeware — wisdomware, leading to a knowledge - intensive society as the
subsequent stage of the information society.
         The challenges brought about by this evolutionary trend do require higher
creativeness and innovative responses. Therefore education and training is undergoing
major changes. The focus has shifted to learning rather than teaching. The individual as
learner is becoming a networked learner where the learning organisations reached a
stage of just-in-time knowledge provision. Indeed, telematics, multimedia and further
information technologies will progressively play an ever increasing role in all the
concurrent streams of innovative process. Undoubtedly the change of management will
turn on management of the lasting permanent change. The profuse percolation of
innovation will strongly promote networking of vertical knowledge and transversal
        Indeed innovation is thought to become a key to stimulate growth,
competitiveness and employment.
        The relevance of INNOVATION and its state-of-play has been recently stressed
and brought to a wider audience attention throughout Europe by the European
Commission on launching a Green Paper on Innovation (see Innovation and Technology
Transfer, Special Issue, February 1996; WWW:http:/
        The present book is addressed to all those concerned with innovation as a
dynamic process of society evolutionary changement. In particular, those responsable
for designing the objectives on education and training may find the book as a high value
in assessing the challenges to be considered in restructuring and improving the
efficiency / efficacity of the learning and training institutions to match the needs of XXI
Century society.
        The book aims to compile the perceptions and motivations that emerged during
the conference Strategies and Policies for Innovation and Technology - Towards the
XXI Century (Porto, Universidade Lusiada, March, 1995) as an answer to the
endeavours to be faced by the fast transforming society.
        The book is organised in six sessions covering aspects of: environment and
ecoindustries; technologies; energy; training; education and research; health, and
economics and management. A wide range of important problems is covered related to
innovation and having basic significance in industrial, economical and education
developments. Comprehends also extensive up-dated references that would be of great
value to all those interested on the innovative aspects in those disciplines.
        The editors express their deep gratitude to the Cooperativa de Ensino
Universidade Lusiada, and to JNICT - Junta Nacional de Investigagao Cientifica e
Tecnoldgica for the financial support that enabled the publication of the volume.
        In addition thanks are due to all contributors for their outstanding engagement on
the engineering and materialisation of this book.
        Special thanks deserve Dr. Augusto Meireis who has done an unceasing, patient
and unyielding work along the book project unfolding.

                                                                              The Editors

                PROF. DOCTOR A. J. FAIRCLOUGH
                President ofNETT - Network for Environmental Technologies Transfer in
                Kew, - Richmond, Surrey, - UNITED KINGDOM


Mahattna Gandhi is reputed to have said that nature can look after people's needs; but
cannot look after their greeds.
        Amongst humanity's greeds - or excesses - two stand out: the excessive rates of
population growth in many poor third-world countries and excessive consumption in the
rich north. Both undermine the integrity of the global environment; and both generate
rapidly growing energy demands.
        The seminal Brundtland report of 1987 - rightly entitled " Our Common Future"
(1) - on the relationship between the environment and development, introduced us all to
the concept of "sustainable development".
        Almost all the multitudinous pollution and natural resource problems that face
humanity - in different ways in different places - are steadily growing in complexity,
difficulty and global impact. They can all be traced back to the excesses noted above.
        The environment is our resource base for a sustainable future. It is the only one
that we have. It is the basic resource. All human activities depend on it and all our waste
products end up in it. Unless current deterioration can be rapidly reversed, there is no
hope of creating the stable conditions that are necessary to make sustainable
development possible.
        In short we are in a situation of deepening crisis - quite different from the usual
slow learning process with which we have for so long been familiar in addressing
environment and natural resource issues.
        The achievement of sustainable development has to be treated as the key issue for
the future of Planet Earth as we approach the 21st century and the need for action is
urgent. It has become an economic and social (as well as an environmental) imperative;
and, I would add, is fast becoming a political and security imperative as well.

1 - The Changes Needed

For this imperative to be adequately addressed we must find ways of reconciling rapid
improvements in environmental and natural resource standards and management with

O.D.D. Soares et al. (eds.), Innovation and Technology — Strategies and Policies, 1-19
© 1997 Kluwer Academic Publishers. Printed in the Netherlands.
continued economic growth, especially for the growing populations in developin;
countries; this in turn calls for the use everywhere of very much stricter environmenta
and natural resource standards and management practices.

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        Continued "tinkering" - more of " the mixture as before" - is a totally inadequate
response. Radical, courageous and very difficult changes are urgently needed. The
directions in whichi we need to move are clear from Figure 1 (the GLobal Equation),
        As to the scale of the changes needed, the influential Washington - based World
Resources Institute (WRI) has repeatedly stressed both the scale and rapidity of the
environmental and natural resource degradation that human activities have caused; and
also the need for large-scale social and economic transitions if we are to have any
chance of halting, let alone reversing it.
        WRI has identified the need for what it calls six " Transitions to a Workable

      - A demographic transition to stable populations before the world's population
      doubles again;
      - A technological transition away from today's resource intensive, pollution-
      prone technologies to a new generation of environmental ly benign ones;
      - An economic transition to a world economy based on reliance on nature's
      "income" and not on depletion of its "capital";
      - A social transition to more equitable sharing of environmental and economic
      benefits, among and within nations;
      - Transition in a consciousness to a more profound and widespread understanding
      of global sustainabiiity;
      - An institutional transition to new arrangements among governments and peoples
      that can achieve environmental security.

       All these transitions involve major changes that require consensus and joint
management. All will require all nations to make difficult commitments to one another
in order to secure common benefits. And, as we know, nations are not very good at this.

2 - The Crucial Excesses - Energy and Population

The Brundtland report which spelled out the changes needed in all aspects of human life
in order to achieve sustainable development (meeting the needs and aspirations of the
present without compromising the ability to meet those of the future), was especially
blunt on both energy and population.
       On energy it said that "A safe and sustainable energy pathway is crucial to
sustainable development; we have not yet found it"; and it was quite clear that present
patterns of energy production and use are unsustainable.
       On population Brundtland said that: "In many parts of the world, the population
is growing at rates that canot be sustained by available environmental resources, at rates
that are outstripping any reasonable expectations of improvements in housing, health
care, food security or energy suplies; and it added that "Sustainable development can
only be pursued if not population size and growth are in harmony with the changing
productive potential of the ecosystem".
        Both these crucial excesses must be effectively addressed.
3 - Energy

Energy underpins all human activities. Yet continued heavy reliance on fossil fuels
(including wood fuel in developing countries) can only pose growing problems for all
the well - known reasons - acid rain, global warming and climate change, loss of tree
cover and deforestation, health impacts. The Brundtland report was hesitant about
reliance on nuclear power, which "Is only justifiable if there are solid solutions to the
presently unsolved problems to which it gives rise".
        The report looked to economic growth that is less energy intensive; improved
efficiency in the production and use of energy; and the development of "Sustainable
forms of renewable energy", as the main hopes for the future.
        Certainly action has to be taken on fossil fuels. The Intergovernmental Panel on
Climate Change (IPCC) (2) concluded that to stabilise atmospheric concentrations of
greenhouse gases would require very large reductions in emission - 60 - 80% for CO2
for example (see Figure 2). Imagine the implications of this for fossil-fuel related

          Reductions in the man-made emissions of greenhouse gases
          required to stabilise concentrations at present day levels:

          Carbon Dioxide                     60-80%
          Methane                            15-20%
          Nitrous Oxide                      70-80%
          CFCll                              70-75%
          CFC12                              75-85%
          HCFC22                             40-50%

          Natural sources and sinks are assumed to remain unchanged. Note
          that the stabilisation of each of theses gases would have different
          effects on climate, as explained in the next section.

                  Figure 2: Stabilisation of Atmosferic Concentration

for renewables; for nuclear power; and for rapidly developing countries - like China. Yet
governments (who have somehow managed to act on the less difficult issue of CFC's)
continue to subsidise fossil fuels; under - fund renewables; and dither about whether or
not nuclear power will be socially acceptable long-term.
      Meanwhile, or course, energy demand is increasing; and is bound to increase,
especially in the developing countries (see Figure 3).
       Experience in the 1970's shows that high cost fossil fuels can effectively promote
energy conservation and efficiency. This surely has to be one way to go, particularly as:
       - It is clear that a fossil fuel based energy future is unsustainable;
       - Such a situation would make alternative energies more competitive;
       - Taxes on fossil fuel could generate the additional financial resources needed to
        achieve sustainable development.
                                  Basis of ftojections                                      25
                          Barrels Oil EquivaleniyOipita/annum
                                         990   2000   2010   2020

              300 —     W . Europe                                                         • 20
                        E Europe/USSR
                            I ol world

                                                                                          — 15

                                                                                          — 10



                            1970      1980        1990       2000   2010   2020    2030

        Source "SustmniMeBiomass Energy", basedon IMtedNatimsforecasts

                    Figure 3: One Scenario of Growth in Energy Demands

        More broadly, my own belief is that, in the long-term, the world will need to
phase out reliance on fossil fuels and nuclear power and move as rapidly as possible to
reliance on renewable energies; and to designing the steps by which we could get there.
Nothing less then this seriously addresses the challenge of the Brundtland report to find
a "safe and sustainable energy future".
        In pursuing this goal it is plainly necessary to change the persistent neglect of the
possible role of renewables (in particular for electricity generation). Such energies have
the potential to supply the entire world electricity demand with very much lower levels
of pollution and other environmental damage. Very little of their potential has so far
been realised - as Figure 4 shows - essentially because of lack of competitiveness with
traditional energy sources and lack of interest.

                        Source                               Potential      Realised
                        Wind                                   200,000             4
                        Tidal                                      200            <1
                        Wave                                     4,000             0
                        Geothermal                                >300            35
                        Hydro                                 >13,000         2,000
                        Solar                                very large           <1

                           Current World Electricity Consumption is
                                 10,000 Twh/Year (Estimates)

                      Figure 4: World Renewable Resources - TWh/year
        However Figure 5, which demonstrates the cyclical nature of the use of different
primary energy sources over a 200 year period, is interesting; it suggests that the future
for solar (plus fusion) may be one of growth.

                        \Wood     /                              Nuclear
                                                           / \    Nat-G4s\
                  0,3                      nil /       Y

                  0,2             \        /       /       \        v   "^nlFir

                           1—'   1—i - T   —1      ^ 1 ^ — r            >•
                    1850 1875 1900 1925 1950 1975 2000 2025 2050

 Source: C. Marchetti, The Dynamics of Energy Systems and the Logistic Substitution
 Model, IIASA, Dec. 1979.                        SOLFUS = Solar + Nuclear fusion

       Figure 5: Substitution of Different Primary Energy Sources, 1850 - 2050

       Yet the economics are improving rapidly and the level of interest could readily
be radically changed by appropriate economic interventions by governments, e.g. by:

       - Reforming energy prices and tax policies that distort energy decisions;
       - Removing the bias towards conventional energy sources from decision - taking
       - Promoting investment in commercializing renewables, as suggested in a recent
       article by Dr Keith Kozloff of World Resources Institute (4).

       However it is done, it is clear that much more interest should be taken in
developing renewable energies on a large scale. There would be large increases in
environmental benefits; and reductions in environmental risks.
       In fact many people believe that there is real potential here. For example, the
World Development Report 1992 (5) was very upbeat. It said flatly that "Non-fossil fuel
energy sources, especially renewable sources, offer great promise". Whilst it clearly
thought that both biomass and wind power are also important, it was firmly of the view
that "Solar energy may have the best long-term prospects". In support of this view it
recorded that: "The unit costs of production of photovoltaics and solar-thermal systems
have fallen 95 per cent in twenty years. The market for photovoltaics grew tenfold in the
 1980's and, although still small, is growing at 20 per cent a year".
        Personally, I believe that this optimistic forecasts for solar energy are well
justified. Some 15,000 times the world's annual energy needs are received each year as
solar energy, much of it falling on developing countries. It must make sense for the
world to try to meet its energy needs by the use of a minute part of this virtually
unlimited supply; and, in the process, to reduce pollution and create new earnings
opportunities for many developing countries who have high levels of insolation but not
much else.
        Indeed, I would go further and say that it is my belief that hydrogen will be the
fuel of the future - derived from the electrolysis of water, using solar photovoltaic
energy. If it is thought that this is a fantasy then I can only urge study of an impressive
report published by the World Resources Institute, "Solar Hydrogen: Moving Beyond
Fossil Fuels" (6), which argues convincingly that such a proposal is closer to reality than
may be thought.
        A recent report (7) in the British press of a hydrogen powered bus in Belgium
confirmed me in my belief. It quoted Dr. Joachim Gretz, the "Greenbus" project
director, as saying that hydrogen energy "Holds the final solution to the world's energy
problems"; and as forecasting hydrogen - driven bus and utility vehicles by 1996; fleet
cars 2 years later; and private cars by 2003.

4 - Population

In 1969 Robert McNamara (then the President of the World Bank), made what can only
be called a visionary speech (8). He started by saying:          "I want to discuss with you
this afternoon a problem that arose out of the recent past; that already plagues man in the
present, and that will diminish, if not destroy, much of his future - should he fail to face
up to it, and solve it. It is, by half a dozen criteria, the most delicate and difficult issue
for our era, perhaps of any era in history. It is overlaid with emotion. It is controversial.
It is subtle. Above all, it is immeasurably complex.
        "It is the tangled problem of excessive population growth. It is not merely a
problem, it is a paradox. It is at one and the same time an issue that is intimately private
- and yet inescapably public. It is an issue characterised by reticence and circumspection
- and yet in desperate need of realism and candour. It is an issue intolerant of
government pressure - and yet endangered by government procrastination.
        "It is an issue, finally, that is so hypersensitive - giving rise to such diverse
opinion - that there is an understandable tendency simply to avoid argument, turn one's
attention to less complicated matters and hope that the problem will somehow disappear.
        But the problem will not disappear. What may disappear is the opportunity to
find a solution that is rational and humane. If we wait too long, that option will be
overtaken by events. We cannot afford that. For if anything is certain about the
population explosion, it is that if it is not dealt with reasonably, it will in fact explode:
explode in suffering, explode in violence, explode in inhumanity".
        There has since been some progress in some countries, but nowhere near enough.
Almost 20 years after McNamara's speech, the Brundtland report had to say flatly that
"Present rates of population growth cannot continue". One only needs to look at the
various UN projections (see Figures 6 and 7) to see the truth of that statement.
                                                           \^V^            M c lum
           (0                                                           ] Low
          .2      7

                  1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030


                          Figure 6: Population Projections 1980-2030






                United Nations, low, medium and high population projections.
                By 2050 there is a difference of four billion between high and
                low projections - about the size of world population in 1975.
                Source: United Nations

                 Figure 7: Alternative Futures: Population Projections to 2150

        And this inevitably means (see Figure 8) that population densities will continue
to increase rapidly, especially in developing countries.
        Action plainly needs to be taken, more vigorously than at present, to reduce
population growth rates and, in my view, every developing coutry needs a strongly
supported population policy, designed to encourage environmentally responsible
parenthood, smaller families and the general availability of acceptable family planning
aids. Any developing country government could launch such an effort, if it could find
the will to do so. Many have done so; and donors are certainly ready to help.
       The aim must be stabilisation of population levels as soon as possible and at as
low a global total as possible; and environmentally responsible parenthood. The recent
Cairo Population Conference has taken an important step forward by adopting an action
plan aimed at stabilising global population levels. But the big question - at what level -
remains; and depends on millions of decisions taken by international bodies,
governments, NGO's and individuals.

 Density (people / Km^)
 200                                                                   Asia (- China)
                                                                      -    China
                                                                          Europe ( - U S S R )

                                                                      World Average
                                                                      Latin Ainerica
                                                                      Other Africa
                                                                      North Africa

                                                                      North America


    1750       1800       1850    1900      1950     2000      2050

Source: Sustainable Development of the Biosphere, William C. Clark and R. E. Munn
(eds.), CUP, IIASA, New York, 1986, p. 27

Figure 8: History and Projections of Population Densities for the World as a Whole and
                                for Continental Regions
      In thinking forward into the next century, two points seem to me important to

        - The Cairo action plan has to be seen as a complement to - and not a substitute
for - the sustainable development objectives of the 1992 Rio Conference on
Environment and Development (UNCED) Indeed, coherent population programmes are
the vital third side of the "Population-Environment-Development triangle"; performance
will be significantly improved in virtually every area of human activity as a result of
successful efforts to lower human fertility rates and the rates of population growth;

        - Religious leaders around the world need to be convinced that the protection of
the environment raises profound moral issues which bring it within the realm of their
religious responsibilities; and that, in that context if for no other reasons, they should
commit themselves to efforts to reduce the rate ot population growth. This could be of
especial importance in relation to the poor worldwide - because, although many of them
do not read and do not trust governments, they do listen to their religious leaders.

5 - Other Changes

The fact that I have placed great emphasis on the need for fundamental changes in
relation to energy and population, if environmental protection and sustainable
development are to be assured, does not mean that I think that other changes are
        Energy and population may be crucial; but many other changes - aimed at
bringing about the "transitions" envisaged by WRI - are certainly also needed. In
particular industry and business have to become partners for sustainable development
instead of - as too often in the past - its opponents.
        I shall have something to say about how that might be encouraged in a moment;
but first I think that it is important to note in passing that the world is going to have to
try to bring about these not inconsiderable changes against the background of other very
fundamental changes that are already occurring and are forcing us to recognize that the
future will not be simply a forward projection of the past; we are at a critical "break
        Paul Kennedy, in his recent book "Preparing for the Twenty-First Century" (9)
has drawn attention to the fact that the rapid development of new technologies means
that already:

       - In industry there is more technology; and less employment;
       - In agriculture there is more mechanisation and vertical integration; and less

       We are all aware that the nature of work is changing. A job for life will soon be a
thing of the past; and we shall all have to be much more flexible and adaptable - if we
are lucky enough to have work at all - as to how, when, where and for whom we work.
This in itself is not a threat. But the risk of steadily growing long-term unemployment -
in societies that are becoming steadily richer - is. The danger is that it will lead to
divided societies and social unrest. The signs are already there - with drug sub-cultures
at one end of society and rich ghettos behind security fences at the other.
        In the concluding chapter of his book, Kennedy points out that many social
explosions are preceded by a steady build-up of pressures (which he linkens to the
outbreak of an environmental disaster once incremental damage passes a certain
threshold); and he adds that:
        "We need to be concerned about the condition of our planet as a whole not
simply because we face a new agenda of security risks such as global warming and mass
migration, but also because these phenomena could interact with and exacerbate older
threats to international stability such as regional wars, hostage-taking, and closure of
sealanes, While the newer transnational forces for global change appear to be on a
different plane from the traditional concerns of the nation state, they constitute
additional causes for social conflit".
        It is my belief that, in response to these massive global forces, dangers and
changes, men and women of vision must seek answers by focussing on the value of each
individual; on community; and on quality of life, rather than quantity of goods. In other
words we must rediscover the human dimension.
        Maybe Fritz Schumacher was right that "Small is Beautiful"; certainly, already in
the 1950's, he had recognized that western industrial society contains the seeds of its
own destruction because it has based its production on fuels that cannot be replaced: it
was living on capital instead of income - leading, inevitably to bankruptcy; the
underlying philosophy of continuous economic growth had to be questioned. When he
went to Burma in 1955 he encountered Gandhi's economics, with which I started this
paper, and wrote home about the Burmese, saying:

       "The Burmese lived simply. They had few wants and they were happy. It was
       wants that made a man poor and this made the role of the west very dangerous".

       The need to focus on human needs and the grass-roots - as a means of countering
the "big project, big bucks" mentality that dominates our materialistic economics - is
only now being rediscovered. Gus Speth, the Administrator of the United Nations
Development Programme, has written in a recent article (11), of the need for
"Sustainable Human Development" as a new development paradigm that is people-
centered, environmentally sound and participatory, to take us to the year 2000 and
       Elaborating on the features of this new development model, Speth stresses that it
       - People-centered because it puts people first. It meets theis basic needs,
including the need to attain self-reliance. It enlarges then- opportunities, including those
for a peaceful and healthy life, to be educated and to have the resources to enjoy a
decent standard of living.
       - Environmentally sound because it stresses the need to regenerate the natural
resource base, to increase the long-term productivity of the resource sectors and to
protect the environment both locally and globally.
        - Participatory because it can only be achieved where people have an opportunity
to participate in the events and processes that shape their lives.

       And he adds - rightly - that sustainable human development is an essential
precondition to bringing human numbers into balance with the carrying capacities of
nature and the coping capacities of societies.
       Speth was of course, writing about the Third World. But in my view, precisely
the same requirements exist if the currently excluded poor in developed countries are to
be reintegrated into society. They too need an approach which is people - centered,
environmentally sound and participatory.
       And it is worth remembering that grass-roots approaches of this kind can be
addressed directly to issues that E ^ of concern in relation to environmental protection
and improvement; and to enhancing the quality of life. Many needs and opportunities for
improvements undoubtedly exist at the level where it matters - locally. Although we
must think globally we must act locally.

6 - Helping Business to Help to Protect the Environment

However successful we may be at generating grass-roots activities which can involv
people - and thereby contribute to the process of healing both the environment's and
society's ills - we must recognize that businesses, both big and small, will continue to
exist; and to contribute to our life-styles and quality of life. We must, therefore, consider
how they too can play their part in protecting and improving the environment.
        First, it is important to face facts. Businesses are inevitably concerned with the
bottom line as their primary "focus" of attention; and for many, environmental
protection is seen simply as a cost which they try to keep as low as possible. If there are
profits to be made by abusing the environment, many will abuse it; and sustainable
development will be impossible.
        To change this, governments need to take steps to guide the operation of the free
market by creating situations in which profits can be made from environmental
protection and from promoting sustainable development; and in which there are strong
enforceable penalties for abuse.
        Environmental protection, of course, calls for an appropriate legislative
framework - although, as the EU's Fifth Environmental Action Programme (entitled
"Towards Sustainability") (12) has reminded us, environmental rules and regulations
alone are not enough; participation and commitment are also needed.
        To encourage this on the part of buisiness - whilst enabling it still to be profitable
- 1 believe that governments must use their legislative powers, not merely to set
standards, but also to create frameworks which offer some certainty as to future trends
and requirements; and within which economic factors and voluntary actions can play key
parts. They could, for exemple, make laws which would:

        - Lay down charges (increasing annually) for polluting discharges (thus leaving it
to businesses to decide when it is in their interest to invest in waste treatment facilities
rather than pay increasing charges;
        - Impose diferential taxes in specific cases to encourage the right choices ( e.g.
EU taxes on leaded and unleaded petrol);
        - More generally, use taxes to discourage the bad and encourage the good - tax
pollution and waste; less tax on wages and profits;
        - Eliminate "anti-environmental" subsidies (typically, in third world countries, on
fuel; agro-chemicals, irrigation);
        - In relation to eco-labelling or eco-audit schemes, provide for charges for non-
conformity; rebates for conformity;
        - Require high deposit charges articles containing toxic materials (e.g. batteries)
to encourage recycling;
        - Impose progressive taxes; the UK's commitment to a steady increase in petrol
duty during the 1990's is a good example; it should encourage changes in behaviour;
and because it offers certainty over a period of years, it should assist changes in engine
design, fuel systems, fuel efficiency etc;
        - Make a more imaginative use of incentives to encourage the environmentally
desirable (the UK's Non-Fossil Fuel Obligation (NFFO) is a small step in the right
direction, but much more could be done to promote renewable energy, including % age
targets for, say 2010, 2030, 2050 (or whenever).

        The possibilities are endless; these are just some illustrations of what could be
done; the need is for action.The key point about all such measures is that they would put
powerful incentives into the system and provide all concerned with the benefit of
certainty, whilst leaving to the business man himself (or the consumer) the decision as to
action, when he judges it in his own best interest.
        But, however the necessary changes are brought about, it is surely clear that the
"Eco-Industries" of the future will not be polluting industries; this will no longer be
acceptable. The focus must be on industries that are clean; that are, in very many cases,
small and local; and that create new socially valuable opportunities related to
environmental improvement.
        Amongst the developments that seem likely (on which governments will need to
take initiatives and which business will have to be ready to respond to) are:

        - The setting of targets and timetables for the achievement of sustainable
        - The setting and enforcement of progressively stricter environmental and natural
resource protection standards;
        - Progressively greater emphasis on clean technologies; waste minimisation;
recycling; and no - or low-waste production processes;
        - The growing internationalisation of environmental and natural resource
protection policies;
        - Action, in partnership with other countries, to address global environmental and
natural resource problems - such as global warming and climate change; the protection
of biodiversity; sustainable forest management; the fight against desertification;
        - Preparations for changes in production methods, lifestyles and tax structures.
7 - Targets and Taxes

Let me now say a few words about two of these - targets and taxes. It is difficult to
exaggerate their importance in steering us in the directions in which we need to go if we
are to innovate towards sustainability in the 21st century.
        TARGETS - The importance and effectiveness of setting targets is surely clear
from the history of California's leading role in promoting improved air quality. For
example, faced with Los Angeles, well-known smog problem, a succession of very
tough measures to reduce vehicle emissions have been introduced over the years; and
first the USA - and then rest of the world - have followed.
        Now, with traffic still growing and with air quality still poor, even more
demanding targets have been set - including a law requiring the development of cars to
emit zero and near-zero pollution. It calls, inter alia, for the sale of zero-emission
vehicles by 1998. In a recent article (13) by Hank Wedaa of the South Coast Air Quality
Management District, USA, a fascinating catalogue of initiatives aimed at zero pollution
is set out - all stimulated by a dedicated surcharge of $ 1 per vehicle on car registration.
Zero pollution is seen as a real possibility; indeed he says that they consider that by
2010, 50% of new car sales and 35% of light trucks must be zero-emission vehicles if
Los Angeles air is to be restored to health. Wedaa ends his article by urging readers "not
to dismiss lightly the dreams of California. They have a habit of coming true".
         More mundanely, the importance of targets lies in the fact that they give advance
notice of what the authorities think that society needs for its protection; and thereby
allow time for industry and business generally to adapt, whilst at the same time
stimulating innovation and the development of new technologies, techniques, processes
and products.
         TAXES -1 have already suggested a number of ways in which taxes could play a
crucial role in promoting environmental protection and sustainable development. In this
context it is worth recording that, in introducing the European Commission's 1993
programme to the European Parliament, Jacques Delors, the President of the
Commission, spoke of the need to prepare ourselves for "the necessary changes in
production methods, life styles and tax structures" because "the environment is at risk
with dramatic consequences for the future". (14)
         These are strong words; and the question of a possible carbon/energy tax to help
address the challenge of global warming is already under discussion in the European
         Others have been even more ambitious. For example, in the 1994 Human
Development Report (15), the United Nations Development Programme (having drawn
attention to the gross global economic disparities that exist (see Figure 9) and to the
progress that could be made in promoting human development without increasing
overall expenditure simply by cutting back in military spending - realising the peace
dividend), goes on to make two radical but quite specific suggestions:

- A world income tax of around 0.1% on nations with a per capita GNP above $10,000,
to provide a global social safety net for countries with a per capita GNP of less than
- That the suggestion made by James Tobin, the 1981 Nobel Economics Laureate, for a
0.5% tax on international currency transactions to yield $1.5 trillion a year (see box
below) should be revisited.

                            Distribution of economic activity, 1991
                                   (percentage of world total)

                 I                          GNP - 84.7                              ,
Richest          \                      World trade - 84.2                         /
fifth                ^v^              Domestic savings - 85.5                ^ ^
                       ^'*''~-^„^    Domestic investments - 85.0   ^,..——"'''^

                                 k             ^
Each Horizontal band
represents an equal fifth
of the world's people
                             1 f

Poorest                                                World trade - 0.9
fifth                                                  Domestic savings - 0.7
                                                       Domestic investments - 0.9

Source: Human Development Report, 1994

                            Figure 9: Global Economic Disparities

      Special Contribution

A Tax on International Currency Transactions

       Capital moves ever more freely across national borders, both by direct business
investments and by purchases and sales of financial assets. Capital movements certainly
can benefit the nations directly involved and the world economy as a whole, by
directing world savings to high-productivity projects, wherever they may be. Savers in a
capital-intensive economy often find more profitable investment opportunities in
capital-poor areas.
         However, the capital flows needed to achieve efficient allocation of world
 savings are today a minuscle fraction of worldwide transactions in currency markets,
 whicu are estimated to run at $1 trillion a day. Thanks to modern communications and
 computers, these deals are easy and cheap. The sun never sets on financial markets,
from Hong Kong, to Frankfurt, to London, to New York, to Tokyo. Advanced industrial
 countries long ago abandoned exchange controls, and many developing countries are
 relaxing their regulations.
         Here, as in so many other dimensions of human life on this globe, technologies
 have outrun political and social institutions. The bulk of those trillions of currency
 exchanges are speculations and arbitrages, seeking to make quick money on exchange
 rate fluctuations and on international interest rate differentials. They contribute little to
 rational long-term investment allocations. Exchange rates are at the mercy of the
 opinions of private speculators commanding vast sums. Their activities distort the
 signals exchange markets give for long-range investments and for trade. Interest rate
 arbitrages make it difficult for national central banks to follow monetary policies
 independent of those of major foreign central banks.
         The mobility of finantial capital across currencies is a problem whether
 exchange rates float freely in markets or are pegged by agreements among
 governments. The travails of the world economy since 1973 have inspired nostalgic
 longings for Bretton Woods, or for an older and purer gold standard. But no system in
 which parities can be adjusted on occasion eliminates opportunities for speculation or
 inhibitions • on national monetary policies. But the recent crises of the European
 exchange rate mechanism demonstrated that neither individually nor collectively do
 central banks have sufficient reserves it withstand concerted pressures from speculators
 betting on the devaluation of weaker currencies.
         A permanent single currency, as among the 50 states of the American union
 would escape all this turbulence. The United States example shows that a
 currencyunion works to great advantage when sustained not only by, centralized
 monetary authorities but also by other common institutions. In the absence of such
 institutions, an irrevocably unique world currency is many decades off.
         In 1978. I proposed a realistic second-best option. An international uniform tax
 would be levied on spot transactions in foreign exchange (including deliveries pursuant
 to futures contracts and options). The proposal has two basic motivations. One is to
 increase the weight market participants give to long-range fundamentals relative to
 immediate speculative opportunities. The second is to allow greater autonomy to
 national monetary policy, by making possible larger wedges between short interest
 rates in different currencies.
         A 0.5% tax on foreign exchange transactions is equivalent to a 4% difference in
 annual interest rates on three-month bills, a considerable deterrent to persons
 contemplating a quick roundtrip to another currency. The intent is to slow down
 speculative capital movements; it would be too small to deter commodity trade or
 serious international capital commitments. The revenue potential is immense, over $1.5
 trillion a year for the 0.5% tax.
         J. M. Keynes in 1936 pointed out that a transaction tax could strengthen the
 weight of long-range fundamentals in stock-market pricing, as against speculators. The
 same is true of the foreign exchange markets.
          The tax would have to be worldwide, at the same rate in all markets. Otherwise it
could be evaded by executing transactions in jurisdictions with no tax or lower tax.
Compliance would depend on the banking and market institutions where the vast bulk of
currency exchanges take place. The transaction tax is designed to make international
money markets compatible with modest national autonomy in monetary and
macroeconomic policy. But it would certainly not permit governments and central
banks to ignore the international repercussions of their policies. The G-7 would still
need to coordinate policies, and their policies would still be powerful influences and
constrainsts on other economies.
       It is appropriate that the proceeds of an international tax be devoted to
international purposes and be placed at the disposal of international institutions. This
was my suggestions in 1978. Although raising revenues for international purposes was
not the primary motivation of my proposal, it has been a major source of the recent
upsurge of interest in it.

                                      JAMES TOBIN
              James Tobin, Winner of the 1981 Nobel Prize for Economics

8 - Conclusion

The environment is the basic resource but current policies and approaches - on both
environment and development - are unsustainable. Finding sustainable futures on energy
and population is of especial importance. Business as usual is no longer a viable option.
Major changes throughout all our societies are needed - and needed urgently - to set the
world on course to a sustainable future.
         For such action to become possible a global consensus (involving the support of
all countries on earth - since we are all involved whether we like it or not) is essential; so
too are large additional financial resources, much - but not all - for use in the developing
         We need also to recognize that many societies are "coming apart at the seams";
and that to have any chance of stitching the fabric back together again, we must focus
much more than hitherto on human needs; the local level; and on participation -
sustainable human development.
         The question facing all of us - whether from developed or developing countries -
is: "Have we got the vision and political will to set aside short-term considerations and
instead start the long, difficult and expensive process of bringing about these changes in
all our life-styles; and to raise (and use wisely) the large financial resources that are
going to be needed?"
         In a broader sense, of course, and in the longer term - society needs to restructure
itself in many ways - to recognize better the importance to human beings of a wide range
of values, apart from money - many of them related to environmental quality. It is
already beginning to happen; but we are not there yet. Meanwhile money counts (more
perhaps than it should) and businesses are as they are. Hence my conviction that, to
facilitate business contributions to sustainable development, society needs to create
conditions in which such contributions are seen to make sense in business terms, as well
as environmentally.
        In its special supplement in September 1993 to mark 150 years of publication
(16), in which it mvited eminent individuals to cast their minds forward 150 years to
2143, The Economist started by quoting Samuel Goldwyn as saying "Never prophesy,
especially about the Future". It justified ignoring Goldwyn's advice by expressing the
view that "the interest of prophecies does not simply, or even mainly, consist of their
visions of the future. All forecasts are, in truth, observations about the present and recent
past. They are judgments about which trends and which characteristics of today and
yesterday are likeliest to endure and to have the most impact on tomorrow".

       For my part I shall follow Goldwyn's advice and conclude by simply posing to
you - my audience - the question what the world might look like by the middle of the
21st century if the changes discussed can be achieved? And what kind of disaster area
we might all be living in if they are not? The answer will depend on whether we are
guided by needs or greeds.


1. "Our Coirunon Future", the report of the World Commission on Environment and

       Development, OUP 1987, ISBN 0-19-2828080X.

2. Report of the Intergovernmental Panel on Climate Change, HMSO, London, 1990.

3. "Sustainable Biomass Energy", Philip Elliott and Roger Booth, Shell International
       Petroleum Company Ltd., London, December 1990.
4. "Needed: A National Renewable Energy Strategy", Keith Lee Kozloff, Senior
      Associate, World Resources Institute, International Automotive Technology
       update 1994/95, Kensington Publications, London, 1994.

5. World Development Report 1992, Executive Summary, World Bank. ISNB 0-8213-

6. "Solar Hydrogen: Moving Beyond Fossil Fuels", Joan M. Ogden and Robert H.
       Williams, World Resources Institute, Washington, October 1989. ISBN 0-

7. "Hydrogen Bus Holds the Promise of Cleanar air". The European, 19/25 August

8. Quoted In "World Population - Turning the Tide: Three decades of progress", Stanley
       Johnson, Special Adviser for the Environment, Coopers and Lybrand, World
       Development Aid and Joint Venture Finance, 1994/95, Kensington Publications,
       London, 1994.
9. Paul Kennedy "Preparing for the Twenty-First Century", Harper Collins, London,
       1993,"ISBN0 00 215 705 5.

10. Barbara Wood, "Alias Papa", P. 245, Jonathan Cape, London 1984, ISBN 0-224-

11. J. G. Speth, "Sustainable Human Development", World Development Aid and Joint
       Venture Finance, 1994/95, Kensington Publications, London, 1994.

12. "Towards Sustainability", Commission of the European Communities, COM (92) 23
      Final, Brussels, 1992.

13. Hank Wedaa, "California - Environmental Seed Bed", International Automotive
      Technology Update 1994/95, Kensington Publications, London, 1994.

14. European Commission's Work Programme for 1993, Address by Jacques Delors to
       the European Parliament, Bulletin of the European Communities, Supplement
       1/93, Brussels, 1993.

15. Human Development Report 1994, United Nations Development Programme, New
      York, 1994, ISBN 0 19 509170 1.

16. "150 Economist Years", The Economist, London, 11 September 1993.
This page intentionally blank

                STEPHEN C. JAMES
                US Environmental Protection Agency
                Office of Research & Development
                Cincinnati, Ohio 45268

1. Abstract

With continuing global economic growth, challenges to the protection of the
environment will become increasingly more difficult to manage and implement.
Economic growth affords opportunities for all countries to improve their standard of
living. As this occurs, new and additional stresses are placed on the environment as it
currently exists. Increasing pressure to stem local and global pollution impacts will be
the responsibility of all countries. Current environmental control technologies and
future control technological improvements will not be able to keep pace with increases
in environmental emissions to the air, land, and waters. New generations of
technologies and new approaches to the management of resources will be required to
adequately stem the rising levels of pollution and the depletion of natural resources.
       In order to develop and manage the resources and to control emissions, control
technologies will be replaced by innovations in resource management technologies.
Cleaner processes, substitute (green) chemicals, waste reuse/recycle, advances in energy
systems, etc. will evolve which provide both financial and environmental benefits while
preserving the natural resources.
        In addition to technological innovation, advances in organizational development
and the management of human resources must occur. Focuses on quality, the customer,
global objectives, development of an empowered organization, and the transformation to
a learning organization will be necessary. Without a strategy that encompasses both
technological and management innovation, the necessary ingredients for global change
in the improvement of the environment and management of natural resources will not
        This paper addresses both technological and managerial aspects that are
necessary ingredients for innovation in the 21st century.

2. Shaping Our Future Today

Innovation is not about today. Innovation involves anticipating the future and not
O. D. D. Soares et al. (eds.), Innovation and Technology - Strategies and Policies, 21-27.
© 1997 Klawer Academic Publishers. Printed in the Netherlands.
waiting for changes to happen. Innovation brings on an abundance of challenges for us
which are both technological and managerial. With continued advancement in
technology, innovation becomes even more important because of the need to stay ahead
of your competitors. Globalization and intensity of competition forces industries and
governments to demand more from research and development activities leading toward
technology commercialization. Thus the ability to technologically and managerially
innovate is critical to the success of individual firms and industries and the economy of a
nation as a whole. Individual countries that are not promoting and nurturing
technological and managerial innovation within their industries and governments may
easily find themselves with a declining GNP and thus a declining standard of living for
their citizens as we forward toward the challenges of the 21st century.

3. The Managerial Side

A few years ago, innovation in the United States was generally considered from a
technological point of view. Now, however, the development of a winning business
strategy includes both technological and managerial innovation. With factors such as
reengineering, market drivers, government policies, competitive advantage, the need for
increased earnings, etc.; innovation is equally thought of from a managerial point of
view as from a technological point of view. Many speak of managing the innovation
process, but the real key is providing the environment for innovation to develop and
thrive. Innovation involves people, processes, and technology; and the management
support to follow through. Without concepts such as empowerment, teams, and quality
forcing their way up through the organization and the required top-down support for
such concepts from the senior management; organizations will not be able to develop
and sustain innovation and will not be able to meet the competitive challenges that lie
ahead. For innovation to be successful, the supportive environment and the processes
that enable individuals, teams, and organizations to respond better, cheaper, and faster
with the output desired by the client need to be in place and practiced.
       Today, there are extensive discussion concerning quality, empowerment, teams,
the customer, the suppliers, etc. The problem is that these issues are usually addressed
separately and are not presented as required, integral approaches for supporting
innovation and organizational development. Quality is a concept that too often is
applied to the end product. Rather, quality is a process that needs to be integrated into
the work that an organization performs. Quality processes need to be implemented and
supported by the senior management and taught and encouraged from the bottom of the
organization. Far too often quality is audited by the organization rather than developed
within the organization. Quality encompasses empowerment whereby any individual in
the organization has the right to question and institute change that will improve the
processes and products of an organization. Quality, itself, is an ongoing process of
learning leading to improvement. Quality encompasses training and then requires the
supportive environment that enables the individual to make changes that result in
        Innovation stems from such basic premises such as quality and empowerment
coupled with the ability to assemble a group of individuals (team) to effectively address
the problem. Innovation may start with an individual's idea, but it certainly progresses

with the input and guidance of others. Innovation is a process that must include
breaking down the barriers between subjects and disciplines with persistent lateral
thinking that benefits from intra organizational ties and sociotechnical linkages. This
represents a dynamic model of innovation that connects the fundamental stages of the
innovation process to the organizational aspects (management hierarchy, rules,
strategies, jobs, etc.) and the social patterns (needs, abilities, power, motivation,
cooperation, etc.) that are integral to each other in defining the process of innovation for
today and the future.
        Innovation should have its roots in the earliest stages of childhood development.
Personal and diverse experience are important factors for generating ideas for
innovation. As one advances from the university to the workforce, cross contact with
others is essential. Communications with those throughout the organization and outside
of the organization are also essential. Not only peer communication such as those at
technical conferences, but also the input from the customers using your services and
products are required. Cross-fertilization of ideas comes from cross-disciplinary
contacts. In order for the above to be successful on the organizational level, as I have
mentioned before, the organizational climate must be one of open collaboration and
cooperation across and within divisional levels of the organization. A successful matrix
organization functions so that this cross collaboration is fostered. Organizations that are
formed by the traditional silos approach, where disciplines and other barriers do not
promote cross divisional collaboration, are so segmented from within that the process of
innovation is difficult to sustain because of lack of outside input to the original idea.
When organizations are so closed within themselves, those outside the organization that
are the users of the products and services are clearly left with a signal to look elsewhere
to other organizations where their input is valued. This is especially true in global
businesses where product requirements vary from country to country, and the need to
tailored products to the culture and customs of the country is very important.
       Management's supportive climate and enthusiasm for new ideas and an
organizational culture that emphasizes change foster an environment supportive of
technological development and innovation. An open atmosphere within the organization
where information is readily accessible and exchanged will bring about the interaction
from a variety of sources within the organization that are required to take an idea from
concept through product commercialization.

4. The Technology Side

Globalization and the intensity of competitive forces cause industry and governments to
require more from their research and development activities. Over the past several
years, corporate research and development activities have shifted from centralized
research to product specific research. Research and development teams integrate
technology, marketing, manufacturing, distribution, etc. to achieve shorter development
cycles and a smoother transition to manufacturing. Providers of research and
development activities are academia, federal laboratories, private institutes, and internal
corporate resources. In general, business will seek to accelerate the development of
technology toward the market and will seek to use its own resources where it will gain
the maximum competitive advantage in the shortest time. The technology innovation

process can be seen to consist of four components: emerging technology, exploratory
research, collaborative applied development and commercial development.
         Exploratory research includes long-term and basic research and offers no near-
term competitive advantage. This includes basic research at universities and other
facilities and is usually sponsored by government and industrial consortia. This aspect
of the commercialization process is characterized by initial discovery and innovation.
         Emerging technology initiatives (also considered as pre-competitive
development) are derived from basic research with potential for future competitive
advantage which will still require significant and sustained investment. Technology
risks must be addressed before these innovations, such as prototype development, can be
considered for commercialization. This type of initiative is usually supported by
industrial consortia and public/private collaboration.
         Collaborative applied development (also considered as non-competitive
development) is closer to end use, but consists of activities which do not offer a
significant competitive advantage to any one company within an industry. In addition,
this type of development can also have great benefit across industry sectors. Companies
involved in several industry sectors would reap benefits if their research and
development activities were linked across the businesses of the company. Collaborative
technology development expands technical resources available to the industry.
         Commercial development (competitive development) was generally undertaken
by a single company. However, in today's cost-competitive environment, these activities
may well be better addressed by strategic partnerships and joint ventures. These
activities are not commonly performed by industry consortia or. public/private
         Each of the above examples for industrial technological innovation has different
market drivers and a different class of sponsors or users. As the demand for cost-
effective and efficient technology becomes more paramount in technology development
and commercialization, technology innovation will be undertaken by strategic
partnerships and joint ventures within and among businesses.

5. An International Example

Asia's four tigers (Hong Kong, Singapore, Taiwan, and South Korea) have made great
strides in their economies are graduating from their prior role as newly industrializing
countries (NICs) to full-fledged members of the First World. These countries are
becoming serious global competitors in strategic industries from shipping to
semiconductors. A 1994 global competitiveness report Usted Singapore and Hong Kong
among the world's top four economies, along with Japan and the United States. The
survey noted Singapore's organizational abilities, strong foreign trade, and
infrastructure. In additional to organizational capabilities, the tigers were making there
greatest mark in technological innovation. During, 1993, the US issued 1,453 patents to
applicants from Taiwan.
        GDP per capita has been rising in these countries. Hong Kong's GDP approaches
that of the US while Singapore's is not far behind. South Korea looks forward to annual
8% increases in economic growth. In addition to investing in their own countries, the
tigers are also widening the scope of their foreign direct investments (foreign direct
investments include the acquisitions and the formation of new businesses or plants)
abroad to include many industry sectors such as the automobile and electronics
        In 1994, the U.S. received more investments from foreign firms than any other
country - 20.1 %. China received the second largest amount of foreign investments -
16.6%. Asia, without Japan, received 26.5%, and Latin America and the Caribbean
received 10.8%. This leaves only 26% of a total $204 billion to be divided up among
Europe, Japan, Central & Eastern Europe, India, Canada, etc. While issues such as
political stability and availability and skill of the local work force are important, foreign
direct investments in the U.S. were increased due to the corporate restructuring and the
assumption that the U.S. is a more competitive country. Certainly, technological and
managerial innovation have contributed to this competitiveness and infusion of funds.
Due to innovations in telecommunications and transportation that allow companies to
manage integrated production world-wide, developing countries, especially Asian
countries, are recipients of extensive foreign investments by the U.S. and Japan.
Countries that provide this liberalization of investment laws and are receptive to
innovation will attract research and manufacturing operations from global companies.

6. Environmental Issues

Fifty years from now the world's population is expected to reach 10 billion people. As
the access to information becomes available to all and countries and businesses compete
more aggressively in a global marketplace, all people will aspire to live as current First
World nations do. This rising standard of living allows more people to be consumers of
products and energy resources currently only reasonably available to First World
nations. Thus, can we sustain the oncoming economic progress without causing
irreparable damage to the environment or will a choice be made between economic
progress and environmental protection? Instead of local pollution levels, we will need
to discuss global pollution levels and implementation of innovative solutions for solving
these global environmental problems.
       Instead of the current premise that environmental technology selection be based
on the best applicable technology scenario, new approaches are required that support
innovative, environmental technology development for solution of global problems.
Under best applicable technology, the performance of established technologies is well
documented, and the technology delivers a stated performance. Because selection is
based on established technologies, there is no incentive to consider an innovative
technology. However, if environmental standards were based on performance levels and
if technology developers competed to drive the standard lower through technology
development, then innovative technologies would be candidates for consideration.
Addressing global environmental problems will require solutions responding to a variety
of problems that many countries face. The synergy of global environmental technology
development will overcome any resistance to innovation.
       Another problem facing global environmentalism and industry is predicting
where industry will be in 5, 10, and 20 years. Environmental methodologies, processes,
and controls currently used by industry are designed for today's industry and their
current products. In 5, 10, or 20 years, products or components of manufacturing may
have changed so much that completely different environmental concerns will be evident.
In order to efficiently and effectively manage the environment, industry must be willing
to share their future direction with environmental regulators. In this way, future
environmental regulations can be focused to meet the future needs. This approach
requires innovation in designing the future products and manufacturing facilities that
will make these products. Industrial sectors would find that sharing their future
projections with regulators could result in environmental regulations that are adequate
from an environmental point of view and add value to industry and the consumer.
Environmental protection is currently addressed as a negative economic impact on
industry. In the future, environmental protection must be viewed and pursued as value
added to industry.
        Today, environmental technology is not market driven but regulatory driven.
Environmental innovation needs to be considered alongside manufacturing and product
innovation so that environmental outputs are designed into the process. This
information needs to be transferred globally in order for environmental pollution to be
controlled effectively. Through technology transfer activities (joint ventures, licenses,
or sales of the technology), improvements in the environment can be made worldwide.

7. Changing to Support Innovation

The constraints of the business environment, historical tradition, old ways of thinking,
and other internal resistance are real and will be working against the forces of innovation
within a company. Some businesses find ways to overcome these forces and go on to
innovate, and others do not. If making changes to achieve competitive advantage
through innovative methods were easy; everyone would be doing this, and the advantage
would not be as large or as sustainable as it presently seems to be for select businesses.
       Management is the first hurdle to overcome if managerial and technological
innovation are to occur and have an impact on the company. For change to occur, it is
imperative that organizations and those that manage them recognize that they indeed
have a choice in how they manage their work force. Competitive strategies that stress
value-added (enhanced quality) and innovation require high levels of motivation,
commitment, and trust among employees. Competitive strategies that stress low costs
and low wages inhibit innovation and quality improvement. Recognizing the important
role of management is a necessary precondition for innovation and changing how an
organization manages their resources and whether they obtain a competitive advantage.
This is not easy to do. Recognizing the possibility of doing things differently and
accepting management's responsibility for the present conditions can be threatening to
those who were present when the old choices were made. While this may not be easy, it
is essential.
        It is necessary that people perceive a need to do things differently, or else nothing
will happen regardless of intent of management. Three ways to promote the concept that
change is necessary are: showing information that current practices are neither effective
now nor will be effective in the future; linking the need for change to the competitive
strategy of the business; and providing examples that assist the organization in
appreciating alternative possibilities.
        Change and innovation will confront the current status of activities within the

organization. Uncertainty and risks are associated with change and innovation. To
succeed in this endeavor, the organization, or the one championing change and
innovation, must have a clear view of the goals and vision and provide this to everyone
within the organization. The members of the organization must be able to see an
immediate impact from the change and innovation. This must be measurable and add
value to the organization.
       Just as technology is critical to a business strategy, innovation is essential to a
business strategy for those businesses that are going to compete nationally,
internationally, and globally from now on. With technology development and
innovation and managerial innovation becoming more directly tied to productivity and
profitability, it is time to formulate the right technology strategy and integrate this into
the business strategy to achieve a sustainable competitive advantage.

8. Bibliography

Biers, Dan, "Asia's Four Tigers Spring Into the First World," Wall Street Journal, p.
       A l l , February 28, 1995.

Bleakley, F.R., "Foreign Investment in U.S. Surged in 1994," Wall Street Journal, p.
       A2, March 15, 1995.

Kochan, Thomas and Robert McKersie, "Human Resources, Organizational
      Governance, and Public Policy: Lessons from a Decade of Experimentation,"
      Transforming Organizations, p. 176, Oxford University Press, New York, 1992.

McConnell, D.P., "Managing R&D in Competitive Times," Battelle Today, No. 78, June
     1994, pp. 4-7, Battelle Memorial Institute, Columbus, Ohio.

Pfeffer, Jeffrey, "Competitive Advantage Through People," Harvard Business School
        Press, Boston, MA, 1994.

Silverman, E.M., "Managing the Innovation Process," Quest, Summer 1990, pp 21-31,
       TRW Space and Defense Corporation, Redondo Beach, CA.
This page intentionally blank

                 PROF. DR.-ING. J. L. ENCARNAgAO,
                 DR.-ING. STEFAN NOLL,
                 RALPH PETERS
                 Fraunhofer Institute for Computer Graphics
                 Wilhelminenstrafie 7, D-64283 Darmstadt
                 email: Jle @ igd.fhg. de

Abstract. Computer Supported Cooperative Work (CSCW) introduces new teclinologies,
meant to support people in their needs to communicate and to exchange information.
CSCW group-supporting systems and applications will become more important over the
next years, especially due to the increasing number of interconnected computers, ISDN,
high speed networks, and networking environments. After a short introduction to CSCW,
this paper will give a perspective of the state of the art of CSCW itself. This includes a
description of conferencing, CSCW tools, multimedia collaboration, multimedia mail
and multimedia image communication as examples for synchronous and asynchronous
collaboration. Also video and audio communication is focused on. Furthermore three
different application fields are discussed and finally future trends for CSCW are given.

L Introduction

Over the last few years, CSCW has become the main focus of interdisciplinary research
at several research centres and industrial development departments. CSCW stands for
Computer Supported Cooperative Work. The main task of this research area is the usage
of the given technologies to enable cooperative work of individuals and teams on areas
and contexts where traditionally cooperative work has been nearly impossible.
    Computer-supported groups are, generally, project-oriented (or goal-oriented) with
important tasks and tight deadlines. The group members may be present in the same
room or they may be attending an electronic meeting at which the other members are not
present in the same place or at the same time. Sometimes computer-supported groups are
permanent and formal groups; other situations require ad hoc groups with a finite life-
time and other kinds of properties. The group interaction might be formal or informal,
spontaneous or planned, structured or unstructured. This leads to a large number of pos-
sible approaches and applications types in the area of computer support for groups.
Although computers have been used to support team efforts, the emerging concept of
computer-supported groups differs from traditional computer support concepts. Many
0. D. D. Soares et at. (eds.). Innovation and Technology - Strategies and Policies, 29-60.
© 1997 Kluwer Academic Publishers. Printed in the Netherlands.
 computer systems, such as time-sharing or networited systems, are common place and
 only support loose aggregations of users without any support for the connection among
 them (cognitive, common data, simultaneous or synchronized actions). Each user is seen
 as a discrete unit without any semantic connection to the others. Computer-supported
 groups introduce a new dimension and a new necessity: software designed specifically
 for groups - CSCW software.
      CSCW itself is not an independent technology. It is the integration of several differ-
 ent technologies which are supporting cooperative work [7]. Networking or Video tech-
 nologies on their own are not supporting cooperations, but they are future basic elements
 of CSCW systems, which will ~ combined in the context of a CSCW application -
enable cooperative work.
      Coming from the user's side of CSCW, systems can be divided into four groups,
 based on the Johansen [11] two-dimensional time-location matrix:
      The most important systems in the area of cooperative teamwork are those that take
place at the same time and the same location, such as the Group Decision Support Sys-
tems (GDSS) in so-called Electronic Meeting Rooms. The equipment for these rooms
consists of conference tables with integrated displays, interconnected PCs, and a single
 large screen, on which the display of the conference moderator is shown. The main point
 is that the electronic meeting room looks like a meeting room instead of a computer lab.
      The second group consists of systems for cooperative work at different times (Infor-
mation Sharing), so called asynchronous CSCW systems. Despite the location of the
users, this category contains Groupware like Electronic Mail systems, Project Manage-
ment systems. Hypertext systems, cooperative editors, and in general systems that allow
access to shared information (e.g. Computer Mediated Communication, Workflow Man-
agement, and Collaborative Writing). Tools that permit information sharing assume the
task of organizing and controlling access to this information, These tools use basic tech-
nologies like Hypertext and database mechanisms. In this context also the latest develop-
ments of the World Wide Web have to be considered. WWW allows distant access to
Hypertext documents.
      The most common group is comprised of systems for cooperative work at the same
time at different locations (Conferencing Systems, Shared Windows, Joint Editing Sys-
tems, Whiteboards). The first video-conferencing systems were based on pure analogue
technologies. Those conferences used specially equipped rooms, which are costly and
cost-intensive. The next goal was conferences which allowed the users to stay at their
own desks at their own machines, so-called desktop-conferencing systems. Transmission
of audio and video, as much as the realization of different tools to support the work with
synchronous Groupware, is the major focus of that research area. An integrated desktop-
conferencing system tries to keep the positive aspects of a physical meeting like personal
contact or discussions, while avoiding the disadvantages like expenses or time spent on
      This paper will give a perspective of the state of the art of CSCW. Section 2. concen-
trate on the aspects of conferencing. Two examples will give a brief introduction into
conferencing. Additionally this section describes CSCW tools which should be an add
on to every conferencing environment. Section 3. focus on cooperative inultimedia. A
multimedia collaboration platform combined with group editing facilities and a distrib-
uted cqmputer-based annotation environment are explained. Audio and video communi-
cation is a basic component for collaboration at the same time in different locations.
Inter-personal electronic mail services and multimedia image communication play a key
role for asynchronous collaboration. Section 4. give a brief introduction in this theme.
The fifth section discuss various aspects of audio and video communication and gives an
example for real time video communication. Section 6. provide three application fields
for CSCW in detail: Cooperative Diagnosis in Medicine, Cooperative Training Systems
and CSCW and Concurrent Engineering. Finally Section 7. shows a conclusion and
future trends for CSCW.

2. Conferencing


An electronic conferencing system enables the replacement of face-to-face meetings by
computer supported conferences. These can be two people meeting as well as organized
conferences. Multimedia Conferencing allow the user to participate in an electronic con-
ference with a virtual conference room. Interactive communication and information
exchange between geographically dispersed persons is of great interest in different appli-
cation areas like medicine, office organization, education and teaching or the product
development process.
    The conference system is responsible for the administration of the conferences. It
includes a distributed application server with functionality for organizing the interactions
between users, conferences and applications.
    The main parts of a conferencing system are its user interface, which should allow
intuitive use, and its information management, which organizes the groups, the access
restrictions, and hardware specific settings. The hardware specific settings are very
important due to the use of heterogeneous platforms.
    Managing the flow of data is one of the most critical tasks in distributed systems.
Because of having a big variety of data with different requirements in size and time, the
organization of the communication channels is fundamental for the efficiency of the plat-
form. It should work in high speed networks (i.e. Ethernet or ATM) and also in wide area
nets like ISDN. The system should be highly stable against external influences and
should rebuilt as much as possible automatically. Even in case of errors there must be
mechanisms to guarantee the reliability of data transmission. These requirements can be
solved using a client-server communication model.
    The BERKOM (BERliner KOMmunikationssystem) Multimedia Collaboration Ser-
vices [1] is an example of a basic architecture of a multimedia conferencing system. It
consist of:
    • Audio / video component
    • Conference Manager
    • User Interface
    • Sharing component
    • Conference Directory

                                     Site 1         Site 2

              Figure 1. Basic architecture of a CSCW system, e.g. BERKOM Multimedia
                                   Collaboration Services MMC [13]

     The Conference Manager (CM) starts and runs the conference. All necessary infor-
mation about the participants, actual running conferences, etc. will be kept in the Confer-
ence Directory (CD). The user interface will be released by the Conference Interface
Agent (CIA). The Application Sharing Component (ASC) distributes the interface of an
application to the displays of all conference members, although only one participant at a
time has the right to work on that shared application. Audio and video will be released by
the Audio Visual Manager (AVM) and the Audio Visual Component (AVC). The AVM
controls the creation of the teleconference, and the AVC establishes the direct intercon-
nections between the several Audio and Video components.
    The basic architecture of a CSCW system that is given in Figure 1 is especially
applicable to synchronous, shared conferences. Asynchronous teamwork does not need
audio/video communication. The media of audio and video in an asynchronous CSCW
application, e.g. Multimedia Mail, will be played or recorded and stored without main-
taining the real time aspect. Another example for asynchronous systems is the informa-
tion system World Wide Web. WWW uses several Hypermedia browsers to display
Multimedia data.


The conferencing system WIDE (Workstation Integrated Distributed Environment [21])
consists of two functionally different components. On the one hand is the Conference
Server, which is active on one central workstation. On the other hand are multiple Con-

ference Managers, one instance on every workstation tiiat is connected to the conference.
Conference Manager and Conference Server are working on a TCP/IP-based protocol as
client and server. The Conference Server assumes the distribution of the information to
and from the participants, e.g. at the time of entering or leaving a running conference.
WIDE uses the room-metaphor for its user interface. To participate a user has to apply
for the conference at the reception. After registration and identification via password the
system shows accessible conferences the user is allowed to join. Now the user is able to
connect to an existing conference or to start a new one.
     In an electronic conference the need exists for additional tools (see Section 2.3.) that
support the act of making decisions or collecting votes on the current work. These tools
are visible to and accessible by all the conference members. CSCW tools enable the par-
ticipants to make better decisions faster and to cooperate with each other. Those tools -
e.g. SketchPad (Section 2.3.1.) - can also be used to exchange visual information in an
easier and more intuitive way.
     The user interface of the conference shown in Figure 2 consist of a virtual meeting
room, a control area for gestures, an area to start CSCW tools or shared applications
inside the conference, and a file manager, to store files that are used more often.

                              Figure 2. The user interface of WIDE

    To overcome the geographical distance in a teleconference, without excessively
increasing the grade of abstraction, the conferencing system uses Multimedia compo-
nents. These components include transmission of live pictures and audio of the confer-
ence members. In addition to the live video of the participant the user can distribute
private video data by using a virtual monitor.


 2.3.1. Distributed SketchPad: A shared whiteboard
 The distributed SketchPad [22] [15] is a multi-user freehand sketching system, particu-
 larly designed for shared image viewing and annotative sketching within a conference.
An arbitrary number of geographically divided conference members can create sketches,
drawings and text in order to give comments on a shared background image. All actions
 will be simultaneously distributed to all conference members.
      The SketchPad supports discussions about an "item", an image or application pro-
gram. Before starting the discussion, this item will be loaded and distributed to all con-
ference members. It builds the background for the SketchPad and can be represented by:
      • a raster image
      • a grabbed snapshot from a video sequence
      • a grabbed snapshot from a running application
     Each conference member can make his personal annotations to the background
image in his own layer. The layers are comparable to transparencies stacked on an over-
head projector. They are represented by a transparent drawing area and a specific sketch-
ing color. Through this, the layers are visible to all conference partners but can only be
modified by their owner. The specific color allows the conference member to distinguish
one layer from the other. An additional feature of the SketchPad is a shared pointing
facility. Each user has his own shared pointer to show specific details or points of inter-
ests to all the others. The user interface of SketchPad is shown in Figure 3. The main fea-
tures of the system are:
    • WYSIWIS: What You See Is What I See
    • shared viewing of images
    • simultaneous interactions by different users
    • sketching, drawing and textual annotation facilities
    • multiple shared pointers
    The SketchPad supports for example functional and technical discussions in the
CAD/CAM area. A design draft, a technical drawing or a specific view from a 2D or 3D
CAD model can be directly loaded from a CAD system into the SketchPad. The
SketchPad allows the user to annotate the model in order to identify technical details.
    SketchPad furthermore can help external experts give advice in time critical situa-
tions. For repair or maintenance of complex products like machines, aeroplanes or ships,
a video snapshot or a scanned photo of a defective part can be annotated by an external
expert. In the medical area: X-ray images or a video snapshot during a complex opera-
tion can serve as a basis for discussion. The SketchPad functionality helps the external
expert show specific details.

2.3.2. The Shared 3D Viewer: Collaboration Support for CAD Users
The shared 3D Viewer (see Figure 4) is a viewing system, especially designed for discus-
sions and conferences about 3D CAD Models between geographically divided CAD
users. It is part of an open conferencing environment. The 3D Viewer interprets standard
CAD exchange formats which permits CAD data input from different CAD systems. The
graphics capability allows the visualization of complex 3D CAD models and the interac-

                                                                     IJaii]i>     Color




                              Figure 3. SketchPad user interface

tive modification of viewing parameters. The modifications will be transmitted to all
partners simultaneously.
     The shared 3D Viewer consists of two major parts:
     • the CAD data reader
     • the interactive shared viewer
     The CAD data reader interprets the IGES exchange format, which is supported by
most CAD systems. This interface is widely used to exchange CAD data between heter-
ogeneous CAD systems in the area of mechanical design.
     The interactive shared viewer allows the visualization of the CAD data. In this con-
text shared viewing means that all changes made by one user can be seen by all partners.
Technical designers and engineers working at different locations can discuss technical
problems with a representation of the 3D model. They can zoom or rotate the model to
identify the technical or aesthetic details in which they are interested.
     • Interactive manipulation of viewing parameters includes:
      • transformations (rotating, translating, scaling)
      • representation (wire frame, hidden line, surface representation)
      • lighting and shading (lighting models, light sources, surface properties)
      The 3D viewer allows the visualization of 3D CAD models independent of a specific
CAD system. It allows people who do not work with a CAD system, e.g. project manag-
ers to use a 3D representation of the product in a conference. An additional feature of 3D
 viewer is that the conference members can mark specific details with 3D annotation
 markers which are associative to the model. This makes it easier to show points of inter-
 est to the others.

                                                                          •   ...-tH'iJL

                            Figure 4. User interface of the 3D viewer

2.3.3. Group editors
Cooperative multimedia editing can be defined as the set of activities in which a group of
co-authors cooperate to produce a multimedia document using multimedia techniques,
namely for communication. This document can contain not only text but also other
media, such as raster images, 2D-graphics, audio, voice and video. The communication
channels that the co-authors use to cooperate are not only written messages but also
voice, video, drawings and sketches. As an example for an cooperative multimedia edit-
ing environment, including a group editor, in the following Section 3.1. CoMEdiA is
     Group editors allows the members of a team to have synchronous and asynchronous
access to a single information object. Members can see all changes to the object and may
be able to edit it. Concurrent access is done over a network. The editors can be used to
assist interactions that are either face-to-face or remote. This contrasts with systems that
give the group members asynchronous access to a single object, such as document
authoring tools that coordinate comments and changes from a number of co-authors. It
also contrasts with the systems consisting of one machine whose display is projected
onto a publicly viewable screen, run by a scribe or facilitator.
     Protocols for turn-taking or floor-passing can also be used to control the access to
documents. Instead of allowing free-for-all at-any-time access, the co-authors have to
ask for the "floor" in order to perform any action. The main problem with this technique
is that it is limited to those situations in which a single active user fits the dynamics of

the session. It is particularly ill-suited for sessions with high parallelism, inhibiting the
free and natural flow of information. Additionally, leaving floor control to a social proto-
col can result in conflicting operations: co-authors often make mistakes in following the
protocol or they simply refuse to follow it, and consequently several people act as though
they have the right to.
     Some editors allow co-authors to edit the object simultaneously. Other group editors
provide serial access to the workspace, as if the keyboards and mice were connected
octopus style to one machine. Single entry systems allow only one person at a time to
enter commands or material. Some systems take inputs on a first come first served prior-
ity. Others require each person to indicate by pressing a button that they want "the floor".
This explicit control keeps people from producing jumbles of actions from overlapping
keystrokes or simultaneous mouse movements. The other freer systems avoid jumbles by
social control, asking and giving permission verbally.

3. Cooperative Multimedia


The intend was to realize a system to diminish the costs and restrictions associated with
face-to-face communication and the demand for synchronous availability. CoMEdiA
(Cooperative Multimedia Editing Architecture) built a flexible array of features which
are "open" and can be used and combined, according to the characteristics of the problem
to be solved or the goal to be achieved. The prototype tool is intended to enable co-
authors to work in the same room (face-to-face) or at remote sites within a LAN or a

           Place ^ K                           Same                Different

                              Meeting            ,''      Team Worlt ^
                                  Environrtients          Work Shifts    ""•-,

                                                          Electronic Mail              ^\
                          /Tele-, Video-,
            Different                                     Computer Conferences              \
                        \ Desktop-
                                                          Collaborative Writin*?            i
                        1 Conferencing
                          \                :              Workflow Management           y

               Figure 5. Classification of CoMEdiA in the Johansen-Time/Place Matrix

    Following the classification of the Johansen-Matrix [11] CoMEdiA can be character-
ized like in Figure 5.
    CoMEdiA is an architecture intended to support and encourage cooperation among
several authors, multimedia communication and multimedia editing. CoMEdiA is

designed to support small groups of up to 6 co-authors working in possibly different
locations (connected over a LAN or WAN) who wish to collaborate (but not compete) in
order to produce a final document. It is assumed that each co-author works towards a
goal of common interest, supports the other co-authors and promotes the progress of the
group. Examples of documents to be produced this way are multimedia documents
which involve people with different backgrounds: scientific reports, newspaper articles,
project proposals, source code production, design of rendering scenes for publicity, ani-
mation scripts or several kinds of object modelling (see [20]).
    The advantages of groups are that individuals with very different expertise, back-
ground, problem approaches and geographic separation can contribute to the problem
solution. The potential for a cooperative system such as CoMEdiA lies in the ability to
allow people to do this and to integrate the results for the group as a whole.
    CoMEdiA implements a hybrid architecture. An external process (see the Global
Server in Figure 6) synchronizes all the co-authors' actions and is also responsible for file
system accesses. CoMEdiA is an XI1-Windows based system, but does not use the XI1
features to perform the distributed processing. All the connections between the Global
Server and the coauthors' processes and between the coauthors' processes themselves are
made using Ethernet-LAN functions (TCP/IP) or ISDN-WAN.
                                       Qi-iiutliur X

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                           I Audio chunni;!                            Audii^LhiinnL^I '

                                                             iHim or iSDN-S2M

                                                                    (in n^iLLiisUdl

                                           Figure 6. CoMEdiA architecture


CrystalPad [18][19] is a distributed computer-based annotation environment that sup-
ports groups, discussing on arbitrary applications. In a workstation integrated conference
an application will be distributed to all users via a window sharing component.
CrystalPad overlays the corresponding application like a set of transparencies; each par-
ticipant gets his own transparency where he can sketch his comments in a color only
assigned to him. Integrated in GroupX', the BERKOM compatible multi media collabo-
ration system from SIEMENS, this environment allows multiple users to work with the
application and simultaneously annotate on it.
     CrystalPad supports shared viewing and editing as well as making annotations by
overlaying an application with a virtual drawing area which can be used like a transpar-
ency film. Figure 7 shows the user interface of CrystalPad together with FrameMaker® ,
as an example desktop application.

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                                 Figure 7. CrystalPad with FrameMaker

    The main features of CrystalPad are:
    • cooperative discussion with annotations
    • graphical, textual and hypermedia annotations
    • WYSIWIS: What You See Is What I see
    • simultaneous interaction by different users
    • annotations directly on the desktop application
    • normal usage of the desktop application
    • semantic tagging to the desktop application
    • integrated in conference environment GroupX
    CrystalPad is based on the client/server paradigm. The client exists both as a stand-
alone and as a library version. The CrystalPad Agent (CPA) is the CrystalPad client

1. GroupX is copyriglit by Siemens.
2, ©Frame and FiarneMaker ai'e registered trademarks of Frame Technology Corporatioji

library version and it is integrated in tiie Conference Interface Agent, tfie user interface
of the BERKOM MMC environment. A stand-alone version uses the CPA and has its
own user interface and is mostly used for testing the library detached from the BERKOM
MMC environment. Figure 8 shows the architecture of the integration (it does not show
the complete BERKOM MMC environment, see Section 2. and compai^e with Figure 1.
A detailed description of the whole BERKOM MMC environment can be found in [1]).
It also shows the communication flow of the CrystalPad system, the CrystalPad protocol
(CPP), in dotted lines.

                                        CPP                                          X11P
     CIA: Conference Interface Agent
     CPA: CrystalPad Agent
     ASC: Application Stiaring Component                             FMC
     CM: Conference Manager
     GPS: CrystalPad Server
     FMC: FrameMaker Client
     FM: FrameMaker
     ASCP: ASC Control Protocol                                           FM-API
     CMAP: CM Access Protocol
     CPP: CrystalPad Protocol
     FM-API: FM Application Interface
     X11P: X I I Window Protocol

               Fii>ure 8. Integration of CrystalPad in GroupX (SIEMENS BERKOM MMC)

    Annotations are always made by a user in relation to an underlying text object of the
desktop application. In order to allow for annotations on dynamically changing docu-
ments, a means has to be found to express the connection between an annotation and the
text that it refers to. This can be achieved by introducing invisible tags in the underlying
system, and using them as anchors for annotation mark-up. These tags can be treated like
any other text element and e.g. float around whenever a paragraph gets reformatted.
Figure 8 shows the communication flow for the semantic tagging (in dotted lines). As an
example for a desktop application FrameMaker® is used. FrameMaker (FM) provides an
Application Programmers Interface (API), the Frame Developer's Kit, which is an indis-
pensable requirement for implementing tagging. To use this API, a FrameMaker Client
(FMC) must be registered with the application. This client is also connected to the
CrystalPad Server (CPS). Information about the tagging is sent to the server (using CPP),
which passes it on to the CrystalPad clients and vice versa.
     Today, end user terminals are mostly equipped with audio/video devices, a prerequi-
site of a reasonable conference environment like GroupX. There are obvious reasons to
apply these media for CrystalPad, too. Additionally, the traditional media text and image
should be used intensively. Further media like animation are imaginable. By the adoption
of multimedia annotations in CrystalPad, this integration is performed.
     Figure 9 shows the design of multimedia annotations and theirs link structure.
Together with a "simple" annotation a link managed by CrystalPad is created. Internally,
this link is transferred into the proper multimedia annotation in the form of sound, text,
images, video, or other media.
     The possibilities created by the multimedia extension of CrystalPad are wide-rang-
ing. Sound annotation allows an immediate addition of succinct comments to a text sec-
tor. If the comments consist of longer passages, text annotation is offered in form of a
simple editor. On demand, these passages may be integrated into the document later, e.g.
by a clipboard mechanism. This also applies to image annotations illustrating a docu-
ment section. Video annotations, however, are more effective to a permanent illustration
of parts of or the whole document.


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                                                                               Fii>ure 9. Multirmedia Annotation.s

     Oftice communication is an example of an application field for CrystalPad. The num-
ber of teleconferences to discuss project plans, marketing aspects, decisions in purchas-
ing and sales in office communication will continue to increase. On-line presentation and
annotations to shared textual or graphical documents, provided by the CrystalPad, helps
to reduce communication time, paper mail and faxes.
4. Asynchronous Multimedia Communication

Today's distributed administration scenarios require powerful means for the transmission
and distribution of structured documents (or messages as they are called in communica-
tion scenarios). Besides workflow systems and information retrieval services, inter-per-
sonal electronic mail services and multimedia image communication play a key role for
asynchronous collaboration.


Multimedia Mail (MMM) is a teleservice which has been developed within the
BERKOM \ixo]cci Multimedia Teleservices, launched by DeTeBerkom in 1992. It allows
for asynchronous communication of multimedia objects on the basis of a message han-
dling system [4][14].
    Regarding electronic mail, up to now only text messages are predominantly used,
whereas provisions for the use of messages of more complex structure are still limited to
isolated communities. However, emerging multimedia-capable messaging systems such
as the MMM system are beginning to overcome the obstacles, as shown below. Besides
the integration of adequate multimedia features, the main goal of the MMM project has
been to establish interoperability among a variety of different hardware platforms such
as SUN, IBM, DEC, and NeXt workstations, and PC's as well.

            Multimedia Mail                                                           Multimedia Mail
              U.'ier Agent                                                              U.ser Agent
                                                    X.400 Mail tratisfer
               ( User Interface )                     (store and forward)              ( User Interface )

                e d i a \ /'
         MultimediaX Z' jpM-
          Messar- ^ ' - - Agent^
           Editor            •ser
                                                                             Y   [PM   \
                                                                                                 [ j ^ ^

           ( External Reference 1
                  Manager                                                         (External Referenced
                                                                                        Manager      J

                                           Broadband Communication
                                                   (diiect Jink)

                                             External ReferenceA
                                                  Manager       )

                                                       /^ Global ^1
                                                          Store J

                                           Global Store server

                                    Figure 10. The BERKOM Multimedia Mail .scenario

   As shown in Figure 10, the Multimedia Mail scenario is based on the CCITT Recom-
mendation X.400. According to X.400, a message is transmitted from an originator to a

  receiver via an arbitrary number of Message Transfer Agents (MTA). The sender, as well
 as the receiver are called User Agents (UAs) in the X.400 terminology. Unfortunately,
 this store-and-forward technique which works quite well for the transfer of ASCII mes-
 sages, has a serious limitation regarding the transfer of high-volume multimedia data:
 the message size is limited to approx. 100 kBytes due to the minimum requirements for
 the MTAs storage capacity.
      In order to overcome this limitation, bulky message parts such as video annotations,
 audio annotations, or high resolution still images are being extracted from the message
 body at the sender's side within the BERKOM Multimedia Mail teleservice and only the
 textual part, together with references to each of the extracted message parts, are transmit-
 ted via the X.400 service.
      As the entire MMM service, the handling of the extracted message parts has been
 designed to work in a heterogeneous environment. It is based on appropriate OSI transfer
 protocols and standardized document structures. According to the Distributed Office
Application Model (DOAM) standard, so-called Distinguished Object References (DOR)
 are used as unique global references to the extracted message parts.
      As shown at the bottom of Figure 10, a Global Store Server is part of the BERKOM
Multimedia Mail teleservice [5]. The participants within the mailing scenario are con-
nected to the global store via ISDN or ATM links. This allows for fast data transfer of
 large amounts of multimedia data. It also lays the ground for enabling receivers with lim-
ited local storage capacity to receive and present non-persistent message types such as
audio/video streams in real time without storing the data in between.
     External Reference Managers (ERM) provide the access to the global store: at the
sender's side data are transmitted to the store via the function DORjiroduce and at the
receiver's side a reference can be resolved (i.e., the extracted data can be obtained) via
the function DORjransmit.        The duration of availability of a message part which has
been transferred to the global store can be extended by the sender via the function
     For the representation of images within the MMM scenario, an application profile of
the standardized IIF Data Format^ (ISO/IEC 12087-3) was chosen as new body part
type 181 [31. The BERKOM profile of the IIF-DF supports the following image types:
     • single-band still images (grey level and color look-up)
     • full-color still images {RGB and YCrCb)
     • moving images (sequences of single-band or full-color still images).
     The structure, geometry, colorimetry, and sequential data organization of these
images is described by the IIF-DF syntax and encoded according to the Basic Encoding
Rules (BER) for the Abstract Syntax Notation One (ASN. I). The pixel data fields are
encoded either uncompressed (in binary form) or JPEG-compressed and embedded into
the IIF syntax. The IIF parsers and generators are based on the ISO Development Envi-
ronment (ISO-DE) concerning the handling of the ASN.l BER.
     The MMM teleservice in its current version was successfully demonstrated at the
CeBIT 94 fare. The set-up included a co-existence of multiple Global Stores, locally as

1, IIF stands for Image Interchange Facility

well as femotely (in Berlin).
    Further developments will include new communication protocols for the access to
the Global Store including real-time A/V capabilities, security concepts for all system
components, and the definition of MMM APIs.


     The communication, storage, and manipulation of the information type "digital
image" is one of the most challenging tasks within the development of multimedia sys-
tems and telecommunication services. If the technological issues on image storage,
image communication, and image manipulation (including image compression, image
conversion and the synchronization of images with other information types) are solved
then the most serious obstacles towards the usage of multimedia technology in open, dis-
tributed environments will be removed.
    The RACE II project "Advanced Multimedia Image Communication Services"
(AMICS) [17] was initiated in 1992. AMICS focused on the establishment of an open
image communication platform that is flexible enough to be integrated into future muld-
media broadband services. Although the term "Multimedia Image Communication"
addresses multimedia communication, the term puts a clear emphasis on the aspects of
image communication within multimedia environments.

4.2.1. Image Communication Open Architecture
A huge variety of image interchange and communication (de facto) standards is
employed today in different systems, applications and environments. Most often, these
standards have been developed separately and in isolation from each other, each address-
ing particular needs. Terminology has been conceived in different areas such that the
same terms are u,sed to mean different things. Image data is used in widely differing
application areas and many diverse requirements are placed upon it. By looking at the
whole field of images and image communication, a framework encompassing the various
requirements can be derived.
    Within AMICS such a framework, called Image Communication Open Architecture
(ICOA) [24], was defined. The ICOA enables the various standards and standardization
activities both in the imaging area and the area of image communication to be related and
the necessary support tools to be identified. The framework fulfills the image communi-
cation requirements from a wide range of application areas including multimedia. The
ICOA is composed of various conceptual building blocks including an inspection of
standards in respect to images; a mathematical model on images; a refei-ence model for
image formats; and a comprehensive, generic image data model ICOA (Image Data
Model (IDM)) that can be used to describe any kind of digital images.

4.2.2. The ICOA Image Handler
One requirement for image communication was perceived to underlie all the others, that
of providing uniform access to images whether they are stored locally or remotely. By
providing such uniform access, communication services can be invoked as necessary,
without the knowledge of the application, and other related services such as compression
and conversion can be integrated. Such uniform access is provided through the ICOA
Image Handling Interface (IHI) [25].
     The IHI is reaHzed by means of the ICOA Image Handler. The Image Handler is
modelled as an Open Distributed Processing (ODP) object, whose interface, the IHI,
provides the basic set of operations necessary for the storage, retrieval, and control of
images. It is based on the IDM, thus providing broad and flexible data structures which
can be used to describe any kind of digital image. The IHI establishes a common view on
different data formats. Among other features it provides arbitrary access to parts of digi-
tal images and allows both compressed data (that complies to various compression stan-
dards, e.g. JPEG, MPEG, etc.) and raw data (by which is meant an array of arbitrary
pixel data type, ace. to the IDM) to be passed through the interface.

                          Fifiure II. Architecture of the Image Handler

    The appearance of the ODP object Image Handler is provided although the underly-
ing services may not all be in place. This allows applications to be written independently
of services available at any one time. As a service becomes available, it is used transpar-
ently by the Image Handler, without any changes needing to be made to an application.
Provision of such a concept makes use of ODP trading facilities for locating suitable ser-
vice providers.
    For the realization of the Image Handler as well as for the evaluation of its concepts
data formats have been chosen, that provide a variety of digital images, i.e. moving
images, multispectral images, binary images, etc. Figure 11 illustrates the Architecture
of the Image Handler.
     The Image Handler was successfully integrated into an overall multimedia teaching
scenario. The various advantages of the Image Handler were shown in a wide area
demonstrator by using ISDN (see [23] for more details).

5. Video and Audio Communication


Multimedia is defined as a combination of text, graphics, animation, music, speech, still
images, and video. The growing use of multimedia entails a dramatic change in the use
of computers. The hitherto strict separation between computers and telecommunication
facilities is dissolving by an integration of communication media having a comfortable
access to multimedia information systems.

             Multimedia                                                      Multimedia

                                                              Processing      ^rSSj

                              Netnorklng                   »- Networking

  Figure 12 Multimedia communication on distributed platforms. On each platform data can be processed
           (compression/decompression, etc.). The platforms communicate via LAN or WAN.

    Possibly the most essential component of any system supporting person-to-person
communication is audio. Most claims of users of teleconferencing systems concern the
quality of audio. Studies have been made indicating that more than half of the
information transmitted during a teleconference is verbal. Therefore, technical
shortcomings of such an important information source especially attract the eye. Many
problems concerning the audio component are caused by the high sensitivity of the
human ear to time discrepancies, since the auditory organs are more sensitive than the
eyes. Delays and jitters within a certain period (50 to 200 milli sec.) being ignored with
image sequences lead to unacceptable results with audio sequences.

    In a multimedia communication system video communication means the consecutive
sequence of digital video images. These are captured, digitized, transmitted, and repro-
duced with a minimum of delay to grant an adequate communication channel.
    The exact synchronisation of audio and video data flows, the so-called lip synchroni-
sation, often causes great problems. The obvious solution is the integration of audio and
video signal into a single file format. This is the basis of recent versions of the standard
video formats. For example the microsoft video-for-windows format can directly inte-
grate WAVE audio files.
    Another more demanding method is to perform synchronisation by high-accuracy
timers. Problems may arise here concerning the timers with the adaptation of source and
target platforms.
    In the following, the integration of audio and video into a cooperative system shall
be described in more detail.

5.2. AUDIO

Different multimedia platforms provide different types of audio devices, formats, tools,
and services. Nevertheless, all of them offer a common set of functionality, like record,
store and playback. This does not, however, apply to the data formats. Here, most of the
computer suppliers favor their own audio formats (SGI: AIFF, Sun: (J.-law, PC: WAVE,
etc.). Many formats and audio periphery devices are based on Pulse Code Modulation
(PCM), where, with a certain fixed scanning rate, the current level of the audio signal is
digitized and, within a given value range, stored in a file (AIFF, WAVE). A typical appli-
cation has, e.g., a scanning rate of 8 kHz within a 8 Bit value range (= 8 kBytes per sec-
ond). This, according to the Shannon scanning theorem, allows a maximum audio
frequency of 4 kHz with a dynamics that comprises 256 different grades between silence
and maximum loudness. This represents the dynamic performance of the human voice
quite well.
    The resulting audio quality corresponds to one of a good telephone signal. CD qual-
ity can be realized with a scanning rate of 2 x 44.1 kHz (stereo) at 16 Bits dynamics
range (= 196,4 kBytes per second).
    Other formats like, e.g., the ji-law format are based on a logarithmic algorithm. To
use these formats for the exchange within cooperative applications further prerequisites
must be taken into account. For a platform-overlapping exchange real-time converter are
necessary that are able to change all used audio formats into an interim format. This
interim format is exchanged via network and reconverted in the target machine into the
platform-specific format. Experience has shown that these converters can be realized
without problems in software. They create - depending on the performance of the under-
lying CPU - from 10 to 50 milliseconds of delay.
    Another bottleneck may be caused by the network capacity. If this becomes too low,
compression algorithms must be applied. A widely used standard is the ADPCM algo-
rithm (Adaptive Differential Pulse Code Modulation). It is adapted to the prerequisites of
the human voice and achieves compression factors of 2 to 5 without greater losses. The
algorithm can easily be realized in software for compression and decompression. Mech-
anisms like Down-sampling (removal of single digitized audio values out of the PCM

data flow) or Up-sampling (interpolation of lacking discrete audio values in the PCM
data flow) represent further possibilities of the audio processing. They are used for prim-
itive compression ends and for the adaptation to differing audio hardware. Thus, the inte-
gration of e.g. 8 kHz and 12 kHz audio periphery just by software is given.
     Very good results have been achieved with the application of Noise Gates and an
Echo Cancellation for real-time communication. The first automatically closes the com-
munication channel when the audio signal falls under a dynamic threshold previously
determined (i.e. under silence or mere background noise) and opens the channel as soon
as the user speaks into the microphone. The second prevents feedback troubles. Here, the
arrived audio signal is emitted, then received again by the microphone and sent back to
the source with a certain time delay. The result may range from a high whistling to a
repeating echo. The implementation of these mechanisms may prove to be non trivial. In
the scenario described above, the network is in aspect of time the most incalculable ele-
ment. Depending on the existence of asynchronous services, delays (caused by buffers)
or jitters (caused by differing transport times) may occur. These may only be prevented
by an accurate network set-up or upgrade.

5.3. VIDEO

Video is an analogue signal. To capture this video signal and to transmit it via a network,
it must be digitized. For this special hardware is needed which, however, is becoming
increasingly affordable and widespread.
     Digital video is, per se, a visual information that may be seen as a sequence of digital
images within a close time frame. The reception and transmission of a continuing video
sequence requires bandwidths of up to 216 MBits/sec. which overtaxes most system
buses, LANs or WANs. The peak value of 216 MBits/sec. corresponds to the PAL video
signal digitized according to the CCIR-601 specification. This mere data amount
requires special methods for their handling.
     This is the reason why the most important video formats and mechanisms are based
on compression as well as on color and volume reduction. On principal, there exist two
different compression techniques, the first performs a pure single image compression,
i.e. each image out of a video sequence is compressed without taking into account the
predecessor or successor image. The JPEG standard (Joint Photographic Expert Group)
belongs to this category.
     The second technique compresses the single images in reference to a certain number
of predecessor and successor images. This enables image sequences of very high quality
with a high compression rate. However, this entails an immense compression effort
much higher than for the single image compression. This applies as well for the decom-
pression effort. The first method needs a symmetric effort for compression and decom-
pression. This is not true for the second method where the effort is strongly asymmetric.
     Nevertheless, this second technique is favored. This is mainly due to the compres-
sion rates in the range of 100, the high quality and the increasingly easily available com-
pression/decompression hardware. Well-known representatives of this send technique
are the following standards: MPEG (Moving Pictures Expert Group), CCITT H.261
(Px64), Apple QuickTime, IBM Indeo, and Microsoft Video for Windows.
     To increase the performance of video procession witliin a time scope, tlie resolutions
 in the color and space domain can also be reduced. For the spatial domain there exist
standards like the Common Intermediate Format (CIF) with 352 x 288 pixel or the Quar-
ter Common Intermediate Format (QCIF) with 176 x 144 pixel. The reduction of the col-
ors comes up to 256 colors either or to 128 res. 16 grey tones. Furthermore, it is
necessary to decide whether an image rate of 25 or more images per second is necessary.
Often a rate of 10 images per second is sufficient.
     To be able to work reasonably with video as a communication channel within a coop-
erative environment either a low-effort software algorithm like JPEG must be used or for
inore demanding algorithms respective hardware must be purchased. If then color inten-
sity, resolution, and image rate is adapted respectively, a basic network bandwidth of 64
to 128 kBits per second is sufficient for video communication purposes.


 The availability of a great variety of ISDN-PC adapter boards has caused a boom in the
 ISDN market. Consequently many ISDN basic rate accesses were sold in recent times.
 Since ISDN is nearly globally available, most of today's existing computer integrated
 video communication systems are designed for ISDN. The introduction of the European
 ISDN protocol DSS-1 will bring more international competition to the market of termi-
 nal equipment. This, again, will result in yet more affordable video communication sys-
 tems for ISDN.
     Moreover, a standardized Application Program Interface (API) is existing for ISDN-
PCs facilitating the hardware independent implementation of CSCW systems. While
 version 1.1 of this Common ISDN API - often referred to as CAPI - is specified only for
 DOS and MS-Windows, the current version 2.0 also supports OS/2, UNIX, and Net-
Ware. Currently, CAPI 2.0 has been submitted to the ITU for world-wide standardiza-
     MISTER COOL (Multimedia ISDN-Terminal for Cooperation over /ong Distances)
is a PC-based system which supports tele-cooperative applications with video communi-
cation via ISDN [12]. By means of a special plug-in board for video- and audio compres-
sion and a commercial ISDN-PC-Adapter board it offers video communication facilities
at low cost.
     The board is comprised of a video digitizer, and modules for video and audio com-
pression. The videos are displayed via the so-called feature connector of the VGA-
device. Hence, the system bus is charged only by the compressed video data which are
exchanged by the ISDN-board. Speech is either transmitted uncompressed by way of
ISDN telephone or compressed by means of MISTER COOL.
     In order to meet the channel capacity of ISDN, video compression is performed in
two steps. First, significant reduction is achieved by sub sampling the analogue video
signal during digitization. Subsequently, to compress the remaining data to the 64 bit/
sec. transmission capacity of an ISDN channel, the JPEG baseline algorithm is applied
     Other than usual PC-based video communication systems where compressed data are
passed to the network via hardware interfaces, this approach allows the exchange of data

                       Figure 13. Screen of a MisterCool whiteboard session

via a CAPl-based software interface thus enabling the use of the software with any other
network providing an API.
    The software supports a variety of telecommunication applications under MS-Win-
dows. As a cooperative application a tele-whiteboard is implemented allowing two sub-
scribers to transmit bitmaps over ISDN. Both session partners can edit this bitmap
simultaneously. The result of each operation is displayed in both the local and the remote
    Figure 13 shows the screen of a MISTER COOL whiteboard session. A map of the
city of Darmstadt is distributed via ISDN to explain to a foreign visitor the way to the
Computer Graphics Institute. The remote cursor is shown in black.

6. Applications Fields for CSCW


Because of the constant improvements and developments in medicine, new work- and
cooperation models are becoming noticeably more important. This touches on the fact
that modern, expensive medical equipment, such as equipment needed for radiological
examinations, is becoming more and more centralized in large clinics. This demonstrates
the large need to be able to convey remotely-produced examination results, so that the
patient and doctor can discuss them directly.
    Different approaches of CSCW are intensively involved with this problem. Because
of its low cost and universal access, ISDN is especially suited as a communications
medium for this application.
    The cooperative project ICAMEDIN (Kooperatives Arbeiten und Medizinische Diag-
nostik auf Innovativen Netzen) arose from this context [2], [6]. KAMEDIN is a software
system that allows cooperative work on radiological images using the standard ISDN
network. Image data can be exchanged, discussed for diagnosis, or automatically classi-
fied using an Artificial Neural Network.
    Cooperative work between two doctors assumes that the application software allows
both to be able to see the same computer images. Considering the quantity of the image
data to be analyzed (normally 130 to 512 kBytes per slice, or approximately 100 MBytes
per patient for CT- and MR-data sets) the on-line connection speed for the small-band
ISDN is too slow and would be too time consuming for a real-time, on-line discussion.
Therefore, the data is transmitted in batch-mode before the actual ISDN conference
begins. Consequently both conference partners have the image data locally during the
conference. This means that only single commands have to be sent over the network
from one partner's software to the other's while the actual conference is taking place.

                                                                                                         Filetransfer 1
          FiletraTsfer 1   N                                                                              (Receiver;

    Ccntefence \                                                            ; Daemon i ,                       Conference            ^ s
     :Marer)   / *                                                       -»^i    B   I                           (Slave)
                                                                                                  I      Hletransfor 2          'i
         Fllatrcreifera                                                                                   (Sender)
                                                                          U^rHC^i'sS^^i^^VSv* — : „ . lSftSV.*.&?i*'. ^i.'i.-

             Fif;ure 14. The daemon controls the transport capacity of the ISDN connection for tlie
                    other KAMEDIN module (file transfers, session, conference, batch job)

    For a teleconference, a point-to-point connection between the two system applica-
tions is created (see Figure 14). The conference is opened by the initiating user's soft-
ware (the "Master"). At this point the conference preparations are complete since the
necessary files have already been transferred. A necessity for building the connection is
that a background process ("daemon") is running for the cho.sen partner's software
("Slave"). Common image data can now be worked on. At this point the following syn-
chronized and pseudo-parallel imaging functionality are available on both computers:
    • Conversion from CT- and MR-data into system-specific image format;
    • Sequential overview of all the images in the sequence in a small scale;
    • Overview of the image header information in separate sequence detail data and
      image detail data;
    • Display of sequences, single images, and double images;
    • Zooming;
    • Density measurement.
    In order to avoid conflicts between the partners, KAMEDIN allows only one at a
time to be able to execute program commands (this state is known as "having the floor",
compare with Section 2.3.3.)- The initiating user starts the session having the floor, and
buttons allow the floor to be passed back and forth.

                             Figure 15. KAMEDIN's User Interface

    The mouse positions of both partners are visible at all times, making "telepointing",
as well as viewing the other's window-operations possible.
    The system supports diagnoses through the use of Aitificial Neural Networks (Back
Propagation as well as Three Dimensional Kohonen Feature Maps). These networks can
automatically segment and classify tissues in the data set.
    Based on KAMEDIN's image data, many possible representative examples of exam-
ined tissue classes in particular Regions of Interest (ROI's) can be characterized. The
neural networks are then trained using these ROI's. Automatic classification then follows
through the use of these trained neural networks. The resulting classifications can then be
visualized in three dimensions.
    Because of the tremendous amount of calculation necessary, especially during the
neural networks' training phases, KAMEDIN allows the training and classification pro-
cesses to be executed on a super compilter. It connects the various processes through the
ISDN network.
    Some possible users are, for example, newly established doctors who would be able
to consult with experts and specialists in chnics and hospitals. KAMEDIN can also sup-
port cooperation between doctors in different hospitals. Considerable time savings can
be realized through quick and uncomplicated sharing of patient information. Image data
and results that are sent through the mail can sometimes take too long.
    One of the major advantages of the system lie in its general accessibility and low
communications costs: the telephone charges for one cooperative session are at most DM
40 per hour within Germany; an ISDN connection is about DM 74 per month.


 DEDICATED (Development of a new Dimension in Computer Assisted Teaching and
 Education) is a project within the European DELTA program. Partners from four Euro-
pean countries - Germany, Portugal, France, and Greece - are collaborating in the DEDI-
 CATED project. Its overall goal is to develop, establish, and evaluate Local Training
 Centres (LTCs) as centres of local teaching expertise, and then connect these centres to
form a European-wide network of Computer Based Training (CBT) sites.
     The integration of text, images, video, and audio is one of the great challenges in the
development of future computer-based training materials. The courses supported by
DEDICATED are therefore based upon multimedial contents. They also allow for coop-
erative work as well as for a remote access to information via networks. In this connec-
tion, notions like interoperability between heterogeneous ETC platforms and portability
of courses play an essential role. Other interesting and crucial points are the experiences
in the domain of administration and management of LTCs.
     The primary goal of development within the project is the disposal of a flexible plat-
form for the development, application, and management of computer-supported learning.
Local Training Centres (LTCs) that are installed in Germany, Portugal, France, and
Greece form the basis of DEDICATED. An LTC basically consists of a central computer
(server) ensuring the link to the international network and connecting the learning plat-
forms (clients) joined via a local network and supplying them with certain basic services
(data bases, management, etc.). The learning platforms are standard computers with net-
work capability like Silicon Graphics Indigos, Sun Spares, or high-end personal comput-
ers assembled with relatively low-cost multimedia equipment (video cameras,
microphones, frame grabbers, etc.). By this, a wide distribution can be achieved which
would certainly be limited by very expensive extra components.
    The LTCs are linked via heterogeneous international networks (Internet, ISDN), thus
forming an integrated virtual learning environment. Within this environment, groups of
developers are collaborating and different learning scenarios like teaching, individual
studies and remote studies, are taking place. Moreover, the LTC managers are enabled to
exchange their experiences and cooperate in the development and harmonization of new
learning programs.
    In addition to the installation and testing of the LTCs the development of a Modular
Training System (MTS) is a focal point in DEDICATED realizing a conception for the
modular and learning objective oriented design of training software. To reach this end,
the system is organized in different levels:
    The lowest device-oriented level is built by the Generic Learning Support, Here, the
linkage of the different LTC platforms and the reach of different devices are realized.
Thus, the Generic Learning Support presents a device-independent, distributed working
environment. It performs the integration of the LTCs and supports the exchange of
results. Generic functionality is supplied in the fields of presentation, interaction, com-

                                              LTC                LTC Architecture

                          Figure 16. The DEDICATED LTC Architectur

munication, storage, and processing. It is crucial that widely used standards are used to
offer a customary working environment botii to users and developers of DEDICATED
courses. Therefore, in the fields of presentation and interaction, the approved
mechanisms of OSF-Motif are used on UNIX workstations and MS-Windows on
personal computers. In the fields of communication and storage, standard transmission
protocols and common data formats for text, graphics and multimedia are used. Even the
processing of data, e.g. manipulation or compression, is performed using known or just
slightly modified methods. This contributes to a frictionless exchange of the
DEDICATED courses and the provision of real-time audio/video communication
between the single learning platforms.
    This computer technology is, however, intended to be strictly separated from the
proper learning courses. A user of the DEDICATED infrastructure does not need to think
about the "how"; he just can concentrate on the "what", i.e. the learning subjects and
objectives. He is working on a familiar machine in a familiar environment, however, he
can access specific data from other platforms and has a direct audio-visual contact to co-
learners or to a teacher.
    On principal, this applies also to the course developers who need not necessarily be
teachers. Therefore, beyond the Generic Learning Support level there are the Learning
Materials. This level is technology-oriented and defines the learning environment
available on an LTC. The learning materials are programmed device-independent and
have access to the resources of other LTCs. They define the expertise of an LTC and can
be developed specifically for each LTC.
    The upper level presents the Course Material. This level is learning objective orien-
ted. On this level, learning contents and strategies are defined in an abstract way. This

 level being device- and teclinology-independent allows the design of training software
 that can easily be adapted to other technical conditions. This offers the only possibility to
 enhance the effectiveness of the learning programs that are often too much technology-
 oriented today.
     For the learning materials and the course material level the development of a course
description language is crucial. This description language defines the anatomy of a
course which is compiled by modules as required, partly interactively, partly automati-
cally. Here, the data of the learning material like text, images, animation, videos, audio,
clc. form the main constituent of the course. The description language also contains and
supports mechanisms describing the demands of the author for the course (subject, target
group, kind of media, degree of detail, etc.) as well as allowing for users' profiles (atti-
tude, learning success, etc.) For a distributed multimedia system as it is realized by the
LTC structure standardized exchangeable media formats, mechanisms, and compression
methods for text, images, video, and audio are essential. This applies above all to time-
independent and real-time-capable media. Therefore, tele-communication multimedia
(Tele-Media) mechanisms have been introduced within DEDICATED. These define the
tlata formats, the time reaction, the error handling, and the control mechanisms of multi-
media subjects being exchanged via networks.


The improvement of the product development process is a major goal for companies and
enterprises to remain competitive. Organizational changes and the use of innovative soft-
ware tools are inevitable to reduce product development time and costs. A key concept
used to achieve this goal is concurrent engineering. Concurrent engineering can be
regarded as a systematic approach to an integrated product development which embodies
parallel work, cooperation, and informafion sharing among designers, mechanical engi-
neers, manufacturing engineers and project managers.
    CoConut (Computer Support for Concurrent Design using STEP) [lOJ provides a
homogeneous environment in a heterogeneous hardware environment, supporting the
integration of already existing software and data. To support the communication between
different staff persons, the CoConut environment includes applications based on CSCW
techniques. This aspect is fundamental in reducing costs and time during the develop-
ment and integration of parts of a new product.
    The main purpose of the CoConut system is to share information during the design
process. Information sharing must be supported, even if the members of the design teams
are geographically divided. The design and the manufacture of a product is regarded as a
complex chain of different processes. Continuous and homogeneous support by an envi-
ronment will help to improve the product development process in the direction of enter-
prise integration based on an underlying product model. A product consists of other
products and therefore represents an assembly of numerous different parts normally
designed by different engineering groups. As the groups must build one product, com-
munication and coordination is essential. The fact that groups may not necessarily work
at the same physical location makes communication difficult, especially in the early
slaves of the design.

             Technical Designer                                        Project Leader
          cieates assembly group II                              (Scheduling and management

                                      Fij;ure 17. The CoConut Scenario

    Two main aspects are important for this environment. The first aspect is the avail-
abihty of a common data repository based on a standardized information model, which
can be accessed by all involved persons. CoConut is based on an underlying object-ori-
ented model, which was developed by TC184/SC4 of the International Standardization
Organization (ISO). This model is part of the ISO standard 10303 (STEP) [9]. STEP is
an acronym for "Standard for the Exchange and the Representation of Product Model
Data" and characterizes the emerging standard for the exchange of product model data.
STEP is the only standard which offers an information model covering various phases in
the life-cycle of a product. The second aspect includes a communication environment
which supports the communication among the design teams. When the design teams are
regarded as dispersed work groups, communication over wide distances is essential.
Enhanced communication services using CSCW technology can provide the tools to
enrich this collaboration with the functionality of virtual meetings. The integration of
these two aspects offers an environment for information sharing independent of the
physical location of the cooperating persons.
    These two aspects cover one of the most important issues in work group computing:
the co-ordination of asynchronous and synchronous communication in a team. The infor-
mation model gives a common understanding of the shared data and is a basis for the
consistent and uncontradictory data access of all team members and their applications.
The functionality of the model covers all relevant data which occurs in the design phase
of a product, e.g. information about the product structure and the product geometry, the
approval status of specific parts, the project progress and the people and organizations.
This allows for asynchronous information sharing in the design team, where the access is
managed by the logging mechanisms of an object-oriented data base system.

     For synchronous communication within the design team desktop conferencing sys-
tems cover the basic communication support with integrated audio and video connec-
tions. CSCW applications which are specifically designed for the use within CAD work
groups are used to discuss certain details of the CAD model, the management of a
project, or the workflow in the group. One application used for discussions about the
shape of a product is the 3D Viewer (see Section 2.3.2.). The functionality of the 3D
Viewer includes shared viewing and annotation capabilities. Shared viewing means that
view modifications made by one user can be seen by all partners. Annotations to the
shape e.g. specific markers can be made by all partners simultaneously to support the dis-
cussion. Designers or project managers can discuss technical problems with a represen-
tation of the 3D model without starting a CAD system.
     The link between asynchronous and synchronous communication of the CSCW
applications is maintained by the common data repository of the CoConut environment.
Every application in the environment either a single user or a CSCW application is
directly integrated with the underlying data base. Every collaboration in the group deal-
ing with aspects of the project management, the workflow, or the product development is
based on a consistent and integrated data set.
     The CoConut environment represents an open, extensible framework for the integra-
tion of engineering applications and the collaborative support of geographically dis-
persed work groups. Future extensions to the system can address the underlying
information model as well as the integration of applications which support specific tasks
in the process chain of product development, such as kinematics or FEM analysis. Nev-
ertheless, the concept is open for the support of the whole engineering process as well as
other application areas, e.g. Electronic Design Automation.

7. Conclusion and Trends

The need to exchange ideas, to get immediate response, to make decisions, in short to
communicate in a time efficient way without geographic barriers opens application fields
for CSCW technologies. In the future the requirements for communication services will
increase. Companies will decentralize their design and engineering activities and the
international cooperation within and between enterprises will grow.
     CSCW technology will have a great impact on future communication and informa-
tion flow within these companies and enterprises. It will help to save time and money on
travel and reduce telephone costs and paper mail. It will improve the information flow
between teams or groups and allow them to communicate in a flexible and time efficient
way. These processes require an adequate communication infrastructure to avoid infor-
madon flow problems.
     Task-specific CSCW environments are one of the basic requirements for future
CSCW systems according to the individual communication needs of each application
     • Technical discussions between designers and engineers are important aspects
       within the product development process. The basis for these discussions are techni-
       cal drawings or 3D CAD models created by a CAD system. Graphical tools with

       sketching and modelling functionality offer additional support in discussions,
        where the partners are not physically present (Section 6.3. gave an example to
       solve this problem).
     • For the consultation of external experts in time critical situations, video and audio
       connections are key components for the communication. An expert from a central
       office or centre can only comment on a situation if he gets a high quality image or
       video sequence of the item being discussed.
     • In office communication and management sophisticated conferencing tools are
       needed, especially on-line video with synchronized audio connections and joint
       viewing systems with annotation facilities. Additional off-line communication ser-
       vices, such as multimedia mail or workflow systems, improve the general informa-
       tion exchange.
     • Other CSCW application fields are medicine and diagnostic support, publishing,
       tele-teaching and training, telemarketing and information management.


An other important point for CSCW environments is the integration of synchronous and
asynchronous co-operation. An example: A few people write a joint research paper. The
authors will join in a teleconference, to make changes right on the spot with a joint edit-
ing system (synchronous work). In order to discuss the current state of the document,
draft copies are being circulated by Multi Media Mail (asynchronous work) and
reviewed. Sketching and modifying diagrams on a white board is also an excellent
means of exchanging ideas (synchronous work). The authors must be able to easily
switch between synchronous and asynchronous work to concentrate on their target.


The best co-operative hypertext editor is useless if it does not allow, by an intelligible
interface, an easy exchange of data with the standard single user text processing systems.
This example stands for a huge problem of current CSCW systems. The tnore data
involved in a CSCW system that is created and modified in other contexts and systems
the more it is essential that the CSCW system is concerned with aspects of data integra-
tion. In the domain of text processing this may not be as great a handicap as that, for
areas like co-operative publishing, co-operative organization concerns in ijusiiiess or
even co-operation in product development. However, the handling of data in a CSCW
system can turn out to be a real problem. The aspect of data integration, i.e. the electronic
availability of data in homogeneous formats, independent of the user's physical location,
is a big challenge for future CSCW applications.


Not only the integration of data but also of conventional software and groupwarc is - as
to its functionality and user interface - crucial for the usefulness and acceptance of
groupware. A permanent change from one system to another is an obstacle for the use of

groupware in addition to the conventional application software. There are different meth-
otls to achieve an integration of groupware and conventional software. One method is to
extend the software by groupware functionality, another to offer an operating system or
vviiidovv environment comprised of groupware functionality. Both approaches do exist,
however, they do not, by far, cover the requirements in this field.

8. Expression of thanks

We wish to express our thanks to Martin Bernhard, Christof Blum, Michael Jager,
Holger Kress, Volker Ktihn, Adelino Santos, Norbert Schiffner, Klara Schroeder, Riidi-
ger Strack and Bernhard Tritsch for their contributions and their support.
    The work on CrystalPad was performed in a project financed and supported by Sie-
mens ZFE Munchen and Saarbriicken.

9. References

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2, Bu.sch. C. and GroB, M. (1993) International Neural Network Texture Analy.sis and Visualization toi'
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.V Blum. C. (1993) l^esign Principles and Applications of ISO/IEC"s Image Inlcrchangc l-'aciliiy (IIP). In
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4. Blum. C. ct al. (1994) The BERKOMMulfunedui           Mail Teleservice. Release J.I. Fuhlislicd by DcTcBcrkom
     Giiibtt, Berlin.
.\ Blum. C. and Neumann, L. (1994) The Global Store Server — A Multimedia Teleservice Component, in
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6. Grol.i. M. and Seiberl, F. (1993) Visualization of Multidiemnsional Data Sets using a Neural Network. In
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7- Encarnagao. J.L.. Foley, J. (eds.) (1993) Multimedia - System Architectures luut Appliculions. Inlernational
     Communication and Research Centre (IBFI).
K. IS()/lt;C DIS 12087-3 (1992) Information Tecluu)U>ffy - Computer Craphics luid lni(ti>e I'rocesshii; -
     liu{r.^e Frocessin^ and Interchange (IPl). Part 3: linage Interchange Facility (IIF).
9. ISO/IS 10303-1. Industrial automation systems - Product data representation anil exchan'^e - Part I:
     Overview and fundamental principles. International Organisation for Standardisation; Geneve 1994.
 10. Jasnoch, tJ., Kress, H., Schroeder, K. and Ungerer. M, (1994) CoConut: Computer Support tor Concurrent
     Design using STEP, In Proc. of the 3rd IFEE Workshop on Enabliui; 'Techn(do^.iies: Injraswucntre for
     Cdllahoraiive EiUerprises (WET-ICE), April 17-19, Morgantown,
 1 I. .lohansen, R, (1988) Groupw<are: Computer Support for Business Teams. In: The I'ree Press, New York,
12, .lager. M, and Osterfeld, U, (1994) Introducing^ Video Cotnmuniialion           and Presentation on desktop
     Computer. Proc. SPIE2188, pp.3.'i0-361.
13 Kiiekes. A. (1992) The BERKOM Multimedia Collahorath>n .Service, technical report, BERKOM-WG
     Mulliiuedia Collaboration. Release 1.7,
14, Moeller. E„ Neumann, L,, Schiirmann. G., Thomas. S., Weber. R. and Wolf. F. (1994) The BERKOM
     Multimedia Mail Teleservice. In Computer Commuincations .lournal. 4/94,
I.T, Noll. .S. and .Schendcl, M.G. (1991) Cooperative sketching in a network environment for the automotive
     industry in Europe. In Proceedini^s of the Eiuroaraphics 1991. Technical Report Series. Viemia.
16, Pcnnbakei. W,P, (1990) DRAFT JPEG Techn. Specification, Revision 8. Infortiial Working Paper. JPEG-
 17. Peyn.-H.etal. (1993) Th: AMICSDemonstrator. Deliverable R2056/TN/EWZ/DS/L/007/aI, RACE Project
      R2056 Advanced Multimedia Image Communication Services (AMICS).
18. Peters, R., Neuss, C. and Bernhard, M. (1994) CrystalPad: Shared Authoring with Annotations.
      Postersession Proceedings 1WACA '94 Workshop, Heidelberg, pp. 14-23.
19. Peters, R. and Neuss, C. (1995) CrystalWeb; A Distributed Authoring Environment for the World Wide
     Web. In Proceedings of the Third International World Wide Web Conference, WWW '95. Darmstadt,
     Germany. Computer Networks and ISDN Systems, Volume 27, Issue 6, Elsevier Science B.V., Amsterdam,
     pp 861-870.
20. Santos, A. (1993) Cooperative HyperMedia Editing with CoMEdiA. Journal of Computer Science and
     Technology 8/2.
21. Schiffner, N. (1994) Integration of Virtual Prototying Applications with a Distributed Conferencing
     System. Proceedings IFIP 5.10 Workshop on Virtual Prototyping. Providence, RI.
22. Schendel, M.G., Noll, S. and Rix, J. (1991) Distributed SketchPad System: A tool for cooperative sketching
     in a network environment. In Contribution to COMICS-Workshop, Toulouse.
23. Strack, R., Cordes, R. and Sutcliffe, D.C. (1994) Demonstrating Image Communication within Open
     Distributed Environments. In Proceedings of the IWACA '94 Workshop, Heidelberg.
24. R. Strack et al. (1993) Conceptual Building BlocLs for an Image Communication Open Architecture
     (ICOA). Deliverable R2056/FhG/lGD/DS/P/002/b 1, RACE Project R2056 Advanced Multimedia Image
     Communication Services (AMICS).
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     Communication Services (AMICS).

                Universidade do Amazonas - FT
                Av. Gal. Rodrigo Otdvio Jorddo Ramos, 3000
                CEP 69077-000'Manaus, AM - Brazil


The basic idea of writing this paper is to attempt to "tie together" various "phenomena"
present in the capitalistic world. These "phenomena" shall be identified through:

•   the re-study of the theoretical concepts which explain the economic cycles;
•   the level of "disturbance" related to innovations;
•   the analysis of the large waves, starting with Kondratieff s version until Carlota
    Perez's "clean" analysis;
•   to finally, delve into the question of paradigms; of the five great paradigms the
    capitalistic society has been through in its various phases.

        It has to do with a prospective analysis of the phenomena dealing with the
economic sphere and, therefore, the social, political and technological instances. It is
further intended to shed some light onto the relation of the main objects of the "material-
productive culture", generated by innovations always under the prism of the economic
events - cycles and waves - and technical-economic paradigms.
        Of course, technological innovations, in addition to being the driving force of the
technical progress, have indeed been influential in the creation of Schumpeter's
announced "disturbances".
        It is the object of this analysis to study the influence of the concrete
manifestations -products- of innovations through the five technical-economic paradigms
as well as how such influence has contributed to the wave-like movement of the
        For the purposes of this paper, the observations and considerations are made
under the light of the most common approaches from the Technological Innovation:

• Vision under the format of organization (administrative focus, prioritizes
• Vision under the format of Process (examines and highlights the productive
0. D. D. Soares el al. (eds.), Innovation and Technology - Strategies and Policies, 61-75.
© 1997 Kluwer Academic Publishers. Printed in the Netherlands.

•    Vision under the format of Product (studies the "tangible results" of an innovation)

Within this context, the third vision shall be prioritized, namely, that being centered on
the "objects", the way these impinge upon as the facts in the oscillations studied by the

1 - By Way of an Introduction - The Topics

The foregoing topics sum up the theme which shall be dealt with throughout this paper,
defined through an evaluation of the evolution of some of the theoretical concepts
related to the capitalistic system, on its dynamics and the "variations" affecting it but
which, until then, now one knew the reasons why, supply and demand, growth and
accumulation of capital, monetary policy and so on. It is only following the arrival of
theoreticians that the non-evident forces which moved, which created fluctuations within
the system started to be investigated. It was then that what was later denominated
"crises" and "prosperities" came to light.
       Before the appearance of the theory of cycles, as this theory was later called,
there was work directed at the study of these phenomena. Such studies are related to the
famous general theory of the economy.
       Aiming at a critical analysis and a methodological framework, what follows have
contributed to its determination:

• The economic cycles - the insights of Keynes / Schumpeter / Freeman
• The lorig waves - the insights of Kondratieff / Carlota Perez
• The Five Technical / Economic paradigms - the insights of Kondratieff / Schumpeter
  and the contributions by Freeman and C. Perez
• The "objects" of each paradigm and their relationship with the cycles

2- Economic Cycles - an Analisis of the Keynesian Concept

The work Keynes develops within the economic theory, when analyzed through the
lenses of the cycle theory, place him as a scholar belonging to the mainstream of the
theoreticians of economic cycles.
        "The essential characteristic of the economic cycle is its periodicity, (...) the
alteration between good and bad phases regularly distributed in 7 to 11-year periods,
and global in scale". Carvalho (1988).
        "// the behavior of the economy shows...rhythm and regularity to such a
sufficient degree as to enable (us) to refer to cycles...", Carvalho (1988), indeed,
regularity was essential even for the concept of cycle proposed by Keynes himself.
        It is important to precisely define what is being examined. The issue in question
is not whether the economy tends to fluctuate instead of regularly and harmoniously
behaving, but rather whether the fluctuations are cyclic and whether they behave within
a stable and identifiable pattern. Fluctuations may be the manifestation of the difficulty
in the market economy to sustain itself. Strictly speaking, cyclicality requires repetition.
 "Each unending spin, each cycle emerging from its predecessor and merging into its
successor" (Mitchel (1950:46) In Carvalho,1988).
        In his works, on the general theory, Keynes ignores the long term analysis of the
economy. Critics used to refer to narrowness of perspective always restricted to the short
        For a short-term analysis there are two approaches: the "static" one and the
"dynamic" one. The former studies a given position in the economy, and this, in a
certain way, confined to the microeconomic field. In the dynamic analysis, the issue is to
identify some form of repetitive movement, as an economic cycle. In the analysis
proposed by Keynes, the static method could be used to study macroeconomic problems.
And it is owing to the static framework that the general theory proposed by Keynes has
represented a step backward as compared to the pre-Keynesian macroeconomy centered
on the economic cycles. Keynes' work "was concerned with (...) states and situations
rather than with events, he has adopted a method formally of equilibrium and limited
the economic cycle to a sole chapter, a mere illustration of the powers of the new
theory" (Shake, 1967), in Carvalho, 1988.
        Be as it may , Keynes' thinking is not to be disregarded, for as his critics have
stated: the prevailing approach to the capitalistic fluctuations has indeed changed in the
general theory ...and there onwards.

3 - The Origin of the Cycle Theory

Studies on the theory of cycles started to be developed in the second half of the XIX
century. These studies proposed amply diverse visions on the causes and modes of the
cyclic behavior. The notion of convergence which had been reached in other fields of
the economic theory was non-existent. Different theoreticians pointed towards
completely different forces as being responsible for the wave-like movements. Anyhow,
the theoreticians were studying from different angles the causes for the instability in the
economy. These theories began to be grouped in terms of the cause for the cyclic pattern
or for the nature of the reversions (e.g. sub-consumption or super-investment). They
would then begin to be structured in two large groups.

      Those engaged in the study of cycles could be classified into two groups
depending on the nature of the work being carried out by each one:
      The economic statisticians (empiricists)

•  They had as their function to describe the observed fluctuations and to identify new
   forms or new sources of data to be investigated.
• They collected and prepared the greatest number possible of series and described
   their advancements as well as drawbacks.
• They dealt with empirical facts.
Exponents: Mitchell, Kondratieff.

       The theoreticians of the economic cycles (theoreticians)

•   They had as their objective to identify the principles of cyclicality.
•    They searched to estabUsh the causal hierarchies which related the processes of the
•    They dealt with the interpretation of facts.

       If the economy as a whole underwent cyclic fluctuations, all the series which
described important economic behaviors somehow manifested those fluctuations.

4 - Classification of the Cycle Theories

There are two important fundamental approaches on the nature of economic cycles:

       Perpetual motion models
       The cycles are unending oscillations intrinsic to a capitalistic economy. They
were born with capitalism and will only be eliminated if the system itself is to be altered.
Therefore, from this standpoint, the normal behavior of a capitalistic economy is cyclic.
       Carvalho quotes Freeman: "...The behavior of a capitalistic economy is cyclic".
Cycles, therefore, do not start from "normal states" of behavior. The cycles are the
normality. Thus, "a crisis is expected to be followed by a depression, a depression by a
recovery, a recovery by prosperity and prosperity by a new crisis". (Mitchell, 1950:44).
It is to be understood, therefore, that the previous statements restate the idea of
cyclicality, where there are moments of crisis and moments of growth which
characterize macroeconomic changes. It could be stated that such periodic fluctuations
design the perpetual motion models.

        Propagation models:
        These theories propose that the adaptation of a capitalistic economy to an
exogenous change has the form of one or many waves. Each cycle is seeing as a
historical individual beginning whenever a state of rest or of "normality" is ruptured by
an exogenous shock. The absorption of such a shock is marked by advancements and
dephasings which define the wave-like form of the process.
        These models only explain the regularity of the stages of a given cycle but not the
periodicity of a cyclic process. To explain a succession of cycles an additional theory
which would explain the source of the shocks and the reasons why these regularly
reoccur would be necessary. In the absence of such a theory, it can be stated that
between the end of a cycle and the beginning of the following cycle long waiting periods
occur, denying, thus, the predictive element of this theory.
        The most influential version of such models is attributed to Schumpeter (1939).
According to the Schumpeterian theory, the exogenous disturbance is given by an
innovation, which "moves" an economy apparently in "rest" or in a state of equilibrium.
To quote Schumpeter himself:
        "Any disturbance can have the power to generate oscillations (...) any influence
over the economic process will not only produce an isolated change, but rather a wave-
like movement (...)" Schumpeter (1950:30), in Carvalho, 1989.
        According to Carvalho's analysis, Schumpeter singularizes innovations among
the "disturbances" of the system, but, says Carvalho, the theory fails to explain a cyclic
process. Without explaining how and why innovations are periodically introduced.
According to Schumpeter this would not be possible.
        Further development of the propagation models has to do with the disturbances
created by the economic policy. Worth mentioning also are the monetary theories of the
cycle and, recently, the Lucas' cycles, whereby "the form through which the economy
tries to adapt to monetary shocks" is analyzed.

5 - Kondratieff's Long Waves^

A Kondratieff wave is defined as the peak and fall of a growth mode and each crisis is
defined as the hard transition from a growth mode to another.
        Each growth mode implies the establishment of a new set of social and
institutional arrangements developed in such a way as to favor the unleashing of
successive technological revolutions or of successive "technical-technological
        From such an analysis, it could be said that a long wave depression means a
structural crisis.
        As it has been interpreted by Schumpeter, each Kondratieff long wave represents
a new industrial revolution, based on a new group of technologies. Thus, the so-called
first revolution was based on Abraham Darby's discovery of the wrought iron for the
mechanization of the cotton industry which took place in the period 1780/1842 (chart 1)
         Kondratieffs second wave was the steam era, that of the railways and the
Bessemer steel, from 1842 to 1897.
         Kondratieffs third wave, beginning in 1898, defines the discovery of electricity,
of the heavy chemistry and of the automobile.
        Neither Kondratieff nor Schumpeter have attempted to speculate on the future
and had they done so, one wonders if they would have predicted the expansion of the
world's economy after the Second World War (1945), or the depression (oil crisis) in
the 1970s.?
        The analysis could lead us into thinking that the end of each phase of expansion
would coincide with the outbreak of a large scale war, as for example the Napoleonic
Wars, the American Civil War, the wars in Central Europe in 1860, the First World War
(1914-1919) or the Vietnam War (1960-1970). Only the second world war could be
considered an exception to the rule, since this announces the 4th. Kondratieff.

        Schumpeter has deducted that during the recession period of each long wave
there exists an exceptional cluster of new inventions, which become the starter for the
next period of growth of the next wave. It is at this moment that Schumpeter makes a
distinction between the invention and its application which he later called
        "According to Schumpeter's understanding, innovation will be the basic function
of capitalism and comprises the dynamics of the capitalistic production". (Hall, 1981).

 40 to 60-year long cycles in economical growth

      Cotton             Railways      Electricity        Spacecraft       Microprocess
       Iron               Steel        Chemical /          Industry             ors
      working                          Automobile         Electronics          Bio-
        1st.               2nd.            3rd.              4th.               5th.
     Kondratieff        Kondratieff     Kondratieff       Kondratieff       Kondratieff
     1785/1842          1842/1897       1897/1940         1940/1995            1995/

                            LEVEL OF ECONOMIC ACTIVITY
      1784                 1825         1886        1935                       1989
  1750             18             18          19                        19
                   00             50          00                        50 2000

       CHART 1. The Long Cycles of Economic Activity Identified by Kondratieff
                  Adapted by Schumpeter as Waves of Innovation
                   Source: Hall, 1981, reinterpreted by the author

6 - Long Waves as Modes for Successive Grovt'th

          "Long wave phenomena are a form of behavior of the economic system" (Perez,
In order to understand long waves, given the depth of the transformations which affect
all the spheres of society, it is necessary to amplify the area of analysis and to globally
see the evolution of the system in its totality, including the technological, the social and
the institutional components and their interaction with the economic sub-system. To this
end, Perez approached the problem on two levels: the economic sphere and the
technological sphere. To the extent that the limits of growth along the technological path
interact, they gradually lead to the consolidation of a new paradigm, which in turn
revolutionizes the whole productive system. She further explains the interface between
the economic cycles and paradigms as "social-institutional landmark", which includes
the issue of human resources and politics as well as the "technical-economic sphere",
which involves knowledge and capital.
        Perez (1988) considers the technical-economic sub-system and the social-
institutional landmark to be factors which, depending on their interaction propitiate for
the peak (attachment between them: the summit) or the depression - here understood as
the detachment: the descending point -. Whenever there is a depression there is a
warning enabling the beginning of social and institutional behavioral re-arrangements.
To these parameters of a radical transformation are to correspond and that indeed ought
to be happening at the technical-economic sphere.
        But why is such a detachment produced? Despite having permanent interaction
the two sub-systems have distinct rhythms. The economic activity is driven by profit and
by growth. This renders rapid changes possible and the sum total of the units comprising
the economic system only become viable when the transformation, the change, has
already reached critical proportions.
        The institutions are laggard whenever actual changes are to be recognized. These
-the institutions- suffer from a high degree of "natural" inertia, fruit of past successes
and linked to various interests.
        The fundamental transformations which lead to such periods of attachment and
detachment are defined by Perez as the successive technical-economic paradigms, which
permeates the entire productive apparatus at each forty/sixty years. Such a concept of
paradigm is understood as "a global revolution, both technical and organizational that
transforms the what and the how of the profitable production (...) and establishes a new
maximum efficiency and productive frontier". (Perez, 1989:3)
        It is interesting to emphasize that the system of interrelated innovations in
products and in processes in technical, organizational and managerial areas, is not
restricted to clusters of technological innovations.
        The change in paradigm is here understood as a radical transformation which
remains at the total state-of-the art, namely, within the technical, social and institutional
sphere and, therefore, within the economic boundary.
        According to Perez, "the organizing principle of each paradigm is to be found in
the dynamics of the relative cost structure of all the possible productive inputs" in
which case the inputs are subject to four conditions for a relatively long period, as

       A.    relative cost, tending to go down;
       B.    supply "appears practically" unlimited;
       C.    potential of placement in various activities is evident;
       D.   capacity to reduce capital, work and products costs and the transformation of
            these is amply recognized.

        In this sense, the previous characterization would provide for the bases to state
that microelectronics points towards the fifth peak of the long wave - mentioned by
Kondratieff and analyzed by Schumpeter - .
         Similarly, oil - jointly with petrochemical products and energy-intensive
materials - has been the basis for the fourth Kondratieff. As to the third Kondratieff, the
paradigmatic bases would correspond to steel and, for the second, coal. Finally, the key
factor of the first Kondratieff corresponds to manpower. (Table 1).

    KONDRATIKFF    KEY FACT'IK          •OBJECTS"         * llARACTERISTICS               CIIAN(;ES
        1st.         Manpower            Mechanic             Low input cost             new model for
                                           Boom                                           organization
       2nd.             Coal           Steam engine         unlimited supply        new occupational profile
       3rd.             Steel           locomotive            potential for           new products profile,
                                                                unlimited            tendency to low costs
                                                                                   new pattern of geographic
        4th.             Oil            Automobile          reduction of costs,          localization for
                                                              work, products            investments, new
                                                              and unlimited        infrastructure adequate to
                                                              transportation.        the new technological
        5th.      Microelectronics         Chip^                                   concentration on powerfu

    TABLE ]. Paradigms, Characteristics, the Objects and Variations of the Paradigm. A
                                 Comparative Table.
                     Based of data of Perez (1988) by the author

        This comparative chart aims at showing the interrelation which exists between
the long waves analyzed by Kondratieff, the most important factors which characterize
the corresponding period and the way these factors are later analyzed by C. Perez, as
evidently there is coherence and correspondence for each fundamental factor, the item of
changes is also possible to be included in the analysis of the whole: in fact as we refer to
the first machine age, prior to its appearance, the work organization in the artisans
communities used to be radically different, the occupational profile of men changes from
guild apprentices to factory workers; from owners of the means of production to salaried
employees; from experts and masters of the whole manufacturing process to routine
specialists of one part of the process. Finally, one moves from the master's house to the
house of capital: THE FACTORY. Such an analysis is feasible for all the waves
developed by Kondratieff.
         Four long wave phases are characterized in the studies conducted by Perez
under the light of changes in the technical-economic paradigm:

•     Recovery Phase: socio-institutional conditions favorable to the technical-economic
•     Prosperity Phase: Periods of high growth global indices;
•     Recession Phase: Decline of the old paradigm. A new pattern of inversion in the
      markets is evidenced;

  The change extrapolates the technical sphere, lead to a restructuring of the whole productive system. The
challenge: to attempt to establish an adequate landmark for the economic growth and the maximum social
well-being. The social forces are there, now it shall all depend on your relative power, your lucidity and
innovative capacity.
  This is a component which will be present in many and most likely, in all "objects" of the fifth paradigm. It
is to be found in artificial satellites, in the new video and sound systems, in the TV sets, in last generation
computers; more than one specific element becomes the fundamental part which speeds up current technical
•     Repressive Phase: Exhaustion of the old paradigm and inertia of the socio-cuhural

On chart 2 it is possible to observe how long waves operate with wave declines and
births in the process of interacting.

    Degree of

                                                                   1- Point of entry in the
                                                                   crisis - pre-depression
                                                                   2- New forged phase
                                                                   3- Saturated market

                            CHART 2. Long Waves Structure.
                Developed by Guimaraes A. Based on the analysis by C. Perez

         Having understood the functioning of the cycle theory, Kondratieff s waves and
the analyses made by Perez, it is important to establish connecting axles between these
"phenomena" and the tangibility of the innovations - its influence for each cycle as
initially defined by Kondratieff. In our analysis, each "object" carries the whole
symbology, the whole essence of the change moment, expresses the Zeitgeist (spirit
of the age) as the Software and, the energy plus the basic low cost input of the
technological moment as the Hardware.
         Thus, innovation in the form of product, shall be studied here with three
objectives in mind:

ONE, to show that through the technical-scientific paradigms, the hiatus which separates
      the moment of invention from the moment of innovation was wide and that the
      tendency to a reduction is increasingly greater;

TWO, to list the influence of each tangible manifestation of a technological innovation,
     every specific moment in the oscillations of the wave designed over time by the
     corresponding paradigm; and

THREE, "to fundamentally speculate" on the average acceleration of technological
    innovations from economic cycle to economic cycle or from paradigm to

      The objective of listing a series of manifestation of products, through History is
to enable, on the one hand, to measure the speed of diffusion of innovations and the
gauging of acceleration of the temporal intervals between the moment of the invention
and the consolidation of the innovation, on the other. It is to be observed that the elapsed
time factor is increasingly shorter. This allows us to deduct that there are internal and
external objective conditions which serve as accelerators of the innovation process:

           No.         "objects"        Invention      Innovation    Elapsed Time
            0  Steam engine               I a. c.         1765             *
            1  Photography                 1720           1840            120
            2  Smelting furnace            1713           1796             83
            3  Battery                     1780           1859             79
            4  Light bulb                  1802           1873             71
            5  Telephone                   1820           1880             60
            6  Radar                       1887           1934             47
            7  Telegraph                   1793           1833             40
            8  Magnetic tape               1898           1937             39
            9  Radio                       1887           1922             35
           10 Helicopter                   1904           1936             32
           11 Television                   1907           1936             29
           12 Locomotive                   1803           1830             27
           13 Gas engine                   1860           1886             26
           14 Automobile                   1861           1886             25
           15 Xerography                   1934           1950             16
           16 Transistor                   1940           1950             10
           17 Valve                        1900           1910             10
           18 Nuclear reactor              1940           1950             10
           19 Atomic Bomb                  1940           1946             06
           20 Polymers stereo-espec.       1964           1967             03
           21 Solar Battery                1960           1962             02
           22 Microelectronics             1970           1972           02-1,5

                       TABLE 2. Speed of Diffusion of Innovations.
     Various sources (Pirro e Longo, W., Souza Neto, J.A., and research by the author).

External   factors:
      •     Information networks provide exchange among researchers;
      •     increasingly greater competition among innovative corporations;
      •     globalization of the economy, enabling the rapid dissemination of an
         • the growth of a great number of corporations which believe in a determined
            technological sector;
         • growth of economic investments.

Internal    Factors:
      •      accumulation of knowledge of each area is increasingly greater;
      •      greater quantity of incremental innovations applied to a basic concept;
      •      existence of R&D laboratories, whereat the work of interdisciplinary teams
            displace the figure of the isolated scientist and inventor;

       •   the presence of the "organization" figure which coordinates research activities
           and facilitates the passage towards production and diffusion of innovations;
       •   the technological component "design" giving versatility to defined markets
           through the differentiation of products, whenever various corporations come
           in to dispute the same market.

         It is to be emphasized that the determining factors which follow a product
innovation, are not restricted by it, but also by the forms of production, by the idea of
organization of the corporation or of the research center, by the mode of production in a
determined historical moment, by the type of energy available at the time of the
innovation, by the inputs which enable the "construction" of the innovation, the
productive processes, by the market structure and , mainly, by the social organization
that is to receive the diffusion of the innovation.
          The related "objects" are significant to the extent that they represent the
fundamental moments of world technical and economic progress. Thus, for example, we
have the steam engine where various incremental innovation emerged from, when it had
been requested for a specific use (steam vessel, boiler, locomotive, textile machine and a
number of other machines from the beginning industrial revolution). Another example
was the automobile which has unleashed radical social and urban changes - cities and
roads were built for it. Having the automobile industry as a hub, a great number of
parallel industries were created and various production sectors have been opened. A
further example has been the telegraph which was the starting point for communications
and has allowed man to reduce distances and to gain time.
          Each innovation in the form of a product becomes a projection of men's senses:
one can see farther away - distance-wise - using TV - to watch a war being fought sitted
in an armchair at home, via satellite. One can hear further away over the telephone or a
computer. One can move or travel faster, with little physical effort with the aid of
microelectronics. Everything is reduced and everything becomes even faster.
         Each object included in Chart 3, exerts a striking presence in the disturbance,
giving out a determined rhythm. It is to be stressed that on the appearance of the
innovation of the "object", this contributes for the rising to the next high point in the
oscillation on the wave defined for the Kondratieffs cycles. Thus, the steam engine is
the key to the ascension in the first industrial revolution which was comprehended by
Kondratieffs first and second waves. Namely, the steam energy dominated nearly one
hundred years, sharing Kondratieffs second wave with coal - it is the age of the
           On the second revolution, however, the discovery of electrical power and later
invention of the bulb, makes this type of energy the main input for the third Kondratieff
Oil as an energy resource, enters Kondratieffs fourth wave to divide the energy
responsibility and of inputs for technology in its processes and products. The automobile
is a key "object within this paradigm.
         The accelerated development of current economic and technological sectors does
not yet allow us to see a definitely striking "object", however everything revolves
 around the essence of this third technical revolution: the CHIP, increasingly faster,
smaller, cheaper, versatile. It is being mainly used in the computer and
 telecommunications industry. The object of this wave, must truly be all possible
 applications of the chip.

                 I                         II                            III                          IV                         V
 FIRST INDUSTRIAL REVOLUTION                                             SECOND INDUSTRIAL                         THIRD REV. IND.

        STEAM                           COAL                    ELECTRIC                              OIL                        7

                                                                     Electricity                  Electronics             Computer
                                       Railways               Communications                       Aircraft              Languages
     Textile Industry Metallurgy mineral (telephone, radio)                                    Commercial           Microelectronics
                                 Communications Chemical Industry Communications                                            Japan
                                                                    (fertilizers)                 (television,         Organizational
                                                              Automotive Ind.                      satellite)               Model
                                                                                            Space Exploration

 1785 1              1         1 18401            1          |1887 1           1            11920 1         1      |1995 1



                                                        Telephone                         Nuclear reactor                            7


 Mechanics               Telegraph                                    Engine
  Boom                                          Steam


             1       1          1          1             1           1             1          1             1      1         1
 1785                           1840                         1887                                 1940                 1995 1

          CHART 3. Technical - Economic Paradigms - Kondratieff s Waves - Product
            Based on findings by Pirro e Longo, W. and reinterpreted by the author.

                                                                                                      No.      "objects"
                                                                                                      0     Steam engine
                                                                                   1st. Kondratieff    I    Pholography
                                                                                                      2     Smelling furnace
                                                                                                       3    Battery
                                                                                                      4     Light bulb
                                                                                                      5     Telephone
                                                                                                      6     Radar
                                                                                                      7     Telegraph
                                                                                                      8     Magnetic tape
                                                                                   2nd. Kondratieff   9     Radio
                                                                                                      10 Helicopier
                                                                                                      11 Television
    @    60                                                                                           12 Locomotive
                                                                                                      13 Gas engine
                                                                                                      14 Automobile

         40    - •
                                  '                                                                   15 Xero graph y
                                                                                                      16 Transistor
                                               1   12 1                            3rd Kondratieff    17 Valve
                                                        3 14                                          18 Nuclear Reactor
                                                                                                      19 Atomic Bomb
         20    - •                                             15
                                                                                    4th Kondratieff   20    Polymers slereo-
                                                                                                      21    Solar Battery

                                                                    DDDiiSiis 2"   22                 22 Microelelronics


              CHART 4. Elapsed Time: from Inventions to Innovations According to Kondratieff s Waves.
                                        Based on Information from Table 2

       The above Chart synthesizes the behavior of the innovations in the form of
product through the periods of Kondratieff s waves. It is to be noted that the evolution
invention - innovation is increasingly quick. The interpretation of these data confirm:

•       the acceleration between the basic idea and the diffusion on the market
•       innovations use the growing volume of scientific and technological knowledge.

       It is to be noted that the average speed, measured in time elapsed between the
evolution from invention to innovation is increasing to the extent that time goes by,
having as a reference the maximum time and the minimum time for each group
corresponding to a Kondratieff wave . The evidence is described in the table below:

                          KONDRATIEFF                      .'Vvcragc evolution in years
                               1st.                                    45
                              2nd.                                     35
                              3rd.                                     30
                              4th.                                     15
                              5th.                                      7
                     TABLE 3. Average Evolution Time in Terms of
                               Kondratieff Waves

The approach adopted in this paper, has contributed to clarify many uncertainties, albeit
the concept of technological innovation may be studied, criticized or apprehended from
different points of view. We have taken as our standpoint the concept of innovation in
the form of product, that is, the tridimensional "objects" which assisted in shaping men's
material culture and that also have contributed to shape the peaks and the crises as
analyzed by Nikolai Kondratieff.
        The objective is laid out. One should think and synthesize the way the "objects"
behave regarding the normal lack of equilibrium of the economy and also the way they
become representative supports of a technological moment.
        It has become evident that innovations in the form of product are increasingly
more dynamic. They suddenly create markets. They spread throughout the world at
unusual speed supported by the globalization backdrop.
        At this moment, it is necessary to ask: is it possible that the hiatus in the past
regarding the time elapsed between invention and innovation will no longer exist in the
future?. That inventions will no longer exist? NO! It would be as if the fountain of
dreams would dry up.
        The conviction remains that it is possible to contribute to the solid work
developed by scholars, by believing that different points of view with which to face
knowledge can exist. It is necessary to run the risk and to run the risk of erring, too!
        It is felt that a door is probably being opened.


Abernathy, W. J. and Utterback J. M. (1978) Patterns of Industrial Innovation, in
  Product Design and Technological Innovation, Open University Press, Philadelphia,
  1990, pp. 257-264

Benavides P. H. (org.), (1993-1995), Evolu9ao dos Objetos, Vols. I, II, III, documents

Benavides, P. H. ( 1994), Apontamentos de aula das Disciplinas: "Ciencia, Tecnolosia,
  Dlfusao e Inovacdo: Conceitos Bdsicos". ministrada por Arthur Oscar Guimaraes;
  "Dimensdo Economica das Inovacoes Tecnolosicas". ministrada por: Antonio Carlos
  F. Galvao e Ariel C. Garces Pares. Disciplinas do Modulo I do Curso de
  Especializa^ao para Agentes de Inovagao e Difusao Tecnologica, Manaus, Brasil

Carvalho, F. de. (1988), Keynes, a instabilidade do capitalismo e a teoria dos ciclos
  economicos in Pesquisa e Planejamento Economico 18 (3), Rio de Janeiro, pp. 741-

Hall, P. (1990), The Geography of the Fifth Kondratieff Cycle. (1981) in Product
  Design and Technological Innovation, Open University Press, Philadelphia, pp. 265-
Perez, C. (1985), Microelectronica, ondas largas y cambio estructural mundial, nuevas
  perspectivas para los paises en desarrollo in World Development, 15 (3), pp. 441-465

Perez, C. Revoluciones Tecnologicas y Transformaciones Socio-Institucionales, in
  Cragnolini, A. (ed.) Cuestiones de Politica Cientifica y Tecnoldgica, Consejo
  Superior de Investigaciones cientificas, Madrid, 1989, pp. 480-489

Roy, R. (1990) Introduction: Design Evolution, Technological Innovation and
  Economic Grown in Product Design and Technological Innovation, Open University
  Press, Philadelphia, pp. 252-256
This page intentionally blank

                 Institut Frangais du Petrole
                 Rueil Malmaison - FRANCE

1. Forecasts: a Necessity

Forecasting is an exercise that is essential for human activity. In order to survive, every
individual, every community has to try to foresee how to face future situations.
         Nowadays the importance attached to long term plans has been reduced, but each
country and each company still draws up medium term plans (for 3, 4 or 5 years)
designed to look into the future and to help in taking decisions on how to meet changing
         Forecasting the future is especially necessary in the energy business, which is
capital intensive and involves particularly long investment lead times. It takes over 2
years to build a tanker, over three years to build a refinery, and the development of a
large oil or gas field in the North Sea takes even longer. How can the decision be taken
to launch projects involving several hundred or even several thousand million dollars
and that will not start to make a profit for 5, 10 or 15 years, if the future is obscure and
we cannot forecast markets and prices even in the medium term.
         Planning was particularly fashionable in the 1950s and 60s. The techniques were
particularly useful in, indeed necessary for, the guidance of economic policies or
projects in a context of fast, steady growth. Planning the construction of new refining
facilities to meet increasing needs was commonplace in the 1960s. The slowdown in
growth, the upheavals in economic activity that occurred in the 1970s, and the often
wide gaps that appeared between forecasts and what actually materialised, made the
projections less credible. In the 1980s, economists often preferred to leave the market to
make the adjustments between supply and demand. Is this a reason to give up

2. Failure of Forecasts - Demand Forecasts - Price Forecasts

In the early 1960s, the Robinson report, the first study conducted in 1960 by the
European Organisation for Economic Co-operation (OECE, the forerunner of the
O. D. D. Soares et al. (eds.), Innovation and Technology - Strategies and Policies, 77-91.
© 1997 Kluwer Academic Publishers. Printed in the Netherlands.
OECD) to foresee the demand for energy, estimated European needs in 1975 as follows.

                          1960 FORECAST              ACTUAL 1975 CONSUMPTION

TOTAL                            850-950                            11-18

Oil                              300-385                             665
Coal                             310-370                             247
Other                            240-235                             276

                Figure 1: Europe - Energy Demand in 1975 (million t.o.e.)

        As can be seen, these forecasts considerably underestimated oil consumption and
overestimated coal consumption. Already the first problem was apparent, i.e. the
difficulty in forecasting major structural changes.
        Let us move on a decade and look at a second example. II 1972, the European
Commission issued a report entitled "problems, means and progress required in
community policy for the period 1975-1985" in which it estimated energy needs in 1985
as follows.

                          1970         1985 FORECAST                ACTUAL 1985

Solid fuels               1520               2240                           2080
Liquid fuels              2250               4935                           2800
Natural gas                890               2415                           1500
Primary electricity        130                1575                          530
TOTAL                     4790               11165                          6910

              Figure 2: Outlook for World Energy Demand in 1985 (million t.o.e.)

        The estimate made in 1972 proved to be nearly double the actual figures.

         Let us now look at price forecasts, the second important aspect of projections.
The 1950s and 60s were marked by a fall in prices, the consequence of the huge oil
discoveries made in the 1940s and 50s. This fall in prices was itself a factor that
contributed to the extraordinary growth in oil consumption after the war. In the early
1970s, the trend was reversed. The fear of an energy shortage, linked in particular to the
fall in the reserves/production ratio, put the producing countries in a strong position and
led to a steady increase in price of $2/bbl in 1970 to around §3/bbl in 1973. In 1973 all
the experts agreed in their forecast that the price would continue to increase. But none of
them foresaw the increases that were to take place at the end of 1973 (from $3 to over
$10/bbl), nor those of the period 1979-1981 (up to more than $30/bbl).
         On the other hand, at the beginning of the 80s when the price of the barrel was
around $30, experts thought that prices would inevitably continue to rise and anticipated
prices in the region of $50 or more during the 1990s- In fact, in 1995 the price is less
than $20/bbl, and "conventional wisdom" now considers an increase to more than $20 to
be unlikely before the end of the century.
        Let us end with a last example, to illustrate the difficulty of forecasting: in 1982,
in its forecasts for 1985 - then in the relatively near future and by when there would be
few significant changes, the US Department of Energy considerably overestimated the
demand for oil in the non-communist countries, although their forecast price ($32/bbl)
was higher than the actual 1985 price. Furthermore, the DOE greatly underestimated
production outside OPEC and consequently overestimated OPEC production in 1985 by

3. The Principal Parameters of Forecasts

Forecasts for energy demand depend mainly on income, expressed in terms of GNP, and
on the price of energy.
        GNP and population: energy consumption obviously depends on population, but
also on the income of each inhabitant. The key parameter is therefore per capita GNP
and it can be seen that energy consumption per inhabitant increases with per capita
GNP. For instance, per capita energy consumption is 8 t.o.e. (tons of oil equivalent) in
the United States where energy is abundant and cheap, whereas it does not exceed 50
kep (kilos of oil equivalent) in the poorest countries in Africa. If we leave extremes
aside, we can see that the average consumption of energy is around 0.5 t.o.e. in the
industrialised countries and 0.5 t.o.e. in the developing countries. World-wide, average
energy consumption is around 1.6 t.o.e. per capita, and this figure has remained constant
over the last 20 years because the increase in income, which results in increased energy
demand, is offset by the fact that the bulk of population growth occurs in the poorer
        Elasticity: elasticity, or the ratio between the increase in the consumption of
energy and the increase in GNP, has been in the region of 1 for a long time in most
countries However two recent phenomena have helped to reduce energy/GNP elasticity
in the industrialised countries:
        - The rise in the price of energy led to unprecedented efforts to save energy in the
1970s and early 1980s. Consequently, in the OECD countries, the GNP rose by 60%
between 1973 and 1990, but energy consumption rose by only 14%. At the same time,
oil consumption decreased by 10%.
        - The increasing share of services in GNP at the expense of industry, and the fact
that services consume much less energy than industry. Overall energy / GNP elasticity
has decreased sharply in the industrialised countries, well below 1, whereas it remains
close to 1 in the developing countries. We shall see later, however, the problems
involved in a more accurate calculation of elasticity.

       Price forecasts are based on projected production costs but, more importantly, on
an analysis of the supply/demand balance and on the development of this balance in the
medium and long term which is the key parameter. We have seen that the fear of an oil
shortage, apparently shared by the companies themselves, was the main cause of the
increases in 1973 and in 1979-81. The potential over-production that appeared at the
beginning of the 1980s and that has prevailed ever since, has, on the contrary, led to a
fall in prices. The rapid development of spot markets in the 1980s, then more recently of
futures markets, has strongly accentuated the tendency of prices to react sharply to
fluctuations in the supply and demand balance, and even to anticipated changes in the

4. Discrepancies Between Forecasts and Reality

The discrepancies mentioned earlier, for example between energy consumption forecasts
made in the 1960s and at the beginning of the 70s and actual consumption, can be better
explained in the light of the previous analyses. The forecasts of the 60s were based
largely on two series of assumptions which, in the event, proved to be wrong:

        - Continued economic growth in the OECD countries at a pace similar to that
between 1960-1970, i.e. of the order of 5'% per year, and an energy/GNP elasticity ratio
of around 1. In fact, economic growl was negative in 1974 and only slightly higher than
2% on average from 1974 until the mid-1980s. It is particularly interesting to note that
forecasters in the 1960s refused to consider very low rates of growth, since an increase
in unemployment - the inevitable result of a slowdown in growth - was considered
socially unacceptable.
        - A gradual increase in oil prices, which had no comparison with the huge, drastic
increases that occurred in 1973 and 1979-1981. This increase was also supposed to be
limited by the cost of producing tar sands, estimated at the time at $5/bbl. This figure
has proved an underestimate (in 1995 it stands at a minimum $20 - 25/bbl) and the sharp
increase in crude prices led to the implementation of energy conservation and alternative
energy polices whose effectiveness was evidenced during the second oil shock.

       Although the errors in the forecasts made in the 1960s and 1970s, a period
marked by sustained economic growth in a context of abundant resources, are
understandable, it is striking to note that the forecasts made after the first oil shock
continue to assume rates of 2rowth that, while admittedly lower than those of the Post-
war period, were still than the rates actually observed. It is no doubt difficult to imagine
a low rate of growth when one is familiar with the devastating effect of such a situation
on our economies. Nevertheless, the overestimation of economic growth in the OECD
countries and in Europe in particular, has systematically led to forecasts for energy
consumption that are higher than actual consumption.

5. Some Comments on Forecast Models

The models used for forecasts of both demand and prices are mostly of the econometric
type. We could perhaps apply to this form of model Churchill's description of
democracy as "the worst of all forms, except all those other forms that have been tried
from time to time". A number of the problems stem from the design or the use of the
models. For instance, the equations that link together the variables (e.g. energy demand
as a function of income and the price of energy) require the determination of elasticity
coefficients. A substantial amount of work has been devoted to determining these
coefficients, but considerable uncertainty prevails. In spite of the efforts devoted to
evaluating the elasticity ratio of energy demand to income and to prices in the United
States, the discrepancies in the figures reported are such that, even assuming that the
evolution in GNP and in prices is correctly forecast, different consumption forecasts can
vary considerably.
       Further, the need to introduce external variables is also a source of error, as we
have noted in the numerous forecasts that overestimated growth in GDP.

6. The Impact of Forecasts on the Future

Forecasts influence the behaviour of the players, and thus have a decisive impact on the
development of consumption and of prices.
        Let us imagine for a moment that, at the beginning of the 1980s, instead of
projecting a high oil price (in excess of $50/bbl at the end of the century), experts
agreed on a lower price (in the region of the current one). Petroleum exploration would
certainly have been much less extensive, and capital investment would have been much
lower because of the lower prospective returns. It is also probable that less emphasis
would have been placed on energy saving. Overall, the supply demand balance would no
doubt have been much tighter than it is at present.
        In other words, the expected shortage and subsequent high prices, have led to
substantial effort going into the reduction of costs, to energy saving, and to the search
for new reserves from which consuming countries are now benefiting.
        Let us take another example. In 1980-81, faced with the sharp increase in the
price of fuel oil, some industries converted to the use of coal, thereby reducing the
demand for liquid fuels and helping to lower the price.
        These two examples illustrate what are known as self defeating forecasts. On the
other hand, some forecasts accentuate the effects they project. Companies that make
optimistic forecasts of economic growth will, accordingly, incur the expense of
recruiting more staff which, in turn, increase economic activity. Likewise, the
expectation of a rise in stock market prices will incite investors to buy shares, thus
bringing about the expected rise.

7. The Scenario Method

The relative failure of traditional forecasts in the field of energy has led a number of
large oil companies and international organisations to resort to new methods for
projecting the future. The best known of these methods is that of scenarios, which are
not forecasts but descriptions of different possible future situations. They serve as a
starting point for stimulating ideas on the assumptions to be contemplated and on the
consequences of the decisions taken.
        One of the best known examples is that of the Shell group which, in the 1980s,
developed two possible scenarios to improve the perception of the real world and its

future, and also to prepare Shell's managers to handle unforeseen events. These two
scenarios, called Global Mercantilism and Sustainable World, principally concern three
areas: geopolitics, international economics and the environment. The Global
Mercantilism scenario is characterised chiefly by the weakness and the instability of the
world's economic and political systems. Priority is given to regional agreements and to
bilateral trade agreements on products between blocs. Competition within and between
blocs is strong. The environment is not included in political priorities.
        The Sustainable World scenario assumes better international co-operation and
consideration of the environment on a global scale, including assistance in this respect
from rich countries to poor ones.
        In the field of energy, the second scenario, which assumes better international
cooperation that takes into consideration the important need to stabilise C02 emissions,
gives a lower consumption of energy than the first one. The growth of demand for
energy is around 1.6% in the Global Mercantilism scenario but only 1%, in the
Sustainable World scenario.
        Similar methods were used by the European Community in the beginning of the
1990s to forecast demand for energy in Europe by 2000 and 2010. Several key
parameters were identified: economic growth, price levels, consumer behaviour, the
degree of integration of community policies, and the importance of environmental
legislation. The different scenarios gave rise to oil demand forecasts in which figures
doubled from one scenario to another. Sustained economic growth subject simply to
market forces, logically leads to the highest consumption. High prices together with a
stringent energy conservation policy would reduce this consumption by 45%.

8. Should Forecasts be avoided?

The need for forecasts has been stressed from the start. The semi-failure of the methods
used in the 1970s and 1980s is not a reason to give up all attempts to foresee the future,
but indicates that we should apply a more cautious approach, measuring the uncertainty
that surrounds the key parameters.


Before moving on to the third part of this presentation, which I shall use to outline a
realistic scenario for the future, I would like to consider some ideas on how crude oil
prices are set.

9. Crude Oil Prices - a Review

Over a long period of time the price of crude oil fluctuates considerably. But, over the
time since Colonel Drake drilled his first oil well in 1859, it is possible to distinguish
several distinct periods:

        Over the first of these periods, from 1859 to 1870, the price varied substantially,
from $1 to nearly $100 per barrel, depending on the haphazard levels of new discoveries
and on a market which grew slowly in conditions of fierce competition between the
different producers.

        From 1870 to 1911 prices stabilised. This was the period when Rockefeller
gained control of the American industry. By around 1900 he controlled the key elements
of the transport and refining sectors and was able to impose his own "posted price" on
the producers from whom he bought his crude oil supplies. However, after the enactment
of the Sherman (anti-trust) Act in 1890, proceedings were started against Standard Oil
which led, in 1911, to the dismantling of the Rockefeller empire and the break-up of
Standard Oil into 33 different companies.

       The time from 1911 to 1928 was one of rapid growth in oil consumption. It was
the boom period of the automobile industry and demand for motor spirit grew quickly.
The major oil companies, later to be known as the seven sisters, fought relentlessly
among themselves to gain control of the new outlets. Prices fell, until the Achnacarry
Agreement was concluded between the Chairmen of Shell, of Standard Oil of New
Jersey and of Anglo-Persian Oil. The other four majors, Socony Mobil, Standard Oil of
California, Texaco and Gulf also subsequently subscribed to this agreement.

       The period from 1930 to the middle of the sixties, was marked by the domination
of the oil companies who controlled both the markets and oil prices. The understanding
between then meant that the market shocks that could, for example, have resulted from
the major oil discoveries in the Middle East in the 1930s, were avoided. After the
second world war, the majors pursued a policy of weak, indeed declining, prices which
helped petroleum penetrate world markets. Oil consumption grew rapidly.

        In 1960 the producing countries formed the Organisation of Petroleum Exporting
Countries, to try to halt the fall in prices which was reducing their income. From the end
of the 1960s, the reduced level of oil discoveries and the increased level of demand, led
to fears of shortages. The development of environmental concerns resulted in some
williiigness to limit economic growth and to end the waste of primary resources. But the
overall balance of forces tipped in favour of the producing countries and OPEC was able
to impose substantial price increases in the 1970s. However future prices could still be
forecast, because the increases were programmed in advance. This at least permitted the
elements of forward operations to be correctly calculated.

        The final period began around 1980 and continues today. OPEC is unable to halt
the fall in prices that has followed the reduced demand for crude oil and the increase in
non-OPEC production. Prices fluctuate considerably on the free markets which became
preponderant from 1985. The very numerous operators on these markets include crude
oil producers and refiners, but also traders who are, in the main, purely financial players.
The oil market is now very similar to other commodity markets such as those for
agricultural products, metals, etc.
10. Crude Oil : Strategic Product or Commodity ?

This rapid overview has shown that there have been both:

periods of stable prices when a limited number of players (oil companies or OPEC)
controlled the market and oil prices; and

periods when the large number of players, at all levels, made prices highly sensitive to
changes in the supply / demand balance.

       The debate between supporters and opponents of the theory that energy, and
particularly oil, are not like other commodities, is an old one. The strategic nature of
energy and oil is undeniable; the determination of the German army to seize Russian and
Middle East oil reserves during the second world war is sufficient evidence of that. But
recent developments in the free markets, in futures markets and in derivatives markets
seem, at least for the present, to slow that those who think that oil has now become a
basic commodity, just one raw material among others, seem to be right.

11. Factors Affecting Future Crude Oil Price

Most experts agree in predicting relatively low crude oil prices, less than $20/barrel, up
to the end of the century. In the short term the combination of low economic growth in
the OECD countries, economic restructuring in eastern Europe which has initially led to
a reduction in consumption and the surplus of crude oil production capacity, have
resulted in downward pressure on prices.
        What are the factors that will affect oil prices over the next 20 or 30 years?
        The first is the inevitable increase in OPEC countries', and particularly in Middle
East countries', share of world production and crude oil exports. The reserves of Iran
and the four major Arab producing countries are sufficient for them to continue to
produce at current rates for more than 80 years. Elsewhere there are only three countries,
Venezuela, Mexico and Libya, with a reserves to production ratio of over 40 years and
who could still be significant exporters after 2020 - 2030. This will strengthen the ability
of the current OPEC members to set prices.
        The second factor is the expected increase in the difficulty of finding and
producing oil. Merely maintaining current production levels would require the
commissioning of smaller and more expensive fields, and the need to increase
production will add to this. As an example. North Sea production will be more and more
dependent on the operation of so-called marginal fields whose exploitation is only made
viable by the use of installations already developed for other fields nearby
        The result of these first two factors is that prices will tend to increase. The third
factor, the reduction in the costs of exploration and production, will act in the other
direction. How will this reduction in costs be obtained?
        By a significant reduction in the number of wells that have to be drilled to
discover a commercial field.
        By increases in the productivity per well, obtained, for example, by the use of
horizontal drilling.
        By reductions on the costs of production installations, the development of
submarine oil production etc.
        The example that I have chosen, shows that one has obtained cost reductions of
more than 20%. Such reductions will be pursued in the future.
        In the absence of technical progress, in the year 2000 only some 60% of oil
reserves would be commercially exploitable at a price of below $12/barrel. The
technical progress envisaged should increase that proportion to 90'%.
        An abundance of low costs resources in the Middle East, coupled with the
possibility of limiting the costs of marginal supplies because of advances in technology,
should, in an open crude oil market, result in price increases over the next few years
being limited to a reasonable level.
        In the third part of this paper, the authors propose to try to outline possible trends
for the years to come, based on an analysis of the oil price and demand situation.


12. Energy Requirements

World production and consumption of energy showed strong and uninterrupted growth
from the end of the 1940s until the end of the 1970s. The annual growth rate, more than
60s during the 50s and 60s, was a little lower during the 70s because of the first oil
shock. Even so it averaged nearly 5% p.a. between 1950 and 1980 and consumption
almost quadrupled over this period.
        The second oil shock of 1979 gave rise to substantial price increases which, in
turn, meant that energy demand ceased to grow, indeed it even declined slightly, during
the first half of the 1980s- However the fall in prices, which started in 1983 and became
substantial in 1986, clanged the position and demand grew once more, reaching 8
thousand million tonnes oil equivalent (8 G t.o.e.), excluding non-commercial sources
such as wood and animal wastes, in 1990. It has remained at around that level over the
last four years.
         But this apparent stability in demand has actually resulted from a combination of
three quite different factors:

- The economic recession in the industrialised countries of North America and Western
Europe where energy consumption has remained stable.
- A strong fall in energy consumption in the countries of Eastern Europe.
- A substantial increase in energy demand in certain countries in South East Asia which
have shown quite dramatic rates of economic growth.

        The current breakdown of primary energy consumption is 39% oil, 21% natural
gas and 27% coal. Other sources (nuclear energy 5.6%, hydroelectricity 6.9% and
renewable energy) only account for 13% of world energy needs. It will be seen that oil's
share of total primary energy demand, which was 45% in 1980, has therefore fallen
significantly. Gas, on the other hand, has increased its share and the share of
hydrocarbons overall is now about 60%, a little lower than in 1980. Coal has maintained
a constant share over the 15 years, while nuclear energy has grown strongly, increasing
its share from 2 to 6%. The share of renewable energies, mainly hydroelectricity, has
remained constant.

13. Future Energy Demand

Future levels of energy consumption depend on two factors: per capita consumption,
which will depend on the level of economic development, and the world population
        Per capita has remained constant over the last 20 years at 1,6 t.o.e. and this figure
should not be very different in the future. The world's population is increasing rapidly.
It reached 5 milliard in 1990 and should exceed 7.5 miUiard by 2020. It is generally
expected that it will continue to increase until the second half of the 21st century,
eventually stabilising at around 10 to 12 milliard.
        Growth in energy demand in the industrialised OECD countries has been slight in
recent years. In the future, energy saving through more fuel efficient engines and boilers,
building insulation etc., together with the increasing importance of service industries in
the economy, will strictly limit growth in energy consumption in this region.
       The position is quite different in developing countries where increasing demand
arising from population growth is strengthened further by increases in average wealth.
This growth is particularly strong in Asia.
        Overall world energy consumption, excluding non-commercial sources, should
reach 10 milliard tonnes oil equivalent (10 G t.o.e.) in 2000 and be of the order of 1213
G t.o.e. in 2020
        In the year 2000, the break down of this demand by different energy sources
could be as follows:
        - Coal: because of the abundant reserves, forecasters in the 1970s and 80s
expected a substantial increase in coal consumption, particularly when it was thought
that the price of crude oil would remain at a high level ($30/bbl or more). The fall in
crude oil prices and, more importantly, increasing environmental concerns, have led
forecasters now to predict low growth in coal consumption. In the year 2000 it is
expected to be between 2.5 and 3 G t.o.e., i.e. between 25 and 30% of expected total
primary energy consumption, compared with the 1990 level of 28%.
        - Nuclear power: the repercussions of the Chernobyl disaster have led to nuclear
power developments being frozen in a number of countries. The use of hydraulic power
and other renewable energies will grow significantly but, overall, the share of nuclear,
hydraulic and renewable energy resources will only grow from 13% in 1990, to 14 or
 15% in 2000.

       That leaves 55% of energy demand in 2000 and certainly still more than 50% in
2020 to be met by hydrocarbon resources. The share of oil is expected to fall slightly,
from 38% in 1990 to 34 - 36% in 2000, and the share of natural gas will increase.
However these percentage figures must not be allowed to conceal the growth in the
volumes required, to at least 3.5 milliard t.p.a. of crude oil and 2 milliard t.o.e. p.a. of
natural gas (compared with today's consumption of 3.2 and 1.8 respectively). By 2020,
probably more than 4 G t. oil and 3 G t.o.e. gas will be needed annually.

14. Overall Energy Reserves

The volume of energy reserves is substantial. Proven conventional oil reserves
(excluding heavy oils, bituminous shales and tar sands) stand at 135 milliard tonnes,
more than 40 years consumption at current rates. Natural gas reserves, in oil equivalent
terms, are of the same order of magnitude but, because consumption is lower, they
represent more than 60 years current consumption.
         Coal reserves amount to several hundred years consumption. There are about 350
G t.o.e. anthracite and bituminous coal reserves and 200 G t.o.e. of the lower calorific
value sub-bituminous coal and lignite. In total, these figures for proven reserves amount
to more than 200 years of current consumption but probable reserves are substantially
         Uranium reserves are sufficient for more than 40 years production of nuclear
electricity at current rates. The development of fast breeder reactors, currently still in the
experimental phase, could increase this potential considerably, but their development is
still very uncertain.
         At least in theory, there are also considerable opportunities for hydroelectric
power development with sites, such as the estuary of the river Zaire, having substantial
potential that has been only partially developed or is still unexploded. In practice,
however, because of the high costs of electricity transmission, such developments are
dependent on their proximity to an adequate market. The potential for the production of
electricity from small scale dams or turbines is also considerable but production costs
are high. There is also the problem that the further development of larger scale dams
would pose environmental problems and these would be particularly acute in
industrialised countries.
         The other renewable energy resources are also abundant but the costs involved
are usually high and above the levels of current energy prices.

15. Crude Oil Reserves

The current and future importance of liquid hydrocarbons in relation to the world energy
scene is such that it is worth considering in more detail the present extent of our
knowledge of crude oil reserves.
       Proved reserves amount to some 135 milliard tonnes, or about 1,000 milliard
barrels. The term proved reserves means the quantity of crude oil that could be
economically produced with current technology at a crude oil price of the order of
$18/barrel. Current estimates are based on the assumption that 30% of oil in place is
       At this stage one should note that the level of proved reserves, expressed in terms
of years of current production, fell sharply between 1950 (R/P ratio about 140) and 1980
(R/P ratio about 28), before increasing again to an R/P ratio of about 45 in 1990. But,
looking behind these figures, one sees that the main part of the increase in proved
reserves during the 1980s came from extensions to and revised estimates for oil fields
discovered before 1980. The production quotas adopted by the major producing
countries have provided an incentive for such revisions because they have been related
to each country's share of the reserves. Actual crude oil discoveries made during the 80s
only amount to 12 G t.o.e., while cumulative production over the same period was 30 G
        A further point needs to be made concerning the distribution of oil reserves.
While there are some 30,000 oil fields in current commercial production, some 40
"super giants" (i.e. fields with reserves of more than 700 million tonnes) alone account
for over half of the world's reserves, while the 340 "giant" fields (i.e. fields with
reserves of more than 70 million tonnes), including the super-giants, contain 78% of
world reserves. The point to be noted is that both the number of giant fields discovered
and their average size have declined markedly in recent years.
        While it is clear that many oil discoveries still remain to be made, particularly off
shore where current production technology is limited to depths of less than 1,000 metres,
most writers estimate ultimate recoverable reserves as around 305 to 320 milliard
tonnes. That means that, after the 100 milliard tonnes already produced and the 135
milliard tonnes reserves already proved, there are still some 70 to 85 milliard tonnes of
oil to discover, on the assumption that 30% of oil in place is recoverable.
        There are two factors that could considerably increase that estimate:
        - A significant increase in the average recovery level. It is very probable that
improved technology will raise that to 40'% during the next century, which will increase
the volume of reserves already discovered by 100 milliard tonnes.
        - The development of heavy Venezuelan oils and Canadian tar sands which also
represent recoverable reserves of the order of 80 milliard tonnes, although it should be
noted that the reserves economically recoverable are currently much lower.

16. Production, Reserves and Prices

The price of energy is a key factor in quantifying reserves. Although total energy
reserves are vast, only a part of them, the proved reserves, could be exploited
economically at 1994 energy prices.
        There is no such thing as a single price for energy.
        In general, however, because crude oil remains the marginal energy resource, the
price of other forms of energy remains a function of the price of crude oil.
        A further factor making fluctuations in crude oil prices even greater is the
differences between the characteristics of the various producing regions. The Middle
East holds about two thirds of world crude oil reserves and production costs there are
particularly low, only a few dollars per barrel. But, for a number of reasons, this region
only supplies 30% of current world oil demand. The consuming countries need diverse
supplies and, since the 1970s, the international oil companies have successfully explored
for oil in difficult but politically safe areas such as the North Sea and Alaska. The
Middle East countries would be able to increase production, and lower prices, to gain
market share at the expense of the higher cost zones, but they would risk seeing a further
decrease in their overall incomes.
        The net result is that crude oil prices are close to the marginal production costs of
the most costly regions. In the North Sea this is of the order of $10 - 12/barrel and the
current price (some $15/bbl at the beginning of 1994) is still sufficient for the
development of some fields to take place, as is shown by this area's recent increase in
production. It is also probable that a fall in prices to, for example, $8 - 10/bbl, would
only result in a marginal change in the production level because production costs include
a high proportion of "sunk" financial costs- But such a fall in prices would prevent new
fields from being developed.

17. What Capital Investment?

The energy sector is highly capital intensive, accounting for some 15'% of world
investments for a 5% share of global GDP. The individual costs of some items are very
high, for a production platform or a refinery they can be more than a milliard dollars.
        The major requirement for capital expenditure is on exploration and production,
which has always accounted for well over half of total investment in the oil and
petrochemicals sector. But unlike capital expenditure levels in the downstream sector
which are relatively stable, the level of exploration and production investment is
strongly dependent on crude prices. From $98 milliard in 1982, upstream investment fell
to less than $60 milliard in 1987, the year of the oil counter-shock. Today it stands at
$75 milliard p.a.
        This link between capital expenditure and oil prices is particularly apparent in the
case of the 30 largest oil companies, whose investment in exploration and production
fell from more than $50 milliard in 1980 to less than $30 in 1989. The level of return on
upstream capital investment by the same companies has similarly declined. As measured
by the ratio of net annual profit to capital invested, the profitability of their operations
fell from 15% in 1984 to 7% in 1989. A notable consequence has been the low level of
replacement of reserves by the major oil companies, which averaged only 50% for the
period 1981 to 1990.
        The fall in exploration and production expenditure up to 1987 is particularly
apparent in the USA The 1981 level of $55 milliard was 60 % of the world total (about
$95 milliard). Over the last two years the US level has been below $20 milliard p.a.
while the world total has been of the order of $75 milliard.
        While the USA, with less than 15% of world oil production, still takes 30% of
the oil industry's world level of investments, expenditure in Africa and the Middle East
(with more than 70% of world reserves and over 30% current production) only
accounted for 7% of world investments over the period 1971 - 1987, i.e. some $5
milliard p.a.
        It would be reasonable to expect a level of oil demand of some 70 million
bbl/day by 2000, growing to more than 80 million bbl/day by 2010 - 20. But non-OPEC
production (excluding the former Soviet Union) should, at best, remain at its present
level. This will mean that an increase in OPEC, i.e. effectively Middle East, production
capacity of around 15 million bbl/day will be needed over the next 15 years.
        To provide for this growth in oil production, increased capital expenditure will
be necessary. For Middle East and African OPEC countries it is estimated that $150
milliard will be required for an increase in capacity of 15 million bbl/day, including
expenditure on the replacement of capacity that will be exhausted over the next few
years. It will be seen that, in comparison with the investment level of $5 milliard p.a.
since the beginning of the 1980s, this represents a substantial increase. That is not
surprising since, in the period since the second oil shock, OPEC's production capacity
has actually declined.
         Outside OPEC and eastern Europe/FSU, the increase in expenditure required will
be relatively modest over the next few years. The decline of mature zones such as the
North Sea will doubtless mean a shift of exploration effort to even more difficult areas,
but this will not happen for a number of years.
         In the downstream sector (shipping, refining, marketing and petrochemicals) a
considerable increase in capital expenditure will be required in the next few years. This
will be to meet increasing environmental constraints, rather than for new capacity in
shipping, refineries or distribution. The heaviest expenditure will be in the areas of
refining and marketing. In the industrialised countries, and probably also in some newly
industrialised countries, the manufacture of "greener" products (unleaded motor spirit,
low sulphur fuels) together with the requirement to clean up liquid and gaseous
emissions could lead to refining expenditure virtually doubling. In marketing, vapour
recovery requirements at depots, on delivery vehicles and at service stations, will mean
massive investments.
        Because of this inevitable requirement for higher capital expenditure, the current
low oil price poses two problems:
        - The oil companies' ability to generate cash flow to finance capital expenditure
internally is falling. That is all the more worrying for the upstream sector where the
inherent risk requires a high level of self-financing. And the producing countries' ability
to finance capital expenditure internally is falling at the same time, most of these
countries now have budget deficits. Even the Gulf countries, faced with the
consequences of the 1991 war and the need to finance the development programmes
launched during the 80s, are being forced to reduce their investments in the oil sector
because of limited financial resources.
         - The prospective profitability of new development projects is poor. In fact the
production level from fields already operating is only slightly affected by falling prices,
firstly because the major proportion of production costs are fixed and, secondly, because
part of the reduction in price is off-set by a reduction in the tax paid to the producing
country. But there are a number of projects that could be profitably developed with an
oil price of the order of $18 - 20/bbl, but which will not be profitable at a price of
$15/bbl because of the high level of investment required.

18. Conclusions

World primary energy demand will continue to grow at between 2 and 2.5% p.a. over
the next few years but at lower rates after the beginning of the next decade.
       Within total primary energy demand, the share of oil will decline and that of
natural gas will increase. In volume terms, however, the consumption of both will
increase significantly.
       Energy reserves are adequate to meet demand over the short/medium term.
However the price of energy will be a key factor in the actual exploitation of these
       The present trend of low crude oil prices constitutes a threat to the realisation of
the investments necessary to provide for increased production. The cost of such
investments will increase, because new oil fields to be developed are becoming
gradually smaller and more difficult to access. At the same time the oil industry is faced
with new and significant requirements for capital expenditure downstream for the
protection of the environment and improvements in product quality.
        Barring unforeseen political events, the price of crude oil will remain at less than
$20/barrel over the next few years, because of over-capacity. It needs to increase
thereafter in time to finance the investments required for new capacity- Should it do so,
then the future could be one where growing demand for oil is constrained by higher
prices which, in turn, ensure the availability of adequate supply. However, should prices
fail to rise either sufficiently or in time, then not only will growth in demand lack that
constraint but the necessary investments in production capacity will not be made. In
such a case, a mismatch between supply and demand will make a further period of price
instability inevitable.
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                WILLEM VAN GOOL
                Emeritus professor Utrecht University, Netherlands
                Jachtlaan 53, 3972 TXDriebergen, Netherlands


A brief survey of tools developed over the past few decades for the analysis of
energy systems is presented. It is essential that exergy analysis be used to
determine the value of energy lost in processes. Scenarios based upon economic
parameters are not useful for the analysis of long-term developments.
Backcasting using physical parameters is more acceptable for a long-term policy
development. A few aspects of the greenhouse effect are summarised. It is
shovm that prejudices and misconceptions about the greenhouse effect and about
energy efficiencies can lead to useless activities. Some of these activities exclude
poUcy actions which are necessary to achieve a considerable reduction of carbon
dioxide emissions in the future.

1. Introduction

The ECEME Conference in Portugal in 1994 took place twenty years after what
is called the first oil crisis. That crisis was considered by many people as the first
sign that the world was running out of fossil fuels. If this would have been true,
we should not be faced with our present problem: the threat of an increasing
greenhouse effect. This conference is the right occasion to ask what we have
learned in the last two decades about energy policy. The second question is: did
we learn enough to develop the proper energy policy with respect to the
greenhouse issue?
    We have learned a lot about energy systems, their interactions with
environment and economics. The answer to the first question is yes, we have
scientific tools to analyse the options for future developments of the energy
system. But, do we have an improved energy policy compared to that in 1974?
The answer is: no. One reason for the mismatch between science and policy is
obvious: it takes about one to two decades before scientific progress is embedded
in national policy.
    In this paper we will highlight some scientific developments in the past few
decades. This review is limited to progress made in the analysis and the
0. D. D. Soares et al. (eds.). Innovation and Technology - Strategies and Policies, 93-105.
© 1997 Kluwer Academic Publishers. Printed in the Netherlands.
understanding of energy systems in view of future developments rather than the
technical progress over this period. We will also show how certain common -but
fallacious- opinions and statements obstruct a satisfactory development of long-
term policy: the fairy tales.

2. Energy science: how it started

Prior to 1973 the foundations were laid for what is called energy analysis or
energy accounting [1]. The problem was that no theory and data were available
to answer questions about the energy necessary to produce commodities and
materials. The analysis approached the question looking from the outside to
processes: which fuels are being used for the process and how much product is
obtained. Although rather simple, the method included some refinements with
respect to the usual description of energy use. Credit is given to materials
produced in case they are fuels or could be considered as such. Second order
effects, such as the energy required to build the process equipment, are taken into
account [2], Energy analysis was the first step in a long process leading to the
more refined method of exergy analysis which we use today. It was also the first
encounter between economists and scientists in physics and chemistry.
Somehow, it was the beginning of the development of the multidisciplinary field
of energy science.

3. Energy and exergy

After the 1973 oil crisis many scientists wondered whether their science could
contribute useful ideas to lessen the strain on the energy market. A great deal of
attention was paid to the use of natural resources, such as solar- and wind
energy. Other studies were directed to the question of how energy is used to
fulfil the demand.
    Old concepts, such as availability, were studied again. Availability was
defined by Gibbs in 1873 [3]. During many decades the concept was
rediscovered, disappeared in literature, but regained foil attention in the 50s and
60s. German and East European scientists studied the use of the availability
concept in mechanical engineering problems. Rant proposed to use the name
exergy instead of availability and that description is commonly used in present
scientific literature [4].
    Exergy analysis of processes and process chains is the only way to establish
where the value of energy is lost in processes and in society.
    Energy donated by a process, such as in burning coal, has to go somewhere. It
is taken up by an energy acceptor system. This could be a room that needs to be
heated, a car that needs running fuel, and thousands of other energy needs. The
importance of exergy analysis is that it takes into account the exergy of the
fonction that is to be folfiUed [5].
   Exergy is the maximum amount of high quality energy or work to be obtained
from a donating process. We define the quality of energy as the ratio of the
exergy to the energy value:

                        Quality = q~ exergy / energy                           (1)

    The scope of exergy analysis is much wider than of energy analysis. All
materials in processes can be characterised by an energy value and an exergy
value and thus by their quality.
    The basic laws of thermod3aiamics are very simple using the formulation
mentioned before. Exergy analysis has been described in many publications [6-
8]. We report here only a few basic equations.
    According to the First Law energy is never lost in a steady state process:

                                I^Hi^in = ZHj,out                              (2)

where Hj^in is the energy (enthalpy) of flows entering the process and Hj^out the
energy of flows leaving the process Obviously, one cannot learn very much from
the first law efficiency Ei if all inputs and outputs are taken into account

                         ei=lHj,out/i:Hi,in=l                                  (3)

   The Second Law can be formulated in terms of exergy: in every irreversible
process exergy is lost. Using B for exergy in a notation analogously to the first
law formulation

                         lBi,in>lBj,out                                        (4)

                        ABiost = Bin-Bout > 0                                  (5)

   The exergy efficiency £2 is always smaller than one:

                       62 = Bout/Bin <1                                        (6)

   The maximum improvement of the second law efficiency is of course ABjost-
However, ABiost can be large for two different reasons. First, the process could
be a large-scale operation, for example a refinery. Then, exergy losses can be
huge even if the exergy efficiency is high. In the second case the process is not
of a very large scale, but its efficiency is low. Analysing completely different
processes or different production sectors in society for energy improvement, it is
usefiil to use the improvement potential IP [9-10].
                            IP - ( 1 - 62)* (Bin-Bout)                         (7)

   Basically, this structure for exergy analysis was available in the 70s, but the
precise formulation has been changed somewhat in subsequent developments. A
summary of the use of exergy analysis and a few results relevant for energy
policy follows.

4. Analysis of energy systems

In 1975 the American Institute of Physics published the proceedings of a
meeting dealing with second law analysis (as the name for activities dealing
with exergy, for many years, would be) [11]. It was observed that the exergy
efficiency of gas boilers used for space heating was very low. This was a
surprising fact since the energy efficiency of this operation can be quite high and
gas heating was (and is) considered to be a very efficient operation. The
improvement potential is great.
    Exergy efficiencies approaching 100% can be realised only if the process
becomes reversible. This means for many processes that one has to increase the
size of the equipment. Increasing equipment size requires increased amounts of
building materials, which in turn means increased energy use for the production
of materials and equipment. So one gets a trade-off between energy use for
investment and energy savings during lifespan of the equipment [12]. See Fig. 1.

                                        TO THERMODYNAMIC LIMIT

      TOTAL COST =



                             PROCESS ENERGY + 'INVESTED' ENERGY

                  Fig. 1 Energy and money including investments
    Many other issues were studied in the 70s. We select only two problems since
 they are relevant in the present situation, too.
    Time dependence of changes in energy use were studied by means of
 scenario's. The range of the scenario's studied is very wide; from very simple to
 the more complex studies. These scenario's proved to be useful to gain insight
 into the interaction between different production factors.
    We learned that the power to forecast changes in the energy system by means
 of scenarios is limited. The large scale of the global energy supply system
 makes it very passive to changes. Any major change on a world scale takes many
 decades to become relevant. On such a time scale results of scenario studies
become very sensitive to small changes in assumed parameters, such as an
increase of oil prices or a change in interest rates. Especially economic
forecasting is not based on a solid theoretical foundation. Many models for the
development of oil prices were developed in the 70s, but this author is not aware
of any model predicting the fluctuation of oil prices over the last two decades.
    We learned important lessons from these scenario studies. We already know
most of the physicaj properties of the energy system that will be used in 2050.
We know how much heat we will get if we bum oil in 2050. We know the limits
for efficiencies with which conversions take place. So what we can do is to
assume a desirable situation of the world energy use in 2050. Based upon
physical properties and taking into account penetration times of new
technologies we can backcast from 2050 to 1995 or 2000. Obviously, we have to
include economic and political conditions if we approach today. During the
backcast we change from control by physical laws to control by economic laws
and political conditions. These observations are relevant for the development of
a path to a future with a reduced carbon dioxide emission taking into account
that we do not know at present whether this reduction will be necessary or not.
    In the 70s, the greenhouse effect was one of the major study projects at the
Institute for Energy Analysis in Oak Ridge (Tennessee, USA). We will not dwell
upon the results of these studies, but it is one example to demonstrate what was
mentioned earlier: it takes decades before scientific results penetrate policy
circles. Political interest in the greenhouse effect was aroused only after a
politician, Mrs. Brundtland of Norway, chaired a commission that published a
scientifically highly controversial report [13].
    Another example of slow penetration of scientific results into political action
is the use of exergy analysis to establish the route along which a reduction of
carbon dioxide emission can be achieved in the future. We have mentioned that
two decades ago the low exergy efficiency of fulfilling low-temperature heat
demand was observed. In the meantime thousands of papers have been published
reporting exergy efficiencies of industrial productions and other activities in
society. The picture obtained about good and bad use of energy differs
drastically from that obtained by the usual energy description. If policy is not
based upon the exergy picture many short-term activities to reduce the carbon
dioxide emission will be a waste of time and money. We are going to
demonstrate that in the next section.
5. The greenhouse in 2050

We do not intend to discuss the greenhouse issue fully since sufficient recent
literature is available. It is stressed that discussions about the greenhouse effect
have often a religious character. One paints a picture of the future with floods,
hurricanes, illnesses and famine. We cannot see or smell it now, but it is to
come. However, if we live now decently it might fade away. Living decently
means for many groups involved in the debate that we must pay an ecotax for
energy use.
    We will not dwell upon all fairy tales about the greenhouse effect. It is
relevant to know that without the existing greenhouse effect life on earth is
impossible. Two aspects are solid knowledge. The concentration of carbon
dioxide in the atmosphere increases and if a climate change occurs there is no
way to remove carbon dioxide from the atmosphere in time.
    Although we do not observe, at present, an increase of the greenhouse effect,
we can certainly not escape the green wave that affects politicians, media,
producers and many others in society. This leads in some nations to short-term
actions to stabilise carbon dioxide emissions on the 1989 level. The procedure is
to do more of what we are doing already: pushing industry and households for
more energy conservation in order to reach self-imposed short-term objectives.
    Although the actors involved may be self-satisfied, these actions are not
relevant if one really wants to lessen the increase of the greenhouse effect. The
present approach denies both the reasons for the increase of world-wide carbon
dioxide emissions and the scope of the problem.
    The major forces behind the increase of carbon dioxide emissions are:
     - population increase
     - economic growth in several countries with large populations that used to
       have a low standard of living
     - nearly 90% of the world energy supply is based upon fossil fuels
    The world use of energy during the past few decades is shown in Fig.2,
together with population numbers and oil price. It demonstrates that the growth
of energy use decreases somewhat after the sharp price increases in 1973 and
1980, but after a few years the growth returns. This is an indication that even a
world-wide ecotax on fuels will not solve the problems.
    In Fig. 3 the energy use is extrapolated to 2050 using very moderate growth
percentages: 1.5% per year for energy and 1% for population The greater part of
the present use of fossil fuels occurs in nations that are already industrialised.
Taking into account that the greater part of the increase of energy use is to take
place in developing countries with larger populations than those of industrialised
nations, some conclusions are obvious. If, for example, we want world carbon
dioxide emission to remain at the 1990 level then the industrialised countries
must reduce emissions to about 25% of their 1990 levels.
    It has been said before that forecasts do not have much predictive power.
This aspect is not very important in backcasting: the industrialised countries may
have to reduce their carbon dioxide emission drastically. Some options are
shown qualitatively in Fig. 3: no single option alone can solve the problem and
natural resources differ considerably for various nations. For most countries it
will be impossible to fulfil the objective to reduce their carbon dioxide emission
levels by 75% by tightening present conservation measures. A long-term

       600 n                      Population /10 million
                                 Energy / EJ
        500-                     Oil $/10 barrels



       200'                                                              Fossil

          65       70          75       80        85         90        95
       Fig. 2 Growth rate of energy 2% and of population 1.9% in 30 years.

structural change may be necessary, but we must keep in mind that it could be
unnecessary or not on the indicated time scale. However, it does not do any harm
to analyse how we could arrive at a situation with low carbon dioxide emissions,
since the availability of fossil fuels will decrease anyway. It is often said that we
still do not need to worry about that perspective, as there is coal enough in the
world. By comparing coal, oil and natural gas for electricity production it is well
known that coal produces the largest amount of carbon dioxide per kWh
electricity, more than in cases where oil is used and much more than natural gas.
It is not amazing that outsiders lose track if they hear that in connection with the
greenhouse effect a change of fossil fuels in the sequence coal — oil -» natural
gas is being encouraged, whereas the resource situation might require the
sequence natural gas and oil -> coal. However, we have exergy analysis to assist
us in finding our way out of this confusion.
6. Away from fossil fuels

The advantage of backcasting is that we know where we are heading to: carbon
dioxide emission in 2050 at 25% of the 1990 level. What do we do with that
25%? Probably we will end up with the situation that for some applications
replacement of fuel by other resources will be difficult, even over fifty years. For
example long distance transport by trucks and planes, buildings that are too

                         Required CO, reduction

       Carbon emission

                      Carbon emission for developing nations

                                         - Lower growth of population
       1990                                Use solar, wind, biomass, nuclear
                               To be
                              replaced     Fuel substitution
                                           Change and optimise processes
                                         _Remove and store CO2
                      Emission remaining for industrialised nations

      Fig. 3 Carbon emission increases from 5.4 to 13.3 Gton C per year.

new to be demolished and too old to be renovated. Chemical industry needs
fossil fuels for their carbon content in order to build organic polymers. This
carbon is not emitted into the atmosphere immediately: so we do not need to take
the feed stock from the fuels that are allowed within the 25% share. Whether the
carbon will eventually end up as CO2 in the atmosphere depends upon our
actions when the polymers have accomplished their tasks: the extent of
recycling, waste disposal, burning or other uses. If the polymer is used in a long-
term application such as insulating material, it usually saves much more carbon
dioxide emission than it produces when finally burnt.
   For the illustration of the reduction of the remaining 75% it is good to use
realistic data, for example, of The Netherlands. But, to simplify the discussion
the data have been modified to some extent in order to make them useful for
other countries, such as Otherlands.
   Otherlands has 15 million inhabitants and uses 3000 PJ per year which means
6 kW primary energy per person including all national activities. Let us assume
the aggregated distribution of energy use in Table 1.
    Energy policy is often based upon this type of data. Energy conservation is
aimed at industry and especially at the large users such as chemical companies
including those that produce fertiliser, steel, aluminium, and polymers. With
natural gas available, a gas distribution system was built to serve five million
customers using gas boilers. The system is considered to be very efficient. No
planning exists to change the system fundamentally. However, cogeneration of
heat and electricity with district heating is used in some cities and plans are made
in other cities to use the same system. Cogeneration is also applied increasingly
in industry. The financial structure (subsidies for installation of the equipment

                            Table 1. Energy use in Otherlands (PJ)

             Primary fuels:       coal           400
                                  oil           1000
                                  natural gas   1600

             Total                              3000

                                                               End use
             E-sector (electr.., refineries)                  13%      400
             Industry                                         37% 1100
             Transport                                        17%      500
             Households                                       17%      500
             Other sectors                                    17%      500

and favourable reimbursement for electricity delivered to the public grid) makes
cogeneration an interesting business option. In some situations it pays off to
install cogeneration even if only steam is required by the company.
   It is obvious that further implementation of this system will obstruct the road
to a situation with low carbon dioxide emission. If a large demand for low
temperature heat exists cogeneration is a good option to fulfil that demand. One
of the conditions is that the electricity production of thousands of small
cogeneration plants does not jeopardise the public grid. As we have ample time
and other short term solutions are lacking, it should not be a problem to use
cogeneration in those places where electricity production and large-scale users of
low temperature heat are located side by side. If necessary, it will be
economically acceptable to dismantle these installations. However, the large
investments necessary for district heating make this application self-confirming:
one does not improve insulation of homes and buildings anymore. In industry
decreasing heat demand is no longer popular since it threatens the economics of
the cogeneration plant.
   The fairy tale is that this solution is very efficient. This is only true if one just
counts the amount of energy and not its value. The exergy efficiency of
cogeneration is hardly better than that of electricity alone. It becomes even lower
if the ratio of heat to electricity increases. But the major obstacle is the fact that
one gets thousands of small electricity producers all using natural gas. The
reduction of carbon dioxide emission to the required level becomes impossible.
    Analysis of the national energy use based upon exergy shows a completely
different picture. Official exergy statistics are not yet available, although there
are no fundamental obstacles for Bureaus of Statistics to produce these data
(with some technical assistance for the calculation of exergy values of materials
and other products). Consequently, in redrafting Table 1 in terms of exergy,
some assumptions had to be made. In exergy analysis the exergy of the output of

              TABLE 2. Exergy supply and demand (PJ) in Otherlands

                                 Input       Output      Exergy       Exergy       IP
E-sector                                                  loss       efficiency
Electricity           Coal       250
                      Gas        300
Total electricity     Total      550          250          300          0.45      165
Refineries            Oil       1000          900          100          0.90       10
Natiu^al gas          Gas       1300          130            0           1.00       0
Final use                     Demand Non-energy Exergy                Exergy       IP
Sector:                                       use         loss       efficiency
Fertilisers                      150          110           40          0.73       11
Chemical industry                600          350          250          0.59      109
Basic metals                     140           20          120          0.14      103
Other metals                      60           20           40          0.33       27
Building materials                50             0          50          0.00       50
Transport                        500             0         375       <--0.25 a)   281
Households & other b)           1100             0         935       <--0.15 c)   795
  a) Efficiency based upon fimctions to be fulfilled in the sector
  b) All sectors with predomantly low temperature heat demand
 c) Efficiency based upon heating with hot water systems

processes is taken into account, since that exergy is required anyway to
manufacture these products. The exergy loss in the process is the only amount
that might qualify for improvement. We used what official statistics call the non-
energy use in the end use as a first indication for the exergy values of the
products. For transport and low temperature heating other exergy values are
used. See Table 2. It follows from this table that pushing large industrial
companies for further energy saving gives only a very limited scope for reducing
carbon dioxide emissions. For many of these industries the cost of energy has
always been so relevant that it led to high exergy efficiencies. The more
important question is whether or not we need or want these industrial products.
This question cannot be analysed in detail here. We only want to point out that
many of the available materials and also new materials under development are
relevant to obtain energy conservation in many applications. Exergy analysis
shows clearly that the highly praised efficiency of the heating system for low
temperature heat is a fairy tale: much of the desired reduction of the carbon
dioxide emission must be realised in these sectors.
    Space does not permit to provide details for the road from today to 2050. The
analysis starts with the present situation. One can try to fulfil all low temperature
demand by cogeneration. However, the heat demand is so much higher than the
electricity demand that either one has to export electricity or one must find
other applications for electricity. One of these applications is the use of electrical
heat pumps for space heating. If electricity is available electric heat pumps are
very efficient for low temperature heating. Along this way a large reduction of
the carbon dioxide emission can be achieved. Gas and warm water distribution
systems for heating are not longer required.
    But, decreasing the demand comes first. Hot air heating is favourable if heat
pumps are used. Since most of the homes and buildings that are to be constructed
in the next decades will still be in use in 2050 it will be necessary to start
building in such a way that the construction does not prevent the use of electric
heat pumps in the future. Together with electrification of the transport systems
in cities (metro grid, electric vehicles for local transport) this will result in a very
clean environment.
    Designing such a future is very important. We do not need to undertake wild
actions now. We must be careful not to invest in long-term structures which will
prevent that development, such as district heating in cities. We must concentrate
upon a proper design of all new homes and buildings.
   There is only one question left: how do we produce electricity without the use
of fossil fuels? Obviously, Otherlands -just as The Netherlands- is not doing so
well at this moment. Its carbon dioxide emission per kWh electricity is above
the average in Europe. In Fig. 4 the carbon dioxide emissions per kWh electricity
production in some countries are shown. However, Otherlands has fifty years to
catch up with the low carbon dioxide emitters. Or it could buy electricity from

7, Ecotax

Another fairy tale in international policy is that to tax fuel use would be the first
condition to reduce the growth of the carbon dioxide concentration in the
atmosphere. It is shown in Fig.2 that sharp price increases of oil -and
consequently of natural gas in countries where gas prices are coupled to the oil
price- cannot halt the growth of energy use on a world scale. Of course,
governments can set the ecotax so high that economic activities collapse. The
creation of an economic world crisis to prevent the growth of energy use is not
only unnecessary but is even contra-productive.
    If energy will be taxed, more than the going rate, it should not be based upon
energy input but upon exergy used in relation to the amount of fossil fuels
needed for the production.
    The major problem with taxation is that there is no program of how to reach
the desired reduction of carbon dioxide emissions. If such a plan existed one can
imagine that additional capital investment will be required. Building exergy
efficient homes, introduction of heat pumps, switching to durable resources for
electricity production, they will all require large investments. But, designing the
plans can be done without first introducing an ecotax.

                                                                       I           ^                           Europe

          4     imrn^AmMMmM^mmAmm                                                         Germany
          3 B i l i i i H l ™ S l i B
                                  t^^Wi^MWMiH'iHHiiiM'iiHiilU'tMnMi! •..|..illli..,.l....^*
          2 M/m^m^^m^^^mm^^Wm U^A
                 X X X X X X X X X XX X X X X X X X X X X X X X X XX X X XX X X X X X X X XX X X X X X - 1   TT K
               0.0                   0.2                      0.4                      0.6                    0.8       1.0
                                        — ^ kg carbon dioxide / kWh-e

               Fig. 4 Carbon dioxide emission from electricity production

S. Conclusions

If it were really necessary, it is certainly possible to arrive at a large reduction of
carbon dioxide emissions in fifty years. But, since we are not certain whether or
not this is necessary at all, energy policy should balance long-term vision and
short-term activities.
    The long-term vision requires that we ban the use of fossil fiiels for space
heating. Electric heating by using heat pumps is exergetically favourable and
environmentally clean. Electricity should be produced without or with only small
amounts of fossil fuels, like several countries have been doing. In the long term,
natural resources such as wind, water, hydropower, biomass could be used. The
time that is available could prevent the application of these resources to the
required extent. Electricity based upon nuclear energy could fill this gap.
   Particularly for countries that are embarked upon a course to achieve a
reduction in the use of energy, short-term activities could be damaging to the
long-term objectives. Using cogeneration for district heating to fulfil the existing
demand is an example. Long-term policy requires that first this demand is
decreased considerably, which is technically feasible.

1. Slesser, M.: Units in energy accounting, in The energy accounting of materials, products,
  processes and services. Organisation TNO, The Hague, 1976.
2. Boustead, I. and Hancock, G.W.: Handbook of industrial energy analysis, Ellis Horwood,
   Chichester, 1979.
3. Gibbs, J.W.: The scientific papers of J. Willard Gibbs, Part 1 p.50, Longmans, Green
   and Co, New York, 1906.
4. Rant, Z.: Exergie, een neues Wort fur "technische Arbeitsfahigkeit", Forschung Ing-Wis. 22
   (1955), 36-37.
5. van Gool, W.; Fundamental aspects of energy conservation, Energy 8-9 (1980), 783-792.
6. Cambel, A.B., Second Law Analysis of Energy Devices and Processes, Energy 8-9 (1980).
7. Gaggioli, R.A.: Thermodynamics: second Law Analysis, KCS Symposium Series 122, 1980.
8. Gaggioh, R.A.: Thermodynamics: second Law Analysis, ACS Symposium Series 235, 1983.
9. Diepstraten, F.M.J.A. and van Gool, W.: Exergy matching for efficient energy conversions.
   The 2nd International CongreM on £'«e/-gy, Tiberias, Israel, 1988.
10. van Gool, W.: Exergy analysis of industrial processes. Energy 17 (1992), 791-803.
11. American Institute of Physics: Efficient Use of Energy, Conf Proc. No.25, New York, 1975.
12. Phung, D.L. and van Gool, W.: Analyzing Industrial Energy Conservation Policies: the
    method of cost-energy dynamics, Energy Systems and Policy 6 (1982), 1-43.
13. World Comm. Environ. Div.: Our Common Future, Univ. Press, Oxford, 1987.
This page intentionally blank

                 PROF. DOCTOR JOHN WARD
                 Director of Department of Mechanical and Manufacturing Engineering
                 of University of Glamorgan

1. Introduction

In strict scientific terms the title of this lecture is misleading since energy cannot be
destroyed, it can only be changed from one form to another, i.e. it is always conserved.
However, in the present context I will take energy conservation to mean the use of less
energy to provide virtually all the services and goods demanded by modern
industrialised societies. People increasingly require energy-related services, such as
warm and well-lit homes and work-places, transport, refrigeration and air conditioning,
telecommunications and manufactured products, so that world energy consumption is
steadily growing and currently stands at the equivalent of using approximately 9 billion
tonnes of oil per annum (Figure 1). Nearly 90 per cent of this energy is obtained by
burning fossil fuels, such as oil, natural gas, or coal and this is leading to increasing
environmental concern.
        The rich industrialised countries use large amounts of energy and there is some
connection between per capita energy consumption and material prosperity (as measured
by the gross national product per head of population), see Figure 2. The variations in the
1 975 data presented in this diagram can be attributed partially to differing climates and
patterns of industrial activity in the various countries. Nevertheless comparison of
energy use in Switzerland and the Scandanavian countries with North America, for
example, suggests that there was (and still is) considerable scope for energy
conservation whilst simultaneously maintaining living standards.
        The title of the lecture poses a question which I will begin to answer by quoting
from evidence submitted to the Select Committee on Energy of the House of Commons
in 1991. "The overriding environmental imperative for industrialised nations such as the
United Kingdom must be to reduce the use of fossil fuels and electricity".
        I consider that energy conservation is NECESSARY in order to avoid, perhaps
irreversible, environmental damage. In addition, as I will attempt to demonstrate, it will
result in significant economic benefits. Energy-efficient technology is currently available
so that energy conservation in the United Kingdom is limited not by technical factors but
by lack of political will. Market forces alone will not provide sufficient stimulus, so that
policy measures are required if appropriate levels of energy saving are to be achieved.
O. D. D. Soares et al. (eds.), Innovation and Technology - Strategies and Policies, 107-124.
© 1997 Kluwer Academic Publishers. Printed in the Netherlands.

                                                                                 • Oil
                                                                                 • Natural Gas
                                                                                 • Nuclear
                                                                                 • Hydro
                                                                                 • Coal

                                Figure 1: World Energy Use 1970-1989

      12               I    I    I            I       I      I        I      I       I

                                                  U nited S tales • , ' '
      1 0
                                                                 ^^       Canada

      8                                                                                     -

                                                           .     .          c\ • ^ ' S w e s d e n
 D.   6                                                   A ustria • ^ , ' •
  i                                  NetKerlands •                 „ , , ' ' ,-.
                   ,, .^ . „ .     ,      ,'                  • a W ' e s t G e r m an-
                   United K i n g d o m ' ,      Beleium        V- T-.            i
 ^                               "    / y , D c i g i u i u ^M D e n m a r k
                                          Iceland •
      4                                              Fj-a'nce • N o r w a y
                                     J a p a n , ^--' , . •         _ .,          ,    ,
                             ,, ,        '^ • " ' A u s t r i a      Switzerland
                             J-taly           ,'                                •
                   Ireland*" •            ^^' • N e w Zealand
                 Venezuej-a*         ,'Israel
      i            Gre&Ce«       ,'Spain                                                   —

            C-D P ""^ys ^ V M e X i c 0

      0                I    I    I            I       I      I        I      I       I

             0             2000        4000         6000          8000                    10000
                              G N P per capita ( 1 9 7 5 dollars)
                                     Figure 2: Energy Usage vs GNP
       However, before considering the subject in greater detail, I will now introduce
the units which are used to measure energy- The internationally recognised unit is the
Joule. This is a very small amount of energy and a single bar electric fire generates 3.6
million joules (or 3.6 megajoules) each hour. Thus very large numbers are often
associated with energy use so that alternative units, such as the energy liberated by
burning a tonne of either coal or oil, are often used, see Figure 1 for example.

2. Why do ne Need to Conserve Energy?

Energy conservation has been practised to some extent, at least, for most of this century
usually in response to a temporary scarcity of indigenous fuel (e.g. coal shortages in the
UK in the 1940s) or for economic reasons. The oil crises of the 1 970s and the
associated OPEC (Oil Producing and Exporting Countries) inspired fuel price rises
provided considerable impetus for cost-effective conservation measures and many
industrialised countries have subsequently significantly reduced the intensity with which
they use energy (Figure 3). A further motivating factor, at this time, was the widely-
expressed fear that serious depletion of finite oil and natural gas reserves would result in
severe fuel shortages around the turn of the 20th century.
       It is now generally accepted that such fears were exaggerated and currently the
United Kingdom (which has been described as "an island of coal surrounded by a sea of
oil and gas") does not appear to be concerned with the security of its long term energy
supplies. The cost benefits which can accrue to both individual householders as well as
industry and commerce, however, are still a valid justification for introducing energy
saving measures. These economic benefits are potentially very large since the United
Kingdom currently spends £50 billion on energy . In addition, the last few years have
seen the growth of a much greater awareness of the environmental consequences of
energy production and use and these concerns may well become of paramount
importance in the future.

3. Environmental Effects

Localised air pollution has long been associated with the combustion of fossil fuels.
Thus the widespread use of coal in industry and domestic fires caused Charles Dickens
to write in. the mid-19th century in "Hard Times" of: "a town of red brick, or of brick
that would have been red if the smoke and ashes had allowed it; but as matters stood it
was a town of unnatural black and red like the painted face of a savage".
       The "London Smog" of December 1 952, which caused 4000 additional deaths,
is usually considered to have been a watershed for pollution control in the United
Kingdom. Subsequent legislation and shifts to the use of natural gas and oil instead of
coal in industrial and domestic applications have reduced smoke emissions by more than
85 per cent. Although these emissions are no longer a serious problem in the UK this is
not true of many large cities and industrial conurbations in Eastern Europe and the
Developing World.
        Traffic generated air pollution can be a severe local problem particularly when
exacerbated by meteorological conditions. Thus, for example, whilst legislative control
of exhaust emissions has reduced the effects of the notorious photochemical smogs in
Southern California, motor vehicles were prohibited from the centre of Athens on
several days last year as a result of high pollution levels.





                          United States of America

                           United Kingdom


            -2.5   -2     -1.5    - 1 -0.5       0    0.5
             % Average annual change in energy intensity 1973 - 1988
                 Energy intensity = primary energy usage

      Source: OECD, 1990

                          Figure 3: Change in Energy Intensity

        On a regional basis the emission of combustion-generated sulphur dioxide and
the oxides of nitrogen, particularly from power stations, is widely believed to be a main
contributor to the formation of "acid rain". These gases can be transported large
distances in the atmosphere and are transformed chemically before increasing the natural
acidity of rainfall. The acidification process can be modified by local geological
conditions in that limestone, for example, can partially neutralise the acids whereas the
soils such as those found in conifer plantations can have the opposite effect. This acid
deposition is thought to be responsible for structural damage to buildings, damage to
forests particularly in Central Europe, and a reduction in fish stocks in freshwater lakes
and rivers. The problem has been tackled by European Community legislation which
will reduce the emissions of "acidic' gases in stages over the next eleven years.
        However, whilst action has been taken against these local and regional problems,
concern is growing about the "greenhouse" effect. The greenhouse gases (carbon
dioxide, methane; nitrous oxide, CFCs, ozone, water vapour) allow direct radiation from
the sun to penetrate through the atmosphere whilst simultaneously partially trapping the
thermal radiation emitted by the Earth to outer space. They thus act in a similar fashion
to a pane of glass on a sunny day.

        100 .




                1765     1800      1850       1900       1950    1985


                Figure 4: Relative Contributions to the Greenhouse Efectt

        The natural background level of these gases helps to maintain the temperature of
the Earth at a level suitable for human habitation but their increasing concentration as a
result of human activity, particularly energy production, may well bring about global
warming. Although global temperatures have increased over the last century the changes
may still be within historical, statistical fluctuations so that opinions differ as to whether
global warming has started. Nevertheless it is now widely considered that the potential
effects over the next 60 years could be:

       (i) An increase in mean global temperatures of 1.5 to 4.5''C with significantly
       greater warming taking place in the polar regions.

       (ii) The increase in temperature will lead to a decrease in the thickness and
       coverage of both sea ice and glaciers. The resultant meltwater run-off together
       with the thermal expansion of the oceans could raise sea levels by a metre or
       more with catastrophic effects for populations in low-lying areas.

       (iii) Regional changes in temperature and rainfall together with the possibility of
       more frequent storms and extreme weather conditions will markedly affect local
       agriculture and ecosystems. These local effects are uncertain and in some
       scenarios Wales, for example, will have a climate similar to Northern Portugal
       whilst in others it will become colder as the Gulf Stream is deflected.

                       1 1         1 1          1      1     1 1 1
         ^340-                 Direct observations^               /
         >>                                         ^ ^ ^ ^
         B                     Ice core observations      ^^^^^ /
         (X                                          \^^       ^'
         o                                                  X /
         1 300-
         u      -
         U 280-

                       1 1             1
                                   1 1850 1                  1
                                                       1 1 1950 1
               1750        1800                      1900                  2000

                Figure 5: Increase in Atmopheric Concentration of CO2

        The potential, long term disruptive effects are enormous and the UN Inter
Governmental Panel on Climate Change which met in 1 988 concluded that "The best
predictions available indicate potentially severe economic and social dislocation for
future and present generations, which will worsen international tensions and increase
risk of conflicts between and within nations. It is imperative act now"
        The relative contributions of the main greenhouse Pollutants are illustrated in
Figure 4. The dominant effect of carbon dioxide (C02) is clear particularly since
international action has been agreed for the control of CFCs as a result of concerns
about depletion of the ozone layer. The C02 concentration in the atmosphere has been
increasing rapidly (Figure 5) largely as a result of the combustion of fossil fuels for
energy production. Thus any strategy for reducing the greenhouse effect must involve
limiting emissions from this source. Consequently the UK Government has agreed to
stabilise Britain's emissions of carbon dioxide at their 1990 levels by the year 2005 'if
other countries take similar action'. Even more radical actions are recommended by
some experts who consider that C02 emissions should be reduced by 60 % of their 1990
level by the middle of the next century.

4. Control of Carbon Dioxide Emissions

Absorption of combustion-generated carbon dioxide from large plant such as power
stations is one method of control which may be technologically possible in the future,
but present estimates indicate that such processes would lead to a two to five-fold
Increase In the cost of electricity generation. In addition there are unsolved problems in
disposing of the absorbed carbon dioxide although possible solutions may include
storage in disused oil or natural gas wells or in the ocean depths.

    B |

                 Figure 6: Variation of CO2 Emissions (relative to coal)

           Figure 7: Potencial CO2 Reductions by Year 2005 (10% discont rate)

       Reforestation in temperature regions coupled with a reversal in the rate of
destruction of tropical forests could Play a significant role in absorbing carbon dioxide
on a global scale- Woodland currently occupies about 10% of the land mass in the
United Kingdom and even a doubling of this in the next 25-30 years would only absorb
an extra 1 -2 % of our current carbon emissions. Thus reducing the rate of emission is
the only viable method of control for the United Kingdom. This may be achieved by
switching to more "greenhouse-friendly" fuels for energy production and also by
promoting energy conservation. Fuel switching can involve:

       (i) Conversion from Coal to Oil to Natural Gas

       Some of the potential benefits to be gained from this are illustrated in Figure 6
which presents the relative rates of emission of carbon dioxide (for the same energy
output) for the three major fossil fuels- Thus it makes both economic and environmental
sense to switch from electricity to natural gas for space heating in he domestic and
commercial sectors. On a large scale both National Power and Power Gen have started
to replace some of their coal-fired power stations by gas turbine powered combined
cycle Plants and a number of independent generators have also declared their intentions
to use natural gas. These new stations will be more efficient so that carbon dioxide
emissions will be approximately halved for the same electrical output. The driving force
behind this switch is largely economic but already fears have been expressed that a
major conversion programme could lead to gas becoming a relatively 'scarce" and hence
much more expensive fuel by early in the next century. Thus the overall scope for
conversion from other fuels to natural gas may be ultimately limited by resource


                                  Domestic       Commercial
                                                 and public

                            Figure 8: Changes in U. K. Energy Use

       (ii) Increased Use of Nuclear Power

       The use of nuclear power in the UK has already helped the electricity generating
industry to reduce the rate of emission of C02 (per unit of generated electricity) by over
40% over the last 40 years although the overall rate of emission has almost trebled over
the same period. Whilst increased use of nuclear power is technologically feasible (e.g.
France generates almost 70 % of its electricity in this way) there are doubts concerning
the cost-effectiveness. In addition a safe and secure method of disposing of radioactive

waste has yet to be found However, the main factor inhibiting the expansion of nuclear
power is the fears and attitudes of the general population since the accidents at Three
Mile Island and Chernobyl, and this has led to a virtual world-wide suspension in the
construction of new nuclear power plants. Nevertheless over the next 20-30 years
nuclear power is likely to play a part in any strategy to reduce greenhouse emissions.

       (iii) Renewable Energy Sources

       The so-called renewable energy sources (wind, tidal, wave, geothermal, hydro
and solar power) could in theory supply the entire current world electricity consumption.
However the large land area which is required for many of these sources together with
their Intermittent nature will inhibit their application. Thus the Central Electricity
Generating Board estimated in 1 988 that 'the upper limit of renewable energy
contributions as a percentage of likely UK electricity demand' will be about 7% in 2005
rising 18% in 2030. More over the environment a impact of some of these devices.
Particularly when installed on a large scale, is already causing concern amongst some
environmental pressure groups.

       Each of these three methods of fuel switching will probably have a part to play in
reducing future UK carbon emissions, see Table 1.

               Technology                     Reduction in Current CO2 Emissions by

1. Changing from Coal to gas combined                             7%
cycle generation
2. Nuclear power                                                 7%
3. Renewables                                                     7%
4. Re-forestation                                                 1%
5. Energy Conservation                                           24%

  Table 1: Contributions to the Reduction of Carbon Dioxide Emissions (Dale, 1989)

       It is clear from this table that energy conservation will have to play a major role
in preventing climate change. Moreover, Friends of the Earth have recently undertaken a
survey of the costs and potential of various energy technologies for reducing carbon
dioxide emissions in the UK non-transport sector, see Fig 7. The technological and
economic data were obtained from Government reports and a 'discount rate" of 1 0 %
was applied in all cases. The diagram shows that the most cost-effective measures are
various end-use energy saving technologies (more efficient electrical appliances and
lighting, space heating improvements, combined heat and power) together with the
introduction of gas-fired combined cycle power generation. Development of renewable
energy sources and construction of nuclear power stations are much more costly

5. Current Energy Conservation Technology

It has been estimated that energy savings of at least 20 % could be achieved readily by
the application of current cost effective end-use energy conservation technology. End-
users of energy in the UK can be broadly categorised into four sectors, namely domestic,
commercial, industrial and transport.

       (i) Domestic Sector

       The are approximately 22 million dwellings in the UK so that considerable
savings can be achieved by reducing the rate of heat loss from buildings and by the
gradual replacement of old central heating boilers with high efficiency gas condensing
boilers. The costs and benefits of these measures are listed in Table 2.

 Energy Saving        Number of        Average Cost         Typical         Total Annual
  Technology          Dwellings        per Dwelling         Payback        CO2 Reduction
                      Defficient            (£)              Period          (M tonnes)
                      (millions)                             (years)

1 . Hot water tank        4.6                10               0.4                2.4
2. Loft insulation        3.3               100                2                 2.6
3. Draught                19.6              50                 4                 4.5
4. Condensing             11.7              150                4                 5.4
5. Cavity wall            9.0               300                4                 11.9
6. Solid wall             9.2              1500                21                12.4
7. Double glazing         16.5              500                21                7.3

        Table 2: Domestic Energy Saving Measures (Building Research Establishment,

        Loft and hot water tank insulation have achieved significant market penetration
so that future gains are limited. The largest overall "cost-effective" savings would result
from the widespread installation of cavity wall insulation. The main barriers to this
appear to be lack of public awareness together with unavailability of finance. These also
hinder the introduction of high efficiency lighting such as compact fluorescent bulbs
(Table 3). Capital costs are relatively high but significant savings accrue so that
Edinburgh University, for example, recovered the costs of installing these bulbs in their
halls of residence within 9 months.

       (ii) Commercial and Public Sector

        Many of the improvements, (better insulation, more efficient space heating and
lighting) which have been discussed for the domestic sector also apply to offices, shops,
leisure centres, hotels, hospitals and other commercial and public buildings. In addition
savings can be achieved by better control of temperature and ventilation and the use of
more efficient electrical appliances.

        Lamp Type                100 W Tungsten Filament      20W Compact Fluorescent

      Operating Life                   1 000 hours                    8000 hours
       Capital Cost                  £3.50 (8 lamps)                    £13.50
      Electricity Cost                   £48.00                         £9.60

        Total Cost                       £51 .50                        £23. 10

Table 3: Comparative Lighting Costs Over the Lifetime of a Compact Fluorescent Bulb

        Buildings in this sector often have a requirement for base load electricity and hot
water so that the installation of a "Combined Heat and Power" system (CHP) can be
attractive from both a financial and an energy saving point of view. In these small-scale
CHP units a gas-fired reciprocating engine is used to drive a generator to meet the
electrical demand whilst hot water is obtained by recovering heat from the engine
exhaust and cooling system- This compares with a conventional arrangement whereby
electricity is supplied from "the grid" and a separate boiler generates hot water. Energy
savings of 30-40 % are possible with payback over 35 years although this can be
influenced by the price which can be obtained for sales of surplus electricity.

       (iii) Industrial Sector

       CHP can also make a significant contribution in the industrial sector although in
some industries the large electrical and heat loads may involve the use of a gas turbine to
drive the generator and a waste heat boiler is then often used to produce steam for
process or other applications. The use of more efficient electrical motors is another
important measure in this sector.

       Industrial furnaces and kilns for heating metals, glass, ceramics and pottery are
usually fired by gas or oil burners. Many of these heating processes take place at high
temperature so that the heat losses in the hot exhaust gases can be up to 80 % of the
energy input to the system. These gases can be used to preheat the air which is supplied
to the burners for combustion purposes- Recuperative and regenerative burners are used
for this purpose and can save up to 50-60 % of the fuel. Many thousands of these
burners have already been installed in the United Kingdom but their wider application
could still yield significant reductions in industrial energy use.

       (iv) Transport Sector

       Energy use for transport (of which nearly 70 A is for private cars and
motorcycles) has grown rapidly whilst the energy consumption of other sectors in the
United Kingdom has remained steady or declined (Figure 8). Moreover the Department
of Transport has forecast that the number of cars will increase by 80-1 30 % by the year
2025 with an even greater increase in road freight traffic. Thus transport seems set to
consume a progressively increasing Proportion of delivered United Kingdom supplied
energy unless remedial action is instigated.

             decker bus

              electic rail                                             I Average

               Inter city                                              I Fully laden

              petrol car

                             0         1    2           3          4
                                 Energy use (MJ/passenger m lie)

                      Figure 9: Energy Efficiency of Land Transport

        Currently the average "fuel consumption" for cars in the United Kingdom is
about 30 mpg and each car produces about four times its own weight of carbon dioxide.
However the 6 most efficient diesel Powered cars on the United Kingdom market will
achieve over 50 mpg under urban driving condition so that there is considerable scope
for energy efficiency improvements even with current technology. In the future,
reductions in engine size and vehicle weight, improved engine and transmission
performance, reduced aerodynamic drag, and the development of free-flowing lubricants
to reduce friction are all likely to contribute greater fuel economy. Most of the major
motor manufacturers have already developed prototypes which are capable of travelling
 1 00 miles per gallon of fuel. Public forms of transport (rail and bus) are more energy
efficient particularly if well patronised. Figure 9, so that a shift in transport use would

also be beneficial.

                                                                  Sulphur dioxide emissions from
                                                             J0         european refineries
         Penetration of unleaded petrol in U.S.A.


                             Half life
                            = 10 years                      (50,2 —          Half life
           I I I I I I I I I I I 11 I I I I I I I I I I I                    = 6 years
        1970     1975     1980      1985     1990                     I 11 II11 IIIII I
                          Year                                        1980     1985      1990

                Figure 10: Rate of Introduction of Environmental Measures

       Transport is a particularly key area in any efforts to achieve energy conservation
and a major programme must be directed at "the car". The Select Committee on Energy
has thus recommended 'a large increase in the transport sector's C02 emissions
balanced by disproportionately heavy reductions in other sectors does not seem to us a
rational way of achieving the emissions target, and we recommend that the Department
of transport draw up a comprehensive policy with clear objectives and providing strong
fiasco measures to try to prevent this occurring'.

6. Barriers to Energy Conservation

I hope I have demonstrated, so far, that current technology is capable of delivering large
energy savings in a cost effective manner so "why are energy conservation measures not
more widely adopted?"

       One of the reasons is that the structure of the energy market is such that energy is
supplied by a relatively few large companies whereas the consumer-side is often made
up of smaller businesses, organisations and individuals. The dominant supply-side has a
strong interest in increased sales as evidenced at times by the tariff structure which
favours large users of energy and can lead to waste.

       In addition consumers of energy often expect to recover the cost of an energy
conservation measure within 2-3 years whereas the energy supply industries often seek a
much lower rate of return- Many energy users (whether individuals or organisations)
also often suffer from an acute shortage of capital funds for investment. These financial
barriers have resulted in a disproportionate concentration on the need to expand energy
supply instead of reducing demand by the adoption of cost-effective energy saving

        A further barrier is that energy consumers particularly, but not exclusively, in the
domestic sector often lack awareness and technical information on energy efficiency. It
can be difficult to obtain impartial advice and some measures such as cavity wall
insulation still suffer from a 'cowboy' image.

       These various barriers severely inhibit the adoption of energy conservation
technology so that a package of policy measures is needed to overcome the distortions in
the energy market- This would bring the United Kingdom into line with countries such
as Japan which, perhaps because it is largely dependent on imported fuel supplies, has
an impressive record in efficient energy use, see Figures 2 and 3. In Japan, a single
government agency is responsible for implementing a comprehensive and long term
package of measures including provision of information, education and training,
financial jncentives, and standards and regulations.

7. Policies to Promote Energy Conservation


       (i) Information and Publicity Campaigns

        The UK Government has promoted a number of information campaigns to prove
both general awareness and specific advice on energy efficiency. Perhaps the best
known of these was the 'Monergy' campaign which was launched in Energy Efficiency
Year, 1 986, and concentrated on the financial benefits of energy conservation.
However, the promotional budget of the Energy Efficiency Office (which is responsible
for promoting energy efficiency) has been approximately halved in real terms over the
last five years so that the government has greatly reduced the scope and scale of its
information dissemination presumably on the grounds that previous campaigns have
succeeded. This conflicts with commercial advertising practice which seems to indicate
that the promotion of greater awareness of energy conservation should be a continuing
process. Moreover several surveys, e.g.- a recent study of attitudes to cavity wall
insulation by the Building Research Establishment, have indicated that there are still
widespread misapprehensions with regard to energy efficiency so that increased
government involvement In information provision Is urgently required.

       (ii) Appointment of Energy Managers

       There is often a lack of technical expertise in industry with regard to energy
conservation. In Japan this barrier is reduced by making it mandatory for all enterprises,
which have an energy consumption above a certain specified level, to appoint an energy
manager- The European Community (EC) are considering similar action and the Audit
Commission has recommended that local authorities should employ a full-time energy
manager for every lil million of expenditure on energy. These appointments would be at
least "self-financing" because of the energy savings which are readily available in most
organisations. It has been estimated that the adoption of this proposal would require a
five-fold increase in the number of full-time energy mangers. The training of the
additional personnel presents a challenge to Higher Education to develop courses such
as the new Honours Degree course in "Energy and Environmental Technology" which
has recently been introduced by the Department of Mechanical and Manufacturing

       (iii) Labelling and Certification

        There is a need to introduce a system of energy labels for goods such as domestic
appliances since it is often difficult for the consumer to know whether an appliance is
energy efficient or not Such schemes already operate successfully in the USA and
Australia and an EC mandatory scheme will soon be introduced in the United Kingdom,
probably in the autunm- The Government should proceed with this scheme as an urgent
priority and should also examine ways in which labelling could be extended to homes
and transport- Home energy certification already applies in Denmark, where a home
energy audit is compulsory at time of sale in the same way as a structural survey is
required in the United Kingdom. The resultant energy certificate is then a factor in
determining the sale price.


        We have seen that a great deal of energy is consumed for heating domestic and
commercial buildings- The energy requirements have been gradually reduced with the
progressive introduction of more stringent building Regulations. Thus a house
constructed to the current (1 990) standards uses up to almost 40 % less energy than one
built under the pre-1981 Regulations. Nevertheless our current Regulations are still
significantly less rigorous than those in force in Denmark, which has a similar climate
and uses similar building methods- Stricter regulations do not necessarily lead to
significantly higher costs since energy saving measures can be incorporated relatively
cheaply at the construction stage. Thus over 1000 homes have been erected in the
Milton Keynes Energy Park to standards at least 30% more stringent than current
regulations. Significant reductions in energy consumption were achieved with
constructional costs which were only about 1 % greater than those for conventional new
homes. The introduction of more severe Building Regulations only has a very gradual
effect since the annual increase in new housing currently represents less than 1 % of the
total housing stock. Nevertheless the Government should consider further revision of the
Regulations as a way of eventually achieving significant energy savings.

       The setting of minimum standards for new domestic appliances and boilers,
lighting, and electric motors would also be worthwhile- In California, for example the
gradual introduction of refrigerator standards has significanfly reduced energy
requirements in this application. The United Kingdom Government should thus follow
the example of the USA with its National Appliance Energy Conservation Act, 1 987,
which set stringent standards for gas and electrical appliances.

       (i) Selective Government Grants

       Selective Government grants can be effective in overcoming both information
and financial barriers as evidenced by the market penetration of loft insulation. The
Government also operated a very successful subsidised energy survey scheme for
industry and commerce which identified u35 worth of energy savings for each lil spent.
Currently the Home Energy Efficiency Scheme (HEES) provides 90 @ grants towards
basic insulation of low income households. Poor heating conditions are associated with
many health problems particularly those affecting the elderly. Thus the HEES should be
extended and the requirement for a 10@ contribution should be removed to encourage a
much wider uptake. Although a new Industrial Survey Scheme is about to come into
operation this should be expanded and made less bureaucratic.

       (ii) Taxation

        The imposition of taxes e.g. a 'carbon' tax, on fuel usage has frequently been
proposed as a way of encouraging energy efficiency- A detailed examination of the 'pros
and cons' of this is beyond the scope of this lecture. However, I do not believe that such
measures can be justified at present since any unilateral imposition would seriously harm
the economic competitiveness of the UK and moreover would have any extremely
regressive effect on low income householders whose fuel bills are a high proportion of
their disposable income.
        There is a better case for selective tax changes. Thus energy efficient products
are subject to VAT at present, whereas domestic fuel is VAT exempt- Although there
could be problems in defining "energy efficiency products", removal of VAT from this
category of goods could provide a useful, if small, impetus to energy conservation.
Similarly tax incentives should be used, as in Japan, to encourage the use of small,
highly efficient cars.


        In parts of North America and Scandinavia the energy supply utilities are
required by their "regulators" to undertake so-called "Least Cost Planning". This means
that they are only allowed to invest in the provision of additional energy supplies if it
can be demonstrated that this provides a better financial return than expenditure on
energy conservation measures for consumers, in order to reduce demand. The resulting
energy efficiency programmes have often involved free energy surveys for all
consumers, and grants, or the provision of interest-free loans, for the purchase of
insulation and energy efficient appliances, lighting and motors. The utilities benefit by
making the lowest cost investment so that average bills are lower. Least cost planning is
now mandatory in 26 states in the USA and has produced impressive levels of
investment in energy conservation- Thus, for example, Wisconsin Electric, which serves
a population of 500,000, invested $50 million in 1990 and the electricity utility in
Ontario is spending $ 1 billion over four years. The introduction of similar schemes for
the United Kingdom electricity and gas utilities would be a significant step forward to
improving energy efficiency in this country.

8. Conclusions

I hope that I have demonstrated that energy conservation is a necessary and cost
effective way of reducing the environmental impact of energy use. Current energy
efficiency technology, employed in a cost-effective manner is capable of yielding
improvements of at least 20 %. However, there is an urgent need for policy measures to
overcome various barriers which hinder the adoption of the technology. It is important
to stress that these policies should not be applied in a piecemeal fashion. Financial
incentives will only work if supported by suitable legislation, and marketing and
information dissemination. On a hopeful note, when these conditions are met, the rate of
introduction of environmental protection measures can be rapid, see Figure 1 0.
        I will leave the final word to the House of Commons Select Committee on
Energy which has concluded that: "improvements in energy efficiency are almost
universally seen as the most obvious and most effective response to the problem of
global warming" and noted that "widespread opportunity to invest profitably in cost-
effective measures to improve the efficiency of energy conversion and use are being

9. Acknowledgements

I would like to thank all the academic, administrative, secretarial, and technical staff of
the Department of Mechanical and Manufacturing Engineering for their support, either
direct or indirect, in the preparation of this lecture. Particular thanks are due to Mr Tony
Evans who prepared the slides and illustrations and Miss Heulwen Jones who typed the
manuscript. I am also grateful to the Reprographics Units and the Learning Resources
Centre for their assistance in publishing the paper.

10. Further Reading

House of Commons Select Committee on Energy, 'Energy Efficiency', Third Report,
H.M.S.O., 1991

"Energy Technologies for Reducing Emission of Greenhouse Gases", Proceedings of
Experts Seminar, O.E.C.D/I.E.A., Paris, 1989

J B.W. Dale, "Abatement of Greenhouse Gases in the United Kingdom" in "Energy
Technologies for Reducing Emission of Greenhouse Gases" Proceedings of Experts
Seminar, E.E.C.D./I.E.A, Paris, 1989.

Watt Committee on Energy, 'Technological Responses to the Greenhouse Effect"
Report No 23, Elsevier Applied Science Publishers, London, 1990
J. Blunden and A. Reddish, "Energy, Resources and Environment" The Open University
and Hodder and Stoughton, 1991

P.M. Smith and K. Warr, "Global Environmental Issues" The Open University and
Hodder and Stoughton, 1991

                      GEOFFREY PAUL HAMMOND
                      School of Mechanical Engineering,
                      University of Bath,
                      Claverton Down,
                      BathBA2 7AY,
                      United Kingdom


The historical development of the civil nuclear power generation industry is examined in
the light of the need to meet conflicting energy supply and environmental pressures over
recent decades. It is suggested that fission (thermal and fast) reactors will dominate the
market up to the period 2010-2030, with fusion being relegated to the latter part of the
21st Century. A number of issues affecting the use of nuclear electricity generation in
Western Europe are considered, including its cost, industrial strategic needs, and the
public acceptability of nuclear power. The contribution of nuclear power stations to
achieving CO2 targets aimed at relieving global warming is discussed in the context of
ahemative strategies for sustainable development, including renewable energy sources
and energy efficiency measures. Trends in the generation of electricity from fission
nuclear reactors are finally considered in terms of the main geopolitical groupings that
make up the World in the mid-1990s. Several recent, but somewhat conflicting,
forecasts of role of nuclear power in the fuel mix up to about 2020 are reviewed. It is
argued that the only major expansion in generating capacity will take place in the Asia-
Pacific Rim and not in the developing countries generally. Nevertheless, the global
nuclear industry overall will continue to be dominated by a small number of large
nuclear electricity generating countries; principally the USA, France and Japan.

1          Introduction

The nuclear power industry is facing contrasting fortunes in different parts of the World.
In the USA the investment in new plants is hindered by public concern over
environmental and safety issues. This can be contrasted with the major programme for
the construction of nuclear facilities that is underway in the newly industrialised
countries, particularly on the Asia-Pacific Rim. In the present contribution the historical
evolution of the civil nuclear power generation industry and future trends are examined
in the light of the need to meet conflicting energy supply and enviromnental pressures
over recent decades. This is done against a background of several studies by leading
organisations in the energy studies field that have made forecasts of the likely growth of
0. D. D. Soares et al. (eds.). Innovation and Technology - Strategies and Policies, 125-140.
© 1997 Kluwer Academic Publishers. Printed in the Netherlands.

nuclear power in various geopolitical regional groupings up to 2020. These provide a
framework for discussing the global prospects for nuclear power into the 21*' Century.
No attempt is made to be judgemental about the merits or otherwise of this industrial
sector. The aim is simply to identify possible medium-term futures for the global
nuclear power industry, and the factors that are likely to influence its development.

2        Historical Background

2.1      GESTATION (1945-1965)

In 1994 the nuclear industry celebrated the fiftieth anniversary of the first self-sustaining
controlled nuclear chain reaction at the University of Chicago, under the direction of
Enrico Fermi [1]. This led subsequently to the Manhattan project to develop an
"atomic" bomb, which was dropped on both Hiroshima and Nagasaki in 1945. Those
involved in the project might contend, with some justification, that this induced its own
"peace dividend" in the sense that the major military alliances (NATO and the Warsaw
pact countries) did not engage in full-scale warfare with each other over the intervening
period. Although nuclear weapons and their delivery systems have undergone great
advances since the end of World War II, the peaceful uses of nuclear power for
electricity generation have also developed apace in those countries with their own
independent nuclear "deterrenf:         initially the USA, USSR, UK and France.
Internationally, the main concern is now focused on the proliferation of nuclear weapons
in those countries which have not hitherto possessed such devices, particularly in the so-
called "Third World".

2.2      BRINGING TO MATURITY (1965-1985)

One motivation for the construction of civil nuclear power plants from the early 1960s
was that they could utilise fissile material produced by the military nuclear weapons
programme. They were consequently foreseen by governments as being part of a wider
strategic development. By the end of the 1960s civil nuclear power programmes had
evolved a life of their own. The peaceful use of nuclear electricity generation has now
spread to such an extent that some 30 countries operate nuclear power stations. It was
initially seen as an important energy source that was potentially "clean, cheap and
abundanf to rival the traditional fossil fuels: coal, oil and natural gas. In this regard it
was subject to the vagaries of the global energy market, which were themselves
determined by geopolitical events. The first of these was the OPEC oil embargo in the
aftermath of the Middle East war of 1972, and the oil price "hike" following the Iran-
Iraq war in 1979/80. This induced a great sense of insecurity over oil supplies,
particularly in Western Europe and Japan. It motivated the Organisation of Economic
Co-operation and Development (OECD) to establish the International Energy Agency
(lEA), one of whose tasks was to encourage the holding of buffer oil stocks. The OECD
countries also took steps to conserve energy in general, and to develop alternative
energy sources to petroleum. Many of them, particularly those with meagre indigenous
energy resources, were attracted to the idea of the development or rapid expansion of
nuclear energy programmes for electricity generation. However, this "dash for nuclear"
was short-lived. Several factors acted to discourage the planned rapid construction of
nuclear power plants. Firstly, Western efforts to conserve the use of oil were
spectacularly successful. World oil demand fell, and OPEC found that they could not
control the production and price of crude oil in the 1980s and beyond as they had during
the 1970s. Secondly, people in the West became far more aware of the possible
disadvantages of nuclear power encapsulated in Amory Lovins' phrase "the Hard
Energy Path" [2]. Two events reinforced this perception: the reactor failure at Three
Mile Island (USA) in 1979 which was contained, and that at Chernobyl (USSR/Ukraine)
in 1986 which was not. In addition, many people became concerned about handling
radioactive materials, principally radioactive emissions during the fuel cycle, the
subsequent disposal of high and intermediate-level wastes, and the eventual need to
decommission plants. The storage of high-level waste and decommissioning of plants
would require facilities that would operate safely over many decades. Finally, the
prospect of cheap nuclear energy seemed much less certain than had been claimed by its
early advocates. The capital costs are high and they have not been offset by low ruiuiing
costs, particularly if waste storage and decommissioning costs are taken into account.
The private sector has generally proved unwilling to meet these liabilities without
government financial support in one form or another. Table 1 indicates the comparative
life-cycle costs of nuclear and fossil fuel power plants for five OECD countries. These
projections (made at a 5% discount rate, over a 30 year lifetime, and assuming a 75%
load factor) suggest that the costs of electricity generation depend on whether or not
countries have access to relatively inexpensive fossil fuel supplies; for example. Western
USA coal and UK natural gas.

                   TABLE 1. Comparative Costs of Electricity Generation Plant
                              (US mills at 1 July 1991/kWh)*

                  Plant Type         Coal              Gas           Nuclear

                    Canada            32.6            40.6             29.9

                    France            50.6             54.8            32.8

                     Japan            63.0             77.3            53.6

                     UK               49.3            45.3             55.0

                     USA              43.7            49.3             42.8

                   *1 mill = US $0,001

                   Source: OECD, adapted from the Uranium Institute, 1994 [3].
2.3          ENVIRONMENTAL IMPERATIVES (1985-1995)

The gloomy prospects for nuclear electricity generation in the 1980s have been partially
transformed in the 1990s. This has come about due to the realisation that there may be
serious global environmental consequences of the continued burning of fossil fuels.
Combustion of these fuels produces the primary so-called "greenhouse" gas of carbon
dioxide (CO2) which the consensus of scientific opinion now believes will contribute to
global warming, leading to possible serious climate change. The amount of CO2
produced by electricity generating plant using different fuels [4] is illustrated in Figure
 1, where the benefit of nuclear power is clear. Similarly the fossil fuel exhaust gases
that contribute to acid rain (sulphuric dioxide and the nitric oxides) are also eliminated
by the nuclear fuel cycle [4]. In addition to the problem of pollutant emissions from
fossil fuel combustion, there is also now a better awareness of the finite nature of oil and
natural gas reserves. The OECD governments are specifically anxious about the global
distribution of these energy resources, which in the next 20-40 years will be located
largely outside their control.

           1000000 —

      -;    800000 —

      1     400000 —

                         Old   Modem Advanced   Without    With   CCGT
                                                FGD       FGD

                               COAL                  OIL          GAS       NUCLEAR

           Figure I. Gaseous emissions attributable to UK electrical power generation
                            (adaptedfrom Nuclear Electric pic [4])

3            Technologies and Timescales

The present contribution focuses on the medium-term; the likely development of nuclear
energy up to 2010-2030. Over this period the market will be dominated by "fission"
reactors, either of the thermal (burner) or fast (breeder) types. They require plutonium
and/or uranium fuel to operate. Indeed the fast reactors were designed to take as their
first charge of plutonium fuel that produced in the earlier thermal devices [1]. In the
1970s there was quite a wide variety of alternative thermal reactor designs, but that of
choice [1] has now mainly become the pressurised water reactor (PWR), developed from
an American original design. These give rise to the problem of radioactive emissions
and waste disposal highlighted in the previous section, but concentration on one
principal reactor type is likely to result in enhanced operating safety and cost
competitiveness. Due to the fall in the demand for nuclear-generated electricity
compared with the exaggerated projections of the 1970s, concern over the finite nature
of uranium supplies has diminished (see also Section 5.4 below). Consequently the
impetus to move towards fast breeder reactors has greatly declined, although this
technology would undoubtedly be required if there was to be a significant increase in the
number of nuclear plants built world-wide.

There has been much speculation since the 1970s over the possibility of generating
electricity using a fusion reaction with heavy water as an abundant source of fuel.
Although the USA, the European Union, and the Commonwealth of Independent States
(CIS, the former Soviet Union) all have experimental facilities, the feasibility of a cost-
effective reactor appears remote. Perhaps in the long-term (say 2050-2100) this might
be attainable, but fusion is highly unlikely to have an impact on the energy scene during
the period considered here. Even the Chairman of the main UK nuclear generator, John
Collier, has argued [1] that commercial exploitation of fusion will be 40 or more years
away. However, its great attraction would be the near limitless source of raw material as
a supply of fuel. It also appears to be, in principle, much safer and environmentally
benign than the current generation of fission reactors. The amount of radioactive
material that might be discharged in a fusion accident would be small, due to the short
residence time of fuel in the reactor, and imder normal operating conditions the reaction
products in wastes are themselves short-lived.

4        Electricity as an Energy Source

The nuclear fuel cycle produces a high-grade energy source, namely electricity. This is
a "capital" resource that can be generated using either depletmg fossil or nuclear fuels.
These can be contrasted with the renewable (or "income") energy sources, such as solar
energy and tidal, wave and wind power. In the aftermath of the 1992 Earth Summit in
Rio de Janeiro (the UN Conference on Environment and Development) there has been a
greater awareness of the need to devise strategies aimed at sustainable development.
The World Commission on Environment and Development in the influential Brundtland
Report [5] defined sustainable development as meeting "the needs of the present without
compromising the ability of future generations to meet their own needs". Hence,
governments have been encouraged to conserve depleting fuel resources, and to make
greater use of renewable energy sources. However, the World Energy Council (WEC)
has suggested [6] that renewables can only contribute some 4-5% of total energy
consumed by 2020. The protagonists on both sides of the nuclear energy debate have
argued that the concept of sustainability supports their position. Thus, Collier [7] has
recently suggested that nuclear power is one means of helping to maintain the energy
resource balance of the planet at the same time as environmental quality. He had the

issue of greenhouse gas emissions and global warming specifically in mind. On the
ather hand, Greenpeace [8] argue that nuclear power will leave future generations with a
legacy of nuclear waste. The two positions could, of course, be reconciled if long-term
safe storage of waste could be assured, but this is difficult to prove a priori.

Electricity is high-grade in the sense that it can be used to provide either power or heat.
However, large energy losses occur in generation unless used in conjunction with
combined heat and power (CHP) systems. It is also wasteful in thermodynamic terms to
convert fuels to electricity only to employ them for heating. If heat is required, then it
would be far more efficient to bum fossil fuels (for example) to produce it directly.
Lovins [2] has suggested that in the USA only some 10% of final energy use requires
electricity. In any case, the latter is a rather poor substitute in transport, which
predominately uses petroleum products. The issue of sustainability of fuels in the
transport sector is still one that is insufficiently addressed given some of the projections
for the short life of oil and natural gas (see Hammond and Mackay [9] for a UK

Another limitation of electricity generation in terms of meeting global energy demand is
its requirement for a high technology infrastructure. It is often argued that energy
demands will grow in the future to meet the rising needs and expectations of the
developing countries, who often have rapidly growing populations. However, these
countries are unlikely to have the financial resources or expertise to follow a high
technology route, certainly not in Africa (except South Africa) or in much of Latin
America. Even in mainland Asia, where the industrial base is in some instances well
developed, the proportion of electricity actually produced by nuclear power is very small
(see Figure 2).

5        Forecasts of Nuclear Power 1990-2020


In analysing the likely future demand for energy it is useful to disaggregate the world
into geopolitical or regional groupings. Thus, although the global average consumption
of primary commercial energy per capita in 1992 was about 2kW, the regional variations
were dramatic. North America consumed lOkW (a fall of nearly one kW on that in the
 1970s), whereas the other regions stabilised with Western or OECD Europe at about
4.5kW, non-OECD Europe a little over 5kW, and the "Rest of the World" only using
 1.2kW. Obviously the developing countries (which make up a significant proportion of
the latter group) use non-commercial energy sources, such as wood and dung for heating
and cooking. Nevertheless, correcting for these fuel sources will redress the figures only
slightly. The data clearly reflect the enormous disparities in affluence across the globe.
\^'hen the per capita energy consumption data are multiplied by the respective
populations, they give rise to upward trends in regional energy demands. The
proportion of this demand that is supplied by electricity obviously varies from grouping
to grouping, as does the fraction met by nuclear power. This nuclear share of electrical

               Lithuania                                                          80
       Republic of Korea
Taiwan Province of China
        United Kingdom
           United States
         Czech Republic
                 Canada                 ^     15.2
               Argentina                ^14.4
                  Russia                111.8
            South Africa     ^m 6
            Netherlands      ^    4.9
                    India   •13.3
                 Mexico     M3.2
                Pal<istan   • 1.2
                   Brazil   10.7
             Kazakhstan     10.6
                   China     0.1

 Figure 2. Nuclear share of electrical power generation by producer country 1992, %
                            (source: United Nations [10])

power generation within the 30 "nuclear power" countries is shown in Figure 2 [10]
indicating a range from 0.1% (China) to 80% (Lithuania), with the unweighted average
being about 27%. When these are aggregated into geopolitical groupings, they mdicate
general upward trends, with the global share increasing as indicated in Figure 3. This
World Total is seen to level out in recent years according to lEA data [11, 12],
corresponding to a world-wide nuclear share of electricity generation of some 17%.

The discussion of future trends in global energy supply and demand over the last few
years has been greatly influenced by projections made by the WEC [6]. This is a
prestigious body with Member Committees in some 100 countries, although it tends to
be dominated by organisations having supply-side interests; principally energy utilities.
Their most recent forecasts were based on nine geopolitical regions and four different
scenarios. Estimates of population and economic growth in the various regions, together
with projections of changes in energy intensities (the energy consumed per unit of GDP
at constant prices), enabled forecasts of primary energy requirements and the fuel mix to
be made up to 2020.

      1970           1975            1980            1985             1990           1995

      Figure 3. World-wide nuclear share of electricity generation 1973-1992, %

In the case of nuclear power the WEC projected global electricity generation in terms of
a reference scenario and a range as depicted in Figure 4. The 'high growth' upper
bound on this range implies an increase of some 100% in nuclear power production over
the period 1994-2020. In contrast the WEC 'ecologically-driven', low energy scenario
suggest a growth of a little over 40%. Most rapid growth is presumed to occur in the
newly industrialised countries of the Asia-Pacific Rim (see Figures 5 and 6). However,
significant increases in nuclear electricity generation are forecast to take place in both
Western Europe and the countries of the former Soviet block. In the latter case, the rise
in production is only likely to occur after a period of constrained output following the
'collapse of communism' in these states. The duration of this lag will depend on the
pace of political and economic reforms, as well as the buoyancy of the international
economy generally.

Recently the United States Department of Energy [13] has produced its own
International Energy Outlook (hereafter denoted as IE095), which suggests a much
more conservative view of the prospects for nuclear power (see Figures 4-6). The model
used had similarities to that employed by WEC, although the detailed assumptions about
changes in economic growth and energy intensities differed, as did the time horizon of
1990-2010. Projections were made for ten individual (mainly industrialised) countries,
with the rest of the world split into regions. The IE095 forecasts for the early part of the
1990's are now seen to fall below actual data as reported by the lEA [11, 12] and BP


                                  WEC {1993 ): REFERENCE
                                  SCENARIO AND RANGE
O    3000

<    2000
                                          DATA :IEA (1994)/BP (1995)
O    1000

            1970   1980   1990          2000             2010          2020

        1500                    1             1
                                                                      '                     '
                      HISTORICAL DATA {lEA / BP ) -            FORECASTS -
                         ^ ^ WESTERN EUROPE                      ' " ' ' ^ WEC ( 1993 )
                        -^   EASTERN EUROPE/CIS
                                                                1 ^       IE095
  D 1000
  C3                                                         ^ ^ s ^ ^ ^ l -              ^ < — NEA(1994)
  OC                                                     '^^^^^"^                     ^
  g                                         »-»'*^^Jl---^"
  O      500                                                                                "
                                                                                          ^ -^

          n       M>'^''*'^^l                 1                       I                     1

               1970          1980           1990                    2000                  2010              2020

          Figure 5. Regional trends in nuclear electricity generation: wider Europe

a further 72 plants under construction [7]. There are major plans for the construction of
replacement stations in Western Europe as earlier reactors come to the end of their
operatmg life. Nearly 150 reactors would have to start construction during the next 20
years in order to replace about 80 GWe of plant due to be decommissioned over the fu-st
quarter of the 21st Century [7]. The main countries that might be expected to participate
in such a programme include Belgium, France, Italy and (West) Germany.

Estimates of nuclear generatmg capacity are not given explicitly by the WEC [6], but
projections have been reported by the Nuclear Energy Agency [15] and in IE095 [13].
In addition, the Uranium Institute has provided forecasts [3] based on the questionnaire
responses of its members concerning their plans for plant operation and construction up
to 2010. These are the major corporations mvolved in nuclear power generation and
uranium fuel processing within the OECD and some of the CIS Republics (including the
Russian Federation, but not the Ukrame). Its forecasts are shown graphically in Figure
7. They are very close to the projections given in IE095, and their estimates for North
America and Western Europe are ahnost identical to those suggested by the NEA. This
is perhaps unsurprising given the similarity in the methodology adopted by both the
NEA and the Uranium Institute. The results show that the global nuclear generating
capacity will grow by some 22% between 1992-2010. However, the bulk of this
expansion will take place in Asia and Australasia (about 120%), mainly in the countries


                     HISTORICAL DATA (lEA / BP ) -
   7       1600
                        -^   NORTH AMERICA
                       - O ASIA AND AUSTRALASIA
           1200        -D- REST OF WORLD
  C)   )
  o        4O0

              1970           1980            1990           2000     2010              2020

           Figure 6. Regional trends in nuclear electricity generation: non-European
                                     geopolitical groups

of the Asia-Pacific Rim. This is consistent with the forecasts of nuclear power
generation discussed in Section 5.2 above, although it tends to support the more
conservative end of the range of projections.


The World Energy Council [6] have argued that the development of the nuclear power
industry up to 2020 will not be constrained by shortages of uranium fuel. However, the
Western Worlds' output of newly mined uranium has fallen significantly in recent years,
as illustrated in Figure 8. Here global reactor requirements estimated by the Uranium
Institute [3] are contrasted with fiiel supplies. The shortfall in supply over demand in
the early 1990's has been offset by drawing down on inventories, and by the recycling
of reprocessed fuel products. Stocks held by Western producers amounted to some
15000 tU (tonnes uranium) at the end of 1992 [3]. Forecast supplies of newly mined
uranium depend on the mine capacity utilisation rates assumed. The range indicated in
Figure 8 corresponds to what is arguable the extreme band of 58-100% capacity. In
1988-1992 the average rate was about 76%, although it fell to 58% in 1992 [3]. Clearly
demand will need to be met by a combination of primary production, recycling, and a
drawdown on stockpiles. The 'collapse of communism' has led to a global market for
uranium, which is yet to settle down.      Consequently, the Uranium Institute (3) has

         bUU                              1                      '1                          1

                      ACTUAL 1 FORECAST
                                                                            WORLD TOTAL-v
    z    400
                                 REST OF WORLD V
                                              EASTERN E U R O P E / C I S
                                               WESTERN EUROPE

                                               NORTH AMERICA

          n                               1                      1                           1     •       1
               1990                   1995                     2000                         2005   2010

                Figure 7. Cumulative nuclear generating capacities by regional groups
                                       data and projections

drawdown on stockpiles. The 'collapse of communism' has led to a global market for
uranium, which is yet to settle down.       Consequently, the Uranium Institute (3) has
that in the face of uncertainty nuclear fuel producers and reprocessors need to react
flexibly in the expectation of fluctuations in the supply and demand balances.

6               Nuclear Energy Issues in Western Europe

6.1             STRATEGIC ISSUES

Perhaps the main factor that will determine the extent to which Western Europe will
embrace the nuclear option to meet a significant fraction of its electricity needs into the
next century is its public acceptability. This is determined by the degree to which the
public are convinced that nuclear power stations can operate safely, and that radioactive
by-products can be securely stored over long periods. The extent to which people in
different European countries appear to accept the nuclear option varies quite widely;
presumably due in part to cultural factors. In France, which has very little in the way of
mdigenous fossil fuel reserves, the nuclear share of electricity generation is already
about 73% (see Figure 2). Certainly the French have made little resistance to this in
contrast with other countries where there are active and vocal opponents of nuclear
power, who have a significant influence on the public via their access to the media. The
safety record of the nuclear energy industry compares favourably with its competitors
[16], but is often perceived as being more life-threatening; arguably out of proportion to

   1000000                     I                 1                          1
                  ACTUAL FORECAST
                                                WORLD SUPPLY-
                                                _ - _ . ^ T , , . i n«T»          FORECAST
                                                - • - A C T U A L DATA            py^^GE
   >- 80000

                                                            WORLD TOTAL ^
                            REST OF WORLD   \

      60000   -          -;;^=^:^b; — —
                                                        ASIA AND AUSTRALASIA

  i   40000
                                                       EASTERN EUROPE/(;!!>

                                                        WESTERN EUROPE


                                                        NORTH AMERICA

                               1                  1                         1
                             1995               2000                       2005              2010

        Figure 8. Cumulative uranium supply and demand: data and projections

the actual risks. Obviously, it is incumbent on the civil nuclear industry to reassure the
general public over its long-term operating safety, a task that is undoubtedly daunting.

The next most significant inhibitor of nuclear power in the world after the collapse of
communism, where private ownership has become the dominant mode of economic
organisation, is the cost issue. The relatively high capital cost of nuclear plant in
comparison with the alternative fossil fiiel generators was discussed earlier in
Section 2.2. Nevertheless, this is counterbalanced to an extent by the uncertainty over
fossil fuel supplies in the medium-term. The lifetime and global distribution of these
vary enormously:

                  Oil: OPEC (Middle East)-dominated, 20-40 year life
                  Natural Gas: CIS (Russian)-dominated, 40-70 year life
                  Coal: Widely distributed, 80-240 year life

These figures are rough estimates assuming current rates of consumption (14), and new
reserves are quite frequently found. However, they indicate that the sources of fossil
fuel supplies for OECD countries, with the exception of coal, are rather insecure. If
depletion of oil and gas at anything like this rate actually occurred, then the price of
these fuels would rise. This would make the financial case for nuclear energy look
much brighter. It has often been argued since the "oil crises" of the 1970s that nuclear
power should be adopted as an "insurance policy" against the insecurity of the oil
market. In reality the two resources are not substitutable, particularly in the transport
sector as discussed in Section 4 above.

In the industrialised regions of the world it has often been considered important to keep
a technical capability in civil nuclear power in order that the West does not fall behind in
this area of high technology. It is also seen as a technology with considerable export
potential. Considerations of this type have certainly influenced the industrial strategy of
countries such as France (and Japan).


The prospects of global climate change induced by the emission of so-called
'greenhouse' gases from fossil ftiel combustion is an issue of considerable interest and
concern to those Western European nations at risk of flooding if sea levels were to rise
as a result of climate change. Notwithstandmg this, the European Union is attempting to
meets its obligations to reduce COj emission under the UN Framework Convention on
Climate Change agreed at the Rio Earth Summit. The main focus of this activity is
concentrated on an examination of economic instruments, such as a carbon tax, to
discourage emissions. These would be favourable to nuclear power, but also to energy
efficiency and renewable energy sources (see Section 4). Friends of the Earth and
Greenpeace [8, 17] have argued that nuclear power is one of the least cost competitive
means of CO2 abatement. Table 2 displays the relative cost-effectiveness of energy
saving measures and nuclear power for reducing CO2 emissions. The ranges indicate the
uncertainty bands suggested by various US studies [17]. Nevertheless, it is clear that an
energy efficiency strategy displaces between 2.5 and 20 times more carbon dioxide than
nuclear power per dollar invested. In any case in order to have a serious effect on global
wanning the investment in nuclear power would need to be enormous. One study [17]
has suggested that to replace coal-fired power stations with nuclear ones by 2025 would
require 5000 new 1 GWe nuclear plants that would need a world-wide building
programme of one new station every two and a half days, with nearly half of these being
located in the Third World. A similar study based on lEA data [17, 18] concluded that
to shift OECD countries to a 70% nuclear share of electricity generation (the current
proportion in France) by 2010, would require the construction of 800 1 GWe stations at
a rate of one every nine days. These figures are implausible, and serve only to illustrate
that a nuclear-only option for tackling global warming is not feasible. It may well, of
course, play a part in a programme to reduce CO2 emissions together with other
measures. However, the choice of nuclear energy is likely to be dictated by
considerations other than global warming, against a background of a European Union
market fi-amework.

7        Concluding Remarks

The prospects for global nuclear electricity generation has been examined in the light of
the need to meet conflicting energy supply and envirormiental pressures over recent
decades. It is argued that fission (thermal and fast) reactors will dominate the market up
               TABLE 2. Cost-effectiveness of CO2 Reduction Measures (ton/1987 $)

                      Measure -               Efficiency      Nuclear Power

                       Range of               0.0130-0.0500   0.0025-0.0060

                 •Source: Keepin, 1990 (17)

to the period 2010-2030, with fusion being relegated to the latter part of the 21*' Century
A number of issues affecting the adoption of nuclear electricity generation have been
considered, including its cost, industrial strategic needs, and the public acceptability of
nuclear power. The contribution of nuclear power stations to achieving CO2 targets
aimed at relievmg global warming is shown not to be cost-effective in comparison to
alternative strategies for sustainable development, such as renewable energy sources and
energy efficiency measures. However, nuclear energy can play a useful role in CO2
abatement if countries adopt it for other reasons; for example, because of lack or
insecurity of other fuel supplies.

Trends in the generation of nuclear electricity from fission reactors have been critically
analysed in terms of the main geopolitical or regional groupings that make up the World
in the mid-1990s. This has been done by examinmg several recent, but somewhat
conflictmg, forecasts of role of nuclear power in the fiiel mix up to about 2020. These
indicate a growth in nuclear electricity generation world-wide of between 30-120% over
the period 1990-2020. The major expansion in generating capacity is likely to take
place in the Asia-Pacific Rim: Chma, Japan, South Korea and Taiwan. These so-called
"Tigers" have rapidly growing economies with carrying capacity for a major expansion
in nuclear power facilities. They typically have very limited reserves of indigenous
fossil fiiel supplies (except China). In addition, they are generally attracted by a high
technology energy option, and arguably have rather lower concern for environmental
protection than do European and North American OECD nations. Nevertheless, the
global nuclear industry overall will continue to be dominated by a small number of large
nuclear electricity generating countries; principally the USA, France and Japan. These
three industrialised states accounted for nearly 60% of installed nuclear reactor capacity
in 1990, and they are still likely to retain roughly this share by 2010 [3] unless the more
exaggerated projections [6] are fulfilled.

8        Acknowledgements

The present contribution is a revised and updated version of the original invited paper
given at the International Congress: Innovation and Technology XXI, Oporto, Portugal,
20-25 March 1995. The author is grateful to the Organising Committee and to Professor
Albino Reis (a Vice-Rector of Universidade Lusiada, and Chairman of the Energy
Session) for their kind invitation, which stimulated this work. He would also like to
acknowledge the support of British Gas pic, who have sponsored his Professorship.
However, the views expressed in this paper are those of the author alone, and do not
necessarily reflect the policies of the company. Finally, the author is grateful for the
care with which Mrs Sarah Crampin, Miss Sarah Tucker and Miss Dawn Holland
(University of Bath) prepared the typescript and Mrs Gill Green prepared the figures.

9        References
1        Collier, J.G.(1994) The role of nuclear power in a changing world, Bristol University (UK)

2        Lovins, A.B (1997) Soft Energy Paths, Penguin, Harmondsworth.

3        The Uranium Institute (1994), The Global Uranium Market: Supply and Demand 1992-2010,

4       Nuclear Electric plc,(1994) Submission to the UK Government Review of Nuclear Energy, Volume
        2: The Environmental and Strategic Benefits of Nuclear Power, Harmondsworth.

5       World Commission on Environment and Development (1987), Our Common Future (The
        Brundtland Report), OUP, Oxford

6        World Energy Council (1993), Energyfor Tomorrow's World, St. Martin's Press, New York.

7        Collier, J.G.,(undated) Nuclear Power - Clean Energy for the 21st Century, Nuclear Electric pic.

8       Greenpeace (1994) No Case for a Special Case: Nuclear Power and Government Energy Policy,

9       Hammond, G.P., and Mackay, R.M., (1993) Projections of UK oil and gas supply and demand to
        2010, Applied Energy, 44 93-112.

10       United Nations (1994), World Economic and Social Survey 1994, l^evi York

11      International Energy Agency (1994), Energy Statistics ofOECD Countries 1991-1992, OCED,

12      International Energy Agency (1994), Energy Statistics and Balances of Non-OECD Countries
        1991-1992. OECD, Paris.

13      US Department of Energy (1995), International Energy Outlook 1995, DOE/EIA-0484.

14      BP Statistical Review of World Energy, (1995) (annual).

15      Nuclear Energy Agency (1994), Nuclear Energy Data, OECD, Paris.

16       Fremlin, J.H. (1987), Power Production: What are the Risks?, OUP, Oxford.

17      Keepin, B.(1990), Nuclear power and global warming. In Leggett, J., (Ed), Global Warming: the
        Greenpeace Report, OUP, Oxford,, pp 295-316.

18      Kouvaritakis, N (1989)., Exploring the Robustness of Energy Policy Measures Designed to
        Reduce Long-term Accumulations of Carbon Dioxide: An Approach, lEA, Paris.

                M. J. SOILEAU,
                12424 Research Parkway, Suite 400
                Orlando, FL 32826-3271


Humanity has progressed from the Stone Age through the Information Age of the 20th
century. In the next century new wealth will be created from knowledge. Will be
discussed Research, Education and Training in photonics that will be needed to ensure a
major role for photonics in the 21st century.

1. Introduction

The 20th century saw the evolution from the Industrial Age to the Information Age. The
21st century should see the progression from the Information to the Knowledge Age.
The Information Age is spawning a world in which new wealth is based upon
knowledge. One can describe research as the creation of information, training as
guiding the use of information, and education as the fusing of information into
knowledge. Photonics (or optics) is a good example of the interrelation of education,
training and research. Photonics (or optics) is at once the tools of education, research
and training and is the product of these functions. Photonics-based industries will
provide much of the wealth of the next century and will be the source of tools for other
fields, e.g., knowledge exchange, efficient production, environmental security and
medicine. The natural resource needed to create knowledge-based industry is the minds
of humans. Education, research and training at once provides the human capital needed,
the pathway to new knowledge, and maybe (one can hope!) the pathway for the
evolution of the Knowledge Age to the Age of Wisdom by the end of the 21st century.
In this paper, I address the role of photonics in the 21st century — the pervasiveness of
optics, the economic impact of optics, and the preparation of human resources needed to
ensure this role.

2. Is there a Bright Future for Photonics?

Before trying to answer the question posed by the title, I should first define the term
O. D. D. Soares et at. (eds.). Innovation and Technology - Strategies and Policies, 141-147.
© 1997 Kluwer Academic Publishers. Primed in the Netherlands.
        The generation, manipulation, transport, detection, and use of light information
and/or light energy; where light refers to electromagnetic radiation from the far infrared
to the x-ray region.
        Other terms used interchangeably with photonics (or as subtopics of photonics)
are quantum electronics, electro-optics, lightwave technology or simply optics.
        The invention of the laser sparked a renaissance in optics that was then fueled by
Cold War competition between East and West. Military planners saw much potential
for this technology, and while laser weapons are still the sole territory of Hollywood,
photonics systems were the stars of Desert Storm. Indeed, the classical photonic
systems (i.e., pre-laser) such as periscopes, binoculars, and range finders have been
substantially supplemented by laser range finders, laser designators, laser radars, laser
gyroscopes, as well as low light level and passive infrared viewing systems which give
US forces command of the night.
        Now that the Cold War is over and defense spending is on a tight downward
spiral, a key question is can this defense-related technology be transitioned to the private
sector. I think that the answer is a resounding yes and, in fact, the backwash of
nondefense applications has been building long before the New World Order was
declared. Examples abound. Fiber optics telecommunication is certainly the most
obvious, as is CD technology for audio and computer ROM applications. Industrial,
medical, and environmental applications of photonics systems have been developing
over several decades. In fact, photonics systems have long been a part of our consumer
economy. The most obvious are TV's, CD's, and VCR's. Less obvious are all the
control units for these devices and other home appliance remote controls. Virtually
every home in the US has smoke detectors (which are basically photonic devices, i.e., a
light source and a detector) and now many homes and businesses are equipped with
infrared motion detectors that either trigger alarms or turn on lights, etc. Photonics
systems have even made their way into toilets as many public "facilities" now have
"photo flushers." What more can we expect?
        The answer to that question depends on technological advances, attempts to push
defense technology into new markets and applications, as well as global economic
factors. As I gaze into my crystal ball (a passive photonic system), I see several growth
areas for photonics, including:

       1. Entertainment
       2. Telecommunications
       3. Manufacturing
       4. Biomedical applications
       5. Remote sensing
       6. Information processing and
       7. Traditional applications such as precision instrumentation and systems for
research markets.

        Potential dollar value of these markets and opportunities for jobs for photonic
scientists, engineers and technicians have been estimated by many to be of astronomical
proportions with some estimates as high as 10^^ dollars per year!*''^'^' Will these
predictions be realized? I think that it is impossible to answer such questions, if for no
other reason than it is impossible to agree on what should be counted. What is clear is
that there are now large markets for photonics-based products, that these markets are
expanding, and that new products and markets are rapidly developing. What is less
clear is the role that various countries will play in this economic adventure. Who will be
producers or who will be mostly just consumers of photonics products? I hope the
answer is that the US can reverse the trend and begin to lead in the production of
products that result from the leading edge research that we excel in.
        One window of opportunity for US industry is in application of photonics to
entertainment. HDTV is rapidly being developed, with Japan well in the lead at this
time. However, there remains no good solution to the display or "electronic projector"
for such systems. A leading candidate for electronic projectors is laser driven displays.
Innovation in laser diode pumped solid state lasers have resulted in a renaissance in
solid state laser research. New laser crystals, together with new nonlinear optical
materials, and innovations in systems design offer the promise of compact, reliable,
efficient red-blue-green sources needed for laser projection systems. This is an area of
current US leadership and offers US industry a chance to reenter the TV market.
        Laser application in manufacturing is a classic example of technology pioneered
in the US and now dominated by Japanese and European companies. The Japanese
government and industry partnerships have spent over a billion dollars on a ten year
program for improvements in excimer lasers alone. However, here too is a window of
opportunity for the US and others. Recent advances in high power diode lasers and
laser host technology offer the promise of new laser machine tools that will be all solid
state with all the advantages of compactness, efficiency, reliability and ruggedness that
we have come to expect in solid state electronics. This topic is the subject of a $34M
Technology Reinvestment Project (TRP) award, the largest such award in this program
(which is a cornerstone of the Clinton defense transition effort). Major engineering
problems remain to be solved and diode costs are still prohibitively expensive, however,
these are not fundamental problems, and whoever solves them will lead the market in
laser machine tools in the future.
        The press for ever higher density electronic circuits is driving the push for x-ray
lithography. The Japanese are leaders in the investment in synchrotron x-ray sources.
However, such sources are massive, unreliable and extremely expensive. Once again
diode pumped solid state lasers offer an alternative. At this time, the US is leading the
development of laser driven plasma x-ray sources. Much is still to be done in the
development of this technology and the hard engineering of systems for production has
not yet started. The microelectronics industry is arguably the largest in the US. Our
progress in developing advanced systems for microelectronics manufacturing will
certainly determine if we will remain a producer as well as a consumer of such products.
        A final topic for this section is the so-called information super highway. This is
really a photonics super highway since information is conveyed by photons through
optical fiber. This is relatively mature technology, however, the giant leap will be high
capacity "interchanges" for the super highway. At the present time information is
conveyed by photons but then translated back to electronics for distribution to the users
(e.g., to the home). To exploit this super highway system we must develop cost
effective technology for delivering high information content directly to the user. This is
the domain of high speed, high bandwidth photonics switching which is a current topic
of world-wide photonics research. Huge markets await those that can produce the
needed photonics switches, relays, sources and amplifiers needed to bring this super
highway to full use.
        Various groups have tried to assess the importance of photonics (optics) in the
next century. Such assessments require the extensive use of a crystal ball and should be
viewed with some skepticism. The predictions are indeed bright. Some forecasts
predict markets of hundreds of billions of dollars annually. Indeed, the pervasiveness of
optics adds difficulty to the normally difficult problem of predicting the future.. We
can, I think, be certain that photonics will be an important technology in economic
terms, in human terms (e.g., medicine, education, etc.), and in future scientific and
technological advances in other fields. The US National Science Foundation (NSF) has
identified optical sciences and engineering as an important area of future emphasis.*'"

3. Education

One should consider at least two aspects of photonics and education:
        First, how should we educate people to take part and contribute to industries and
services associated with photonics?
        Second, how will photonics technology influence education in other field?
        Most of the education in the sciences and engineering is supported by
governments. This is true even in the US, which seems to be ever more driven to a
smaller role for government, as well as other nations which recognize a more central
role for government. This support by government is true in the prestigious, private
universities in the US (e.g.. Harvard, MIT, Caltech, etc.) since research staff, graduate
students and faculty participating in graduate programs in the sciences and engineering
are at least partially (if not mostly) supported by government contracts and grants.
        Much, if not most, of the government support for science in the post Second
World War period was connected with the great East-West confrontation. Science was
supported in efforts to achieve and/or maintain military superiority or to score
ideological points in the cold war era. No one mourns the end of the era of nuclear
confrontation. However, the reality is that the East-West confrontation was the primary
justification for nations (both East and West) to spend the money of their citizens on
science research and education.
        The anecdotal evidence seems to indicate that there is now a world surplus of
PhD educated people in the physical sciences and engineering. This does not seem to be
the case for technician level workers (at least not in the US) where a recent survey
showed more than 345,000 people now working in this field alone in the US, and there
will be more than 740,000 by the year 2000.*'* Recent graduates of BS and MS
educated students are still in good demand, although less so than in the recent past. It is
indeed hard, if not impossible, to gauge societies needs for highly educated people in
any field. Given this difficulty, how do we convince society that it should invest its
resources in costly education and research? The answer has to be that new wealth will
come from knowledge and knowledge comes from research and education.
        The discussions that follow assume that indeed the economic forecasts are correct
 and there will be a growing need to educate people in photonics. Three categories will
 be discussed: 1) photonics technicians; 2) BS and MS scientists and engineers; and 3)
 PhD level education.
        The US Department of Education recently commissioned an extensive study of
the US needs for photonics technicians and the level of education required/'* A chief
finding of this study was that a high level of technical education is required for such
workers. The work done is complex, technically demanding, and highly changeable.
Photonics technicians must be proficient in science and mathematics, as well as skilled
in the use of maintenance of photonics devices, components, systems, and applications.
A major conclusion of this study is that photonics technician education (and technicians
for the so-called high technology fields) cannot be a "second prize" for students not
capable of acquiring a university degree. The math and science education should be
more applied than the college preparatory classes, but must have a similar degree of
        The skill standard for photonics technicians is such that a minimum of two years
of high school and two years of post-high school education is required. On very positive
aspect of such rigorous technician level education is that students can easily transition to
a university degree program if they choose to do so. This opportunity for university
level education is considered critical in the US, since custom dictates that students be
allowed to follow career paths with greater potential benefit.
        Four-year university level preparation (typical BS degree in the US) for careers
in photonics is typically a bachelor's degree in one of the traditional science or
engineering disciplines (most commonly physics or electrical engineering).*^"" Optics
has been a traditional part of physics degree programs and now many electrical
engineering departments offer some undergraduate courses in optics. Students can
select specific BS programs in optics at selected universities, however, such programs
are relatively rare. Many educators (including those that work in optics) believe that
students should not become too specialized in a sub-field (like optics) during a four-year
degree program. A compromise (which we have chosen at our university) is to offer a 4
to 6 course sequence (which constitutes a minor in optics) in the context of a degree in
physics or engineering.
        One area where change is occurring is at the master's (MS) level of study. There
are now many graduate programs in optics worldwide. In the past, MS programs (at
least in the US) were mostly stepping stones for the PhD degree. However, industry is
increasingly interested in MS level students with some practical experience rather than
PhD graduates. Several new programs done in cooperation with industry are being
developed in the US (e.g., at CREOL, the University of Alabama-Huntsville, University
of Connecticut, etc.).*'''*'
        The PhD degree in optics (photonics) is subject to increasing debate in the US.
Support for the education and research components of such education is under severe
pressure. Many of the sources of federal support have been severely cut or eliminated.
State universities are under severe financial pressure to reduce costs and better serve
undergraduate students. An unfortunate outcome of these pressures is a decrease in
support for all graduate education, including photonics and other areas of science and
engineering."' Such changes will undoubtedly impact the development of knowledge-
based industry in the US and abroad (since more than half of the PhD level scientists
educated in the US are from abroad).
        The gloom of reduced budgets aside, what should constitute a graduate education
in photonics (optics)? Approaches vary with most universities offering degrees in
traditional disciplines with varying amounts of optics content and perhaps a thesis or
dissertation in photonics. Some universities (few, but in increasing numbers) treat optics
or photonics as a discipline onto itself. The recent NSF Panel on Optical Sciences and
Engineering recommends that optics be so recognized. A more common situation is that
students pursue a traditional discipline (e.g., physics or electrical engineering) with a
concentration in the optical sciences.
        In the final part of this paper, I want to briefly discuss the role of photonics in
modern education. The availability of CD-ROM's and computer data services "on line"
are changing the way students are taught and the way they learn. Increased access to
high bandwidth communications connected worldwide provide new opportunities for
delivery of education in all fields. This should provide special opportunity for less
developed regions to access much of the best education from the world's finest
universities. Some educators are predicting that the Information Age (due in large part
to optical communications) is changing the nature of universities, and some are
predicting that most universities will not exist for long in their present form in the next
        My own view is that universities will evolve to better exploit technology in the
delivery of education. The new technology will certainly provide enhanced access to
educational materials. However, I do not think that this century is the last one for which
universities are a collection of scholars and students. Too much education happens in ad
hoc ways that cannot be done via a cold, electronic media. An old friend advised me to
go to a university with good students to acquire the best education in science. He noted
that in the beginning of our education, the teacher teaches and the student learns. This
process evolves to one at the PhD level where more is learned by the student's actions
and from fellow students. In fact, I tell my students that a signal that they are ready to
complete their PhD is when they begin to teach me more than I teach them. The human
contact in this process can never be replaced.
        In summary, the future for photonics in the next century is indeed bright.
Knowledge of photonics will be part of the wealth creating process of the 21st century.
The key element in successfully developing this new wealth is investment in human
capital. Photonics-based technology is but one means to develop this capital through
global communications. The human content of this process is what promises the hope of
evolution from the Information Age, through the Knowledge Age to the Age of Wisdom
of the 22nd century.


1.       "Optoelectronics: Enabling the Information Age," Optoelectronics Industry
Association, 2010 Massachusetts Avenue, NW, Suite 200, Washington, DC, 1995.

2.       "The Light Fantastic," Business Weeks, Number 3318, May 10, 1993.

3.      The Lightsource. The Newsletter of the Optoelectronics Industry, Vol. 3, No. 1,
January 1994, 1994, Strategies Unlimited.

4.      Optical Science and Engineering: New Directions and Opportunities in
Research and Education, NSF Workshop, May 23-24, 1994, Arlington, VA.
5.      National Photonics Skill Standard, © 1995, CORD, P.O. Box 21689, 601 Lake
Air Drive, Waco, TX 76702-1689.

6.      Optics Education. SPIE's Annual Guide to Optics Programs Worldwide, SPIE,
P.O. Box 10, Bellingham, WA 98227-0010, USA.

7.      International Conference on Optics in Education, SPIE, July 9-10, 1995, San
Diego, CA.

8.       "Engineering Education for a Changing World," published by The American
Soceity of Engineering Education, 1995.

9.       "Roundtable: Whither Now Our Research Universities," Physics Today, Vol.
48, No. 3, pp. 42- 51, March 1995.
This page intentionally blank

                 Prof. Carlo Corsi
                 Consorzio Roma RicercheITALIA


The specific content of this speech regards the project of an Integrated System of
Innovation Centres.
First, it is necessary to define exactly what Innovation Technology is. For sure it is not
simply applied research, since it covers applied research itself, industrial and product
development and, last but not least, the impact of the product on the market.
   SCIENTIFIC RESEARCH                                                NDUSTRIAL DEVELOPMENT

                       INNOVATION TECHNOLOGY

          PRODUCT/PROCESS                                             MARKET

                    Fig 1: Innovation and technology man frame
So Innovation Technology is a complex non linear (circular) phenomenum and not
simply sometliing coimected to applied research.
However, a general definition of iimovation, automatically refers to something new. But
new for whom and where?. For instance, it possible to assimie that a product which is
new in a geographic or market area nowadays, coidd be new as well in another one in
the future. These considerations introduce two fimdamental aspects of Innovation
Technology which need to be taken into accoimt: the first one reflects the international
character of spatiality and the other one the local character of temporaUty.
0. D. D. Soares et al. (eds.), Innovation and Technology - Strategies and Policies, 149-156.
© 1997 Kluwer Academic Publishers. Printed in the Netherlands.

                              INNOVATION TECHNOLOGY

                  INTERNATIONALITY 4      SPACE      •TERRITORY

               COMPETITIVENESS     4      TIME       •KNOWLEDGE/

                                                               I  PROCESS

                   Fig 2: Innovation and technology interactions
An example will help in explaining this concept. Until a few years ago, Italy was one of
the most important producers of electronic valves - those used for the old valve radios.
Nowadays we are hardly among electronic producers of a certain level, while the NICs
(Newly Industrialised Countries), like Taiwan for example, that just 50 years ago hardly
knew what electronics was, are nowadays among the greatest semiconductor producers.
It appears so clear how and why the concepts of space and time are so strictly related to
the problem of Innovation Technology although the market globalization is impacting
strongly by limiting the spatial concept and shortening the timelag.

                         INNOVATION TECHNOLOGY
The Key to success for industrial and national economy:
The best management of innovation change
Rate of change and progress too fast and wide for an isolated industrial structure
to react promptly and adequately
"Management of Change" not "Change of Management"
Technology innovation structures to support know-how and co-operation
- Science Parks
- Innovation Centres (Technological Poles)
- Business Innovation Centres - BICs
             Table I Innovation and technology a key to success
Innovation Technology, and in particular the ability to manage it and the fast changes
of today's world, are the bases of the economy of every advanced country. The proper
management of this ability guarantees the country's real competitiveness on the
economical level.

                          TECHNOLOGY MANAGEMENT
Make "the new" as for what currently existing (Temporal Aspect) and as regards
a given territorial economical - technical situation (Spatial Aspect).
Product result but also interactive process between research activity and industrial
Fast and complex change in technology field involve deep transformations in firms'
products, processes and strategies.
Necessity to single out, analyse and evaluate, in terms of costs and times, the
outside developed technological innovations (more seldom inspired inward)
strategically important for the firm's future.
               Table II Innovation technology management cycle
Therefore, Innovation means also organisation, management ability and in this way
does not relate only to industry but also to governmental services.
In order to help the Innovation development, several initiatives were planned and
undertaken for the settiag up of Centres named in different ways: Science Parks,
Innovation Centres, Technology Poles, BICs (Business Innovation Centres),...
All these names, however, refer to a specific definition, identifying a certain type of
This speech will concentrate on the strategic importance of creating such structures
which can help the interaction between the knowledge somces - Universities and
important Research Centtes - and its users, industries and SMEs in particular. To
accomplish this goal it is necessary to develop the capability to transfer the Innovation
Technology fiom the Somce to the User.

appropriate use of technologies and innovative processes to obtain advanced products,
competitive on international markets.
Organisation of synergical exchanges of technological know-how among different cultures
and disciplines.
Development of a catalyst function for transferring knowledge and technical culture
between sources (Universities, Research Centres, etc..) and users (Industries and Services).
Mixed structures, strongly synergic, among: Universities, Public Research and Economic
Bodies, Chambers of Commerce, Territorial Financial Economic Bodies and Public and
Private firms.
              Table III Objectives in innovation and technology

                                INNOVATION KEYS

Know-how / Technological Behaviour
Technology Transfer: to know how to teach "learning to learn"
Solutions for problems avoiding new solutions in search of problems
"Good Sense" in technology strategies:
Future needs planning, by activating co-operation in general development trends
               Table IV Innovation and technology driving trends
Complex problem based on cultural behaviour which presuppose "knowledge" and
capability to transfer it "learn to teach the learning" and to make use of it "learn
to learn".
"Not invented here" problem in high-tech structures and problem of SMEs
scarcely prepared to openings also because of cultural weakness.
It is important to single out problems needing solutions and not solutions in search
of problems.
Importance of networks Relay structures and clusters.
             Table V Innovation and technology transfer culture
shoidd be better defined as "infonnation difiusion", meaning with this expression Uie
capability to give technical infonnation to the User. Qa the contrary, the concept of
Technology Transfer is far more complex, since it implies the transfer of product and
process know-how. Usually this goal is achieved by traasferring qualified personnel (so
it is clear that certain countries, like the United States, succeed in such transferring
thanks to the high mobility of the workers) or acquiring know-how.


From the previous considerations it is possible to understand why some European
Countries' situation is so overbalanced: careers are based on a sort of corporative system
and the workers' mobility is therefore very limited, especiallyfi-omthe Academic world
to enterprises and vice versa.
Moreover the globalization of the markets especially for advanced high tech products is
pushing a stronger synergistic co-operation among know-how generators and industrial
manufacturing users.
This is one of the most important reasons for which Scientific and Technological Parks
have been constituted and developed. They are a kind of container/infirastructure where
a specific kind of transfer takes place: people work there aiming at the same goals,
although using different methodologies and tools. In the end Industry is able to develop
the product and University Research labs carry out innovation and research.
Then is evidait the importance of developing these research areas/Scientific Parks and
creating a capability of network stracture co-ordination in order to help the SME's
growth. However, it shonld not be forgotten also how it is important helping the
emergent, true bmovation, in structures and sites where such growth effectively shows
capabilities of autonomy and support.
Certainly, when these structures are realised, several factors should be taken in
consideration: especially thefinancialmeans and the general economic situation of the
country should impose the choice of solutions which allow the maximum return as for
the investments. Again, the problem brings back to the need of developing a network
system, a "cluster integrated system", whose structure will be analysed more in details
in the following.
First of all it should be pointed out a problem that is often underestimated, related to the
quantity and quality of the persoimel. Some countries - like Italy, for example - show an
evident gap if compared with others.
It can often happen that a country has not only httle resources as regards structiu-es and
infrastructures, but also is poor for what concerns human resources, and therefore lacks
of personnel with suitable technical expertise to face the problem of the Parks and, more
in general, of Innovation.
However, this situation confers also an advantage, since it allows to optimise the
development projects, referring to the other countries' experiences, that is to survey the
international scenario. In this way, analysing the experience of the American, the
Enghsh and the French parks - which show very different characteristics, since the
French ones are very large structures with a centralised organisation and planning,
while the English ones have much smaller dimensions and are more numerous - it is
possible to complete a serious survey and to learn by the others' experience.
The main conclusion deriving from such analysis is that it is necessary to create an
Innovation Centre which has a strong interaction between the knowledge sources and
its users. It follows that it is necessary to constitute structure typologies which have
their own functional specificity, like for instance the BIC that have little dimensions,
but a relevant strategic importance, because of its function of enterprise-incubator, that
allows them to play a primary role in the creation of Innovation Centres (IC). Such ICs
have to constitute the fundamental modide for broader structures like those of the
Scientific and Technological Parks.
A this implies that one of the primary aims is the co-ordination of aU the Bodies
usually addressed to the planning and development of the Technological Innovation,
that is to say Universities, Scientific Research Centres and even Industrial and Trade
Union Associations.
To conclude, the proposed here discussed is to develop an Integrated System of
Innovation Centres, implying important choices of both vertical and transversal kind.

A pragmatic approach, based on economic and technological "good sense", takes
into account:
a) international addresses of Innovation Technology Strategic themes
    (Electronics/Informatics, Telecommunications, Biotechnologies, New Materials,
    Robotics - Automation, Environment, Transports);
b) planning and infrastructural/territory context ties
                  Table VI Innovation networked centres
Integrated System solution, based on the singling out, within a Global Project, and
planning of Building Blocks which allow to realise , in short times, an Integrated
System of Innovation Centres with Clusters Networks structures among big
Centres, sources of knowledge in the territory (University and Research
Laboratories and Public and Private Industry Big Laboratories) and the Users in
the Territorial Industrial Context, especially SMEs.
          Table VII Innovation and technology globalization
Vertical choice refers to the strategic technologies choices which the great countries
take care of, like Microelectronics, Optoelectronics, Industrial Automation,
Biotechnologies, New Materials and Space Technologies. In these sectors it is
important to support the existing developments by co-ordinating the industrial and
academic research centres, improving their co-operation and planning.
Transversal choice regards deeply interactive technologies, like design computer
technologies (CAD/CAM/CIM) that can be the bridge between the holder of expertise
and knowledge and their user.
AU this is developed aiming at the integrated system based on a strong cultural
interaction and a "physical interaction by means of the containers, that is to say the
Science Park.

                       DEFINITION OF SCIENCE PARK:
"Friendly" linking structure and organisation between the industrial system and
university and governmental research structures.
The Science Park:
Has formal and operative links with Universities and / or other more advanced
training and research institutions.
It is structured and works to support the growth of territorial industrial
infrastructures that work on the basis of an advanced technological knowledge.
It has a co-ordinating function, in order to transfer technologies and their
managerial organisation in the territory.
                    Table VIII Science park characterisation
On this subject it is evident the importance of pleasant atmosphere and environment of
these infrastractmes to support and increase interaction and co-operation between
professors and managers, establishing the conditions of a continues information
exchange based on fiiendly relationships. All these factors contribute to the
development of a network which uses telematic infrastructures and allows permanent
coimections among these Innovation Centres with consequent opportunity for the entire
territory to utilise such potentialities.

I.P.S.T. as linking instrument between University Industry because realising
expression of Technological Transfer.
As Infrastructure Centre (human and equipment resources) is able to produce
knowledge and therefore Innovation Technology.
As best place for co-operation and knowledge transferring activities thanks to
"learn to learn" behaviour methodologies.

                   Table IX Attributes of innovation systemic
The Parks' possibility to develop and survive depends on the adoption of this
methodology of behaviour. The initiatives should be understood as an attempt to
globalize the initiative, that is to say that in order to confront themselves successfully on
a world level it is necessary to overcome the concept of territorial pseudo-power and co-
operate effectively, but stiU autonomously, with a strong co-ordinating and functional
planning, at regional levelfirst,then national and, in the end, European.
The subject of the capabilities co-ordination, multidiscipUnary and pluricultural
collaboration is the most relevant one and should be therefore particularly stressed.
In conclusion this speech suggests the creation of an Integrated System based on
modular centres identifiable, for the greatest part, with the existing ones. Everything
which afready exists should therefore be co-ordinated, not abandoned, because
innovating does not mean at all costs destroying , but improving and increasing what
already exists.
All this can be realised creating a network structure which we have defined as a
"cluster" structure, that is to say a network with poles of functional concentration
mainly based on transversal pervasive technologies (e.g. information technology,
CAD/CAM); which with the explosion of growth of telematic networks (e.g. Internet) is
evidently underlining the sttategic value of an Integrated System of Innovation Centres
acting on international level especially linking East - West Europe.

Miller, Rand Cote, M. 1987, "Growing the next Silicon Valley", A Guide for
          Successful Regional Planing, Free Press ISBN 0669145777
Adair, J. 1990, The Challenge of Innovation, Talbot Adair Press ISBN 09511835 32

                SERGIO RUSSO
                Via della Resistenza, 39

1. Generalities

Innovation, according to Schumpeter, is a phenomenon of "creative destruction". It
occurs within history, evolves along with it and constantly transforms it. Innovation has
neither age, nor place nor time. In the global village of technological culture, innovation
is no longer a choice but a constant of life. Rejecting it can only result in the final
exclusion from the modern international community.
         Innovation is a condition of the spirit first, rather than a state of mind. It implies
technology and knowledge, study and research; it is not a linear process but the
combination of a great number of opportunities, an ever-changing objective that
modifies itself on the basis of the resources employed and, mainly, on the basis of
human resources.
         Innovation implies a cultural context, as well as educational and training
processes capable of generating innovative strategies rather than imitative ones.

2. Innovation as an Opportunity for Economic Development

The new technologies are blurring the usual distinction between mature industrial
sectors and advanced ones, and in many cases, they have brought sectors considered as
mature to a process of total renewal, allowing them to go back and play a significant role
in economic development.
           The new technologies are making the exploitation of low-grade resources
possible and often allow the re-evaluation of processes earlier considered to be of
limited importance, thus challenging the classical assumption of the international
division of work, according to which mature sectors should be implanted in developing
countries, whereas industrialized ones ought to invest in advanced sectors only.
           A clear example is offered by the car industry whose product, most certainly a
mature one, needs to be constantly up-dated and has been transformed from a
mechanical complex into an electronic one in response to new technologies and new
social demands.
           Innovation is therefore an exciting opportunity which opens new perspectives
 to intelligence and invention and may allow any sector to play a significant role,
0. D. D. Scares et al. (eds.), Innovation and Technology - Strategies and Policies, 157-165.
© 1997 Kluwer Academic Publishers. Printed in the Netherlands.
provided it is duly up-graded. Equally, any geographical area may acquire pre-eminence,
provided it possesses adequate technology. Even areas considered marginal in primary
industrialization may, in fact, become central, thanks to innovative and technological
           Research, first among the conditions for development, naturally settles near
industries or universities. Technology, that is the industrial transfer of research, also
finds in industries its privileged ground. That is why the historical mechanism of strong
areas that perpetuate their position of privilege seems to be inexorably destined to repeat
           There is actually no doubt that the optimal conditions for the development of
economic initiatives are to be found where an industrial culture, a circuit of information,
qualified human capital and research laboratories are already present. In recent years,
however, many events have contributed to the modification of such a well-established
certainty. First of all, there has been a strong demand for development and economic
progress from areas of the Far East, from East-European countries and weak regions of
Western Europe. These areas are entering the world scene with a potential for change so
overwhelming that it cannot be ignored and which no doubt represents a political reality
to be reckoned with.
           Besides, the concept of "center" and "periphery"—traditionally governing the
geographical hierarchy, as well as the economic one—has been transformed by the great
computer revolution, by the abolition of barriers, by the improvements in transportation
and telecommunications. The fall of ideologies and political barriers has made the world
more and more homogeneous and receptive to novelties and, finally, the new
technologies have reduced investment costs in several productive sectors and
increasingly rewarded the "added value", i.e. the innovative potential contained in the
product. It is obvious, for instance, that the price of a robot is not equal to the total sum
of the costs of its components. The added value is substantial since it must repay the
technology, innovation and research contained in the product, as well as the potential
economic advantage that its use will generate. Only in primary transformation is there
still a close relationship between invested capital and value of the product. In all other
productions with high technological content, the "idea" is worth more than the product.
           The best evidence of the role of innovation is the ever-increasing importance
industries attribute to the "time-to-market", that is the time that elapses between the
creation of a product and its marketing. In many sectors new discoveries are not
patented because the speed with which products reach the market and their constant
modifications far outweigh any income of position derived from the exploitation of the
           This new situation is allowing even marginal areas, or areas excluded till now
from major development processes, to participate in the competition and sometimes win.
In a certain sense, it is the challenge of intelligence versus strength. David against
           However, we cannot assume, through excessive simplification, that starting
conditions today are equal regardless of geographical considerations, since, if it is true
that there are no more peripheral areas predestined for underdevelopment, nevertheless,
 some situations remain in which competing is more difficult than ever.
           The great opportunity mentioned earlier is therefore also a huge challenge
 specially for weaker areas previously excluded from the industrialization processes of
the century which, through an adequate communication and transportation system, as
well as government and cultural policies intended for the creation of a favorable climate,
could finally board the running train of world economy.
         What conditions, or better, pre-conditions can turn innovation into an occasion
for growth?
         An essential one is to operate in a context of adequate infrastructures. Just as
essential are supportive policies and, in particular, a political approach to culture
capable of stimulating innovation and research. And in cultural policies, a key role is to
be assigned to education, especially at graduate and post-graduate levels.
         Here in Sardinia, an experiment has been undertaken which is both unique in its
kind and representative of the new way of understanding the culture of innovation in
graduate and post-graduate education.

3. The Experience of AILUN

In Nuoro, in the center of Sardinia, in a town of 40,000 inhabitants with an economy
unfamiliar with processes of industrial development, an association of which I am
President was established in 1986. It was born thanks to the initiative of industrialists,
some local state bodies and numerous private citizens.
          The association, called AILUN (Association for the Institution of the Free
Nuorese University) was intended as the first step towards the creation of a Free
University whose objective would be to promote a center of excellence in the field of
advanced technologies.
          It certainly was an ambitious project, but based on some absolutely rational
considerations. The first was that an area with a difficult economic development, such as
Central Sardinia, cut off from the main routes of regional, national and international
communication, therefore strongly penalized from the point of view of its localization,
could not conceive its own development as a natural evolution of traditional economic
          In fact, in the absence of a solid industrial structure, going through all the
phases of development—i.e. from primary industrialization to the productive
verticalisations, to enter the tertiary of services and the post-industrial phase—would
seem unrealistic. The mere idea of choosing to follow this path, provided such a thing
were still possible, would mean to ignore the obvious reality of the contemporary growth
of more developed areas, which would still leave the development differential
          Furthermore, there can be absolutely no certainty that the macroeconomic and
contextual reasons, which prevented industrial development in the past, will now allow
growth along a path which had previously revealed itself impracticable. Yet, there is no
doubt that the wealth of an area cannot be created without the production of some kind
of goods. The fundamental logic still stands: greater wealth in a given area is reached
only by producing goods to be sold elsewhere with an adequate profit margin. Beyond
this, only services or welfare assistance exist.
          Thus, the real problem is how to skip some phases of the traditional
development and to get, laboriously, from the pre-industrial to the post-industrial phases
of research, trying, all along, to understand which new productions innovative
technology will allow to locate in areas previously excluded from development.
           Being unable to compete with the great centers of research or large industries,
AILUN sought out its place among the niches and the sectors overlooked by other
universities and existing research centers. This choice made the challenge less traumatic,
yet it left quite an ample range of opportunities.
           Subsequently, an evaluation was made to select those sectors with highest
technological content and greatest added value—such elements being the only ones
capable of reducing the economic disadvantages due to localization to the point of
almost nullifying them.
           AILUN therefore singled out two spheres of action which satisfied the
following fundamental requisites: it was not to be the object of study elsewhere in
Sardinia and being innovative within the Italian panorama itself. The spheres that were
selected are:
- Optical technologies or better, opticoelectronics
- Organizational sciences
           Optical technologies are one of the main frontiers of technology of the year
2000. They are already showing their versatility (from compact disc players to the
medical field, from telecommunications to measuring tools, from industrial lasers to
super-computers) and they are doing so without any clear perception of what the limits
of possible applications may be. Optical technologies now greatly rely on computer
science for data processing, so that the new science is no longer optics but photonics or
better, opticoelectronics.
           Organizational sciences are meant to give a scientific answer to the problems
stemming from the ever greater complexity of the systems that regulate our
technological society. Their goal is to create experts in management and organization
with an integrated professionalism absolutely innovative if compared to the typical
economic approach of business administration schools.
           AILUN's experience overturned the traditional assumption for that research
centers were to be located near industries in order to capitalize on the likely onset of
new economic activities and greater development of existing ones consequent to the
creation of a center for training and excellency.
           As it turned out the experience was not simple at all, particularly because of
cultural problems: in all marginal areas there is a strongly-rooted tendency to accentuate
and overestimate cultural traditions and historical identity. This depends on the obvious
observation that a lesser development consolidated those cultural ttaditions with fewer
occasions for interchange with the outside world. Even though this situation might
potentially call for an eagerness toward greater openness, in fact it almost always pushes
toward a form of anachronistic and aristocratic isolation that leads to consider one's own
specificity and traditions as a capital far superior to that of other social settings.
           To propose an action, in the heart of Sardinia, aimed at grafting there such
sfrongly innovative elements in relation to cultural traditions, has been a huge
provocation which was met with some predictable difficulty, dividing public opinion
between promoters of an openness toward innovation and supporters demanding that
only those actions with a strong reference to the local situation—both from the
economic and the cultural point of view—need be undertaken.
         But the fundamental message of the initiative was, and still is, to demonstrate
through a concrete experience, that one can no longer think of innovation only as a
means of increasing the productivity of existing processes. The deepest meaning of such
an action lies in its ability to stimulate new economic processes.
         The new centrality belong to areas that command innovative technology and,
since there are research sectors outside traditional cultures, the future homeland for such
sectors rest with those people who will want and know how to attract them wherever
they may live.

4. The Activities of AILUN

Thus began AILUN's activity four years ago.
          Due to the lack of sufficient resources needed for the creation of full university
courses, AILUN organized a post-graduate curriculum in two disciplines: Organizational
Sciences and Optical Technologies.
          Financed by the Sardinian Region, these are one-year courses with an
international characteristic: the students (limited to fifteen per course) come from
various countries and so do the academic staff which enlist the contribution of experts
from some of the world's best universities. English is used as the official language.
Students who attended the courses at AILUN so far have all succeeded in putting their
training into use in the job market.
          The School has made substantial investments in equipment and facilities, such
as computer rooms, a center for software production, a multimedia room, optical
technologies laboratories with advanced equipment and highly qualified staff Recently,
AILUN has also opened a consulting service aimed at enterprises present in the territory:
the objective here, is to verify how the new technologies can be applied to ongoing
productive activities so as to improve quality and economic output. For the purpose,
seminars on the application of optical technologies, as well as free consulting assistance
to businesses were offered and met with quite a favorable interest. In short, AILUN
stands as a small island of innovation and technology within a strongly traditional
          Today, this very characteristic is putting AILUN in front of a series of new
possible scenarios for its future.

5. Technological Park and Research Projects in Optical Technologies.

Sardinia has recently instituted a regional technological park whose best known feature
is the calculus center presided by Nobel Prize, Carlo Rubia, Within this context and in
reference to Central Sardinia, the Regional Authorities have singled out AILUN with its
laboratories, and optical technologies as the research sector toward which financing and
plans of applied development ought to be allocated. And so, with a fund of ca.
 1,200,000 US$, spendable over a two-year period, AILUN, alongside its traditional
post-graduate courses, has established a series of research projects selected on the basis
of some fundamental requirements which are: the possibility to connect with the local
economic situation, the willingness to cooperate with a scientific partner with previous
background on the subject and the presence of an industrial partner interested in
producing the goods derived from the research. In other words, concrete and applied
research aimed at the production of prototypes capable of being engineered and from
which a direct economic fallout can be expected.
          Based on these criteria AILUN has selected research projects in the following
- environmental diagnosis (quality control of the air with the foreseen installation of an
observatory for atmosphere quality control through optical technologies and water
quality control with particular reference to liquid wastes discharged by water treatment
- quality control of wines
- quality control in cheese production
- applied diagnosis in the biomedical sector (deformation of the vertebral spine and
probes for medical diagnosis)
          Consultations are under way for research in the field of peripherals equipped
with optical technology for computer processing of virtual reality and for robots used as
control and maintenance moles in inaccessible waterworks and sewage pipelines.
          The Institute of Research on Electromagnetic Waves of Florence, the Institute
of Physics of the Atmosphere of Rome, the Free University of Brussels and the
University of Porto are some of the scientific partners that collaborate with AILUN.
          I wish to underline the collaboration with Prof. Oliviero Scares, of the
University of Porto, a friend of AILUN since its early days, appreciated teacher, advisor
and scientific partner in the research project for quality control of wines, to which he
brought the experience he has matured in his own research on quality control of Porto

6. The Sciences of Organization

The course in Organizational Sciences is another fundamental sector of the academic
activity of AILUN and it plays an original role in the training of innovative professional
figures. Both in content and methodology, this course differs greatly from traditional
teachings. Subjects range from economy to psychology, from sociology to specific
disciplines of the sector.
          As with Optical Technologies, this is a higher education course with an
international character due to the origins of both students and staff. The members of the
former are united by the common characteristic of representing the highest expertise in
their field of competence. The openness to innovation is the key element of this course
whose objective is to train people for the management, guided by instrumental
rationality, of complex organizations in all sectors.
          Innovation presupposes a consolidated knowledge of basic disciplines upon
which the new criterion for interrelations must be built; therefore science, economics,
applied mathematics, foreign and technical languages, classical studies and human
sciences, form an essential background to which relevant subjects not usually studied in
universities must be added. Consequently, the science of decision-making, planning,
control and organization, become relevant knowledge for the new discipline whose
fundamental characteristic is interdiscipinarity.
          The course on Organizational Sciences, as any innovative approach, ultimately
aims at linking "knowledge" and "know-how" and solving the great dichotomy between
"thought" and "action", an aspect which has certainly not been settled in traditional
universities where teaching is, by definition, disciplinary, that is organized in disciplines,
and where any synthesis is entrusted to the subjective attitude of the student, but is
neither encouraged nor guided by educational training.
          This is the reason why post-graduate schools were created worldwide, in the
various departments of professional training sciences, from business school to every
other institution for higher education in France, Britain and the United States. The
disposition toward innovation is not only an innate condition of the spirit but a typical
professional and cultural "skill" one can learn and train for.
          If proof is wanted of how much road must still be covered by traditional
university education to convert to innovation, it will be sufficient to remember that
Herbert Simon—famous scholar who, thanks to the concept of bounded rationality has
brought relevant contributions both to the analysis of organizations and to the theory of
decision-making—received the Nobel Prize in 1976 for Economics, because the study of
decision-making processes is not thought of as a self-standing discipline. On the other
hand, the University of Rome awarded him a degree honoris causa in Psychology, the
discipline which seemed closest to his field of knowledge. At present Herbert Simon
teaches Psychology and Computer Science (artificial intelligence) at the Carnagie-
Mellon University in the United States.
         We are presently witnessing a general redrawing of the maps of knowledge
strongly driven by the urgency of problems to resolve. This redrawing is in itself a
remarkable project of social engineering because it constitutes a project of knowledge to
be developed rather than an object of knowledge to be analyzed.
          Obviously, organizational sciences, as any innovative science, cannot exclude
any form of traditional knowledge from its own range. Its purpose, by definition, is to
optimize the management of social organizations and is most likely to strongly affect
people's conditions of subjective comfort. It belongs to the sphere of social engineering
and as such raises problems of ethical character.
          Inclination toward innovation means gathering the correct information at all
times, but also knowing how to use it in an appropriate way and, above all using
knowledge in a concrete sense, taking upon oneself the emotional responsibility of the
choice. Because of the perennial necessity to choose between relevant options and often
to condition the lives of others with one's own choices, it is said that competitiveness, a
characteristic of our times, requires an ever-greater control of emotions.
          Man, as a rational machine, analyses, evaluates and decides. There is no doubt
that this is true nor is there doubt that this situation is more and more difficult to
manage, in particular if one has not been trained to regard innovation as a condition of
life. But what is required so that people responsible for an organization achieve the
inexorable process of synthesis between information and choices?
          According to some, this synthesis is a mere logical process—like some result of
a complex formula for which it is necessary to know the correct value to give variables,
but whose result in the end would come out almost mathematically. For others this
synthesis is an artistic-intuitive process, therefore a creative one—it begins with
technical scientific knowledge but adds something to it, a touch of talent capable of
creating even what otherwise does not exist.
         This vision recalls the study on the specialization of the brain, according to
which the right side is dedicated to creativity, whereas the left one has better logical-
mathematical aptitude. In any case, as regards to innovation, we can conclude that the
result tends to converge: both the aptitude toward innovation and the ability for
managing innovative processes develop through practice.
         How? Certainly not in the field where inevitable errors are matched with high
social costs. These skills are learned through simulation, in schools for higher education,
and above all, through general and constant cultural modifications.

7. Conclusions

In Italy only 20% of young people between age 19 and 25 enroll at university and only
one out of three graduates. Among all job-holders, only seven out of one hundred are
university graduates, thirty-five only attended primary school, and twenty-five went
through high-school. In the United States, in Japan, in France, these percentages are
much higher and in some cases even double.
          It is easy to deduce that without education there is no progress, there is no
development and there is no future. Nowadays the technological revolution is pushing to
the forefront developing countries whose educational policies are evolving at a
vertiginous rhythm.
          And in time, this will make all the difference. Those with the highest levels of
knowledge, in all fields will be winners.
          If we are not able to reshape our schools so as to attract more young people, if
we are not able to make our schools more innovative, industrialized countries will lose
the challenge to developing countries, to whom they are already losing the demographic
          That the threshold of knowledge necessary to access the job market is
constantly rising is by now a widely consolidated conviction. A few years ago, the
acquisition of a high-school diploma, or better, of a university degree, was still a peak
from which one could quietly look down at a life of guaranteed employment where to
invest the knowledge previously acquired without, any need for further training, apart
from the practical experience gained on the job. Today, educational goals that can
guarantee a stable success no longer exist. The very same university degree is no longer
a goal in itself. Post-graduate courses multiply and follow one another, while
specializations always invent new frontiers. The new boundary of knowledge therefore
is not only change as such but also the awareness of its inevitability.
          It is impossible to forecast who the winners of the challenges of the next
millennium will be, or if man will be able to survive his own intelligence. However, it is
certain that in order to retain any hope of success, our children will definitively have to
maintain a love for adventure, a readiness for innovation, as well as a profound sense of
their own cultural identity and traditions. Those suffering from "Ulysses' syndrome" will
be winners in the XXIst century.

Miller, Rand Cote, M. 1987, "Growing the next Silicon Valley", A Guide for Successful
         Regional Planing, Free Press ISBN 0669145777
Adair, J. 1990, The Challenge of Innovation, Talbot Adair Press ISBN 09511835 32
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                F. RAMOA RIBEIRO*
                Junta Nacional de Investigagdo Cientiftca e Tecnologica (JNICT)
                Av. D. Carlos I, 126, 2° 1200 Lisboa, Portugal

1 . Introduction

 A synthesis is introduced concerning the main achivements in the Science and
 Technology field which have taken place in the last five years as well as to identify
 the major guidelines defined in the structural programmes belonging to the Second
 Community Support Programme for Portugal, in force till the end of this century.
 These guidelines are expected to allow an adequate benefit out of the investement
 made in the preceeding period.
          It would de convenient to draw attention to a number of challemges faced by
 Portugal which are the reason for us to keep betting on science and technology as it
 happaned before within the First Community Support Framework Programme for
 Portugal. Among the above-mentioned challenges one must point out the following:

 - Portugal benefits from a low average aged population which may represent the basis
   for a large spectrum of human resources witli technological and scientific high level
   qualifications. An emigration flow of highly qualified workers (brain drain) will
   appear if this human potential is not valued under national terms;
 - Portugal needs to maintain its universities competitiveness in the framework of a
   more unified european maiket in what concerns tlie qualified human resources. Tlius,
   a higher standard in university reseairh activities is required;
 - Portugal has a stiong need for diversification in a number of industrial sectors
   (automobile sector, electronics and precision mechanics) services and natural
   resources, which have perspectives of a greater growth at international level and ai"e
   much more demanding under the technological point of view. This diversification
   task must be initialized tlirough domestic initiatives and within tlie dynamics of its
   managerial structure, backed up by the diffusion and development of tlie new
 - Portugal needs to create more attractive conditions in the above-mentioned sectors
   for international operators. In order to accomplish that goal tlie quality of Portuguese
   universities is a relevant and competitive pre-requisite. A high quality research in
   advanced technological and scientific areas is essentifU;

  Pre.sident of .INICT
0. D. D. Soares et al. (eds.), Innovation and Technology - Strategies and Policies, 167-173.
© 1997 Kluwer Academic Publishers. Printed in the Netherlands.
 - Portugal must, in addition, participate in the development of strategic technologies
   mainly oriented to explore its geographical position advantages or at least aiming at
   reducing its peripherical relative position disadvantages. This is the case of the
   communications technologies and ocean exploitation;
 - Portugal is in a position to have access to a number of natural laboratories with
   importance to the increasing awareness of phenomena with world-wide value,
   namely the geophysical and biological sciences. This fact can facilitate the
   settlement of some international R&D activities which would strengthen the
   Portuguese scientific community in the european context;
 - The relationship of Portugal witli other regions of the world constitutes an heritage
   which can act as the basis for tlie development of international scientific cooperation
   activities aimed at reinforcing the universalist chaiacter of Portugal in the european

2 . The First Community Support Framework Programme Main
    Accomplishments in the Scientific and Technological Area

When the First Community Support Framework Programme for Portugal was launched
(1989-1993), a series of sub-programmes were implemented, witli a considerable effect
on S&T.
The Operational Programmes included in tlie First Community Support Framework
Programme that, together with the PRODEP Programme (The Educational
Development Programme for Portugal) contributed decisively towards renewing and
extending tlie National Science and Technology System were:

 - The CIENCIA Programme - a programme entirely dedicated to strengthening R&D
   in the medium tenn by creating national infrastructures for science, research and
   development as well as advanced U"aining for personnel;
 - The PEDIP Programme - the Suuctural Programme for the Development of
   Portuguese Industry - particularly through the Technological Infrastructure
   Subprogramme, the Investment Incentive Scheme - SINPEDIP - programmes for
   training young researchers for industiy, etc.;
 - The PEDAP Programme - the Structural Programme for Agricultural Development
   in Portugal - including interstructural strengthening of R&D in biotechnology and
   agricultural science and technology. These structural programmes were completed
   with the STRIDE Programme. This was a community initiative which, in the
   Portuguese case, was geai'ed to supporting tlie internationalization of tiie Science and
   Technology System. It encouraged the participation of industry in R&D, in
   paiticulai" supporting research by consortia of companies and R&D centres, tiie
   launching of an Innovation Agency and the establishment of two science and
   technology parks.

These programmes encompass tiiree main fields: infrastructures, advanced ti^aining for
personnel, establishing institutions and mechanisms to support innovation.
Two major objectives guided tliese programmes:

 - To stimulate the international competitiveness of the national Science and
   Technology System, supporting research in tiie basic science and new technologies
   to enable Portugal's greater participation in european science and technology. It also
   aimed at maintaining tlie dynamism of university research to guarantee the quality
   and competitiveness of higher education, with respect to Europe;
 - To promote the creation of more technological and innovative capacity in
   internationally competitive economic sectors. It was felt that witliout a stronger
   technological base for agriculture, industry and services, it will be impossible to
   modernize and diversify the means of production and guarantee international
   specialization with better prospects for the future.

A series of achievements were made possible by the implementation of these
programmes which connibuted either to tlie development of tlie Science and Technology
System base, or to the promotion of technological innovation.

Some of the more important achievements in tliis area were as follows:

 - 12 research institutes with poles in several regions and 33 research centres were
   constituted, extended or regrouped. In most cases they ai^e associated with
   universities and geared to basic and pre-competitive research in seven fields:
   information and telecommunications technologies, production and energy
   technologies, science and technology of new materials, healtli sciences and
   technologies, biotechnology and fine chemistry, agricultural sciences and
   technologies and marine sciences and technologies;
 - Several university reseaich centres operating in fields such as exact and engineering
   sciences, eaitli and environmental sciences and economics and management were re-
 - A major advanced ti-aining programme was launched for research personnel, through
   masters and doctorate degrees taken botli at home and abroad. Under this programme,
   around 3200 grants were awai^ded, including more than 500 abroad.

While implementing the CIENCIA Programme, the .TNICT - Junta Nacional de
Investigafao Cienti'fica e TecnoWgica (the National Board for Scientific and
Technological Research) also launched, at domestic level, a series of programmes aimed
at funding reseaixh projects in all sectors of the National Science and Technology
System. These programmes (Base Programme for Scientific and Technological
Development and specific programmes for the Health Sciences, for the Environment and
for the Human and Social Sciences) have followed the Mobilization Programme for
Science and Technology, the latter being in force from 1987 to 1991.
In 1994 .TNICT also launched a new specific programme of long-term contracts. This is
the long-term financing of R&D units to support university reseaich centres and similar
Under tlie community initiative STRIDE a number of research projects have been
funded. These research projects included scientific cooperation witli international and
community R&D institutions.

The last five years were maiked by a wide range of initiatives geai'ed to increasing
innovative capacitiy and mechanisms for disseminating technological knowledge both in
industry and agriculture. Some of the more important initiatives were as follows:

 - The creation of a range of technological infrastructures (equipment and buildings),
   with the support of PEDIP to transfer and disseminate new technologies based on
   relationships with R&D centres cuirently involved in these fields. Three different
   types of infrastructures have been supported:

   - InfrasUuctures for new horizontal technologies which can be applied eitlier in the
     traditional sectors or in new ones (ex: flexible automation and processing control,
     computer-aided design and production, lasers for materials treatment, etc.);
   - InfrasUuctures for the diffusion of new technologies and for the classical
     technologies field in traditional sectors (this is tlie case of Technological Centres);
   - Infrastructures to support the development of capacities and the diffusion of
     industrial technologies which are tlie basis for a number of technology-based
     indusuial and services sectors (electronics and information technologies, fine
     chemistry, precision mechanics, etc.);

 - The creation of a faciUty, as part of PEDlP's Incentive Scheme (SINPEDIP), to fund
   reseai^ch projects in industry, or sub-contiacted by the latter to research institutions,
   with a view to the technology aquisition or development;
 - The launching of a facility, via the STRIDE Programme to support research by
   consortia, whereby companies and research centtes could cooperate on R&D projects.
   This was aimed at developing technologies with a strong impact on relevant
   economic sectors;
 - The establishment of an Innovation Agency to support commercial application of
   research results to encourage technological innovation in industry, technology
   transfer, to strengtiien technological consultancy to industry, etc.;
 - The installation of two science and technology pai"ks, one in the Lisbon region and
   the otlier in the Oporto region. Botli ai^e seen as privileged locations for Portuguese
   and foreign investors wishing to benefit from tlie training, reseai"ch and service
   capacities of tlie universities of Lisbon, Oporto, Aveuo and Minho;
 - The creation of a technology centre for innovative SMEs located at die campus of
   the National Institute for Engineering and Industiial Technology (INETI), in Lumiai"
 - The establishment of incubation centres for new companies linked to some
   universities and research cenues.

In tlie agriculture sector two major initiatives have been taken:

 - The creation of a major biotechnology-oriented research institute hnked to research
   institutes and centtes involved in agricultural and biological sciences. It also includes
   biotechnology research to support agriculture and the agro-food industries;
 - Renewal of laboi"atory equipment at the National Institute for Agrarian Reseaich and
   at Regional Depailments for Agriculture covering all tlie agriculture regions in tlie
   country to facihtate the diffusion of technological demonstration.
Attention must be payed to anotlier programme aiming at encouraging technological
innovation thougli not covered by tlie First Community Support Framework

 - The launching of the NATO Science for Stability Programme (3rd. phase) which
   aims at supporting appUed reseaixh in large-scale projects involving several R&D
   institutions and geared to solve concrete technological problems faced by industry,
   companies, regions or activities.

3. Guidelines of the Operational Intervention of the Regional
   Development Plan for Science and Technology

PRAXIS XXI, which follows the CIENCIA and STRIDE Programmes, is tlie central
pillar of tlie Regional Development Plan and of the Second Community Support
Framework Programme for Portugal in the science and technology £uea, to come into
force in Uie period 1994-1999.
Its main objectives are as follows:

 - To stiengtlien the Scientific and Technological System base tlirough R&D with tlie
   highest quality in terms of international standards which will simultaneously
   guai-antee the higher education development;
 - To promote a greater Portuguese participation in the european scientific and
   technological projects and institutions and to attract to Portugal botli international
   and european S&T activities;
 - To mobilize the resemch capacities to the aquisition and development of
   technologies so that the productive system will be modernized and diversified by
   means of an intervention at the level of sectorial networks for technological
 - To mobilize tlie research capacities to support otlier sectorial programmes which aie
   part of tlie Community Support Framework Programme. This includes to deepen tlie
   knowledge, tlie development and the protection of tlie Portuguese natural equities.

To achieve tliese goals PRAXIS XXI is structured as follows:

 - Research programmes witli a structural nature owing to their interdisciplinary or
   multi-institutional feature tlie emphasis being placed in science and technology.
   These programmes will not only cover different scientific and technological fields
   but will also differ in the degree to which companies ai"e involved. The following
   different groups of programmes will be implemented:

   - Programmes aimed at developing Portugal's scientific and technological base
     including the basic (exact and natural) sciences, advanced technology and a number
     of ju-eas in social and human sciences. These programmes aie geared mainly to
     research institutes;
   - Programmes aimed at mobilizing scientific and technological potential to renovate
     the Portuguese industiial stiuctuie. These will focus on major advanced technology
     sectors with an interest in and prospects for national and international
     development. These programmes will also stimulate reseaich projects by consortia
     of companies and R&D units;
   - Programmes geaied to mobilizing scientific and technological potential for
     regional development. They particularly include interdisciplinary programmes for
     making use of natural resources and programmes of scientific interest within
     international networks which will allow to profit from tlie "natural laboratories"
     located in some regions.

   Encouraging the internationalization of the Science and Technology System by
   supporting greater participation of Portuguese research institutions in the European
   Union R&D Framework Programme. The programmes will also support research
   units wishing to join international reseaich organizations and networks, by
   finalizing programme contracts with R&D units with the greatest potential for
   Encouraging innovation, particulaily by supporting tlie work of tlie Innovation
   Agency, created as part of the STRIDE Programme, including both the coimnercial
   application of research results and support for technological innovation in industry
   and technology transfer;
   Advanced training for personnel, either in association with R&D structuring
   programmes or autonomously. Apart from aiming at increasing the number of
   holders of the doctorate and master degrees, this training action will cover a wider
   range of activities than the CIENCIA Programme. Hence it will include post-
   doctorate grants, scientific reseai"ch grants for young people (not necessarily leading
   to an academic qualification) grants for tlie tiaining of experts, technological
   consultancy and a similar service for science and technology managers. It is also
   planned to hire scientists living abroad to reinforce Portuguese advanced training and
   research courses;
   Creating and strengthening reseaixh infrastructures, by finalizing R&D units created
   by the CIENCIA Programme and basic infrastructures such as science and
   technology parks. New large-scale infrastructures will be installed or acquired for
   common use or to enable a network to function and a resti'icted number of new
   reseaich laboratories will be created, paiticulaiiy those required for full development
   of the aforementioned structuring prograimnes;
   Scientific and technological awareness initiatives.

4. Some Introductory Comments on the Articulation between PRAXIS
   XXI and Sectorial Programmes included in the Regional
   Development Plan

At last I would like to refer to die complementarity between the PRAXIS Programme
and the technological aspect which integrates tlie sectorial programmes included in tlie
Community Support Framework Programme for Portugal. This is the case of the
complementaiities between PRAXIS and PEDIP.
The main targets of the Operational Intervention "Industria" (industry) in its
technological aspect will be:

 - Supporting die feasibility and connection of the technological infrastructures
   implemented by PEDIP I - Technological Centi^es, Institutes for New Technologies,
   Transferring and Demonstration Units - to the industrial sector. Basically these
   infrastructures are devoted to supporting technological diffusion and to promote
   technical assistance and training of technicians. Also, they can undertake applied
   research activities under conti^act with frnns. This means that they operate after the
   actions having been developed by the S&T infrastructures created within CIENCIA
 - Stimulating the reinforcement of companies technological capacities by means of
   R&D activities by contract with the technological infrastructures and R&D
   institutions and through the tiaining of companies senior staff. As a result of diis
   procedure the up-grading of industrial R&D will be stimulated. The same applies in
   respect to industrial R&D demand by other companies and S&T institutions;
 - Supporting a growing favourable environment to cooperation among companies and
   providing help to the launch of stiategic programmes concerning industrial and
   technological innovation;
 - Supporting indusuial involvement in the european technological programmes.

PEDIP 11 action is based on R&D demand by companies, on the reinforcement of the
industry R&D capacities and on the up-grading of the network formed by institutions
devoted to technological diffusion, technology transfer and technical assistance
purposes. These are complementary features to tlie PRAXIS action. As a matter of fact
PRAXIS is essentially designed to sttengthen the national scientific and technological
skills, in the medium tenn, witliin a context of minor regional imbalances. It ensures
also the creation of R&D networks by consortia which will benefit the skills developed
at national reseaich units.
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                 CETO - Centra de Ciencias e Tecnologias Opticas
                 Universidade do Porto
                 Rua do Campo Alegre, 687
                 PT-4150 Porto

Innovation became a major ingredient of industrial ongoing transmutation. The culture
of innovation is a must for companies, in order to remain competitive in products and
services. Aspects of innovation are discussed in terms of matched response to the
permanent and accelerated changes facing production and servicing.

1. Total Innovation Oriented Production

The myth of achieving a solution for a sustained growth by technological overdose has
not given the expected answer to the world problems, Fig.l.

                              OCDE THREE PRODUCTIVITIES
                                 (Annual Average Growth Rate)
 Index                                                           1960-73         1973-79       1979-88
 TPF (Total Productivity Factor)                                   2,9%            0,6%         0,9%
 Work Productivity                                                 4,1%            1,4%         1,6%
 Capital Productivity                                             -0,4%           -1,5%        -0,8%
Source: Economy and Technology, OCDE 1992
                                 Figure 1: Quo Vadis Productivity?

   Management and innovation*" are progressively becoming major key factors for
handling the multiple characteristics of the actual scenario of continuous change. The
rapid mutation on the mechanisms of change are forcing more and more the adoption of
an attitude of antecipation to events and to an interplay of reactions by the concurrence
0. D. D. Scares et al. (eds.), Innovation and Technology - Strategies and Policies, 175-182.
© 1997 Kluwer Academic Publishers. Printed in the Netherlands.
resourcing to innovation. Some industries to protect their leading competitiveness
establish an objective for the product characteristics (including price reduction) and
specifications asking their technical and management divisions to devise the strategy, the
production and the R&D it requires. This has induced changes on industry strategies,
Fig. 2.

                WESTERN                                         JAPAN

             MARKET SURVEY               "1   [           MARKET SURVEY                )

        PRODUCT CHARACTERISTICS           ]   [     PRODUCT CHARACTERISTICS            ]
                      I                                           I
                 PROJECT                  ]              Expected Selling Price
               ENGINEERING                                  Wished Profit
                     '                    )
      PRICE DISCUSSION with SUPPLIERS )       [            TARGET COSTS
                  COSTS                   ]        1
                                              I D ^ S I C J N 1 (ENGINEERING) [SUPL ERSI

                                                  DISCUSSION COMPONENT by
                                                  COMPONENT TO REACH
                                                  EDUILIBRIUM and

c             PRODUCTION                 "]   (                  I
                                                            PRODUCTION                  ]
(      PERIODIC COSTS REDUCTION           )   [     PERIODIC COSTS REDUCTION            ]

             Figure 2: Innovation on Strategy for Market Substained Growth

    The innovation culture branches out in every phase and step of the competitiveness
spiral. Fig 3.
    The response to the challenges facing the permanent industrial transmutation calls
upon all the creativeness*^' facets (productive, expressive, inventive, innovative and
emergent) and throughout the complete cycle from idea and conception to post-selling
services and recycling.
    Only a culture of total innovation oriented production cycle can answer the new
prequesites of production:
    0 Decline in mass production and increased importance of product variety, diversity
      and flexibility.
    0 Shorter lead times.
    0 Shorter product life cycles.
    0 Greater knowledge and service content of products.
    0 New links and demands between suppliers and customers in the production chain.
    0 Increased internationalisation and (partial or total) deslocalization of production
      and R&D.
    0 Friendliness to environment
    0 Trend for a complete closed cycle of production
    and the need to face a corresponding bunch of challenges.
    * Declining significance of price competition.
    * Increased importance of product and service quality.
    * Increased importance of product variety and customisation, or service
    * An ageing population coupled with skill shortages in certain sectors of
       manufacturing, or new services predispostion.
    * New demands for environmentally-friendly products and processes.
    * Increased openness to trade and competition
    * Increased social demands for socially compatible technology and more rewarding
       work, industrial participation and opportunities for the less skilled.
    * Wider flux in motivation and higher level of productivity.
    Innovation and its dynamics*" have then to be recognised as a matter for increased
attention and perseverance.

  DEMAND SATURATION                                    Internationalization of Enterprise
                                                                (World Market)

                           CONCURRENCE INCREASE

           PRODUCTS                                           PROCESS

                                                          Reduction of Costs
        DIFFERENTIATION                                    Scale Economics


                                                       MEANS of PRODUCTION

                           GREATER PRODUCTIVE AND
                          ORGANIZATIONAL FLEXIBILITY

                           COSTS and PRICE REDUCTION

                          Figure 3: A Competitiveness Spiral
2. Innovation a Multidimensional Process

Innovation is a dynamic process with different phases presenting diverse time constant
responses. The innovative process starts with an internal phase characterised by the
creative process. The feasibility of an idea is demonstrated for the case of a successful
creative cycle. This internal phase is shielded from influential market procedures.
   To become an innovation the invention has to be examined in terms of the industrial
and market oriented potential and the niches of market opportunities have to be detected
and evaluated^ ^ The external phase is initiated. A multitude of aspects should then be
considered as for any product or service already in the market. However, as an
innovation specific aspects will have further to be considered: design engineering of the
invention to persuade the investors and ultimately the potential users
    of the usefulness, safety, environment harmless, competitiveness potential, etc.
    The existing standards or those undergoing adoption should be taken into
consideration in terms of compliance with specification and assurance of
transportability, interoperability in line yith the globalizing market tendency and the
deslocalization of production or services networking.
    The original concept of product evqlution by design has matured to a broader
amplitude of the so called dynamical factors of competitiveness. They must be
considered into the design but also in order to create a selective differentiation and
diversity both to market acquisition and market enlargement strategy.
The lifetime of an innovation is sensitive to many external factors so that some artificial
anchoring of the consumer should be used for shielding from a premature ageing.
Quality reputation is the obvious one but a general acceptance of a trade mark will
support the inevitable transmutations required to extend the lifetime of the newly
introduced product/service (in tune with consumers spectations) or reinforcing the
hiding effect from concurrence competition.

3. Innovation Through Case Studies

Innovation is an old and young discipline. Old as a main agent of fostering the progress
we all enjoy. Young as a generalised strategic tool for economic growth. Today
presented as new concept of quality by permanent innovation. It is indeed part of the
generalised concept of management of the permanent change. However, the abundancy
of the literature has not produced yet the universal recipe for a guaranteed success.
    Innovation has to be considered as a culture, an attitude, a vital ingredient all along
the productive cycle, including pre and post-productive phases. Therefore, it is largely
assumed that case studies are a rather valuable methodology. As in other fields some of
the unsuccessful cases tend to be most educative to beginners.
    The analysis of a variety of cases will bring to evidence some cares such as the
avoidance of one to attempt to reach a universal compatibility of design instead of an
adoption of a common language (i.e. universality at specific layer(s) of the system).
(This is particular valid for areas of CAD/CAM and CIM. As a further example one may
forecast strong difficulties for software based instrumentation for the general consumers
market not based on a Windows software environment standard!).

4. Innovation Financial Dynamics

Funding innovation involves risks of a specific nature correlated to the financial
dynamics of the process, Fig.4.
   Main features to be considered relate to the need of extra funding exceeding the start
- up capital while the market has to discover and accept the novel product/service.
   The need for continued innovation is also stressed, in respect, to the laws of market
declining and the obvious need for a product lifetime extension that should at least
recover the investment.

5. The Culture of Innovation
Innovation has to be perceived beyond new finished products or services but rather as a
state of mind. Therefore, as a culture it does not necessary mean, a new advanced
technology, that occasionally the market could not feel as a need as yet. Innovation is
above ail based on advanced production/management and market strategies and in the
management of change at large.
        As a state of mind, peopleware is vital in the innovation process. Peopleware that
has to be highly motivated. It is on their hands and mind the dimension of the success
and the amplitude of percolation of the innovative character throughout the entire cycle
of production, distribution, maintenance and recycling, Fig. 5. It is also valid for the
establishement of a successful service based company!

6. Implications of the Non-deterministic Character of Innovation

Albeit the planing one does not expect a deterministic unfolding of innovation. It is
related to external factors whose relevance an economical analysis can help to establish.
However in the family of the concerned multiple parameters some are random behaved
others unpredictable either on space, time or both. These undeterministic character could
intervene in setting a safe desired rate of innovation success and eventually in setting
        As part of the strategy to obtain a safeguard, priority should be given to the
higher added value innovations.






      CLASSIC                                          ENVIRONMENT
          ^ Maximum Production                             ^Production < Market
          ^Minimum Costs                                   ""Optimized Costs
          ^ Maximize Quality                               —Total Quality
                                                           — Standardization
                                                           —Minimized Polution and
                                                             Environment Agression

                     X                                     NEW
           DESLOCALIZATION                               ENTREPRISE


               Figure 5: The Productivity Concept Metamorphosis (6).

7. Innovation and S y s t e m i c    Cooperation

The fact that robots are increasingly being introduced to manufacture high quality
products proves that the success of innovation should not be necessarily linked to the
products or even to the production technology.
       Modern manufacturing technologies and capital mobility rather emphasises the
innovation as a systemic concept. Innovation appears strongly entangled with
management. The extensiveness of the requirements to bring innovation into a market
success and the global character of market competitiveness seems to recommend that a
fertile ground for innovation could be reached via networking*^^. The concept of
network means here cooperation sharing mutual benefits.
        Countries and regions portrait common goals because they face common needs of
economical growth. No country could expect to reach the highest competitiveness in all
fields. Countries and regions would have to opt to specialised domains.
        Complementary, the evolution trend is for integration of technologies. In certain
cases the innovative character is almost the result of an answer to a spotted need by a
well elaborated integration of technologies available elsewhere, or the design of a
taylored service for the market niche.
        The Airbus project, the EUREJCA projects among many others strongly
emphasise the value of networking and joint-venture projects.
Networking is also in line with modern relations of trade. Indeed, any country that wants
to sell should be ready to buy. Further, in progressively opened market economy
competition is played directly among companies. For an innovation entering the
competition game creating the knots to anchor the networking could prove to be a rather
competitive advantage and result in shortening the response time from the market to the
innovative efforts by companies.


1. O.D.D. Scares Dynamics of Innovation in Sciences and Innovation as Strategic
           Tools for Industrial and Economic Growth, NATO-ASI, Moscow (October
           1994), Kluwer Acad. Publ. (1996) Dordrecht, Holland, 159-163
2. R. Foster Inovagdo a Vantagem do Atacante, Best Seller, S. Paulo (1988)
3. O.D.D. Soares Economic Development of Photonics in Europe, Dubrovnik, SPIE
4. O.D.D. Soares Applied Laser Toolin, MartinusNijhoff (1987), 1-24
5. A. J. Hingel A New Model of European Development and Network-led Integration,
           FAST (1993)
6. O.D.D. Soares Novas Industrias e Infra-Estrutura de Ciencia e Tecnologia na
           Transmutagao Industrial e Protegdo do Ambiente, Didaxis, Riba de Ave


       Visiting Associate Professor of Surgery, Section of Otolaryngology,
        Yale University School ofMedicine, New Haven, CT.
       Assistant Professor of Oral Biology,
        University ofIllinois at Chicago, College of Dentistry, Chicago, IL .
       President of Bio-Medical Consultants, Inc.,
        175 Highland Road, Mansfield, CT, USA, 06250.

                                                      VIDEO                        MEDICAL
MEDICAL                                               ENDOSCOPY                    TELECONFERENCE
           SURGICAL                                 LASERS


Innovations from the fields of clinical lasers, computer science, medical imaging,
spectroscopy, robotics, and biochemistry are being integrated into multi-media and
virtual reality medical systems. These systems are designed to aid physicians in
diagnosis and minimally invasive surgery. The graphic displays of biologic processes
and images of the body are ideal for remote transmission over medical
teleconferencing networks.
0. D. D. Soares et at. (eds.). Innovation and Technology - Strategies and Policies, 183-192.
© 1997 Kluwer Academic Publishers. Printed in the Netherlands.
This presentation will identify several specific medical and surgical applications and
illustrate some amazing new technologies that have emerged for the treatment of
disease and the improvement in health care. Examples will include:

         •   Photodynamic Therapy for treatment of cancer: cancer-localizing drugs
             activated with lasers.
         •   The Microbeam: lasers through microscopes for in vitro fertilization and
             DNA siu"gery.
         •   Selective photo-thermo-lysis
         •   Minimally invasive surgery with video endoscopy
         •   Medical imaging - CT scans, ultrasound, digital subtraction angiography,
             MRI and PET scans.
         •   3-D Virtual reality endoscopy
         •   Medical teleconferencing

Please keep in mind that each of these new treatments or techniques have
disadvantages, or exist only in a research environment. Limited time allows us to look
at each briefly and only examine the obvious advantages.

I have been challenged to predict the future of lasers in medical technology. The secret
to this task is in understanding that technology in practical use today existed ten years
ago in the research laboratories. Thus, if we look in the labs today we can see ten years
into the fiiture.

One of the first surgical lasers in use was the American Optical 100 Watt C02. They
were built from 1967 until about 1975. It was as large as a phone booth, but it
delivered a good quality, high intensity beam of infrared photons to the target that
instantly vaporized the tissue. It turns out that the wavelength of the C02 laser is
specifically absorbed by the water in the tissue and that is what makes the process very
efficient. These lasers cut precisely without bleeding, patients experience less post-
operative pain, and in some cases, lasers may even stimulate healing. Surgical lasers
have proven to be extremely useful tools to the surgeon for a variety of procedures and
new applications are appearing constantly. In addition, lasers have the remarkable
abiHty to sclectivelv destroy diseased tissue leaving normal tissue intact.

The engineering of laser systems has evolved considerably over the past 30 years in
reducing the size, cost, power and cooling requirements of surgical lasers, and in
developing specific delivery devices for specialized surgical applications.

The fiiture will see compact lasers integrated with other technologies: computers,
medical imaging, robotics and telemetry, to name a few.

Dating back to at least last century is the idea of providing magnification with loupes
or microscopes to enhance sxirgical procedures and medical diagnoses. The surgical
operating microscope was alrea^ in use when the surgical laser appeared. One of the
first procedures in otolaryngology was to use a C02 laser through a surgical
microscope to remove nodules from the vocal chords. This type of microsurgery has
developed into a surgical art in otolaryngology, gynecology, and neurosurgery, plus
many other specialties.

With lasers, exquisitely fine surgical procedures can be performed on single living

The laser microbeam is a device for making very tiny cuts in tissue, in fact, in single
cells. It consists of a standard light microscope with excellent optics and a laser beam
directed down the optical path of the microscope to be focused at the tissue into spots
less than a micrometer across.

Microbeam Example 1: Micro-PDT

Laser selective microablation of sensitized intracellular components of auditory
receptor cells. David M. Harris, Burt N. Evans, Joseph Santos-Sacchi, Yale
University School of Medicine, Northwestern University, University of Illinois at
Chicago. SPIE PROC 7632-21.

ABSTRACT. A laser system can be coupled to a light microscope for laser microbeam
ablation and trapping of single cells in vitro. We have extended this technology by
sensitization of target structures with vital dyes to provide selective ablation of specific
subcellular components.

Isolated auditory receptor cells (outer hair cells, OHCs) are known to elongate and
contract in response to electrical, chemical and mechanical stimulation. Various
intracellular structures are candidate components mediating motility of OHCs, but the
exact mechanism(s) is currently unknown. In ongoing studies of OHC motility, we
have used microbeam selective ablation of plasma membrane components and of an
axial cytoskeletal core that extends from the nucleus to the cell apex. Both the plasma
membrane subsurface cystema and the core are rich in mitochondria.

OHCs isolated from guinea pig cochleas are suspended in L-15 medium containing
2.0 ^M Rhodamine 123, a porphryn with an affinity for mitochondria. A spark-
pumped nitrogen laser pumping a dye cell (Coumarin 440 or Coumarin 500) was
aligned on the optical axis of a Nikon C^phot-2 to produce a 10ns, 0.5-10|Lim spot
(diameter above ablation threshold w/50X water immersion, N.A. 0.8), and energy at
the target w 10|aJ/pulse. At short incubation times in Rhl23 the 440nm wavelength
caused local blebbing or bulging of cytoplastic membrane and thus loss of the OHC's
cylindrical shape. At longer Rhl23 incubation times when the central axis of the cell
was targeted (SOOimi w.l.), we observed cytoplasmic clearing, immediate cell
elongation (a5%) and clumping of core material at nuclear and apical attachments.
Experiments are underway to examine the significance of these preliminary

The technique of microbeam selective ablation is a useful tool for probing functional
characteristics of living cells.

Microbeam Example 2: Fertility Surgery

The Beckman Laser Institute with support from NIH has pioneered the development of
the laser microbeam. The microbeam can be used as a gentle and precise "optical
scissors" to cut groves in the zona pellicidum, the outside covering of the human
ovum. This procedure enhances sperm entry during in vitro fertilization.

There is also a microscopic laser device invented at AT&T called the optical trap. It
can be used surgically as an "optical tweezers." Single sperm cells can be manipxilated
without mechanical harm and positioned appropriately.

Microbeam Example 3: Chromosome Repair.

Whether good or bad, science is close to understanding and adjusting DNA, the basic
element of life. The laser has become one of the tools being developed to improve the
understanding of medical science and to give the physician the ability to make those
adjustments. Current research has demonstrated the feasibility of cutting and
manipulating chromosome segments using the optical scissors and optical tweezers.

I hesitate to present this issue to you because of the profound ethical and moral
questions that are raised. Yet, the issues are of such importance that one must at least
be aware that they exist.


"Selective photo-thermo-lysis" is a term first coined by Anderson and Parrish (Science
200, 1983) at the Wellman Labs in Boston. Light is selectively absorbed by a specific
biomolecule (e.g., heamoglobin) and converted to localized heat that lyses the target. It
wasfirstproposed as a treatment for vascular skin disorders such as port wine stain.
The principle of selectivity is based on the fact that each type of atom and molecule
absorbs a xmique spectrum of colors or wavelengths. In fact, all molecules or atoms
can be characterized by their unique absorption spectra.

Selective photothermolysis allows the surgeon to target with the pure color of a laser a
specific type of tissue without harm to surrounding structures. All that is needed is to
adjust the wavelength of the laser to the absorption peak of the target molecule. We
saw this before with the absorption of the infrared beam from a C02 laser by the water
in tissue, and in the outer hair cell experiment by the absorption of the microbeam by
Rhodamine 123.

Selective Photothermolysis Example 1: Removal OfBirthmarks

The normal skin is transparent to the green output of the argon laser. However,
hemoglobin in the blood absorbs strongly in the green. Thus, the dermatologist can
selectively target and destroy the abnormal blood vessels in deep layers of the skin
with the green light from an argon laser, and the overlying skin, which is transparent
to green, remains intact.

Scarmers and other devices are under development to deliver the precise amount and
distribution of energy needed to get a consistent effect.

Selective Photothermolysis Example 2: Tattoo Removal
Other lasers and wavelengths are used to selectively target the pigments in tattoos.
May clinics now have a high volume practice in tattoo removal.


In clinical trials now is a laser procedure for reshaping the cornea, the external lens of
the eye, to correct abnormal vision. If this becomes routine, in the future people will
not need to wear glasses, we can all have 20:20 vision, maybe even better.

A new imaging technique has been applied to ophthalmology for looking at the
distribution of nerve fibers in the retina of a patient. Laser doppler interferometry
through an ophthalmic slit lamp is used to measure optic nerve fiber birefiingence.
Clinically, the Nerve Fiber Analyzer can diagnose glaucoma earlier than any other
system so that preventative measures can be taken even before the patient experiences
any symptoms.


Phototfynamic therapy (PDT) is a new modality for the treatment of cancer. Unlike x-
ray and chemotherapy, it has no harmful side effects. Unlike surgery, it is selective and
non-invasive. However, patients do experience skin photosensitivity and must avoid
sunlight for days to weeks following injection. Second generation drugs limit this side

In PDT a harmless but photoactive drug is injected into the patient. The drug has an
ability to localize in cancer tissues. Alone the drug has no effect. But, when irradiated
with intense, pure color light from a dye laser, the drug undergoes a photochemical
reaction that destroys the host tissue.

PDT has been the center of many research programs for the past 18 years but has only
just gained approvals in Japan, Canada and The Netherlands. Approvals are pending
in the United States, Germany, France, Italy and Spain.


The number of surgical procedures performed in the doctor's office and in out-patient
clinics continues to increase, while the nimiber of surgeries performed in the hospital
operating room continues to decline. Many procedures done in hospitals have become
less traumatic, and patients are retmning home and to work in days instead of months
after surgery. This has become possible through the development of surgical
instruments such as endoscopes and lasers.

Outpatient Treatments Example 1: Laser Assisted Uvula-Palatoplasty (Laup) For

Out-patient laser surgery of oralpharyngeal soft tissue to eliminate snoring has become
a high volimie procedure in the otolaryngologist's office. Several high power C02
lasers and laser handpieces have been designed for this specific procedure.

Outpatient Treatments Example 2: Laser Dentistry

Small, moderate powered, surgical lasers are appearing in dental offices for surgery of
the gums and other soft tissues in the mouth. Laser endodontics (root canals) and the
laser drill for teeth are still experimental procedures. However, the 21st century will
witness the end of scraping, grinding and drilling in the dental office to be replaced
with painless laser dentistry.


Endoscopy, looking into a bo<^ cavity through a small diameter scope, has been
practiced for decades. When medical lasers were developed those working with them
saw immediately the advantages to doing laser smgery through an endoscope. Several
good procedures were developed gradually in gynecology (e.g., ovary surgery,
endometriosis) and otolaryngology (e.g., vocal cord siugery, obstructive cancer
Laser Endoscopy Example 1: Gall Bladder Surgery

In the mid 80's Eddie Joe Reddick, MD, a general surgeon from Tennessee developed
a laparoscopic procedure, using a surgical laser for removing the gall bladder. Because
these new surgical procediu-es required two or more surgeons to work together, video
endoscopy, working off of a video monitor, also emerged. In most cases the 3-6 week
recovery time was reduced to 2-4 days with the new procedure. Immediately, every
general surgeon (about 10,000 in the USA) saw that his greatest source of income
(500,000 surgeries per year) would go to the competition and rushed to get trained.
Surgical supply and equipment companies also responded and built new surgical
applicators and endoscopic instruments for a growing list of procedures. In three years
laparoscopic gall bladder removal became the standard of practice and minimally
invasive surgery was populari2©d.

Laser Endoscopy Example 2: Prostate Surgery

It is estimated that 80% of the men over 60-70 suffer gradual enlargement of the
prostate gland, called benign prostatic hyperplasia (BPH). A minimally invasive, video
endoscopic, laser procedure has been developed to relieve symptoms of BPH. The
addition of ultrasound imaging enhances the surgeons ability to visualize the entire
gland and not damage adjacent structures.

Laser Endoscopy Example 3: Disk Surgery

Many types of ruptured disks in the spine can be repaired endoscopically. There is a
specialized delivery system for the laser fiber and the exact positioning of the fiber is
viewed with afluoroscope.Then the herniated disk material is vaporized.

Video endoscopic surgery is still in its infancy. The latest interest is in 3-D
visualization. By gaining the perception of depth provided by a 3-D endoscope the
surgeon can better perform complicated endoscopic tasks such a tying a suture. We
will discuss below how endoscopes are being combined with other imaging techniques
to enhance the physicians view.


The need for exploratory surgery has passed. The botfy has become transparent to
modem medical imaging technology. We can now look inside and see the beating
heart. We can watch blood flow through internal organs. Neural activity can be
localized and imaged inside the intact awake and thinking brain. For example, the
differences between szchophenic and normal thought patterns can be imaged and
compared. We can also view and follow the distribution of many different
biomolecules with the proper marker and imaging system.
Medical Imaging Example 1: High Speed Computerized Tomography (Ct).

The first x-ray was taken 100 years ago in 1895 by the German physicist, Wilhelm
Rontgen. For thefirsttime the inside of the body had been rendered visible with a non-
invasive technique. Conventional x-ray technology did not change much over the
years, presenting a single view through the body. Today, the combination of powerful
computers with x-ray machines has yielded a detailed reconstruction of the internal
anatomy. The body is viewed from many angles and the 3-dimensional coordinates of
radiographic densities are computed and plotted giving an image of a "slice" through
the body (tomography).

High speed cardiac CT scanners just introduced can take an image in 0.1 second,
eliminate blurring caused by the beating heart. This instrument can image the
distribution of calcium deposits (atherosclerosis) in the coronary arteries and the
prediction of heart attack is improved tremendously.

Medical Imaging Example 2: Ultrasound Imaging (Sonography).

Etolphins, whales, bats, submarine captains and now physicians can image precisely
with ultrasound. A beam of high frequency sound, safer than x-rays, is transmitted
easily through body fluids. The echoes that bounce off of tissue planes and solid
structures are analyzed by a computer and translated into images.

Medical Imaging Example 3: Magnetic Resonance Imaging (Mri).

The first MRI images of a human were made in England in 1977. In ten years there
were over 400 MRI scanners installed in the USA, and an office model has just been
introduced. This growth demonstrates the usefulness of MRI diagnostic results.

An MRI produces images by subjecting water molecules in the body to an intense
magnetic field. The concentration of water in the field can be sensed with a pulse of
radioftequency energy. The output of sensors arrayed around the body are fed into a
computer that reconstructs a slice through the body.

MRI images are of water containing structures such as brain and internal organs, but
not bone. The neurosurgeon can now look into the brain of his patient and identify the
site of pathology without opening the skull.

Medical Imaging Example 4: Positron Emission Tomography (Pet).

A PET scan can image the distribution of a bio-molecule in the body. For example,
imaging the distribution of glucose will give you information about the location of
increased metabolic activity. Glucose, tagged with a substance that emits positrons, is
injected in the patient. The PET scanner can sense positrons and an image is
developed with tomography as is done with CT and MRI.
At the PET Facility at the University of Chicago, normal volunteers are instructed to
perform a repeated task, such as adding a list of numbers. Tagged glucose is injected
and the location of increased brain activity associated with mathematical reasoning
can be imaged. With extensions and refinements of this technolo©' we will see in the
next century researchers imaging detailed human thought.

Medical Imaging Example 5: Image fusion / 3-D Reconstructions

Today, software is under active development that combines images to enhance the
resolution. The vague outlines of a PET scan showing metabolic rate can be combined
with the very high anatomical definition provided by an MRI scan.

Computerized 3-D reconstructions of CT and MRI sections allow surgeons to see
spatial relationships not otherwise visible. A surgeon can plan a difficult surgery such
as facial reconstruction by practicing first on a computer monitor with a 3-D model of
the actual surgical site. During surgery 3-D models give the surgeon the ability to
accurately hit targets and avoid critical structures.


Virtual reality refers to an imaging system that provides stereo sound, a 3-D (stereo-
scopic) visual image in a head-mounted display, and a hand activated controller. The
experience can be either a computer-generated "virtual" environment or an actual
scene transmitted from a remote location. The rich sensory input provides the viewer
with a sense of actually being there. Hand held controls give the user an opportunity to
interact with the imaginary or remote environment.

Through the use of "data fusion" computerized systems can combine live video from
an endoscope with patient-specific three-dimensional computer models. A virtual
reality system for arthroscopic surgery has been demonstrate by Medical Media
Systems working with Baxter Laboratories.


In the US over 30 computer and televideo networks already provide long distance
health care. The Medical Centers of Excellence at Universities and Urban Hospitals
are becoming linked to physician's offices in rural areas. Through computers, cameras
and video monitors a far away specialist can discern almost anything that a physical
exam would reveal. Over the next ten years this network may even extend into the
home through interactive cable TV.

I hope I have provided a small view of the future applications of computer, imaging
and laser technology in surgery and medicine. To prepare for the future you must first
visualize the future.
Please address correspondence to:

David M.Harris, Ph.D.
Bio-Medical Consultants and Associates, Inc.
175 Highland Road
Mansfield Center, CT USA 06250
TEL: (203) 423-7750
FAX: (203) 423-7947

                  PEDRO PITA BARROS
                  Faculdade de Economia
                  Universidade Nova de Lisboa
                  Travessa Estevdo Pinto
                  P-1070 Ltsboa

1. Introduction
One stylized fact of policy-making in major industrialized countries is the
increased attention given to technological progress and innovation. Govern-
ment policies designed to promote R&D activities are a widespread phe-
nomenon. It comes as no surprise that a fair amount of economic literature
is devoted to this theme.
    Likewise, international trade has always been one of the most important
fields in economics literature, with seminal contributions dating back two
    Joint analysis of both R&D and international trade have been however
less frequent and focus mainly on strategic effects in markets characterized
by imperfect competition.
    The first part of the paper provides a brief survey of the R&D literature
and of the arguments provided for Government intervention. The second
part presents some of the main implications of international trade literature.
Finally, in the third part, a joint perspective is provided, with emphasis on
the institution design suggested by economic theory.
    Let me state at this point that only market-wide effects are considered. I
shall not discuss issues internal to the firm. This option does not mean that
the internal organization of firms is not important to innovation processes.
The internal management of the firm and associated changes that have
0. D. D. Soares et al. (eds.), Innovation and Technology - Strategies and Policies, 193-203.
© 1997 Kluwer Academic Publishers. Printed in the Netherlands.

occurred both in theory and in practice in the last decade or so certainly
deserve our attention. However, it is beyond the scope of the paper to
discuss such issues. For a discussion of several important related aspects
on the theory of organizations, the interested reader is referred to Puges-i-
Cambra (1995).
    Also, the empirical relevance of R&D effects, especially positive tech-
nological spillovers, are not discussed. Some empirical evidence on tech-
nological spillovers resulting from direct foreign investment is presented,
with reference to the recent Hungarian experience, in Torok (1995). The
interested reader is referred to it for more details.

2.    I n v e s t m e n t s in R & D

The voluminous literature in R&D can be broadly divided into four main
themes: (i) individual firm decisions; (ii) industry equihbrium; (iii) "search
model" approaches; and (iv) positive feedback models.
    T h e focus of the literature on individual firms' decisions is on the de-
terminants of R&D expenditures, like competition, the possibiUty of imi-
tation, properties of the technological process, uncertainty and so on. This
approach takes as given market structure.^
    T h e second line of approach looks mainly at the equilibrium of industry.
Interaction among firms is the main driving force of the analysis. Specifi-
cations emphasize naturally game-theoretic approaches, usually looking at
the Nash equilibrium. This constitutes essentially a non-cooperative ap-
proach. The analysis is centered on social efficiency of market allocations.
The scope for cooperation and research joint ventures is rather limited, and
cooperative agreements are vulnerable to strategic behavior and deviations.
    T h e third line of research is less developed and follows a "search model"
approach. In this type of models, firms search for the best result among
alternatives. According to the Weitzman (1979) interpretation, we can see
it as a Pandora's Box approach. Typically, a stopping rule is defined as the
firm's strategy of whether or not to pursue further innovation.^
    More recently, a new approach, based on positive feedback has been pro-
posed. The main thrust from this new approach comes from the influential
work of the Stanford historian Paul David.''
    We will not explore further the details of each of these approaches.
Instead, preference will be given to the presentation of the main arguments
suggesting the need for some Government intervention in the marketplace.

   ^For a detailed survey, and still a useful one, of this line of literature, see Kamien and
Schwartz (1980).
   ^See Roberts and Weitzman (1981).
   ^See the important contribution of David (1985).
     Innovation has been considered in literature having several specific char-
 acteristics: (a) it generates knowledge, and that knowledge can be "written
 down",'' (b) it results from a cumulative process of investment, that is, from
 additions to a stock of knowledge. Those two characteristics are important
 for the way economic analysis of innovation is currently being shaped.
     The first important eflFect to be recognized is the "appropriability prob-
lem" (Arrow, 1962). Arrow has pointed out that private firms do not appro-
priate all the surplus generated by the innovation they put forward. Only
a monopoly with perfect discrimination would be able to capture all the
surplus generated by the innovation. However, this type of monopoly raises
distribution problems and it does not constitute a reasonable assumption
for most cases.
     Since private firms are unable to capture all the surplus, and they invest
according to their expected returns on R&D investments, there will be too
little effort devoted to R&D from a social point-of-view.
     This has also important implications for the analysis of the influence
of market structure on R&D spending. Namely, the possibility of costless
imitation and perfect competition after the innovation has been achieved
means t h a t no firm will engage in R&D. It is a typical situation calling for
some type of government intervention.
     This problem has been the basis for a whole literature on the economics
of patent's law , which can be seen as a way to assure a return to R&D
investments and a credible commitment of economic authorities to grant
that return. The first part of the sentence was already discussed, as patents
allow firms to appropriate more of the surplus they generate t h a n otherwise.
     On the second part, note that after the innovation becomes available, the
best social policy is to promote wide diffusion of knowledge. Anticipation of
such a public incentive would prevent firms from investing in R&D. Laws,
in particular patent law, create a framework where government discretion
is eliminated and thus firms know that some monopoly power is granted to
innovators. This is one instance where allocative efficiency is sacrificed to
dynamic efficiency of the economy.
     Another characteristic of R&D spending can generate a case for sub-
sidization: the existence of technological spillovers. This is another side of
the appropriability problem: other firms benefit from the R&D efforts of
one firm. Knowledge resulting from R&D activities has the characteristics
of public goods, and the functioning of private markets renders sub opti-
mal prices.^ T h e externality issue is based upon the idea of information

   *This leads to licensing considerations and formation of research joint ventures. Both
topics have been addressed in the economics literature.
   ^A more technical point is to be mentioned: spillovers can be intra-industry spillovers,
that is, firms of the same industry benefit, or inter-industry spillovers, that is, other
 produced as being easily available to others. This view has been recently
 challenged, arguing t h a t a significant component of the innovation process
 constitutes specific knowledge and is difficult to transmit.^
      On the other hand, we can identify an effect t h a t works in the opposite
 direction: in imperfectly competitive markets and for innovations t h a t do
 not drive out the market competitors, an innovator does not internalize the
 fall in profit its innovation may impose on rivals. This "business-stealing"
 effect may counteract the appropriability effect. Excessive R&D may result
 as a result of excessive entry into the race to innovate.
     The role of dynamic, self-reinforcing, processes of innovation (more pre-
 cisely, learning) have seen their importance increased in our understanding
of how innovations work, and why certain innovations survive and others,
perhaps better ones, do not. The finest example of the issue is provided by
 David (1985), concerning typewriter keyboards. Paul David's main example
runs as follows: In the early days, typing machines were fully mechanical
 and keys got jammed quite easily. Therefore, typists did not need to write
quickly (typing too fast was indeed the problem, as keys clashed against
each other). Keyboard disposition was then established in a way to min-
imize jamming, and the "QWERTY" system was developed.^ Since then
typists were trained on this keyboard, which justified its continued usage,
which in t u r n justified keeping typists learning on "QWERTY" and so on.
     However, several studies on typing have shown that alternative dispo-
sitions of keys would be more productive, with clear reductions in typing
time. History has nevertheless prevented the displacement of "QWERTY"
by those superior alternatives. Even other systems have disappeared. For
example, in Portugal, old typing machines employed not "QWERTY" b u t
the "HCESAR" keyboard. New typing machines and computer keyboards
even if they include Portuguese special characters (like g) follow the "QW-
ERTY" standard.^ These types of dynamic processes are starting to induce
profound changes in the way innovation is seen.^
     Besides the appropriability problem, a feature with considerable impact
on the results one can get from economic analysis has to do with the type
of innovation. Innovations can be broadly divided into two main categories:
process innovation and product innovation.
     Process innovation relates to improvements in existing technology. Pro-
cess innovations can be more or less important. When cost reduction of an
innovation is sufficiently strong as to drive out the market rival firms even if

industries benefit. For our exposition purposes no further distinction is needed.
   ®See Dosi (1988) and Cohendet, Heraud and Zuscovitch (1995).
   ''"QWERTY" respects to the letters on the line of keyboards, left to right.
   *As the one used to type this text!
   ^For a presentation of such view, see Cohendet, Heraud and Zuscovitch (1995).
the innovator sets a monopoly price, then a drastic innovation is achieved.
On the other hand, product innovation implies creation of a new product.
    These two types of innovation are usually associated with very different
degrees of uncertainty. Product innovation is commonly associated with a
high uncertainty in returns from R&D investment, which in turn are fre-
quently very high (pharmaceutical drugs provide a very good example).
Process innovation, on the other hand, has much less uncertainty. By in-
vesting enough, a firm has a reasonably high likelihood of obtaining an
innovation (even if not a drastic one). This will have important implica-
tions for public policy, as discussed in the next section.
    This is linked to the nature of uncertainty, another significant element
in the analysis of R&D. Two main sorts of uncertainty can be distin-
guished: technological uncertainty and market uncertainty. Technological
uncertainty relates to the relationship between R&D spending and time
of innovation or probability of innovation. Market uncertainty relates to
the lack of knowledge about rival efforts and likely times of innovation or
probabilities of obtaining first an innovation.-^^

3. P o l i c y i m p l i c a t i o n s from R & D e c o n o m i c t h e o r y

The justification for an active public policy for promotion of R&D activities
has been based on arguments of market failure, namely under investment
in R&D. T h e issue is usually presented as one of positive externalities -
not all surplus is captured by firms engaging in R&D. The direct policy
prescription is the identification and promotion of growth of those firms or
industries t h a t generate the highest positive spillovers.
     More recently, based on positive-feedback models (which state that "his-
tory matters") policy interventions are also seen as a means of inducing
 "historic accidents" and hence start a cumulative process of innovation.
This kind of intervention is quite risky. We will come to this characteristic
     The classic policy prescription of target selection ("pick the winners"
strategy) has been recently challenged on several grounds. From a policy
point-of-view, essentially two lines of support of R&D activities can be fol-
lowed: selection of industries, or even firms, to benefit from public resources;
or horizontal policies, with the fundamental characteristic of providing the
conditions essential for R&D but without trying to select or identify spe-
cific industries, as the main recipients of governmental schemes to promote
R&D spending.
     The traditional approach of selection of grant recipients makes sense
when process innovation is relatively more important and opportunities

 ^"A review of this line of literature can be found in Reinganum (1989).
for improvement can be more or less accurately identified. For instance, in
countries lagging behind in technology it is not difficult to anticipate t h a t
investing in some firms or industries will result in some process innovation
(even if it is just adaptation of existing technologies in other countries to the
country's characteristics). This explains why such technological targeting
has been a successful strategy in some Asian countries in recent decades.
    However, once backwardness is lost, firms on the "frontier of science"
will find increasingly relevant product innovation. This shift of emphasis
from process to product innovation, as the level of technological develop-
ment of the country increases, also changes in a profound way the degree of
uncertainty present in R&D activities. Failure is, usually, much more likely
in product innovation than in process innovation. "Picking the winners" in
the wrong industries entails very high costs and the risk of wrong choices
increases as an economy shifts from process innovation to product innova-
tion. Hence, a more sensible approach to public policy promoting R&D is to
focus on across-the-board policies. T h a t is, policies t h a t enhance the ability
of the economy to do R&D: improved quality of human capital, support of
research networks, etc...
    T h e main argument is t h a t more successful industries (or firms) will sort
out themselves. This change in policy-making is independent of the exis-
tence and significance of international trade to any particular country. It
results mainly from the evolution of the innovation process and, especially,
from the degree of uncertainty associated with it. The argument for govern-
ment intervention does not rely on the existence of international trade: new
products and productivity gains are welfare improving in closed economies
as well as in open economies.

4.    International trade

So far, R&D expenditures were discussed without reference to international
trade. T h e main ideas applied to open and closed economies alike. We now
turn to International Trade issues on their own.
    Introducing international trade into the picture will change some im-
plications for government policies for R&D and add new ones. However,
the theme is prone to misconceptions. Several "myths" about international
trade must be dismissed before tackling the issue.
    First, it is important to recognize t h a t trade between countries can-
not be regarded as competition among firms. This analogy, while useful
to transmit some economic ideas in a digestible way, is not correct in sev-
eral points. It merely gives a sense of false economic sophistication. For
example, countries mutually benefit from the trade with each other, cor-
porations are engaged, to some extent, in zero-sum games (what they earn
is at the expense of competing firms). Countries consume the majority
of its production, no firm has its employees buying a major share of its
products. Countries export to be able to import; firms sell to have profits
(which are distributed to shareholders, and ultimately are translated into
consumption). The list of differences between countries and firms could go
on and on but the point is clear. Countries are not corporations and sound
management strategies can be erroneous if applied to countries.
     T h e existence of technological differences between countries does not
imply absence of trade. Since David Ricardo, two centuries ago, it is well
established t h a t gains from specialization motivate international trade. This
is true even if one country is more efficient than another in the production
of all goods. W h a t matters is the relative efficiency of production. This
theory is called "comparative advantage" and has been extended in sev-
eral directions.^-^ The main message is nevertheless quite clear: countries
benefit from trade since they can specialize in the production of goods.
The emerging specialization pattern reflects relative factor endowments and
    Of course, if a country is less efficient than another it will have a lower
income. The issue then is not one of existence of gains from international
trade but of income level, which is quite different. Productivity growth and
innovation increase a country's living standard, and this holds true in open
as in closed economies. Hence, countries benefit from trade even in the
absence of innovation and benefit from innovation even if there is no trade.
Policy prescriptions of this theory are clear: free trade should be pursued,
independently of the existence of policies promoting R&D spending.
    More recently, observation that a significant amount of international
trade cannot be totally explained by this theory of relative factor endow-
ments has led to the appearance of new trade theories. Also, the traditional
theory of international trade is not designed to explain why technological
differences between countries exist and persist over time. New theories have
appeared to fill this gap. They emphasize the role of product differentiation,
scale economies and imperfect competition.
    In the realm of imperfect competition, a case for active government
policies in international trade can be found, and R&D can be one possible
instrument of those policies. The argument runs as follows: Imperfect com-
petition means t h a t there are economic rents to be collected by firms. If a
government can, through some policy intervention, shift rents from foreign-
ers to domestic firms, it should do so. For instance, by subsidizing R&D
spending of a domestic government may give an advantage to domestic firms
in competition with foreign firms even if no technological spillovers from

 '^See any textbook on international trade.
 R&D spending are present. This constitutes a "strategic trade argument"
 for support of R&D public policies.
     The strategic trade theory has produced one important stylized fact:
 with imperfect competition, almost everything is possible in theory. There-
fore, by careful selection of a model, it is possible to justify almost every
policy intervention. The shortcomings of the approach are often neglected
 by policy-makers in search of a background for their decisions. Two of those
shortcomings may be quite important, even granting t h a t industries with
the appropriate characteristics are considered.^^
     First, the strategic trade analysis is for a majority of cases conducted in
partial equilibrium framework. T h a t is, economy-wide effects are not con-
sidered. These effects may, however, be significant. For example, expansion
of production in one sector must be accomplished employing resources t h a t
are shifted from other sectors or industries (even within an industry, it is
not infrequent to see t h a t expansion of one firm is sometimes made by hiring
rival firms' workers). At the economy level, since labor and capital (human
and physical) are available in limited amounts, expansion in one industry
means t h a t less productive resources are available for other industries in
the competition to attract inputs.
     International competition in the product market has a domestic compe-
tition counterpart in inputs markets. When some policy favors an industry,
it is neglecting other domestic industries.
     T h e second important shortcoming is the risk of "commercial wars"
between countries, making them worse off than in the no active-policy case.
This can be avoided by cooperation between countries (like in multilateral
trade agreements). However, previous experiences, like GATT, show that
international cooperation on these matters is far from straightforward and
it can be a time consuming process.^^

5.     Policy prescriptions

T h e comparative advantage theory of international trade advocates free
trade policies, irrespectively of technological differences among countries.
The arguments for policies directed to R&D do not necessarily change by
the mere existence of international trade.
     Strategic trade considerations need not to introduce additional mo-
tives for R&D spending policies by governments. The argument for gover-
ment R&D expenditures is based on strategic consideration of rent-shifting,
which cannot be applied to all industries and has considerable risks of re-
taliation. Although strategic trade policy can be, in principle, welfare im-

     ^^And they are not that many.
     ^^For example, GATT negotiations typically took several years.
proving in certain particular cases and welfare reducing in many others, it
may be best to avoid than follow such policies.
    Thus, the growing relevance of horizontal policies for R&D, due to the
nature of the risk involved with obtaining innovations. On the other hand,
we have the possibilities of discriminating in favor of certain particular
industries or firms, as a means to extract rents in international markets.
Given the risks associated with this last option, it seems more appropriate
for public policy not to target specific industries or firms and to emphasize
horizontal R&D policies. T h a t is, the first argument dominates the second
    The more traditional motives for intervention - appropriability and pos-
itive technological spillovers - have a new dimension in an international
context. Besides internal effects on the country, both type of effects may
cross borders and affect other countries. In this latter case, national policies
aimed at subsidizing R&D will be too low from a supranational point-of-
view. Therefore, there is scope for the existence of supranational author-
ities, who should devote their resources to promote those activities with
higher cross-border eff'ects. Within-border effects can be treated effectively
through delegation to national authorities. In this case, domestic authorities
internalize all relevant effects.
    P u t t i n g together the strategic and the spillover motives, the case for sub-
sidizing R&D spending can be reversed when there is international trade
under imperfect competition. In the presence of positive technological ex-
ternalities, a subsidy to R&D spending of a domestic firm also benefits rival
firms (from other countries). For high values of the technological external-
ity, an increase in R&D spending can originate an increase in production
in the foreign firm, thus hurting the domestic firm(s).
    T h e globally positive effect upon rivals from other countries is not
counted in domestic welfare measures. Hence, underinvestment in R&D re-
sults, even if individual governments pursue active R&D policies. Similarly,
for low spillovers, strategic competition between countries can generate too
much subsidization of R&D spending, as some of the gains to subsidized
firms result from profit transfer effects of foreign firms to domestic ones.
   On a more general level, there is scope for supranational R&D policies,
that should be directed towards those activities, or firms, characterized by
high cross-country positive spillovers.
    Coordination by a supranational authority is more important in the ex-
treme cases of very low or very high spillovers. In the first case, the strategic
trade motive dominates, and coordination should curtail the excessive ri-
valry between countries - this is analog to the usual monopoly advantage
over duopoly. In the second case, the gains from coordination result from

increased innovation. T h e strategic effect is, in this                   second-order

6.    Final Remarks

We have argued t h a t international trade and R&D expenditures can be,
to a certain extent, separated in economic analysis. Innovation is beneficial
whether there is international trade or not. International trade, namely free
trade, is beneficial whether there is innovation or not.
    Motivation for governments to intervene in the promotion of R&D
spending is not essentially changed by the existence of international trade.
Nevertheless, a new feature of R&D appears in an multi-country setting:
positive technological externalities may cross-borders. In such cases, opti-
mal policies from a single country's point-of-view need not to be optimal
from a joint multi-country point-of-view. Therefore, there is some scope for
the existence of supranational R&D programs, like the ones put in place
by t h e E u r o p e a n Union, and directed mainly to investments more likely to
generate positive international spillovers.

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Brander, J.A. (1981) Intra-industry trade in identical commodities, Journal of Interna-
    tional Economics 11, 1-14.
Brander, J.A. and Spencer, B.J. (1985) Export subsidies and international market share
    rivalry. Journal of International Economics 18, 83-100.
Coehendet, P., Heraud, J.A. and Zuscovitch, E. (1995) Economics of Innovation and
    Learning, presented at the Conference Strategies and Policies for Innovation and
    Technology - Towards the XXI Century, Oporto, March.
David, P. (1985) CLIO and the economics of QWERTY,American Economic Review 75,
D'Aspremont, C. and Jacquemin, A. (1988) Cooperative and non- cooperative R&D in
    duopoly with spillovers, American Economic Review 78, 1133-1137.
Dixit, A.K. (1980) International trade policy for oligopolistic industries, Economic Jour-
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Dixit, A.K. (1987) Strategic aspects of trade policy, in T.F.Bewley (ed.). Advances in
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Dosi, G. (1988) Sources, procedures and microeconomic effects of innovation, Journal of
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Dosi, C , Pavitt, K. and Soete, L, (1990) The Economics of Technological Change and
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   Harvard University Press.
Puges-i-Cambra, L. (1995) Cambio Tecnologico y Formacion Empresarial, presented at
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   XXI Century, Oporto, March.
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   R. Schmalensee and R.D. Willig (eds), Handbook of Industrial Organization, Volume
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                   DR. LLUIS PUGES
                   Av. Pedralbes, 60-62. 08034 Barcelona. Spain

   I - Introduction
  Since the mid-seventies a new system of teclinology has been gradually supplanting the
  system that emerged at the end of the last century.

  The former system was based on heavy industry and general technology in the fields of
  steel/cement/alloys and plastic, combustion engines and electricity as well as for all
  equipment, systems and products related to these materials and sources of energy (i.e.
  automobiles, home appliances, machine tools, airplanes, telephones, television sets, etc.).

  The new system is based on four fields of technology: microelectronics (information
  technologies), biotechnology, new materials and electro-optics (light technologies).

                             THE NEW TECHNOLOGIES (a)

                                          , NEW PRODUCTS (CALCULATORS, COMPUTERS)
                                          I ADDED TO EXISTING PRODUCTS (RADIOS, AUTO-

                                           NUMERICAL CONTROL


TECHNOLOGY)                                FLEXIBLE MANUFACTURING

                                           INTEGRATED MANUFACTURING AND DISTRIBU-
                                           TION (CIM, LAND)



  0. D. D. Soares et al. (eds.). Innovation and Technology - Strategies and Policies, 205-210.
  © 1997 Kluwer Academic Publishers. Printed in the Netherlands.

                                   THE NEW TECHNOLOGIES (b)

                                           COMPOUNDS (COMPOSITES)

       2. NEW MATERIALS                    PLASTICS (POLYMERS)


                                           FERMENTATION ENGINEERING

                                           ENZYME ENGINEERING
                                           GENETIC ENGINEERING (GENETIC CODE + DNA SPIRAL)

                                           OPTIC FIBER (COMPUTERIZED BROADCASTING)

                                           LASER (OPERATING POWER)
                                           PHOTOVOLTAIC (ENERGY)

Of these new technologies, only the use of microelectronics is currently widespread. The others are
still in the fledgling stage and it will still be a few years before they make a major impact. This is
particularly true of biotechnology.

Every new technological system involves new ways of organizing production and labor, new strategic
concepts and even more international operations (transport, telecommunications, etc.).






                  RESULT            A NEW SOCIETY
                                    WITH UNSUSPECTED
                                    CAPABILITIES AND THREATS

                             EVOLUTION OF PRODUCTION SYSTEMS

Before 1800                    COTTAGE INDUSTRY (Pre-lndustrial)

About 1800                     ENGLISH SYSTEM

                                      Mechanisation of tools

About 1850                     AMERICAN SYSTEM

                                      Standardization of parts and products

About 1920                     FORD-TAYLOR
                               "Scientific management"

                                      Time/motion studies - task optimization;
                                      Moving assembly line-mechanical integration;
                                      Hierarchical structure;
                                      Standardization of accounting.

About 1970                     AUTOMATION

                                      Functional computarization (CAD, CNC, Robots, FMS, ...)

About 1985                     COMPUTER INTEGRATED MANUFACTURING (CIM)

                                      Integration of automated functions

II - Information, technologies and Employment
Information technologies have had a tremendous impact on both the goods and services industries
(before this, most services were barely affected by technological change).

The result: the line between internal and external operations is becoming blurred and both are now
an integral part of corporate activity. Entire companies are being decentralized and operational
procedures are becoming faster and more flexible.

Jobs, too, have changed. The most important things to know now are how information systems work,
how human beings operate both collectively and as individuals, and how to communicate. The blue
collar worker of the turn of the century has been left behind and we are now moving away from the
white collar workers of post-war days and heading towards the era of the golden collar worker (or
superman) who operates, controls and innovates by working in a team.

                                    NEW JOB CHARACTERISTICS

                     a)   Need to deal with abstract ideas and concepts.
                     b)   From physical involvement to mental involvement.
                     c)   Office categories will blur:
                                 multi-skilled employees.
                     d)   Teams are increasingly important
                                 for example: production and maintenance teams.
                     e)   Permanent education:
                                 the need to regularly update knowledge.
                     f)   There will be and end to hierarchies and meticulous job classifications.

                          AND GROUPS WORK; COMMUNICATION.

                                OUT HIS OWN QUALITY CONTROL AND INNOVATE.

Source: S. Ait el Hadj

                            CHANGE IN OCCUPATIONAL                STRUCTURE




                                             OLD                                         NEW
                                       TECHNOLOGICAL                                TECHNOLOGICAL
                                           SYSTEM                                       SYSTEM

III - Management of education
Changes are taking place at a great rate and both individuals and companies must constantly
scramble to keep up with new developments. We are moving away from a production-based society
and into' a knowledge-based world where the emphasis will be on skills and knowhow '. Corporate
structure is getting flatter, encouraging all employees to contribute towards improving their
company's performance.

What does this mean for management education? It means that non-skilled, repetitive jobs (applying
techniques or methods) are becoming increasingly obsolete. Pleople need to be multiskilled and
flexible. In the future the important things will be knowing how to lead individuals and teams and
being able to work in different cultural settings (and, consequently speak a number of languages),
and finally, it will mean that the learning process must never cease: permanent education will
become a way of life.

             mi                          EVOLUTION:    THE JAPA^ESf WORKCn

                                        EVOLUTION:    TWE AMcmCJM WORKFH


IV - References
Drucker, P.F. (1993) The postcapilalist society
          Neither work, nor capital. The determining factor of wealth in tlie postcapilalist society is knowloedge. The "know-
          Therefore, neither cheap labour, nor Japanese style working hours, nor tons of gold. What makes a nation wealthy
          today is what its inhabitants know how to do. But careful, their "know-how", not just their "knowledge".

Reich, R.B. (1993) The work of nations
          We are in the process of moving from the production of "volume" to the production of "value".
          The standard of living is coming to depend less on the success of the nation's core corporations and industries than
          it is on the worldwide demand for their skills and insights.

Porter, M. (1990) The competitive advantage of nations
           The basis for competition is increasingly shifting towards the creation and assimilation of knowledge.

                 P. COHENDET, J.A. HERAUD, E. ZUSCOVITCH
                 BETA     - Bureau d'Economic Theorique et AppUquee
                 Vniversite Louis Pasteur
                 38 boulevard d'Anvers
                 67000 STRASBOURG (France)

The postulated availability of the information contained in the innovation ignores the
very nature of technological progress. Innovation is basically a learning process. It is
neither an exogenous promethean gift nor a multipurpose knowledge base that can be
oriented according to relative price changes. This neo-classical view of the sixties
accommodated well the models of homothetic growth. With the crisis of industrial
restructuring and the emergence of new technologies that came later we were incited, if
not obliged, to look closer at the inner characteristics of technology and they by no
means matched such a view. Technological innovation is a process which occurs
differently across industries and over time (Pavitt, 1984) ; it is at the same time
localized, partly tacit and to a large extent history-rooted and with strong irreversibility
character that makes it strongly path-dependent and of very limited transmissibility. Let's
say a few words about each of these characteristics.
          The "local" nature actually encompasses two interrelated dimensions. The first
is the recognition that technological innovation takes place within a particular structure,
a specific context of industrial products and production processes. More fundamentally
the local character expresses a sort of "fix point" that results from a cumulative process
of successive adjustments of the technology to its context. In such a process a specific
configuration of technological, sectoral and scale related arguments match gradually
each other to create a specific "personality" or pattern. The consequences of this local
character are far from trivial and in 1969 Atkinson and Stiglitz presented it as a selective
displacement of a point or a segment rather than a shift of the overall production
function. And as Sahal (1981) put it"... insofar as the learning tends to be localized, the
very concept of a production function representing a near-infinity arrays of techniques
sharing a common state of knowledge may have to be abandoned".
          The tacit aspect is linked to the fact that production technology is about doing
things, not only about knowing things in the form of an abstract (scientific) principle.
Operating know-how is something very different and is much less transmissible (Dosi,
 1988). It is often dependent upon a division of labor which very often contains implicit
components that make the production setting unique. It incorporates working routines
and craftsmanship components and sometimes, even with the voluntary transfer of the
0. D. D. Scares et al. (eds.), Innovation and Technology - Strategies and Policies, 211-219.
© 1997 Kluwer Academic Publishers. Printed in the Netherlands.
original blueprints, it is not possible to imitate the ensemble of gesture and working
implicit practice in such a way that the product quality is satisfactory
          The third and most powerful argument of the technological learning process is
its historical nature. The view of technological development as an evolutionary process
is now well established due to the joint effort of the historical research of Nathan
Rosenberg (1976, 1982) and the implementation of the evolutionary approach by a
continuing effort of Nelson and Winter (1982, for example). Irreversibility of the
technological learning process was further documented and analyzed by the works of
Paul David (1975, 1986) and of B. Arthur on path-dependency. In addition to the
localized aspect there is a clearly time dependent behavior in learning. If for some
random reason a given technological trajectory is selected, it will undergo successive
improvements that will make it perform better and it will, by this very fact be selected
for future applications. If the current choice had had to be made previously (before the
first choice was made) an altogether different technique could have been chosen. This is
of course a major cause for a restricted transmission of knowledge. Since we can only
maintain alive a relatively small number of options, our "practice memory" capacity
being very limited, purely theoretical options have a very small chance to be reactivated
(Zuscovitch, 1986). After the oil shocks, no one really considered going back simply to
coal-based organic chemistry. One would have created new hydrocarbons from liquified
coal and then used petroleum-based techniques that have been constantly improved.
          All three major characteristics of the learning process mentioned above imply,
in one way or another, severe restrictions on the ability to transmit the information
contained in the novelty. D. Foray went a step further in the argument (1989). He claims
that the standard theory actually mixes up two types of diffusion effects. The first
consists of the dissemination of the information about the outcome of an R&D activity.
Such dissemination occurs without serious adjustment costs while the actual
implementation of the innovation usually require considerable adjustment costs. If the
former diffusion costs are low it is because the firm invests a lot in maintaining a
considerable R&D capacity that can in turn absorb quickly such information. To put it
differently, the adoption costs which are also a measure of appropriability become an
inverse function of the investment in R&D. This view is particularly valid for basic
research, where, although the results are publicly available it takes constant investment
effort in theoretical research to be able to interpret and use abstract results. Even this
really public good can only be appropriated with significant costs which are required to
maintain the learning process alive.

1. Partnerships and Controlled Diffusion of Spillovers

A strong feature related to the evolutionary nature of innovation as a learning process is
the ability to stimulate change within and across the frontiers of the firm. This time the
appropriation matter relies not only on the same innovation ,but rather, on the chain of
induced effects. Spill over effects attracted considerable analytical attention over the last
decade and attempts were made to relate their magnitude to technological infrastructure
(Jaffe, 1986) or to the capital and productive structure as in Bernstein and Nadiri (1989).
One usually finds, the same claim that the social rate of return exceeds the private one
,but in no way can we realistically conclude that the spillover effects escape altogether
the innovating firms and are to be considered as being a negative incentive for R&D
investment. A recent increase in the rate of technological partnership formation
especially in advanced technologies (see Hagedoorn and Schankeraad, 1990) does seem
to indicate that spillovers are mastered to a large extent by reciprocity agreements and
that partners do find that the benefits of sharing and sometimes even diffusing
knowledge overcome the welfare or profit loses. Actually many economists now believe
that these R&D externalities should be taken into consideration in the new formalization
of real growth. Although their macro magnitude is hard to assess (see Griliches, 1991) -
hence the difficulty to say to what extent they offer an escape from decreasing returns -
it is quite possible that the return to the originating firms become higher than their losses
even though they may capture only a small part of the social overall return. We will
come back to that later. To better grasp the spillover effects one usually distinguishes
between productivity spillovers and inter or intra-industry spillovers (see Griliches,
1979orMohnen, 1989).
           Productivity spillovers express the fact that, in addition to the surplus gains for
the innovating industry, these (typically materials or process) innovations tend to reduce
input prices in downstream industries and therefore increase their own surplus. These
however are not always considered as pure externalities since they are transmitted
through the market mechanism.
           The industry spillovers stem, according to the received view, from the
informational nature of the innovation, considered as a commodity that can be easily
appropriated. The innovating firms can expect other firms.either from the same industry,
or, from altogether different sectors to appropriate relevant information about the
innovation properties with relatively negligible costs. This kind of spillovers are made
easier with procedures and practices such as skilled labor mobility, systematic screening
of data bases of relevant professional literature, reverse engineering and sometimes
industrial spying. However, although we should recognize these "negative" spillovers,
we should notice at the same time that a rapidly increasing number of firms expect a
globally positive feedback effects from the different modes of technological transfer. It
is certainly the case for technological partnership agreements, for the "Technopole", that
is new technologies industrial breeding areas, and for the voluntary dissemination of
R&D results to potential competitors in order to sustain strategic markets. Inter-industry
transfers are even less problematic and very often, as in the case of advanced materials,
one cannot really implement innovation unless a significant scaling-up allows for price
reduction that makes the whole diffusion possible. Indeed diffusion is often a controlled
process where the reciprocity rule prevails in a long repeated game. In addition, very
often the development of a innovative "milieu" very often proves to be essential and
information exchanges are the very way of participation. In all these instances spillovers
are of a "positive externality" type and there is absolutely no reason to conclude that
under-investment in innovative activity would prevail.
         The analytical and empirical criticism of what we have termed the received
view on appropriation did not focus on its theoretical core only. Its two major corollaries
were equally attacked, i.e., on the one hand the need for governments to use public
policy instruments such as big research projects in order to substitute for or palliate the
lacking private initiative ; and on the other hand many authors questioned the primary
role and the efficiency of the legal protection device - the patent system.
       -The questioning of the well founded need for big public R&D and technology
programs, set in order to substitute for insufficient private incentive has never left the
theoretical and political literature. It was never as fierce as after the failure of the federal
program "Cogents-centers of generic technology" (see Mowery, 1983 and Foray

        - Lebas, 1988) The purpose of the program launched in 1980 and stopped in
1983 was to create big research centers on generic technologies. Apparently the new
knowledge generated in the project did not feed enough conunercial exploitation in the
industry and probably, as Foray and Lebas suggested "... There can be no pure
substitution between intra-firm research and contractual research without damaging
the overall innovative performance of the system. The firms must maintain or develop
an acceptable level of research capabilities in order to be able to better exploit the
results of the contractual research".

       -The questioning of the efficiency of patent legislation is equally frequent but the
empirical evidence reported by Levin, Klevorick, Nelson and Winter (1987) is
particularly convincing. They showed with the Yale inquiry on appropriation
mechanisms, that patents were by far not the best or the preferred instrument to secure
innovation property rights. Having sufficient lead time over competitors, a better
mastering of production and technology thanks to experience effects (learning curve
advantages) or simply trying to keep secret the new results, were all instruments that
were considered as at least as effective as patents and often much prefened.

2. The Characteristics of the New Model of Appropriation

If real world innovating behavior really depended that much on the imperfect
appropriability problem we would have certainly ended up dragging our feet in
stationary economies. Although the linkage to short term growth has not been
systematic, technological change, if anything, has seriously accelerated since the early
eighties. Measuring its impact is something that gives all economists a serious headache
as it was recently expressed in the OECD conference on the relationship between
science,technology and productivity or what is called "The Solow Paradox" (Paris, June
1989). If the computer revolution is not well registered in growth accounting it is
perhaps because it does occur at a much faster rate than the one that economic agents
would define as manageable or profitable. It is very hard to say if the current pace of
technical progress would be even quicker, given better protection for the innovators'
property rights. The sequence going from better protection, more incentive to innovate,
higher R&D expenditure to competitiveness and rising living standards is by no means
automatic since innovation and imitation costs can rise and change to another, and not
necessarily better path. Furthermore it is not at all clear that the proposition itself is an
unquestionable truism. Levin et al. (1987) express it beautifully and we would like to
quote them fully at this point
        "... The premise that stronger protection will always improve the incentives to
innovate is also open to challenge. Unimpeded diffusion of existing technology is
immediately beneficial not only to customers but also for those who would improve that
technology. Because technological advance is often an interactive, cumulative process,
strong protection of individual achievements may slow the general advance. This would
not occur in a hypothetical world without transaction costs ... in reality however,markets
for rights to information are subject to major transactional hazards, and strong protection
may preclude competitors from making socially beneficial innovations. The semi
conductor industry of the 1950 and The 1960 provides an excellent example of rapid
progress in a cumulative technology that might have been impossible under a regime
that strongly protected intellectual property." The interactive argument should be
extended also to include inter-industry spillovers. In many instances the indirect system
(shadow) benefit from releasing an important constraint exceeds by far the direct benefit
to both users and producers.

3. The New Stylized Facts

We can summarize all these findings in the following manner. There is certainly a risk of
market failure in the inducement of innovative activities due to informational leakages.
Yet the scope of the problem is much limited because on the one hand technological
knowledge is not easily transferable. It is to a large extent naturally protected by the fact
that it is partly tacit and something which is not expressed cannot be transferred. The
local, context-dependent and path-dependent technological learning makes
transferability further limited either by the division of labor in which the technological
body of knowledge of the firm is embedded, or due to the fact that the specification of
the technical solution hardly matches other problems without expensive translation
           On the other hand we have the arguments related to market structure. We
would not like too close a protection that will prevent induced innovation effects both at
the industry level (making cumulative progress less effective) and across industries
(discouraging complementary innovations). However we should not worry too much
there about excessive uncontrolled spillovers because of the transaction costs involved.
These very transaction costs enforce explicit cooperation, but in the case of such
agreements reciprocity principles are established to insure incentive compatibility
among the agents. The rapid development of cooperative forms gives birth to a network
organization that superposes itself on the traditional industrial structure. This is due to
the fact that in an information-intensive production system with a multiplicity of micro-
markets with particular specifications for smaller production runs, there is a growing
number of bodies of knowledge that one has to master and the only possible access to
such a diversity is through cooperation with other producers and users of the products.
Apparendy then, imperfect appropriation is very different in the new technologies
context compared to the pure mass production era where indeed imitation may prove
disastrous. There is no doubt that the ability of the new information technologies
together with others, such as biotechnologies and advanced materials, to tailor
 applications and hence to combine diversity and efficiency makes the "local" argument
much stronger because niche production is local by definition.
         So the new model of innovation comes equipped with a built-in and rather
strong appropriability mechanism. The latter is due both to the "local" context-
dependent self protection at the intra-firm level and the "controlled" diffusion of
spillovers at the inter-firm level. This spontaneously stronger appropriability accelerates
the rate of technological progress as a whole. Not only the industrial structure tends
towards network organization, the firm itself becomes a network of scientific and
technical skills capable of adopting new technologies and of selecting proper
development paths among relevant alternatives. In this view the ability to have access to
the know how of firms in connected areas increases the value of the firm's own human
capital and therefore the incentive to cooperate is obviously strong. This new
technological system with its appropriation principles is not yet fully known empirically,
let alone analytically, because hybrid entities are hard to manage from both points of
view; and what we have is practically hybrids everywhere: competition/cooperation,
social(network)/private goods and dynamic (innovative)/static (management) efficiency.
Yet we should be able to analyze or at least to comment on some of the implications for
the two main corollaries namely technology policy and patent legislation.

4. Policy Implications

As far as technology policy is concerned the new innovation "model" altogether implies
a different types of intervention for the government when it considers stimulating
technology. According to the logic underlying this model the old linear view of a clearly
distinct phase of research followed by production and commercialization is basically
less and less valid and the stages become much more integrated. The system evolves
towards generalized forms of learning by doing. Since the research phase is not clearly
distinguishable anymore, no external research can really compensate private
insufficiencies. Public intervention should therefore take forms which differ from the
one derived from the "former" innovation model. Instead of big public research
programs aimed at substituting for private research the new model asks for a more
catalytic type of intervention, i.e. facilitating the conditions of the research learning
process. The basic idea is to help the technological body of knowledge of the firm reach
a critical mass and thus allow for significant research activity. At the inter-firm level the
basic idea is to stimulate technological partnerships in order to obtain larger cross
fertilization among disciplines, technologies and research programs so that each
individual trajectory of specialization becomes less risky to follow. (Inasmuch as a
better adjustment to diversified needs is insured beforehand and a broader application
potential is available). In a competitive scheme of globalization, that is, larger planet
integration of market, the risk of over-specialization can be shared in two ways. One is
to institutionalize risk sharing devices among firms and helping organize common
market segmentation and some generic research facilities ; the other is by each using
special segments of the fruits of the specialization of the others. In other words some
sort of technological integration is needed. It may be more spatial in nature as in
chemical industries sites that share common infrastructure devices such as steam power,
autonomous electrical power supply and a cheaper access to joint products. It may also
be more abstract in nature sharing knowledge complementarities, or it may include both
as in Sillicon Valleys and alike.
           In a way network stimulation policies are necessary not only in order to
facilitate appropriability, as we argued before. In the new technological context they are
indispensable to allow specialization itself Technological learning has a strong
collective dimension but it is not exported outside private initiative as in big public
programs. It is incremented from the beginning in private incentive. Cooperation
practices create "private" public goods and the real public intervention should have a
catalytic function allowing this technological/social division of labor to reach the often
required "critical mass". The analytical tools that would enable us to measure such
effects are not available since catalytic contributions require another type of formal tools
that can function in a typically hybrid competitive/cooperative structure. We will
probably have to borrow tools from other disciplines as is often the case in periods of
major change. As this last paragraph shows that classical problems of uncertainty and
indivisibility do not disappear; they appear differently in the new technologies context.
In a way this network effect existed well before but did not attract theoretical attention.
In our own experience in measuring the economic effects of the European space
program (BETA, 1988) perhaps the most important finding was that the technological
learning was made possible through the gradual construction and the keeping up of a
critical mass of skills within and among the high-tech firms of the space program. It was
not only technological in nature. Organizational and quality tightening-up effects
allowed the firms to develop skills with which they could face and sometimes even
develop markets in which they could not have been present before. There was by all
means highly beneficial learning process that was that the space project firms
appropriated, but it is to a large extent the outcome of a skill network consolidation. The
cooperation, started under artificial conditions of the program, becomes often
autonomous and the technological partnerships are activated to jointly face international
markets. This ambition for the state to catalyze innovation networks "Milieu Innovateur"
is at the center of some recent theoretical preoccupations and policy recommendations
(see Gallon, 1990). However, once established, the cooperative agreements are not
always stable because clear-cut sharing rules are often not well defined (Jacquemin,
1987) and even when they are, they do not necessarily resist strong appropriation
incentives. What we have been able to show also in the case of the space program is that
the network organization is not neutral vis-a-vis the nature of technological learning and
so the type of role one plays in the network (Main contiactor, equipment, system
contiactor etc ...) tends to shape the learning tiajectory and related appropriability
practices (Shachar and Zuscovitch, 1990).

          As far as property legal instruments are concerned it is useful to distinguish as
well between the individual firm practice and the new industtial structure implications.
At the firm level, patents will continue to be employed along other tiaditional strategies
of appropriation such as lead time, trademarks etc. Proportions may vary according to
the nature of the product and of the market involved. Where new jurisdictional initiative
and imagination is most required is in managing cooperation. It is quite probable that
new legal forms of association should be defined in order to bring more stability to
partnerships and other cooperative agreements. In France for instance, such initiatives
appeared on the public/private interface in the form of "Groupement d'interet
economique". Yet, if the network form of technological innovation grows to become a
dominant industrial structure, new legal forms of economic association will have to
emerge in order to offer better incentives in terms of appropriation of innovative


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                ADAM TOROK
                Research Institute of Industrial Economics of the Hungarian Academy of
                Janus Pannonius University, Pecs


This paper wishes to analyse a special aspect of foreign direct investment (FDI) in
Hungary, namely its role in fostering the transfer of technology to the country. The
amount of FDI totals more than USD 6 billion in early 1995 in Hungary even according
to reserved estimates [Benedek-Kiefer, 1995. p.l.].
       This seems to be a quite respectable amount as compared to most other transition
economies of the region. The technology content of this volume of FDI has not been
analysed yet. This paper is an effort to shed some light on the technologies this inflow of
FDI has brought to Hungary.
       Section 1 gives an overview of the development and main structural features of
FDI inflow in Hungary. Section 2 goes down to the sectoral and subsectoral level with
the analysis of cases. These are taken first of all from the automobile industry, but a
more general overview of the technology content of main investments is also given.
Section 3 offers an assessment of future trends and proposals for economic policy.

1. Trends in FDI ^'
Tax returns were filed by 15.430 partly or fully foreign owned firms ^ in Hungary for
the fiscal year 1993. Their number increased by 3.062 JVs in the first half of 1994, but
the average nsonthly number of JVs disappearing is about 1500. Therefore the total
number of JVs currently in existence in Hungary can be estimated to be around 17.000.
Their registered capital is around HUF 1000 billion ^' with a 60% average share of
foreign ownership, i.e. approx. USD 6 billion.

"The source of our data in this section is, if not otherwise indicated, Benedek-Kiefer, 1995.
^ These companies will be referred to in our text as JVs (joint ventures). This term also covers fully foreign
owned companies in this somewhat simplified approach.
''The exchange rate was HUF 100 = USD 1 in mid-1994. In February 1995 HUF 112 = USD 1.

0. D. D. Scares et al. (eds.). Innovation and Technology - Strategies and Policies, 221-232.
© 1997 Kluwer Academic Publishers. Printed in the Netherlands.
The relative share of foreign ownership currently is about 16% in the capital stock of the
Hungarian economy. The percentage share of foreign owned capital is
        * more than 80% in the production of vegetable oil, non-alcoholic beverages,
tobacco, industrial gas, lighting equipment, paper and packaging material, and the retail
trade of motor vehicles and fuel;
       * 70 to 80% in the production of cement and automotive parts, and insurance and
pension fund management;
       * about two thirds in the brewery industry, plastics manufacturing, foreign trade
and hotel industry.
       The latest financial data are available only for the fiscal year 1993. These figures
speak of a surprisingly high share of JVs in several synthetic indicators of
entrepreneurial activity. For example, their percentage share of net sales was about 33%
in 1993 and their combined exports of about USD 5 billion reached one half of all
foreign sales of goods made in Hungary.
        Our source [Benedek-Kiefer, 1995. pp. 3-4.] also indicates the main fields of
activity of JVs or their foreign owners as far as technology modernization and/or R&D
are concerned. The main sector of interest is manufacturing.
       Two important types of the inflow of technology can be identified in
manufacturing. The first one is the important flows of technology from abroad to host
firms controlled by multinational companies. These JVs are big or medium-sized, most
of them strongly integrated into the worldwide system of intra-firm logistics,
cooperation, production sharing and R&D. Their own R&D is mosfly irrelevant (except
for some pharmaceutical firms and Tungsram [GE Lighting Hungary]). The output of
modern technology underlies to strong control by the market because these capacities
are mostly export-oriented.
        The second type of inflow of technology is directed towards SMEs. The main
carrier of these flows is the purchase or apport of licence and know-how but exports are
not a strategic target in the majority of cases. These technologies can and sometimes do
generate technological monopolies for JVs in Hungary and their organic development
is not automatically ensured by domestic market demand.
       The slowdown of the development of foreign technologies used or foreign
products manufactured in Hungary is quite frequent in the economy and it is neither
limited to JVs nor to SMEs.
       Cases in point include fiber optics for telecommunications, supercritical
extraction (used in food industry) or laminated veneer lumber for the construction
industry, each of which entered Hungary only as an innovation and did not find serious
industrial application [Papanek, 1995. pp. 36-37.].

^ To be precise: none of these technologies appeared in Hungary through a JV, but their cases show the
problems linked to the industrial application of already existing technologies in a not very receptive industrial
environment. A more "spectacular" example is RECOGNITA, one of the first scanner softwares registered in
the w-.rld. This was a world leader in the mid-1980s as a Hungarian product but its domestic development

       Another example comes from our target field for industrial analysis, the
passenger car industry: the mother firm of the biggest car manufacturer in Hungary,
Suzuki, announced in January 1995 that a new version of its Swift model would enter
the world market in late 1995. The Hungarian arm of the Japanese manufacturer
(Magyar Suzuki Ltd.) manufactures just the Swift model of the group, but it pretended
not be aware of the "facelifting" project.
        A comprehensive analysis of FDI in the Hungarian industry has shown that
inflows of technology through JVs usually bring modern technologies to Hungary when
they are part of greenfield investment projects [Papanek et ai, 1994. p. 100.]. All four
cases from the passenger car industry to be overviewed in this paper underline this
conclusion. Our source notes that, among the major FDIs in Hungary *', only GE-
Tungsram's modernization made considerable use of domestic technologies and human

2. The "Technology Content" of Important FDIs in Hungary

A brief analysis of the list of major FDIs in Hungarian manufacturing can give a broad
picture of FDIs as vehicles of spillovers of technology in the Hungarian case.

   Sector, Hun garian/foreign firm Value of FDI, mn USD
                    Tungsram/GE                                               350
                    RvBBA/GM/Opel                                             250
                    Audi                                                      200
                    Suzuki                                                    180
                    Ford                                                      123
                    IKARUS/ATEX (Russia)                                      50
                    Lehel/Electrolux                                          50
                    Building materials
                    Hunguard/Guardian Glass                                   120
                     Food Industry

was hindered by inadequate financing. It still sells relatively well but its former competitors have undergone
much more serious modernization [Papanek, 1995. p.36.].
" These should be above the size of USD 100 miUion, although [Papanek et ai, 1994.] do not explicitly
mention this limit.

                    NMV/Ferruzzi, Unilever                   120
                    Debrecen Tobacco/Reemtsma                68
                    Szerencs/Nestle                          55
                    Sugar refineries/Ferruzzi                50
                    Veszprem Dairy/Unilever                  50
                    Paper and packaging materials industry
                    Paper mills/Prinzhorn                    132
                    Compack/Sara Lee                         100
                    Tetra Pak                                50
                    Aluminium and chemical industry
                    Chinoin/Sanofi                           75
                    Oxigen-Dissousgaz/Hoechst                70
                    Kofem/ALCOA                              50
                    TVK/Columbian Chemicals                  50
      Table 1: FDIs in Hungarian Manufacturing (Transactions Amounting to More than
                                    USD 50 Million)

   Remarks: 1. the list was published in August 1993, but no more big (> USD 50
   million) FDIs have since taken place in manufacturing. The biggest ever FDI in
   Hungary, the USD 890 million privatization of the Hungarian Telecommunications
   Company dates of December 1993. It is not on our list since it was not a deal
   concluded in manufacturing.
   2. the Prinzhorn investment ended in the closing down of several Hungarian paper
   mills by the Austrian investor, due to a dispute with the government over import
   duties of paper as well as pulp and other raw materials.
   Source: Magyar Hirlap, August 16, 1993, p.l3. For a more detailed analysis of the
   listcf. also [Torok, 1994b. p. 31.].
       The list includes 20 projects altogether. We have created 4 groups out of them
with respect to the character of the inflow of modern technology they included.
       Group 1: FDIs with a strong content of such technology which represents the
highest standard available at the mother firm's capacities anywhere in the world. This
group includes, of course, such FDIs which implemented such technologies in Hungary
whose counterpart do not exist anywhere else at capacities owned by the multinational
mother firm. Cases: GE, GM/Opel *', Audi.

' For the engine assembly line and the paint shop.
       Group 2: FDIs with the transfer of modern but standard technologies to
Hungary. These technologies are, of course, much above the usual level of Hungarian or
East European manufacturing as well. Cases: Suzuki, Ford, Guardian Glass, Electrolux,
Sara Lee, Reemtsma, Nestle, Unilever, Tetra Pak, Hoechst, ALCOA.
       Group 3: FDIs in which no significant transfer of technology to Hungary took
place. These FDIs may have included, however, the transfer of a considerable amount of
marketing, organisational etc. know-how. Cases: Unilever, Prinzhorn, Ferruzzi, Sanofi

        Group 4: FDIs with a technologically weak foreign partner. In such cases the
transfer of technology, if any, could have only one direction: outward bound from
Hungary. Case: ATEX ^

        First of all groups 1 and 2 deserve attention. One industry stands out with FDI
embodied only in greenfield investment, the passenger car industry. This industry has
received almost USD 1 billion so far which is about 40% of all FDI in Hungarian
manufacturing. It is a good case for analysing spillovers thorough FDI due to its strong
structural linkages to and integration with the multinational mother firm. There are
remarkable differences in this respect between Hungary on the one hand, and the Czech
Republic, Poland and Romania on the other as host countries to major FDIs in the car

       Suzuki in Hungary, Citroen with Oltcit in Romania, Fiat with FSM in Poland and
VW with Skoda in the Czech Republic equally wanted to make their FDI in Eastern
Europe a specialized part of their worldwide production network. All of these plus the
recently created Rodae JV in Romania with the participation of Daewoo of Korea are
downstream JVs. There are several contrary examples in the Hungarian car industry [cf.
Torok, 1994b. p. 32.]:

        a. Opel Hungary (GM Hungary) is an important upstream firm (engine
manufacturer) serving the group's several other European car plants, its car assembly
line in its Hungarian JV being only a manufacturer for the domestic market;

      b. Ford Hungary (and Audi Hungary) are upstream plants as well, selling fuel
pumps (and engines) to car assembly plants in Western Europe.

       Examples a. and b. represent cases where West European assembly plants of
multinational manufacturing firms established backward linkages in Hungary
through an FDI. On the contrary, the Czech and Polish cases (VW-Skoda and Fiat)
have two different things in common:

" One of the main motives of this FDI seems to have been the acquisition of Chinoin's R&D base by the
French investor.
" Other smaller FDIs hy Russian firms would also fall into this group. E.g.: DKG Oil and Gas Engineering
Ltd. by Gazprom, Orion (consumer electronics and teleconununications equipment) by YUGANSK.
        1. Both the Fiat and the VW projects created only forward linkages for their
groups in Central/Eastern Europe. Both the FSM and the Skoda plants use much more
Italian or German parts than the value of parts they export to Fiat or VW.

       2. These forward linkages took shape in the most downmarket products of both
multinationals. One of their major motives for these FDIs seems to have been to gain
control over or to reduce the degree of contestability of their European markets "from
the bottom", i.e. Central/Eastern Europe.

        Examples a. and b. as well as the two major Czech and Polish cases represent
situations of vertical product differentiation and/or vertical intra-group
        The technology content of the four big FDIs by multinational car manufacturers
in Hungary cannot be treated separately from the output of these projects. While there
is widespread consensus in the Hungarian literature that Opel Astra cars represent a
good European standard of subcompacts with an acceptable price/quality relationship,
the Suzuki Swift models were received in a somewhat controversial way. Some authors
claim that these cars are too small for being sold at a price usually charged for
subcompact cars, they are underequipped and not too modern [cf. Somai, 1993. pp. 59-
67.]. The relatively high price of these cars has been due mainly to the appreciation of
the yen - still about 50% of the value of these cars is produced in Japan. The minimum
of this percentage share can be as low as 21%, because only the engine and the gearbox
cannot be manufactured in Europe for this model [Figyelo, February 16, 1995, p. 15.].
        On the other hand, statistics for 1994 show the Suzuki Swift the most popular car
sold in Hungary ". This can be due to an aggressive marketing push by Suzuki Hungary
and to the fast creation of a countrywide network of service stations. Both of these
factors plus the respect for Japanese quality in Hungary may have been able to offset the
relatively high price of Suzuki Swift cars on the Hungarian market.
       The technology content of the four FDIs in passenger car and components
manufacturing is markedly different. In fact, four different strategies of multinational
firms interested in an expansion to Eastern Europe can be seen behind these differences.
       1. "Island strategy" (Opel Hungary): General Motors purchased an unused
factory building in 1988 in Southwestern Hungary, at a small town close to both the
Austrian and the now Slovenian border. The premises were divided in two and were
equipped with two completely different technology chains:
        the "westward looking" or intra-firm integration oriented element of the
investment was the establishment of an engine factory with a capacity of altogether
260,000 1.41 and 1.61 engines per year ^*'. A fraction (15,000) of the output of this

" The top of the hst of sales in Hungary is as follows for 1994 (by models): Suzuki Swift 16,929; Opel Astra
12,615; U d a (Fiat-based models) 10,230; Lada Samrna 6792; VW GolfA'ento 6565, Opel Corsa 6156; Ford
Escort 2983; Skoda Favorit/Forman 2828; Renault 19 2192; SEAT Ibiza/Cordoba 2189 [Autdpiac, 1995/3.
'"' Due to the slump in European car sales, output reached only 75,000 in 1993, but already 130,000 in 1994
as a sign of the recovery of the market [Figyelo, February 16, 1995. p. 16.].

highly automated factory is used for the assembly of Astra cars in the other half of the
Opel production site in Hungary. The rest is sent to Opel factories in Bochum and
Riisselsheim (Germany) and Zaragoza (Spain).
       The technology used here is completely based on imports of components, without
any local subcontracting. Engine blocs, camshafts and siderods are locally manufactured
from imported castings. The high level of the assembly technology is shown by the
fact that hot tests are performed only on each 20th engine assembled.
The engine assembly line at Opel Hungary is an example of a "technology island"
created by an FDI. This assembly line has practically no forward or backward linkages
with Hungarian manufacturers.
       - the "eastward looking" element of the Opel investment in Hungary is the car
assembly line. Only less than 10% of the value of components comes from Hungarian
subcontractors (batteries, locks, horns, radio equipment and cables). The assembly line
is a "Third World" type one meant to serve the local market only: automation is at a very
low level, and physical output is therefore limited to 8 cars per hour.
This part of Opel Hungary will never play a strategic role in the firm's European
distribution network. It has only served as a foothold for Opel in its drive to become a
leading player on the Hungarian market of passenger cars. This drive has been
successful: half of the altogether 22,000 cars sold by Opel in Hungary in 1994 were
imported models' .           __^
        2. Terminal station strategy (Suzuki Hungary): the Japanese company chose
Hungary for its first major "stepping stone" type investment in Europe. The JV
established in 1990 included 40% Hungarian ownership (by a state-owned consortium).
       The factory is much more than a mere assembly line. It includes a press shop, a
welding shop, a paint shop and the final assembly line. Complete engines and gearboxes
are regularly imported from Japan.
       The project was a high-priority issue for Hungarian industrial policy because
Suzuki did not have a concept similar to Opel's "technology island" type approach. On
the contrary: in order to get access to the EU market, local content had to reach 50%.
       Suzuki has worked systematically on creating a widespread network of
Hungarian subcontractors. Their number reached 35 in early 1995 [Figyelo, February
16, 1995. p.l6.]. Out of them, only 5 or 6 are able to supply Suzuki's production base in
Japan. The reason the others are unable to do so is not quality: each of them had to
undergo Suzuki's meticulous screening process for would-be subcontractors. The
problem is capital: components are ordered in series of 6000 per month by Suzuki
Hungary, whereas the Japanese mother firm would need about 100,000 of each
component a month. Most Hungarian subcontractors are too undercapitalized for such
an expansion of their capacity, and the Japanese suppliers of Suzuki are not interested in
investing into potential competitors.

' " Only locally manufactured Opel Astras can be sold free of customs duties. The other half of Opel's sales in
Hungary profited from the brand's good image in the country. This image is one of the indirect results of the
creation of Opel's local manufacturing base.
       These spillovers of technology would help Hungarian subcontractors to
enter a sizeable new market, but these spillovers are not accompanied by
corresponding flows of capital. Most Hungarian subcontractors can become only local
ones which results in inexisting economies of scale for them. Moreover, their
technological links to Suzuki Japan will necessarily remain indirect and this could
eventually lead to a growing technology gap between Japanese and Hungarian made
components. This would be the case if Hungarian Suzuki will slow product innovation
down because its European markets would still accept older Swift models considered
inexpensive, low end cars.
        This would be a more or less logical outcome of what we have called a "terminal
station strategy" by Suzuki: the costs of maintaining a production site in Europe with
low economies of scale would be bearable for the company only if it could make the life
cycle of the existing Swift model as long as possible. Therefore product innovation
could reach the group's "terminal station" in Europe only if competition would really
make the replacement of the older model an urgent necessity.
       As it was the case with a number of Ford, Volkswagen, Fiat, Renault and other
investments in the Third World: if the target market is mainly the local one, the actually
offered product line would be one already inexisting for years at the home market of the
mother firm. This technology gap reached 10 to 20 years in the "transplant" car industry
of countries such as Argentina, Brazil, Mexico or Turkey, but 40 years or more in
extreme examples such as India or Iran.
       The possibility exists that Suzuki's "terminal station" in Hungary will be at
an ever growing distance from the company's headquarters in Japan - at least in
terms of technology, but first of all product development.
      3. FDI driven by locational advantages (Audi Hungary): Audi is the upmarket
member of the Volkswagen group, and its investment strategy has traditionally been
concentrating on production in Germany.
       It had only two plants abroad before it decided to create a high-tech engine plant
in Hungary. The plant was built during 13 months between 1993 and 1994 in the city of
Gyor, midway between Budapest and Vienna. This seems to be the genuinely
"strategic investment" out of the four reviewed in this paper: its motives probably
did not include the appearance on the Hungarian market of passenger cars at all. The
main motive was the integration of a low-cost but high-quality plant into Audi's
production system in Germany.
       Audi deliberately planned a greenfield investment for the introduction of its new
engine for the A4 model to be launched in late 1994 '^. Possible sites for this investment
may have included Eastern Germany, the Czech Republic and Spain. The Hungarian
industrial city was chosen owing to its good railroad link to Ingolstadt, its well
developed infrastructure, high-quality and low-cost manpower and last but not least a
promise of a DEM 5-6 million investment incentive package by the Hungarian
government [Figyelo, February 16, 1995. p. 14.]. The total cost of the investment has

 ' This is the first commercially produced engine with 5 valves per cylinder in the world.
reached DEM 300 million by early 1995, but the amount planned by 1998 is a total of
DEM 730 million [Figyelo, February 16, 1995. p. 14.].
        The engine assembly plant produces 750 engines a day. All material inputs arrive
from Germany. Audi Hungaria Motor Ltd. currently produces about 8% of the value of
the engine "'but this share is likely to increase. Audi's strategy is a gradual relocation of
the production of several engine components to its Hungarian plant. The second phase
of the investment will consist in a threefold enlargement of the plant's capacity (to 2200
engines per day). The third phase will be the relocation of the production of such engine
components to Hungary as cylinder siderods and crankshafts.
       The Audi investment was based on Hungary's comparative advantages in the
classical sense (its manpower and geographical location). No "indigenous" technologies
were used, and improved entry to the domestic market as a compensation for the FDI
was left out of consideration.
        4. "Tactical" investment (Ford Hungary): the last one of the four big FDIs in
the Hungarian car industry is the other one after Audi producing only components but,
in the strategic sense, they are each other's almost perfect counterparts.
       The strategic importance of the two FDIs is very different. Whereas Audi's
Hungarian plant is inevitable for the group because an important component of the
gorup's new model is produced only here. Ford builds standard components in Hungary
available also from the group's other plants in Europe. These components are not
especially high-tech ones: they include ignition reels, fuel pumps and, from 1997 on,
       Ford's greenfield investment in Hungary was only partly motivated by locational
advantages. This decision was a compromise between GM's choice of building a
component plant and a car assembly line in Hungary and Fiat's, Renault's or Peugeot's
decision of choosing another East Central European country for investment.
       Ford had hoped to get preferential access to Hungary's passenger car market as a
result of this investment but this hope did not come into fulfilment in the end. This
preferential access was limited by the government to manufacturers of cars made in
Hungary only (.e. Opel and Suzuki). Ford protested again this attitude of the Hungarian
government which showed some readiness to compromise in 1991. The solution
provoked a scandal: a technically very precisely defined but officially not named type of
van was exempted from all customs duties.
        It turned out to be the Ford Transit and that model only. Widespread protest by
 other importers of vans to Hungary forced the Hungarian government to change that
decision. The exemption was extended to all types of vans in the given category and
 Ford was offered real estate for the extension of its plant in Hungary as a compensation
for the invalidation of the former compensation. In spite of the denial of preferential
 access to the Hungarian market. Ford is satisfied with the investment and plans to
 develop it [Somai, 1993. p.83.].

" ' This percentage share may be so low also because of the low production costs in Hungary - the main
motive of this investment.

        This satisfaction is mainly due to the good cost-quality ratio of the Ford plant in
Hungary, but this plant is in no way a precursor of the creation of a car assembly plant
by Ford in Hungary. Ford is present in the country, but not as a strong player
comparable to GM and Suzuki in the Hungarian car industry. On the other hand,
Ford's investment in Hungary represents again such a case of transfer of high technology
to a transition economy where direct spillovers seem to be minimal at the moment. They
can be only indirect because Ford Hungary uses only imported components and exports
the totality of its output. Indirect spillovers can be very important through "learning-by-
doing". The approximately 200 Hungarian employees of the plant work in a production
environment completely different from their previous experience and analogous to
shopfloor conditions and requirements in Western Europe.

3. Perspectives and Suggestions
The positive experience with big multinational investors in the Hungarian industry
appears in the new Industrial Policy Document of the Hungarian Government which
makes the fostering of FDI by major multinational firms a priority of industrial policy
[IKM, 1994. p. 8.]. The more specific "Program for the modernization of R&D in
industry" prepared by the consulting firm Arthur D. Little emphasizes the role of
"bridging" institutions in channelling innovations and R&D "products" to SMEs which
it considers the main target area for R&D policy [Ddnyi-Rakusz, 1994.p.3.].
        An important channel of spillovers of modern technology can be the domestic
"satellite" subcontracting firms created around big greenfield investments by
multinational investors. The Suzuki case is a good example in point, whereas this local
or regional spillover effect is still lacking in the case of the other three FDIs reviewed.
       The low level of direct spillovers in our examples shows that the modernization
impact of technology transfers through FDIs is quite limited yet in Hungary, at least if
these impacts are expected to go beyond the "clusters" of modern technology created by
the FDIs reviewed. In fact, the "clusterlike" character of the FDIs presented in this paper
is both a problem to be tackled by industrial and R&D policy and an asset if the
increasing undercapitalization of industry and a bad structure of investments is
considered [Torek, 1994a. p. 357.]. In spite of the lack of direct spillovers, the role of
these FDIs is important in solving the undercapitalization problem and changing the
structure of investments.
        Even the "clusterlike" technologies transferred by FDIs to Hungary can play an
important role in modernization, but from an opposite viewpoint. As Baldzs points it
out, "foreign capital has (...) provided an entree into the Western economy. Some of the
world's leading companies have set up plants in Hungary '"'. These operate on a basis of
wholly imported, up-to-date technology, which has a multiplier impact on the Hungarian
economy through backward linkages" [Baldzs, 1994. p. 287.].
       The entry of Hungarian firms to Western markets provided by the high
tehcnology content of FDIs is rightly emphasized in this approach. On the other hand.

 ' The author's examples include 7 FDIs, out of which 3 (GM, Suzuki and Ford) are presented in this paper.
the importance of backward linkages seems to be overestimated, at least in the light of
our four cases from the automobile industry.
       Our approach to the role of big FDIs in fostering spillovers of modern technology
to Hungary remains entirely positive in spite of the "clusterlike" character of the FDIs
reviewed. Their role is very important in creating a strong interest for Hungary for such
investors who 1. want to set foot in a promising market of the transition region of
Europe (Ford, Suzuki, Opel); 2. wish to create a low-cost production base benefitting
from Hungary's comparative advantages (Opel, Audi); or 3. count on Hungary as a good
location for transferring some capacities from Germany to such an area (and, within it,
the region of Western Hungary) which will gradually become more integrated with the
German economy (Opel, Audi, eventually Ford).
       The role of strategic alliances in such decisions of investors has not been
thoroughly explored yet. Some background information still seems to suggest that the
FDI decisions of the four multinational firms reviewed in this study were not completely
independent from each other.
        The role of FDIs is also very important in improving the quality of human capital
in Hungarian manufacturing. The existence of an "internal brain drain" [Inzelt, 1995. p.
15.] towards JVs in Hungary is a well documented fact, but its positive impacts seem to
prevail over negative ones. First of all it significantly weakens brain-drain from the
country, and it also creates a twofold motivation. 1. Domestic-owned firms will be
forced to improve working and salary conditions for high-skilled people, whereas 2.
better conditions make high-level training more lucrative for students. It has to be borne
in mind at this point that the percentage share of the relevant Hungarian age cohorts
participating in higher education is only around 15%, a low figure as compared to other
transition economies [Inzelt, 1995. p. 12. cf. also Torok, 1994a.].
       On the other hand, internal brain-drain to JVs is probably the best example of
indirect spillovers already mentioned in this paper. It may transform the profile of
domestic R&D personnel in a very practical direction: while in their former jobs they
had to try to compete with leading R&D institutions of the world, and the result was
mostly either inexisting or grotesque **', their new R&D responsibilites are marrower
and much more down-to-earth, but help them to real international competitiveness on the
labor market.
        "The results of R&D conducted by these firms are mainly being used to support
production elsewhere in the world, or they are simply strengthening the design, testing,
quality control and development activities in their newly purchased unit" [Inzelt, 1995.
p.15.]. This helps Hungarian R&D personnel learn how international and intra-firm
channels of transferring know-how and R&D products work, and this pattern of R&D
can make from just West-East spillovers of technology created by FDIs two-way flows
in the future.

 ' See e.g. the case of the "cold fusion" in 1987 [cf Toriik, 1994. p.360.].

Balazs, Katalin: Transition Crisis in the Hungarian R&D Sector. Economic Systems,
             Vol. 18. No.3. September 1994. pp. 281-306.
Benedek, Tamas - Kiefer, Marta: A mukodotoke-import es az iparpolitika feladatai
             (Foreign direct investment and the tasks of industrial policy). Manuscript.
             Working paper prepared for the Modernisation Programme of the
             Hungarian Government. Budapest, February 1995. 42 p.
Danyi, Istvan - Rakusz, Lajos: Az ipari K+F modernizacios programjanak kidolgozasa
             (Elaborating the modernisation programme of R&D in the Hungarian
             industry). Ipari Szemle, 1994/3. pp.3-5.
IKM Gazdasagstrategiai Foosztaly (Strategy Department of the Ministry of Industry
             and Trade): A kozeptavu iparpolitikai koncepcio korszerusitese, az ipar
             modernizacios strategiajanak megalapozasa (Updating mid-term industrial
             policy, laying the foundations for the modernization strategy of industry).
             Manuscript, December 1994. 28 p.
Inzelt, Annamaria: Review of Recent Developments in Science and Technology in
             Hungary. Developments in Hungary's Science and Technology Sector
             Since 1991: A Summary. OECD CCET/DSTI(95)10. Budapest, 1
             February 1995. 50 p.
Papanek, Gabor et al. (ed.): A kiilfoldi mukodotoke-bearamlas szerepe a magyar
             gazdasag atalakitasaban (The role of foreign direct investment in
             transforming the Hungarian economy). GKI Gazdasagkutato Rt.,
             Budapest, 1994. 179 p.
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             (Innovations: their diffusion and governmental support in Hungary).
             Kulgazdasdg, Vol. XXXIX. 1995/1. pp.32-47.
Somai, Miklos: Autoipar es autopiac Magyarorszagon (Car industry and car market in
             ilungary).Ipargazdasdgi Szemle (Review of Industrial Economics) , Vol.
             XXIV. 1993/2. pp. 61-86.
Torok, Adam (1994a) Human resources and technology change in Eastern Europe, Int.
             J. Technology Management, Special Issue on Technology, Human
             Resources and Growth. Vol.9., Nos 3/4 , pp. 351-366.
Torok, Adam (1994b): Industrial Policy and Foreign Direct Investment in Hungary.
             Ipargazdasdgi Szemle (Review of Industrial Economics), Special Issue
             1994. pp. 7-36.

                 Maria da Conceigao Pereira Ramos
                 RUA DR. ROBERTO FRL\S, 4200 PORTO

1. Introduction
It is becoming more important than ever to reflect upon the Portuguese situation
regarding the European Union, by analysing surveys and studying some sectors of
activity and regions. It is also necessary to analyse international experience, taking into
consideration the results of the use of new innovation models, namely in Europe, USA
and Japan.
    In this paper consideration will be given to innovation strategies linked to the
promotion and dynamics of employment: innovation as an opportunity for the creation
of employment; education as a strategic factor for innovation and development; the model
of enterprises, the "culture" of innovation and active employment policies. Finally,
indications will be given regarding priorities for the improvement of the education
system and its adjustment to the labour market, with a view to job creation.

2. Innovation as an opportunity to create employment
The structural changes that have been taking place throughout the world economy, the
growing globalization of technology and economy ^ alert us to the main role of
innovation in economic development. Measures must be taken to accompany a

    1 See Mulder and Pettrela (eds.) (1994).

O. D. D. Soares et al. (eds.). Innovation and Technology - Strategies and Policies, 233-254.
© 1997 Kluwer Academic Publishers. Printed in the Netherlands.

production system based on innovation and quality, as well as to identify more
promising priority areas for the generation and maintenance of employment.
    Present transformations indicate a new model of industrial development and increased
employment in the tertiary sector (Table 1). It is important to note the profound changes
in the nature of production and those in new technologies (namely in computerised and
information systems), taking into consideration innovation dynamics (new activities,
products, materials, services and markets) and to work towards the creation of jobs.
Process and product innovations relate not only to technology but also to human

Table 1. Civilian employment by sector in Portugal'(Thousands)

                                        1985         1990          1992         1993          1994
 Agriculture                            968.5        795.3         490.1        482.3         490.2
 Mining                                   23.5        35.8          22.3         19.6           17.5
 Manufacturing                          994.7      1.122.5       1.038.8      1.010.3       1.008.3
 Construction                           331.1        361.1         346.2        340.2         330.8
 Electricity, gas and water               27.6        40.2          31.1         29.3           36.7
 Transport and communication            176.3        201.7         210.1        198.9          196.4
 Trade                                  562.9        692.0         857.9        825.6         817.3
 Banking, insurance, real estate        117.1        203.6         137.3        140.9          134.9
 Personal services                      854.3      1.020.2       1.176.6      1.176.0       1.185.9
 Total                              4.056.0 4.472.4 4.310.4 4.223.1                       4.218.0
 1. From 1992, the data refers to 14 years and over population. Until 1991 the data refered to
 12 years and over.
 Source: OECD (1995), Labour force statistics, various issues, Paris.

    Portugal's real GDP progressed by only 1.0 per cent in 1994 as against an average
output rebound of 2.8 per cent for EU15 (Table 2). The deceleration of private
consumption growth since the early 1990s reflected an erosion of real wage gains and
deteriorating job prospects.
   While Portugal's unemployment rate remains relatively low, it has risen at a pace
similar to the European average during the recession. Many aspects of the labour market
showed signs of serious deterioration: long-duration unemployment (twelve months and
over) surged to over one-third of total registered unemployment in 1994, from 27 per
cent in 1992; the youth unemployment rate climbed to a record high of 14.7 per cent
(Table 3). Dependent employment fell in all major sectors of the economy in 1993, with
only a few subsectors (machinery and equipment, textiles, electricity, education and
health) being spared employment losses. Labour shedding was more intense in industry.

where male employment dominates, resulting in larger employment declines for men
than for women. Dismissals and hirings of workers with a permanent work contract may
have become more sensitive to changes in overall demand.

Table 2. Macroeconomic indicators (Percentage change)

                                       1990          1991       1992          1993         1994
 Real GDP
    Portugal                             4.1           2.3         1.7         -1.2           1.0
    EU(15)                               3.0           1.1         1.0         -0.4           2.8
 Total employment                        2.3           3.0         0.9         -2.0          -0.1
 Dependent employment                    2.9           1.4         0.8         -2.8          -2.0
 Labour productivity                     1.7          -0.7         0.8          0.9           1.1
 Wages per employee'                    17.7          14.2        13.7          7.9           4.7
 Real wages per employee'                3.4           1.9         3.2          1.0          -0.7
 Unit labour costs                      15.7          15.0        12.8          7.0           3.6
 1. Including supplementary benefits and employers' contributions to social security.
 2. Deflated by the private consumption deflator.
 Source: Adapted of Banco de Portugal (1995), p. 23.

Table 3. Labour-market indicators (Percentages)

                                              1990      1 9 9 1 1992(1)      1993       1994
Labour force (growth rate)                        1.9      2.4                 -0.5        1.3
   Male                                           1.2      1.0                 -1.4        1.0
   Female                                         2.9      4.2                  0.5        1.8
Employment (growth rate)                          2.3      3.0       0.9       -2.0       -0.1
   Male                                           1.4      1.4                 -2.6       -0.5
   Female                                         3.5      5.1                 -1.1        0.4
   Agriculture                                   -4.1      0.5      -2.3       -1.6        1.6
   Industry                                       0.9      0.3      -0.2       -2.7       -0.4
   Services                                       6.0      5.9       2.3       -1.6       -0.2
Unemployment rate'                                4.7      4.1       4.1        5.5        6.8
   Male                                           3.2      2.8       3.5        4.7        6.0
   Female                                         6.6      5.8       4.9        6.5        7.8
   Youth                                        10.0       9.1     10.0       12.7        14.7
    Long-term (12 months and over)'             34.7     30.0      26.8       29.3       34.1
Participation rate''                            69.0     70.3      68.4       67.8       67.5
   Male                                         80.5     80.7      78.7       77.2       76.4
   Female                                       58.2     60.6      58.9       59.0       59.2
Job vacancies'                                  0.16     0.18      0.15       0.10       0.11
1. Break in series.
2. Per cent of labour force.
3. Per cent of total registered unemployment.
4. The working-age population is defined as 15 to 64 years old up to 1991 and as 16 to 64
years old afterwards.
Source: OECD (1995), p.ll and Banco de Portugal (1995).
    It is necessary to coordinate the quality of production and work based on the results of
adapting the labour force to new challenges and reinforcing training, teaching and
research, in other words, the scientific and technological systems. Competitive factors
should be developed that are compatible with the growth of production in relation to the
creation of employment and with ways of managing the labour force that will link the
education/economic system including factors such as technical and professional abilities,
certification of professional qualification, elaboration of strategic human resource plans.
Competitiveness depends on the stages of development of these resources, through
qualification strategies and through quahfying organization.

    The main objective is to attribute a fundamental role to the quality of human
resources, by promoting organizational and management innovations as well as the
necessary measures to modernize the economy and encourage regional development i.e.
placement of innovation support agents and of incentive systems. This is to improve
Portugal's productive specialization^, to renovate enterprises by creating new skills and
by accelerating technological and organizational change which is the basis of the
competitiveness of Portuguese companies, and to generate new dynamics in job creation
by emphasizing the "space" itself The innovative process in local development must be
strengthened in relation both to enterprises and public policies^.
    The change should be anticipated by intervening in the products, markets,
employment and the need to qualify the labour force and prevent negative effects on work
through measures such as the reinsertion of workers, active transformation of human
resources in the strategies of enterprises being restructured and the need for protective
measures in their management. This requires several measures: supporting new work
organization models; elaborating desirable professional profiles and assessing the
potential to guide recruitment and anticipated instruction of qualification for new
professional profiles. A new classification should be elaborated of professions as an
instrument of companies for future management of skills and qualifications.
    In the Portuguese case, the dominant role of the traditional industrial sectors (textiles,
clothing, food processing, metal products and footwear), with a lower skill content, may
have limited the demand for skilled labour. Following its accession to the European
Community in 1986, Portugal significantly narrowed its income and productivity
differentials relative to other EU countries. Over the past ten years, Portugal has made
considerable progress in upgrading the quality of its human capital. Nevertheless, the
education gap vis-a-vis most of other OECD countries is still substantial. "Insufficient
education and training of the workforce" is the most widely cited factor hampering firms'
productivity performance"^. In particular, a lack of intermediate managerial and technical

     See results of the "Porter Report", Monitor Company, Porter (dir.) (1994).
   ^ Camagni (ed.) (1991).
   •* Porter, Monitor Company (1994), p. 58.

skills was seen to stifle innovation, limit product differentiation and constrain the ability
of Portuguese firms to market their goods and services abroad.
    On the other hand, Portugal's relatively low level of accumulated human capital has
been associated with reliance on a labour-intensive mode of production, based on
relatively low labour costs and undifferentiated products^; this has supported rising levels
of employment and avoided the emergence of long-term unemployment at the lower end
of the skill spectrum. Portugal will thus face the challenge of shifting industrial
specialization towards higher value-added production, while at the same time preventing a
rise in unemployment for those with low and middle qualifications.

3. Training, strategic factor of innovation and development
Reskilling of manpower is required in the sectors undergoing the process of technological
and/or managerial modernization. Vocational training seems to be necessary to
accompany the growing flexibility of the laboiu- market workers and it should be
involved in a continuous learning process and the efficiency of manpower depends on a
good system of primary education.
    The Portuguese educational system has been characterized by two features: firstly a
strong quantitative expansion, favoured by the growth of public sector education and the
raising of the minimum school-leaving age and secondly attempts to diversify and to de-
compartmentalise educational streams. In 1993 employment in education accounted for
almost 7 per cent of total employment. Similarly, public expenditure on education, has
risen from just under 4 per cent of GDP in 1985, to above 5 per cent in 1994. Data on
educational attainment show that illiteracy among the working population fell from over
a third in 1960 to 6.5 per cent in 1991, although more than 20 per cent of older persons
were still reported as illiterate (Table 4). Despite this progress, however, the gap relative
to other OECD countries has remained wide.

    The poor level of education of the Portuguese active population constitutes a strong
limit to intense efforts of professional training. According to the 1991 census, the
situation of the Portuguese population, above the age of 10, regarding access to the
educational system was as follows: over 12% were illiterate; about 65% of the
population attended basic schooling (six years); about 21,5% attended secondary school
and only 8% further education. EU financing has played a key role in sustaining the
expansion and modernization of training structures in Portugal. The insufficiency of the
pre-existent educational apparatus has not led to the profitability of the financial means
invested by the European Union since 1986 (Table 5). Professional formation circuits
seem to be insufficient to respond to labour market demands. The frail qualifications in

    ^ Portugal's labour costs in manufacturing in 1993 were around one-quarter of OECD and EU levels,
and marginally lower than in the Asian NIEs. OECD (1995).
human resources not only set back traditional sector modernization efforts, but also
constitute a decisive blockage to the diversification of the productive tissue in more
modem industries.

Table 4. Educational attainment of the working-age population, by age
groups, 1960-1991 (Percentage distribution of each age group)

  Age                                Literate with     Primary    Preparatory      Lower        Upper      Higher
 group          Year   Illiterate   no educational      basic        basic       secondary    secondary   education
                                    qualification    education'   education'    education^   education*

15-64           1960      33.9        31.5            30.4            <
                                                                      —            3.5           ->         0.8
                1970      24.6        22.6            38.7         10.1           2.0          1.4          0.6
                1981      14.6        15.3            42.5         12.3           8.6          4.5          2.3
                1991       6.5        11.6            38.2         17.6          12.2          9.9          4.0

15-24           1960      14.8        36.6            45.6            <r-          2.9           -^         0.1
                1970        3.5        13.8           58.4         19.3           2.2          2.6          0.2
                1981        2.1         6.3           41.8         27.7          15.7          5.9          0.5
                1991        0.8         4.4           21.7         35.7          24.4         12.0          1.0

25-49           1960      35.0        30.6            29.1            <—          4.2            -^         1.2
                1970      24.1        25.7            37.1          7.9           2.7          1.2          1.2
                1981      10.9        15.6            50.4          7.4           7.5          5.0          3.6
                1991       2.2         9.0            46.2         14.5          10.6         11.3          6.2

50-64           1960      53.9        27.6            15.3            ^           2.2            ->         0.8
                1970      47.4        24.8           20.5           4.6           1.1          0.6          0.9
                1981      35.0        24.0           32.5           1.5           3.0          2.0          2.0
                1991      20.8        20.1           44.2           3.7           3.7          5.0          2.5
1.   Four years of schooling.
2.   Six years of schooling.
3.   Nine years of schooling.
4.   Twelve years of schooling.
     Source: INE, Population censuses.
Table 5. Public transfers between Portugal and the European Union
(Billion escudos)

                                                    1991        1992        1993
1. From Portugal to the European                     130.2       146.3      162.9
Financial contribution                                88.7      108.7       127.5
Customs and levelling duties                          37.7       36.6        35.4
Other                                                  3.8        1.0          00
2. From the European Union to                        300.8      557.4       619.3
Reimbursement of financial contribution                8.4        0.3         0.0
EAGGF - guarantee'                                    56.6       74.4        86.4
EAGGF - guidance^                                     41.3       64.3        61.8
ERDF'                                                147.3      275.5       286.0
ESF*                                                  26.6      115.9       152.8
PEDIP - specific budget'                              20.3       21.2        10.8
Social cohesion fund                                                         15.7
Other                                                  0.3        5.8         5.8
3. Balance (2-1)                                     170.6      411.1       456.4
1.   European Agricultural Guidance and Guarantee Fund - Guarantee.
2.   European Agricultural Guidance and Guarantee Fund - Guidance.
3.   European Regional Development Fund.
4.   European Social Fund.
5.   Specific Programme for the Development of Portuguese Industry - specific budget.
     Source: OECD (1995), p. 36.

    The lack of highly qualified and medium level technicians as well as qualified and
highly qualified workers is a present concern amongst Portuguese employers^. There are
special needs regarding not only technical and professional medium-level training, but
also university training, where the options for technological qualifications are few. In
1993, only 8% of the employed Portuguese population was at graduate level or had a
post-graduate education; 69% merely had the basic education^. The poor levels of
schooling make training more difficult, especially theoretical training. Training has been
essentially an instrument of labour force adaptation to work posts. According to data in
the "Survey of Vocational Training Needs 91-93 and 93-95" of the Ministry of Labour
and Social Security, the category "reskilling and recycUng" attracts few tiainees. The
dominant category is "professional upgrading". The persistence of such a limited
conception could constitute an obstacle to innovation.

     6 See Kovacs et al. (1994).
     ' I>fE - Survey on Employment.

    Planning of labour force requirements for a company's strategic development
perspective, is a rare practice which is limited to a few large enterprises. Within
Portuguese management the short term is the predominant perspective in relation to
labour force problems. The dominant attitudes of management are resistance to the
organizational evolution of entreprises due to the importance of personal relations in
recruitment and promotion, the resistance to asking for outside technical assistance and
the tendency to limit incentive policies merely to pay policies*. Management deficiencies
lead to focussing on operational tasks and neglect of long-term planning. The low level
of quaUfication of human resources can create a vicious cycle causing many Portuguese
firms to adopt a static strategy which prevents innovation. We agree with Porter when he
says that the competitiveness of firms comes from informed managers and workers who
have the capacity to innovate and improve, making firms competitive at the international
    Training models based on practical experience do not enable managers to overcome
their limitations in respect of planning and strategy. Good technological training is
essential for the strategic qualification of enterprises. It is particularly important to
increase research in experimental development (I & D): in the leading world economics,
which have the greatest scientific and technological potential. This research is carried out
by big transnational companies, more or less supported by the State and by universities;
in Portugal in 1991, gross domestic expenditure on I & D was 0.56% of GDP, compared
with 1.98% for EUR1210.
    Much has to be done to provide a real opportunity for the promotion of training and
the qualification of human resources, not only in the short-term but also in the long-
term. Solutions to educational problems have a strategic importance for Portugal's
   In 1991 public expenditure on education per student, at $2551 in PPP terms, was
only 54.3 per cent of the OECD average (Table 6). The gap in educational expenditure
per student relative to the OECD average, at all levels of education, was, on the other
hand, smaller than the gap in terms of per capita income, so that public expenditure in
education accounted for a higher share of GDP than in the EU and OECD generally. This
above-average share can be attributed to higher disbursements at the primary and
secondary levels.
    Data on the number of enrolled students, on a full-time equivalent basis, show that
Portugal's enrolment rates in 1991 were still below those of the other OECD and EU
countries, and were also lower than in several other countries with comparable levels of
per capita income (Table 7).

   * See Cardoso et al. (1990) and Monica (1990).
   ^ See Porter (ed.), Monitor Company (1994), p. 12.
   "^ EUROSTAT, Statistical office of the European Communities (1995), 32 ed., Luxembourg.
Table 6. Indicators of public expenditure in education - 1991

                                                    Portugal        EU'     OECD'
Total expenditure on education
   (as a percentage of GDP)                           5.5            5.3      5.2
   Primary and secondary                              4.2            3.6      3.5
   Tertiary                                           0.9            1.1      1.2
   Other'                                             0.3               "     0.5
Current and capital expenditure
   (as a percentage of total expenditure)
   All levels of education
       Current                                       94.1          93.5      91.0
       Capital                                        5.9           6.5       9.0
   Primary and secondary
       Current                                       95.0          94.1      90.9
       Capital                                        5.0           5.9       9.1
       Current                                       88.4          91.3      90.5
       Capital                                       11.6           8.7       9.5
Distribution of current expenditure
   (as a percentage of current expenditure)
   All levels of education
       Compensation of teachers                      85.4         r 73.7     51.3
       Compensation of other staff                    3.0                    14.6
       Other current expenditure                     11.7          26.3      31.9
Public expenditure by source of funds
   (as a percentage of total expenditure)
   Central                                          100.0          57.5      29.0
   Regional                                             -          29.1      48.0
   Local                                                -          11.9         -
   International                                        -           1.4         -
Public expenditure per student
   (in US$)'
   All levels of education                          2.551         3.555     4.700
   Early childhood                                  1.506         2.383     2.216
   Primary                                          2.110         2.491     2.604
   Secondary                                        2.364         3.836     3.358
   Tertiary                                         6.161         6.184     8.560

1. Unweighted average for countries whit available information.
2. Early childhood education and unclassified.
3. Converted usin PPP rates.

   Source: Adapted of OECD (1995), p. 49.

Table 7. Indicators of enrolment in education - 1991 (per cent)

                                                        Portugal         EU"         OECD'
Number of enrolled students
    (full-time equivalent, per cent of
    the population 5 to 29 years
    of age)
    All levels of education^                             47.0           53.3         54.0
    Primary and lower secondary education                34.0           32.8         33.6
    Upper secondary education                             9.1           13.0         12.3
    Tetiary education                                     4.0            7.1          7.6
Number of enrolled students by type of
attendance (per cent of population 5 to
29 years of age)                                         47.0           53.3         54.0
    Full-time attendance                                 44.4           52.0         52.1
    Part-time attendance                                  2.6            3.1          5.5
Number of enrolled students (full-time
equivalent, per cent of the population
in the typical age group)'
   Upper secondary education                               '9.2          104.3        101.6
       General education                                       -           43.9             -
       Vocational education and
       apprenticeship                                          .           67.7             _
   Non-university tertiary education                        1.1            13.2         19.8
   University tertiary education                            8.6            16.4         17.5
1. Unweighted average of all countries for which data are available.
2. In some cases, the data for "all levels of education" may differ from the sum of the
   components shown because of persons with an "undefined" level of education.
3. The typical age group is defined as spanning the typical starting age plus average duration
   at full-time. This ratio may exceed 100 when many of the participants are older than the
   reference age, and may have previously completed another upper secondary programme.
   Source: Adapted of OECD (1995), p. 50.

    The Government's objectives have been as follows: reduction of early school-leaving
in compulsory education; diversification and curricula reforms in secondary education;
initial vocational training outside the school system; decentralisation of the education

    At the secondary level, reforms have resulted in the introduction of vocational courses
in the general school system and of training schools — autonomous schools created by
local authorities, enterprises, unions and entrepreneurial associations in response to
specific needs.

    Curricula refonns at the secondary level, have introduced "cursos tecnoldgicos" and
"curses gerais" targeted, respectively, at young persons who plan to enter the labour
market after completion of upper secondary education and at those planning to continue
to higher education.
    In addition to strengthening vocational and technical education within the school
system, efforts have been directed since the mid-1980s at developing alternative avenues
for entry into the labour market outside the school system. Such avenues are provided by
the apprenticeship system, first introduced in 1983 and reformed in 1988. Apprenticeship
courses combine vocational training provided at government centres and work experience
in firms.
    The second Community Support Framework identifies the improvement in the
qualification of human resources as one of the four priority areas of EU-supported
programmes and devotes Esc. 835 billion to measures aimed at "enhancing the basis of
learning and innovation" and at strengthening "vocational training and employment".
    In most OECD countries, the development of further education and vocational
training programmes has followed the recognition that accelerating structural change is
making skills and occupations obsolete at a faster pace than in the past. The need for
education and training of the adult population is particularly strong in Portugal, given
the high proportion of adults with low educational qualifications.
    The emphasis in Portugal on remedial education programmes for adults was reflected
in the greater importance of general education courses (accounting for around 42 per cent
of all education and training courses, compared to 7 per cent for the EU average), while
the higher incidence of the more educated translated into a higher weight of courses
leading to higher educational qualifications (Table 8).
   The provision of vocational training has expanded significantly in the 1990s, with
annual enrolment figures reaching 8 per cent of the labour force in 1993, up from less
than 5 per cent in 1990, and public expenditure disbursements amounting to 0.7 per cent
of GDP (Table 9).

Table 8. Characteristics of education and training courses received by
employed persons - 1992 (Percentage distribution)

                                                   Portugal                  European Union
                                          Men      Women      Total     Men     Women          Total
General education                         42.3      41.6      41.9      6.5       8.2           7.3
Higher education                          38.5      37.8      38.1     20.0      21.0          20.4
Vocational training                       10.2      12.3      11.3     24.7      24.5          24.6
Dual system                                1.4       2.1       1.7     21.5      17.4          19.6
Other                                      7.6       6.2       6.9     27.3      28.1          28.0
Initial vocational training                4.8       7.3       6.0     26.3      25.7          26.0
Advancement in career                     59.9      60.1      60.0     44.8      44.1          44.5
Changing career                           18.0      16.2      17.2      9.2       9.5           9.3
Other'                                    17.2      16.4      16.8     19.7      20.7          20.2
Less than one month                       34.7      40.1      37.3     27.6      27.0          27.3
From one to six months                    27.6      26.9      27.2      8.2       9.2           8.7
More than six months                         3      18.9      35.5     64.2      63.7          64.0
1. Includes non responses.
Source: OECD (1995), p. 65.

Table 9. Vocational training provided in the context of labour-market

                                   Number of participants'                Public e3( penditure^
                                  1990 1991 1992 1993                 1990 1991 1992 1993
Labour-market training             2.0  3.5     6.2     5.3           0.14    0.20     0.30    0.25
    Training of unemployed adults
    and those at risk               0.1      0.1     0.2      0.2     0.01    0.02      0.05     0.04
    Training of employed adults     1.9      3.4     6.0      5.1     0.13    0.18      0.25     0.21
Youth measures                      2.6      2.5     2.7      2.6     0.33    0.41      0.48     0.37
    Measures for unemployed and
    disadvantaged youth             1.8      1.3      1.1     1.0     0.17    0.19    0.19       0.09
    Support for apprenticeships
    and related forms of general
    youth training                  0.8      1.2      1.6     1.6     0.16    0.22    0.29       0.28
Vocational rehabilitation for
    the disabled                    0.1      0.1     0.2      0.1     0.06    0.04    0.05       0.05
Total                               4.7      6.1     9.1      8.0     0.53    0,65    0.83       0.67
1. As a per cent of the labour force.
2. As a per cent of GDP.
    Source: OECD (1995), p. 61.
    An improvement in labour market prospects is evident for persons participating in
training courses (Table 10). The decreased incidence of unemployment occurred despite a
cyclical deterioration in labour market conditions. Establishment surveys in 1993
support the notion of a positive influence of vocational training on product quality and

Table 10. Labour force status of participants in vocational training

                                                           1993                               1994
                                             Continuous     Initial             Continuous     Initial
                                             vocational   vocational    Total   vocational   vocational   Total
                                              training     training              training     training
Situation before the course
    Unemployment rate                          5.0         24.2        13.6      9.8          34.9         22.4
   Employment/population ratio                82.9         51.7        67.0     79.1          42.6          5.1
Memorandum items: ^
    Unemployment rate                          2.8          9.3         3.9       4.1         12.0          5.3
   Employment/population ratio                72.3         41.0        46.5      71.7         38.0         45.7
Situation after the course
   Unemployment rate                           6.3         16.5        11.4       8.4         27.7         19.0
   Employment/population ratio                84.0         71.6        77.7      82.6         59.1         69.1
Memorandum items:^
   Unemployment rate                          3.8          12.2         5.0      5.4         14.3          6.8
   Employment/population ratio               71.5          41.3        45.7     70.8         38.0         45.1

1. First quarter of the year. Data refer to labour force status of course participants after
completion of a training course attendede nine months earlier (i.e. in the second quarter of the
preceding year). Courses with a duration of over 100 hours in Direct and Participatory
Management centres.
2. Labour Force Survey. Data shown refer to adults (25 to 64 years) in the first column; to
young persons (15 to 24 years) in the second column; and to total in the third column.
Source: Adapted of OECD (1995), p. 62.

   According to labour force surveys the participation in education and training courses
of employed persons was significantly lower in Portugal than the EU average in 1992
(Table 11).

          The proportion of firms recording an increase in productivity in the 1991-93 period is higher for
 those with training programmes (73 per cent) than for other enterprises (39 per cent); the same finding
 applies to product quality. See Minist6rio do Emprego e da Seguranfa Social. Impacto nas empresas da
formagao profissional, 1991-1993, Lisbon.
Table 11. Incidence of education and training among employed persons'
- 1992 (Per cent)

                                                  Portugal                  European Union
                                          Men     Women       Total       Men Women Total
By educational attainment
   Lower secondary education               2.8       3.3       3.0         6.4       7.7       6.9
   Upper secondary education              14.7      11.9      16.2        10.4      17.9      11.0
   Higher education                       12.3       9.5      10.8        10.7      14.0      12.0
By age group
   15 to 24                               12.6      14.9      13.7        27.7      28.1      27.9
   25 to 44                                4.8       5.1       4.9         7.0       8.0       7.4
  45 to 64                                 0.7       0.9       0.8         2.3       3.4       2.7
Total'                                     5.0       5.8       5.3         8.6      10.4       9.3

1. Persons in employment having received education and training courses in the four weeks
prior to the survey.
2. Includes persons unclassified and above 65 years of age.
Source: OECD (1995), p. 64.

4. Management innovation in the firm and active employment policies
The importance of information programs for Portuguese entrepreneurs is to improve the
integration of the innovation function in company management and the promotion of
employment as an instrument for greater enterprise competitiveness. It was noted in a
survey carried out on Portuguese industry, that innovation was not the entrepeneurs'
main concern.'^
    The dominant role in Portugal of small and family-controlled firms (70 per cent of all
firms) may have resulted in corporate structures and personnel management policies
which limit the use of skilled labour^^. Foreign firms may play a pivotal role in
modifying traditional attitudes towards education and training, given the significant
inflow of foreign direct investment (FDI) to Portugal recorded in recent years.
    The importance of a new work organization model compatible with creativity and the
increase of employment, combining labour economics and management economics,
contributes to the development of a space where strategies are devised regarding human
    The success of the technological process demands a vast diffusion process through
skills, organizations, infrastructures and social negotiations. It is necessary to analyse the
obstacles to this diffusion and the innovation effects upon competitive capacity and the

    '•' Demand for more educated workers may also have been constrained by a prevalence of low
educational attainment among employers: at 22 per cent in 1991, the proportion of employers with upper
secondary and higher educational attainment was lower than among employees (24 per cent).

creation of skills at company and sector levels; it is necessary to increase the
understanding of the importance of investment in human resources as a competitive
factor, so that these changes may be incorporated by the different actors within the
    For Nelson'^ the possibilities of international transference of technology are strongly
conditioned by their institutional framework. Countries differ in their traditions, beliefs
and legal and institutional systems. For this author the internationaUzation of enterprises
depends essentially on two elements: the training and educational systems; the existence
of conditions such as governmental policies that stimulate enterprises to get involved in
the international markets.
    The national innovation system should be reinforced in relation to investigation and
development structures in companies, public and associative sectors, but also in selected
structures of technological mutations. This will meet with national and international
cooperation between companies, universities and professional associations, thus
accelerating the transfer of knowledge and training new skills. In Portugal, the
relationship between firms and universities is not considered a priority, not even in
intensive technological industries.
    In Lundvall's works'^ the national innovation systems are a set of relationships
among different actors based on a logic of a learning process. The learning process is a
social one and can not be understood outside its institutional and cultural context. For
Lundvall a national innovation system contains six fundamental elements: the internal
organization of the enterprises; the relationships between enterprises; the public sector;
the financial system; the technological and scientific institutions and the national
training and educational system. As the elements of the national innovation systems
vary; their organization from country to country is also different.

    Several empirical studies show that medium-sized companies that innovate and invest
in research, in "technology specialists" and in the innovation of the product are the ones
that create jobs. Small production units that speciahze in high quality products and are
into international networks should be supported.
    European Union integration may offer new growth perspectives and re-launch
flexible, small or medium-sized companies that are able to explore new opportunities
with more or less labour intensive technical organizational choices.
   The environmental issue has become central to advanced countries and the
requirements of the natural environment cannot be ignored in economic activity.
Environmental concerns and eco-industries (with adequate environmental education)
provide job creation potential. "Green" employment includes many diversified functions.

   ^^ Nelson (ed.) (1993).
   1^ Lundvall (ed.) 1992).
such as territorial organization, local development, urban and industrial economy, rural
ecology, education and training of workers. With the development of non-polluting
technologies and the continued fight against pollution in the industrial process, highly
qualified work posts will become available at industrial production unit level.
   In Portugal it is necessary to improve educational and labour market management
devices in order to promote human resources within the environment and to create an
inventory of professions and of training priorities within this area.^^
   Productive restructuring and employment/qualification policies are accompanied by
quaUty changes in work, industrial re-organization and new management instruments.
   Adjustment of the production system implies new forms of organization and
management in order to increase competence and the workers' autonomy, re-organization
of working hours as well as modifications of duty contents and improvement of
conditions of work.
    How are the challenges of personnel management and competence met by human
resource managers? It is necessary to improve advertising of internal job offers, their
contents and the transparency of the job market and to analyse the quality and prospects
of jobs, defining strategic professions.'^
    The conclusion of a survey on Portuguese firms ^* is that entrepreneurs consider that
strategic professions emerge from management and permanent personnel. The relative
weight of the so called strategic professions is still very hmited. For example, few
Portuguese firms have a human resources manager.
    63% of the professions in internal transformation at the moment do not foresee the
need for recruitment'9. The foreseeable transformations will be essentially within the
internal personnel of the firm.
   Technological innovations and mutations have an impact on human resources and on
labour re-organisation and on the evolution of employment.^^
    It is necessary to re-define the adjustment capacity of the job market, concentrating
efforts on prioritary objectives and on more innovative structures, by identifying needs,
analysing present resources and adjustment policies (recruitment, mobility, training).
   The new model of development should involve the growth and job creation that result
from the new wave of technologies; the evolution of the production process and the

     1^ See Pereira (1995) and Ramos (1995a).
        Professions which are absolutely indispensable to technological and/or organizational transformations
within the firm.
     ^^ Santos etal. (1994).
        Those in which there are new demands in functions that are carried out in order to justify the need
for new qualifications, not only through recruitment but also through professional formation.
     20 Ramos (1993, 1995b).
qualification needs; work organization, labour conditions and the industrial relations,
necessary to develop this new potential.
    The improvement of management tools in the job market implies technical and
financial support for professional reinsertion; re-enforcement of job centres/job demand;
the relation of employment policies and of quaUfication to regional development; forecast
studies per sector/professional profiles.
    There is a need to improve understanding of innovation processes within Portuguese
firms by exploring the links between the innovative behaviour and management skills,
and of the importance of strategic management of human resources for the development
of the company. In order to improve management of labour qualification (individual
management of the "actor's system" careers), it is fundamental to specify the notion of
the organization of qualification and to define notions of competence; to enhance the
mobility and management of permanent workers; and to assess social agreements,
including job management.

5.       Conclusions
The task of ensuring that the supply of skilled labour matches demand is particularly
important if Portugal's good labour market and productivity performance is to be
maintained. The challenge is to create the conditions where the output of the education
and training system matches the demand for industrial skills. This would tend to occur
where capital investment is increasing, management skills are improving and the
conditions are in place for small firms to develop and expand.
     Finally, the following priorities for the promotion of employment can be defined:
     •    reforms in vocational education should increase incentives for youths to
          participate in vocational courses. The higher education system should also
          increase the number of places available to provide skills in those areas for which
          demand has been rising.
     •    training policies should be targeted to widen access to vocational training, both
          initial and continuous; to provide a broader set of skills, thus enhancing firms'
          capacity for internal redeployment of workers; to strengthen co-ordination through
          the establishment of skill and training standards; and to develop forms of
          programmes which specifically address the needs of small firms, i.e., the joint
          training of workers and managers.
     •    to improve work-place adaptations and training policy efficiency as well as new
          jobs based on innovative types of work organization;
    •   to explore potentials in new professional fields and of local job initiatives
        (environmental industries, arts, audiovisuals, proximity services, etc.) for small
        and medium sized companies to create jobs^';
    •   to encourage and promote "enterprise culture". The firm's "environment" is a
        variable in the strategy of the innovation process.
    •   to co-ordinate the action of institutions and local and other informal groups
        (entrepreneurs, municipal councils, employers and trade unions, development
        agencies, technological centres, etc.) to enable them to instigate more active
        employment and training policies.

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                 MARIA ISABEL SCARES
                 Faculty of Economics,
                 University of Porto,

                 ROBERT SCHNEIDER
                 Fraunhofer Institute fur             Systemtechnik        und     Innovationsforshung
                 (FhG/ISI), Karlsruhe

1. Introduction

Since the late 1980's industrial companies have been facing a period of significant
change and turbulence.
       Industrial SME's have to operate under adverse conditions of different kind.
       On one side, they must face a number of challenges, such as:

        • increasing demands on quality of products and processes
        • flexibilisation of production
        • increasing speed of innovation
        • technology fusion
        • customisation
        • internationalisation of markets

        Making it concrete, it means that the above challenges involve a complex set of
actions: from the quality control and liability at the level of the individual product, to the
difficult task uf coping with fast changes in product volume and delivery times, as well
as fast adaptation of existing processes and facing reduction of time-to-market as a
competitive factor. From the task of finding the new winning technology combinations,
to the need to introduce the variability of products to meet individual tastes as well as to
absolute need of finding the niches.

 This research has been implemented within a project subsidised by the European Union - Strategic
Programme for Innovation and Technology Transfer (SPRINT).

0. D. D. Soares et al. (eds.), Innovation and Technology - Strategies and Policies, 255-274.
© 1997 Kluwer Academic Publishers. Printed in the Netherlands.
       On the other side, there are environmental turbulences which are often hard to
deal with. These turbulences do exist at different levels:
       • in technology, affecting products and processes
       • in firms: growing and changing their core activities and policies, entering and
leaving networks
       • networks of different kinds in ever changing configurations
       • and at last, turbulences in society

       In this context, a careful evaluation of a new technology contribution to a
company's competitiveness, involves not only a deep understanding of this new
technology but also the consideration of its interdependencies with production factors
and the company's strategic goals.
       Computer aided technologies have become the key factor for making production
more efficient and flexible. One basic element of computer-aided technology is
CAD/CAM systems. They are a tool for creating data models of products in a design
process and for using the geometric data to programme a numerically controlled
machine tool.

2. CAD/CAM Technology: a Management Task

CAD/CAM-systems have been offered since the mid seventies. The first enterprises to
install them were the large producers of aircraft and vehicles. During the eighties,
CAD/CAM eventually diffused into other branches. Decreasing prices made CAD/CAM
increasingly reasonable for small and medium sized enterprises. An analysis prepared
for the EU (IFO et al. 1991) shows that in 1988 about 50% of all enterprises in the
survey were already using CAD/CAM. In this study the forecast predicted for the year
2000 was 75 percent.
        This fast broad diffusion has its reasons in the economic benefits of CAD/CAM.
Aspects of quality and flexibility are much more important in the decision making
process about CAD/CAM investments than the aspect of cutting costs in the design
        On one hand, the quality of design determines 70% of all the costs that occur in
the different steps of the production process. If design does not optimise the product in
terms of a cost optimum in production, there is no chance to make corrections later on.
Though design only has a 10% share of the production costs, this production step plays a
key role for the economic situation of an enterprise. CAD/CAM offers many
possibilities to increase quality of design in respect of saving money in purchasing raw
material and in cutting planning, manufacturing and assembly costs. With CAD/CAM it
is much easier to use already designed parts in a complex new design. The simplification
of calculating the functionality of design alternatives makes it possible to select the
solution requiring the smallest amount of raw material.
        On the other hand, CAD/CAM increases the flexibility of an enterprise in
reacting to short term customer requirements. Designing variants of a product needs
time and money. CAD/CAM is a tool to make this easier. In times of changing markets,
in which customer's requirements are becoming increasingly specific and the ability to
fulfil these requirements is a prerequisite for competition, CAD/CAM is an essential
element in remaining competitive.
        Whereas CAD/CAM offers the possibility of improving the quality and flexibility
of design departments, the costs of these departments can hardly be reduced. On the one
hand, CAD/CAM makes some elements in the design process faster; on the other hand,
these savings of time are smaller than promised by vendors of CAD/CAM-systems.
Experience has shown that the personnel in design departments before and after
CAD/CAM installations stayed at a constant level. Increases in labour productivity were
compensated by additional design tasks.
        For a considerable number of firms, the use of CAD/CAM technology is not only
a question of whether or not they derive from this technology the benefits mentioned
above. For the enterprises, not installing CAD/CAM brings additional risks:
        • CAD/CAM is part of the globalization of business. As the search for markets,
finance and technology becomes truly global in scope, companies are often finding that
to compete they must forge alliances with enterprises abroad. The global market place is
coming and companies must equip themselves to profit from it. Without CAD/CAM
they cannot be partners due to their lack of competence in conmiunicating by way of
data models.
        • The chance of becoming a supplier of new products in an international
production' network depends on the ability to show proven quality standards in
performances. Entry into these markets is open only for enterprises that follow ISO
9000. This standard is reached more easily with CAD/CAM.

3. CAD/CAM as a New Kind of Technological Innovation

The experience of companies shows that great mistakes can already be made in the first
phase of planning the introduction. German companies experience confirm this, as well
as more recent experiences both in Portugal and Greece". They indicate that introducing
new machine tools as:
        • CAD/CAM strengthens the technical and organisational integration of
different departments. This implies the need for cooperation between these departments
already in the first steps of introduction.
        • Benefits of CAD/CAM result not only from reducing costs but also from
supporting other aspects important for the companies' position in relation to their
competitors. Increasing quality and flexibility may be more important in the future than
reducing prices.

         Disregard of these aspects leads to mistakes in introducing CAD/CAM-
technology. Most mistakes can only be avoided by adequate technology management,
when introducing CAD/CAM, every company should be aware that it is the company
itself that is responsible for making the right choice. The company therefore has to have
its own competence to evaluate the possible benefits and the possible costs of using
CAD/CAM. The suppliers of CAD/CAM are important partners in implementing the

' SPRINT project RA 409 Bis Intermediate and Final Reports
systems. However, may users have had the experience that the suppliers tend to suggest
that problems are easy to solve, whereas in fact the systems offered require a great deal
of adaptation to the specific situations of the users. Moreover, consulting by suppliers
mostly emphasises the support of the currently existing situation of the users by the
systems offered. Long-term goals, especially strategic goals, may thus be neglected.
       When embaricing on technological innovations, risks cannot be avoided
completely. Only by technology management can failure in investments be reduced.
       There are a great variety of different technical and organisational ways to realise
CAD/CAM. There are, for instance, many different CAD systems, different systems for
NC-programming, and different CNC machine tools with different control systems.
These CAD/CAM components vary in performance and in functionality. There are also
many different possibilities for integrating these systems and organising their use. A
CAD system, for example, can be used not only by the staff of the design department but
also by shop floor personnel. In addition, CAD/CAM systems are very often used in
combination with non-computerised tools because not all tasks of a company require the
"highest technology". Thus, optimal techno-organisational scenarios require adaptation
to a wide range of situations that are company-specific, i.e.:
       • different market strategies of the company,
       • different batch sizes,
        • different tooling methods,
        • different qualifications of the staff

        Thus, it is not useful for a specific company simply to imitate the CAD/CAM
solutions of other companies. The complexity of CAD/CAM technology makes it
necessary for the company's own technology management to check the usefulness of
CAD/CAM. The aspects of market, product, organisation, technology and personnel
have different relevance in the different countries.
        In some countries, like Portugal, the market aspect seems to be most important. If
CAD/CAM has not been used by a company up till now, a review of market-oriented
aspects can give some ideas of the company-specific relevance of this new technology.
The phase of introducing CAD/CAM in many German companies, which has been going
on for more than ten years now, has resulted in improved technology management
methods even for this kind of technology check-up steps. These methods deal with the
different tasks and steps of innovation processes: from the analysis of external goals to
the evaluation of the results of activities for change.
        The market-oriented check-up step is important even in many companies using
CAD/CAM already. The technological problems to be solved when realising
CAD/CAM applications call for a high degree of technological competence and
qualification. Most of the tasks are engineering tasks in this phase introducing
CAD/CAM. This could be a reason why companies tend to pay insufficient attention to
the organisational and even the market-oriented aspects of this technology, thus
increasing the risks involved.
        Thus, German experiences with the market-oriented steps of a management
instrument were considered to be useful to the Portuguese companies. However, to make
these methods available for Portuguese companies, there has to be a careful adaptation
to the country-specific situation.
4. Technology Management / Check Up for CAD/CAM Users


TM/CC' is an acronym for Tecnhonoly Management/Check-up for CAD/CAM users. It
is a procedure allowing small and medium sized firms an efficient check-up of the
benefits Computer Aided Design and Manufacturing (CAD/CAM) technology offers. It
is appropriate for companies already using CAD/CAM-systems as well as for those
which are just planning to introduce them. The procedure is guided by a TM/CC
consultant. The consultant uses structured methods and tools to ensure the efficiency of
the check-up. The result of applying TM/CC is a list of internal goals that serve market-
oriented goals and that can be realised by using CAD/CAM technology.
       Introducing and extending the use of CAD/CAM concerns the total company
from the shop floor to the business manager. The discussion of these goals by the
managers and experts of different departments is part of the instrument and leads to a
better mutual understanding and to a consensus of important common goals.
       The check-up focuses on the evaluation of CAD/CAM's contribution to the
company's competitiveness. It analyses whether CAD/CAM supports its strategic goals.
Another focus is on screening the actual and the already planned use of CAD/CAM
systems for different production tasks. The screening includes the consideration of
interdependencies between this new technology and the qualification of staff, the
product and the organisation of production processes.
       One of the most important results of applying TM/CC is that it may create a
company-internal process, bringing experts of different departments close together.
They can then act as a team, developing their own innovation scenarios. The importance
of such a result is evident, since awareness of what has to be done does not result
automatically in carrying out the necessary further steps of innovation (Figure 1).
Especially the management of innovation processes that involve a change in cooperation
between different departments has to start with methods that develop mutual
understanding and a consensus of important goals.
       This mutual understanding is necessary in implementing CAD/CAM-systems
because the possibility of technological and organisational integration requires the
optimisation of the production process as a whole. This includes the possibility that, for
example, a reduction of efforts to carry out the tasks on the shop floor might be achieved
by greater efforts in the planning department (and vice versa). To agree with such a
change where increased efforts are required, the responsible persons in the departments
have to accept that this is necessary. In addition, they have to know that the responsible
people in the other departments that benefit from the changes are ware of these
interdependencies, too.

      TMCC was developed by the Fraunhofer Institute FhG-ISI (kralsruhe, Germany), Centre de Ciencias e
Tecnologias Opticas - Unidade de Estrategia e Inova^ao Industrial CETO-UETIN (University of Porto,
Portugal) and FOSTI Ltd. (Athens, Greece) within project RA 409 subsidised by the Europen Union -
Strategic programme for Innovation and Technology Transfer (SPRINT).

                                            Tasks of company           Tasks of
                                       guided by TM/CC consultant   TM/CC consultant

          Internal Projects

          Internal Projects
          "How to innovate?"

         Figure 1 : The TM/CC-Process Within a Complete Innovation Project

A TM/CC-project develops this necessary transparency about the need for change by
supporting the discussion of these people about important strategic external goals of the
company and their links with company-internal goals. Thus it supports the initial steps of
technological innovation projects involving more than one department.


The introduction and extension of CAD/CAM applications within a company are
complex projects because it is necessary to optimise company-wide processes. A check-
up method intended to produce suggestions of the kind "what to do" has to reduce this
complexity in a specific way to be not only efficient but also effective. TM/CC avoids
reducing the company-wide perspective and avoids just focusing on technological
problems. Such strategies of reducing complexity could be necessary in project steps
that are very near to the realisation of innovation scenarios and require suggestions of
the kind "how to do". To achieve the goals described also TM/CC follows other
strategies. One is to use analysis and evaluation methods that are not very exact but lead
very fast to essential innovation potentials by regarding technological potentials by
regarding technological potentials in combination with organisational ones. They
involve the company's experts in the role of analysers and thus also allow for the
generating of new ideas on innovation. Therefore, the TM/CC project as whole can be
classified as a heuristic method creating important company-internal innovation projects.
The other strategy is to reduce complexity by regarding just one or two product lines at
the same time.

 FhG tSyCETO-UNfV. PORTO/FOSTI SPRINT RA 409 BIS Final Report (April 1995)
       TM/CC is thought of as a project to be guided by a TM/CC-consultant. This
could be one of the institutes that developed this management approach, but could also
be another technology transfer institution using the procedure and instrument described
here. The TM/CC procedure and the instruments used depend on strategic analysis and
planning by the company's experts themselves. The external consultant (TM/CC-
consultant) guides the process and supports it by a number of specific methods and tools
(checklists, etc):

       • In a first step the TM/CC-consultant meets with the business manager of the
company to present the procedure and the instrument of TM/CC. The strategic (external)
goals of the company are analysed. The results of this step are part of the process of
developing weighting criteria needed for setting priorities among the company's internal

       • In the second step experts from "mechanical design", "sales", "technological
planning" and "manufacturing" are interviewed separately. The tasks of their
departments and the actual and planned use of CAD/CAM technology are analysed.
Information about organisation and staff is discussed in relation to the tasks. Based on
this information, internal goals of the departments are collected. The relevance of
CAD/CAM technology for achieving these goals is evaluated. This step is part of
analysing CAD/CAM's potentials for carrying out the tasks more efficiently and
increasing the effectiveness of organisation. The sales expert also delivers external
(market-oriented) goals of the company. The TM/CC-consultant collects them for
analysis of weighting criteria later on.

        • In a third step the consultant prepares the results of steps 1 and 2 for use in
the following step.

        • In a group session the experts who have participated in steps 1 and 2 carry out
the most important task of TM/CC. They check whether the internal goals fit to their
strategic goals and how CAD/CAM can help to achieve the most important of them. In
the first part of the session, the evaluation of external goals should lead to a consensus
about the company's position relative to market needs. This results in weighting criteria
which help to set priorities for internal goals of the company (step 4a). In the second
part, the ideas for necessary innovations (internal goals) are clustered (4b). Examples of
typical clusters found for the metal engineering industry are presented bellow. Finally
interdependencies between external and internal goals are evaluated. These
interdependencies, combined with the weighting criteria, complete the priority setting
for internal goals. The contributions CAD/CAM offers to these internal goals can now
be discussed again. The relevance of CAD/CAM compared with other possibilities to
innovate production becomes clearer, and the weighting of specific functions and
integration aspects of CAD/CAM can be adjusted to the now more visible goals it is
intended to serve. The important innovation ideas can be detected at this moment (step

       • In a last step of TM/CC (step 5) the TM/CC-consultant prepares and presents
a report to the company including his suggestions for further work on the results.

PRODUCTION            •   Production time - Decrease of Error rate by training
                                           -CAD/CAM integration
                      •   Give customer information for best fitting common protocol
                      •   Press suppliers
                      •   Require more "languages"
                      •   Check for training needs (make a plan to improve training)
TIME OF               •   Error Rate reduction (improve training)
DELIVERY              •   More prompt replies to/from customers
                      •   Integrated network to check for "state of orders"
FLEXIBILITY           •   Make proposals to customers
                      •   Consultive capacity to clients (more capacity to be fast)
                      •   General progress report. More specifications to customers
QUALITY               •   Improve self control by training
                      •   Distribute available know-how
                      •   Use know-how for internal training programme
                      •   Generate check list for final control
                      •   Consulting capacity to clients (to check quality aspects)

4.2.1. The Steps of TM/CC
(a) Evaluation of External Goals (Step 1). If a company plans to introduce or to extend
the uss of CAD/CAM-technologies and is interested in applying the TM/CC-method, a
meeting between the business manager and the consultant should take place first. The
TM/CC-instrument contains a review paper that gives an information summary of the
goals and tasks of a TM/CC project. This paper can be sent to the manager in advance to
prepare him for the meeting.
        In this first contact, the consultant presents the goals of TM/CC and the
procedure. He discusses some general aspects of the company such as product lines,
organisation, staff and production technology already in use. It is discussed whether the
manager's ideas on production innovation can be managed in a first step by applying the
TM/CC instrument. The business manager should also agree with the TM/CC-strategies
of reducing complexity. If there is more than one product line, the manager has to decide
for which one the production process should be optimised. If there is an agreement to
carry out a TM/CC project, the meeting can also be used to start up the analysis-steps of
        The purpose of this analysis is to reflect if and how, the ideas on innovating
production are connected with "external" goals of the company. External goals are goals
that influence the strategic positioning of the company in the field of its competitors.
They have to be derived from "external needs" that the company cannot control but just
react to. At least two important sources of external influence have to be regarded as
more or less permanent(figures 1 and 2).

                                       Sources of needs for a change
    Innovation                              ("Why innovate?")
     scenario         New production technology               Customers" wishes
                          becomes available                        change
  External goals     Make use of new technologies      React to new demands of market
     Type of            Forced by technology                  Forced by market
     Focus of            Check for CAD/CAM's            Check for the change of miu-ket
     TM/CC               technological potentials         and the degree of fulfdling
                         a) to offer new products             the market's needs
                       b) to offer producLs cheaper

                         Figure l': Check up for External Goals

       • New production technologies become available. This aspect is an object of
the analysis in respect to CAD/CAM technology.

        • The customer market is changing. For example: customers want more
products fitted to their specific needs. They want shorter delivery times. They want a
"zero failure" product with a higher quality standard. In order to survive in a field of
competitors, it is necessary to react to trends like these. TM/CC is an instrument that
supports a check-up of such trends and analyses whether CAD/CAM can help to react to
the new external demands effectively.
        It is recommended to focus on a short period of time (not more than two years
ahead) to ensure the motivation of the staff to transfer the results of TM/CC into change-
oriented activities. A two years period can already be too long, for example, if the time
period of product innovation is shorter. Thus, the consultant should come to an
agreement with the manager about what period of time is appropriate to the specific
situation of the company. This period of time will then be considered in all TM/CC-
steps and by all TM/CC-participants. It is also recommended that not more than seven
external goals should be collected in order to keep the following steps manageable and
        Examples of external goals are "improve the quality of the products" or "offer
products fitted to specific need for each individual customer" or "reduce price of
        After collecting the company's external goals, the manager evaluates the
importance of each one.
        The TM/CC-instrument provides a tool for this task including rating scales to
check the importance of the goals with regard to competitiveness in general, and for
estimating the degree of present goal fulfilment (figure 3). The result of this evaluation
is used later on as input information to the group session event.


                             Importance of the goal
                     worth                      extremely
                     considering                important

                                                      4         5

           not so good                                     excellent

                            Degree of goal fulfilment

               Figure 3: Rating Scales for Evaluation of External Goals

(b) Collection of Internal Goals (Step 2). In the second step the TM/CC consultant
carries out interviews to collect internal goals from experts for the following general
produrition tasks:

        • Sales. The expert should be in direct contact with important customers, and
with other sales personnel who are in direct contact with them.
        • Manufacturing. The expert should have a particularly good knowledge of
machine tool production and computerised machine tools (CNC machine tools) as well
as the task of NC-programming (making the programmes that control the CNC machine
tools) in the shop floor area.
        • Production planning and process planning. The expert should be involved
in generating information to be used in the shop floor area. Tasks of interest are order
scheduling, NC-programming in the planning area, the planning of manufacturing steps
(work planning) and quality controlling. He should be involved in tasks that are carried
out in cooperation with the company's designers and with the people responsible on the
shop floor.
        • Mechanical design. The expert should have knowledge in producing technical
drawings that are used in the manufacturing and process planning areas.

        If CAD/CAM system are in use already, the persons responsible for their
implementation should also be involved. From the viewpoint of TM/CC there are three
kindi, of company-internal CAD/CAM-experts: those who already use these systems and
are engaged in the implementation process as experts in production tasks; those who use
the systems but did not participate in the implementation process; and those who are
involved in the implementation and maintenance of the CAD/CAM-systems as experts
in these computer technologies and applications, but are not engaged directly in the
production tasks of designing, planning and manufacturing. In this second step of
TM/CC the participation of the first or second kind of expert is necessary. Often these
will also be experts in general production tasks. The CAD/CAM-technology expert, who
is the third kind of expert, should be involved in the group session (step 4 of TM/CC) at
        In the interviews with these experts the TM/CC consultant has to collect "internal
goals" (figure 4) to improve production tasks. The only exception is the interview with
the sales expert. The sales expert in addition has to check for supplementary external
goals; for this the TM/CC consultant uses the same tool as in the interview with the
business manage.

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                          Figure 4 : Check up for Internal Goals

       A goal is characterised as "internal" if it relates directly to a change in the
production process. While an external goal can be stated as "We need to improve the
quality of our products (because of customer demand)", an internal goal has to carry an
idea of what to change within the company to improve production. For example, an
internal goal to improve the quality of the products could be specified as:

       • " using better machine tools for turning tasks" (change of production
       • "... by training of staff in the assembly area" (change of staffs qualification in
a specific area) or
        • "... by re-organising the quality control system of the whole company"
(change of organisation)

       These examples demonstrate that it is very important to collect all internal goals
the experts are currently pursuing, even if they correspond with technologies other than

CAD/CAM with ideas for changing organisation. This is necessary in order to be able to
evaluate, in later steps of TM/CC, whether CAD/CAM technology is effective in
supporting the external goals, or whether it would be better to concentrate the financial
and personnel resources on other types of innovation projects.


      (importance                 Important


   external goal)

                                                    not so      fairty     good      very     excellent
                                                    good        good                 good

                                                       Degree offulfilling market requirements
                                       length & direction:
                 optimum zone
                                               £\   need for "Internal" activities             position now
                                                                                            external goals
  I * J F H Ilocation of                            no additional activities
                 "optimum zone"    0^-              necessary                         o       position then

       Figure 5 : Visualisation of the Company's Position Regarding External Goals

        Nevertheless, the use of CAD/CAM technologies is of special interest in the
TM/CC research. So, the interviews the TM/CC consultant carries out with the
company's experts starts with an analysis of what sub-tasks the general tasks mentioned
above consist of, and the extent to which CAD/CAM serves these tasks already,
discussion also covers the extent to which such support is planned already to increase
efficiency in production tasks. To discuss CAD/CAM's potentials explicitly should
create a background allowing for new ideas to emerge on the use of this technology. It
should also give a good background for the estimation of how important CAD/CAM
technology could be in achieving the internal goals. The TM/CC-instrument provides a
tool in the form of various task-specific tables that assist this analysis. It could be useful
to present these tables to the experts in advance to allow them to prepare themselves for
the interview. In any case, the results of analysing the sub-tasks and the present use of
CAD/CAM should be discussed in the interview situation itself because the intention is
not just collect descriptive data of a given situation, but to use them for the purpose of

creating a cognitive background that orients the experts towards better estimations of
future potentials.

(c) Preparing the Group Session (Step 3). The TM/CC-consultant then prepares the
results obtained in the interviews to make them suitable for a group work situation. In
the next step of TM/CC the experts that participated in collecting and evaluating
external and internal goals will improve the results, working together in a group session.
To prepare this session, the external goals obtained from the business manager and from
the sales expert are transcribed into a chart that visualises the position of the goal in
relation to external influences. Figure 5 gives an example of such a chart. The chart
format should be big enough to make the result visible for a group of about 7 persons.
The optimum zone, and the visualisation by arrows of the need for internal activities to
change the position of the external goals, should also be prepared by the consultant, but
just for the purpose of giving an example. The final positioning of the optimum zone has
to be performed in the group session later by the experts of the company.

        The internal goals that are collected also have to be prepared for use in a group
situation. Each internal goal is transcribed into a card that can be pinned on a flip chart.
In this way, it is possible to visualise the process of developing clusters of similar goals,
to be carried out in the next project step by the experts in a group session. Each card
bears a short description of the internal goal, the expert that goal is assigned to, the
expert's rating of its importance and the expert's rating of the potentials CAD/CAM
offers to support this goal.
        Figure 6 gives an example of such a card.

                                                                       Internal goal

                   Improve access of production planners to


   importance of             expert that created
                                                                    potencial to
   the goal                  the goal (mechanical
                                                                    support the goal
                             design expert)

                      Figure 6: Example of an "Internal Goal Card"
(d) Group Session (Step 4). The final results of the TM/CC goal formulation are
elaborated by the firm's experts in a group session lasting approximately four hours. The
TM/CC consultant leads the session.
Four sub-tasks have to be tackled, each forming the basis for the next:

        • The results of the evaluation of the external goals by the business manager
and the sales expert are presented to the group in the form of a chart. The position of the
firm, which emerges clearly from this, is discussed. If necessary, modifications and
additions are made to the chart. The optimum zone is adapted specifically to the firm. If
more than one product line is being evaluated, the positioning both of the external goals
and the optimal zone should be undertaken on the chart for every product line under
consideration. It is recommended not to consider more than two different product lines
in one session. The result is a consensus on important goals that are dependent on
external influences, and on the extent to which they have already been achieved.
        • The internal goals that have been collected and evaluated are presented to the
group. Goals that are similar are grouped into goal clusters. These clusters should be
given "goal headings" which enable them to be related to the external goals. Since
internal goals tend to be, and should be, formulated as project ideas leading to changes
(cf. example in figure 6), their assignment to these cluster goals is often only implicit. It
can happen that a goal may be assigned to several clusters, if possible, the group should
decide on one cluster to which the goal is to be assigned. The card can only be
duplicated and assigned to several clusters if there is a consensus about this. It is
important not to form too many clusters (5 to a maximum of 7) in order that the linking
with external goals is not too time-consuming.
        • The contribution that can be made by the clustered internal goals to the
attainment of external goals is then worked out. To do this, the external and internal
goals are assembled on a flip chart with a matrix which is left blank to begin with
(Figure 7). The connections between the external and internal goals are discussed and
evaluated. Finally, aggregate weightings can be worked out for each cluster.
        • The contribution of CAD/CAM technology to attaining the internal goals -
now weighted - is discussed. The possibilities are considered for orienting the
introduction or extension of CAD/CAM applications towards the goals identified as

       Documentation of the first sub-tasks is in the form of the jointly elaborated chart.
The main arguments mentioned in the formation of clusters (second sub-task) should
also be written down. The person responsible for taking these notes should be decided
on beforehand. The same applies for the arguments in the following discussion on the
evaluation of connections, which should proceed as follows.

        The external goals are entered at the top of the matrix (to be drawn up on a flip
chart), together with their weighting. The weighting is taken from the average length of
the arrows in the jointly prepared chart (example: see Figure 5). The arrows establish the
relationship between the present and desired status of the external goals. As the example
in Figure 5 shows, the situation may arise where some of the external goals are
positioned better than is considered absolutely necessary. In these cases the weighting
arrows point to the left. However, since there is no sense in making deliberate efforts to
change a position of this kind, the weighting "minus zero" is entered.
       The minus sign shows that the position of this external goal can be allowed to get
worse, if this were an effect of realising other goals.
In the first column of the matrix (Fig. 7), the headings given to the clusters of internal
goals are entered. The second column is for the evaluations assigned to the CAD/CAM
potentials for attaining the goals contained in the clusters. These can be taken from the
cards pinned together in the clusters.

                  cxt. goals
                 (heir weight
                 accorJing to
                    churt 1

  Clusters ot    :AD/CAM'S                                                    Weight ol'
   int. goals    contribution                                              ,, int goal
   (cluslcrii'    to integral                                                 according
     tillcsl      goals {T4)                                                 to ext. goal

                                Figure 7: Evaluation Matrix

       In the fields of the matrix, values are then entered to represent the extent to which
the goals contained in the clusters can influence the external goals in each case. The
value "plus one" means that the internal goals can substantially influence the position of
the external goal in a positive direction. Correspondingly, the value "minus one" is
entered if internal goals give rise to a significant negative shift in position. This may
sometimes well be the case. For instance, it may be estimated that the "forced
development of a certain new type of product" as an internal - and also at the same time

possibly an external - goal (also a possible case), may occupy the capacity of the
designers to such an extent that it hinders the realisation of another important external
goal, the "flexible adaptation of products to individual customer wishes". A figure
between the values of plus one and minus one represents less significant shifts in
position. When carrying out these evaluations, it is important to concentrate on a
possible shift in position of the external goals in the joint chart. It is thus more difficult
to improve a position that is already very good by using certain measures, than it is to
improve a worse position by using the same measures. Thus the position chart must be
referred to for each of the evaluations, and should be placed where it is visible
throughout the evaluation process.
        Finally, for each row in the matrix the values, multiplied by the weighting at the
head of the columns, are aggregated. For negative relative values and for the weighting
"zero" each case should be examined beforehand to determine whether the worsening in
the position of the goal would be so substantial that the negative shift would take it
outside the goal corridor of the "optimum" zone. In this case, the portion of the negative
arrow outside the corridor should be used as a positive weighting value in the relevant
cell of the matrix.
        The totalled values for the goal clusters reflect their relative importance
altogether for improving the competitiveness of the firm. However, even more important
than this result is the use of the chart and filled-in matrix as "game materials" for
developing scenarios for innovation projects. Here, the result values in the individual
matrix cells can also be very significant. The matrix and the chart enable the numerous
and complex interrelationships of individual activities for the implementation of internal
goals to be visualised in a form which is at the same time sophisticated and easy to
handle. The horizon for consideration ranges from individual project ideas to their
incorporation into the strategic goals of the enterprise. The linking of project ideas with
the contributions of CAD/CAM technology makes it possible to assess the importance of
the use of these technologies compared with other innovation projects, as well as
assigning the potential usefulness of CAD/CAM to individual project goals. Lastly, it
allows checklists on the installation of CAD/CAM applications in firms to be prepared
in such a way that individual interests can be subordinated to the general interests of the

(e)    Report and Presentation (Step 5). While TM/CC ends with the report and
presentation of the results to the people involved, this last step of TM/CC cannot be
considered as the last step in managing technological innovation.
       Above all, the report of the TM/CC consultant must give indications and
impulses for further work on the jointly elaborated chart and matrix. Thus the
recommendations should mainly provide ideas for further detailed planning by the firm's
TM/CC team, rather than concrete suggestions. The planning depth attainable with
TM/CC is not really sufficient for this. Feedback of the results, at least in the form of a
written report circulated to all experts involved within the firm, is extremely important.
Only in this way can the formulation of goals beyond the TM/CC activities lead to the
formation of an active innovation team within the firm.
       The summary of the steps presented is given as a table in Figure 8.
5. Results and Possible Extensions of TM/CC

One of the most important result is that TM/CC is efficient in creating a group of experts
who jointly reflect on the situation of the company in the market and consider whether
different task-specific goals are compatible. Because these experts combine knowledge
about the market and about the most important production tasks, the discussion of this
group highlights any lack of consensus in evaluating the company's strategic position.
        This result does not depend on the specific analysis of CAD/CAM potentials.
CAD/CAM technology is just a "vehicle" which brings the experts into a situation
necessary to achieve such a result. CAD/CAM technology is a suitable object to bring
together experts from the different production tasks due to its potential integrating
computer applications throughout the company. Thus the CAD/CAM analysis leads
experts to improve their individual general cognition of "what is necessary to change"
and "why it is necessary to innovate".
        Another important result to emerge is that the responsible people of the company
become aware that their current ideas about changing production might possibly not be
constructive for achieving or defending a good market position. As financial and
personnel resources available for innovation projects to improve competitiveness are
limited, TM/CC is able to indicate:

       • if there are adequate ideas for innovation projects to fulfil the future market
requirements and
       • which of the current ideas correspond best to the company's strategic goals

        The TM/CC application also results in a feeling for the importance of the
company specific results. As it is not an external expert who analyses the situation, but
the company's experts themselves; the more they are accustomed to consider the
company's situation and the contributions of their specific tasks to this situation, the
better are the results. The more they have been used to optimising just their own specific
tasks, the more they become aware of the important fact that they have problems in
positioning their company and in forming correlations between the goals of the company
and their internal projects. In this case, the feeling is that the specific results might be
less good.
        On the other hand, this feeling could result in the intention of the company's
responsible experts to carry out some more TM/CC projects not (only) for the purpose
of checking for CAD/CAM technology, but to support the discussion about the
company's strategic goals.
        Beyond confidential results from the research carried out - which have been
reported to the companies involved in the project - some developments of TM/CC
method have been also achieved, namely:

       • The formal methodology proved to be rather long and hard to be understood by the
companies experts. Then, the originally-planned evaluation of correlations between several
external goals have been dropped. This proceedings doesn't present any considerable damage
to the method possibilities.

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        • The period of time looked at should be clear to all participants since the beginning.
Time matters, then it should be taken into account in all the TM/CC tasks dealing with future
        • Internal goals should be worked at an operational level since the beginning.
        • A careful description of Internal goals should be made: they should be looked at as
innovation projects to be carried out in the period taken into consideration, or as permanent
activities which must be carried out to keep up the standard level of an internal goals which
has already been reached.
        • At least in the group session, dynamic effects should be checked, which means that
a discussion must be implemented about the positioning of external goals in a dynamic
        • Finally, when a company has more than one kind of product, different analysis and
evaluations must be carried out in all TM/CC steps.

       As an instrument, TM/CC should be extended in at least two directions:

        • TM/CC now deals with CAD/CAM technologies as possible objects of innovation.
Its instruments can be adjusted to other objects of innovation too, by adding relevant tools to
the given methodology.
        • TM/CC now deals with the very first steps of innovation processes (seefigure1).
The emphasis of the methodological approach of analysis and evaluation is:

       (i) - to involve the company's staff as application experts in the management process
       (ii) - to take into account, not only technological but also organisational aspects of
production innovation
      (iii) - to focus economic evaluations not only on cost aspects, but also on market

        These aspects could be regarded systematically in other steps of innovation processes
that are not included in the TM/CC project yet.

        • A third aspect of further development could be the use of computer technologies to
assist the check-up. Current developments in computer-supported co-operative work (CSCW)
software and interface equipment have reached a status near to possible commercial
applications. Analysis and evaluation situations arising with TM/CC tasks are potential
applications. This is a chance to bring new technologies to new applications and products.
Therefore, instruments like TM/CC can give some impulses in directing the development of
CSCW software and equipment towards a market that may become considerable in the near


IFOetal. (1991)
   Impact of Information Technologies on Future Employment in the European Community.
Lay G.; Schneider R. (1993)
   Technology Management for CAD/CAM
   Annex 4 of Final Report first period SPRINT Project RA409

Soares, M.I.; Duarte C. (1994)
   Implementation and Support of Working Groups of Potential users of CAD/CAM
   Interim Report, first period, SPRINT Porject RA409 BIS (May)
   Interim Report, second period (September)

Soares M.I., Duarte C. (1995)
   Implementation and Support of Working Groups of Potential users of CAD/CAM
   Final Report (February)

Schneider, R.; Soares ( I ) ; Nezis, ( J ) (1995)
   SPRINT PROJECT RA 409 BIS Final Report (April)
FhG-ISI / CETO-Univ. of Porto / FOSTI

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