The induced innovation hypothesis and its applicability to the high rainfall zone of the Australian sheep industry

Abstract

The subject of this thesis is the Induced Innovation Hypothesis in which it is proposed that the direction (or bias) of technical change is determined by changes in relative factor (input) prices acting as a "spur to invention" (Hicks, 1932, p.124). In addition to reviewing important theoretical developments in this hypothesis, a test of induced innovation was conducted on data for the High Rainfall Zone of the Australian sheep industry over the period 1952/53 to 1976/77. Estimates of biased technical change for five recognized categories of inputs - labour, capital, materials and services, livestock and land - were obtained using the translog cost function model proposed by Binswanger (1974a,b) and adapted by McKay et al. (1980). This model also permitted estimates of the elasticities of factor substitution and factor demand. On average, technical change was found to have been biased towards the saving of labour and land, the using of livestock, and neutral in regard to capital (and possibly materials and services). From the ranking test of induced innovation conducted it was found that all inputs, with the exception of capital, were in general conformity with the predictions of the Induced Innovation Hypothesis. Despite a substantial increase in the relative price of capital, neutral technical change for this input was evident. It was concluded that whilst the majority of technical change biases evident could be explained in terms of induced innovation, the result for capital called into question the general applicability of this hypothesis. Explanations other than changing relative input prices were required to explain the neutral technical change evident for the capital input. The test conducted was considered a rather "blunt instrument" for the purpose, encountering problems categorized as conceptual, methodological and estimational. Further work was considered necessary to confirm the above results. In addition to extending the above study, it was considered that micro-level studies investigating the factors influencing the decision-maker in his choice of technology were required. Show more