Leapfrogging

The concept of leapfrogging is used in many different domains of economics and business, and was originally developed in the field of industrial organization and economic growth. The main idea beyond the concept of leapfrogging is that small and incremental innovations lead the dominant firm to stay ahead. However, sometimes, radical innovations will permit to new firms to leapfrog the ancient and dominant firm. The phenomenon can occur to firms but also to leadership of countries, or cities.

In the field of industrial organization (IO), the main work on leapfrogging was developed by Fudenberg, Gilbert, Stiglitz and TIrole (1983). In their article, they analyze under which conditions, a new entrant can leapfrog an established firm. Tirole (1988:391-2) has emphasized that leapfrogging can arise because an established monopolist has a somewhat reduced incentive to innovate because he is earning rents from the old technology. This is somehow based on Joseph Schumpeter's notion of ‘gales of creative destruction’. The hypothesis proposes that companies holding monopolies based on incumbent technologies have less incentive to innovate than potential rivals, and therefore they eventually lose their technological leadership role when new radical technological innovations are adopted by new firms which are ready to take the risks. When the radical innovations eventually become the new technological paradigm, the newcomer companies leapfrog ahead of former leading firms.

In the field of economic growth, the question raised is: under which conditions, will a country which has the leadership lose its hegemony and be leapfrogged by another country. This has happened in history a few times. In the late eighteenth century, the Netherlands has been leapfrogged by the UK, which was the leader during the whole nineteenth century; this century was even coined Pax Britannica. After the second world war, it is the US which has leapfrogged the UK, and became the hegemonic power of the 20th century, Pax Americana.

Why is this happening? Brezis and Krugman (1993, 1997) suggest a mechanism that explains this pattern of "leapfrogging" as a response to occasional major changes in technology. In times of small and incremental technological change, increasing returns to scale tend to accentuate economic leadership. However, at times of a radical innovation and major technological breakthrough, economic leadership, since it also implies high wages, can deter the adoption of new ideas in the most advanced countries. A new technology may well seem initially inferior to older methods to those who have extensive experience with those older methods; yet that initially inferior technology may well have more potential for improvements and adaptation. When technological progress takes this form, economic leadership will tend to be the source of its own downfall.

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