A Means—Variance Approach to the Theory of Intrafirm Diffusion

The core of microeconomic studies of technological change is the theory of diffusion—the theory of the determinants of the spread of a new technology over all its possible uses. Although numerous empirical studies have been undertaken over the years (see Kennedy and Thirlwall, 1972), the theory itself is still in its infancy. The central approach is attributed to Mansfield (1968) but his theory involves little more than a Taylor’s expansion of an assumed general form (the work of Davies (1978) represents something of an advance on this). However, one of the big problems associated with a new technology is its riskiness, and the existing literature makes little allowance for this in the modelling process. In this paper we face the problem squarely by the use of a means-variance approach. We realize that this approach has its problems, but as Green (1971) states, this model has the great advantage of simplicity. The primary objective is to see under what conditions the model will predict the central result of diffusion studies—the existence of an S-shaped diffusion curve, and what this implies about the determinants of the diffusion speed.