Innovation System Research and Policy Where it came from and where it might go Bengt-Åke Lundvall Aalborg University - PDF

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Innovation System Research and Policy Where it came from and where it might go Bengt-Åke Lundvall Aalborg University Paper to be presented at CAS Seminar, Oslo, December 4, Introduction Innovation

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Innovation System Research and Policy Where it came from and where it might go Bengt-Åke Lundvall Aalborg University Paper to be presented at CAS Seminar, Oslo, December 4, 2007 1. Introduction Innovation System Research Where it came from and where it might go 1 Bengt-Åke Lundvall When the first edition of Lundvall (1992) and of Nelson (1993), the concept national innovation system was known only by a handful of scholars and policy makers. Over a period of 15 years there has been a rapid and wide diffusion of the concept. Giving Google the text strings national innovation system(s) and national system(s) of innovation you end up with almost references. Going through the references you find that most of them are recent and that many of them are related to innovation policy efforts at the national level while others refer to new contributions in social science. Using Google Scholar (May 2007) we find that more than 2000 scientific publications have referred respectively to the different editions of Lundvall (2002) and Nelson (1993). Economists, business economists, economic historians, sociologists, political scientists and especially economic geographers have utilized the concept to explain and understand phenomena related to innovation and competence building. 2 In this paper we argue that during the process of diffusion there has been a distortion of the concept as compared to the original versions as developed by Christopher Freeman 1 This paper is to become a post-script to Lundvall (1992) and it will be integrated in a new edition to be published electronically later this year. I have received useful comments from Lars Gelsing, Birgitte Gregersen, Sandro Mendonca, Judith Sutz and Jørgen Lindgaard Pedersen. Allan Dahl Andersen has, as research assistant, helped me to clean up an earlier draft. Comments to the manuscript may be sent to 2 In economic geography the diffusion of the innovation system perspective has, together with the industrial district and industrial clusters approaches, contributed to the construction of a new economic geography that has changed the way geographical location and agglomeration is explained (Maskell and Malmberg 1997; Cooke 2001; Clark, Feldman and Gertler 2000). 2 and the IKE-group in Aalborg. Often policy makers and scholars have applied a narrow understanding of the concept and this has gives rise to so-called innovation paradoxes which leave significant elements of innovation-based economic performance unexplained. Such a bias is reflected in studies of innovation that focus on science-based innovation and on the formal technological infrastructure and in policies aiming almost exclusively at stimulating R&D efforts in high-technology sectors. Without a broad definition of the national innovation system encompassing individual, organizational and inter-organizational learning, it is impossible to establish the link from innovation to economic growth. A double focus is needed where attention is given not only to the science infrastructure, but also to institutions/organisations that support competence building in labour markets, education and working life. This is especially important in the current era of the globalizing learning economy (Lundvall and Johnson 1994; Lundvall and Borràs 1998; Archibugi and Lundvall 2001). We see one major reason for this distortion in the uncomfortable co-existence in international organisations such as OECD and the EC of the innovation system approach and the much more narrow understanding of innovation emanating from standard economics (Eparvier 2005). Evolutionary processes of learning where agents are transformed and become more diverse in terms of what they know and what they know how to do are not reconciliable with the rational representative agents that populate the neoclassical world (Dosi 1999). Actually, we regard the neglect of learning as competence-building as the principal weakness of standard economics and the narrow definitions of innovation systems as reflecting a negative spill-over from this misdirected abstraction. Both Mode 2 knowledge production (Gibbons et al 1994) and the Triple Helix approach focus on science and the role of universities in innovation. When they present themselves or are applied by policy makers, not as analysing a subsystem within, but as full-blown alternatives to the innovation system approach (Etzkowitz and Leydesdorff 1995; Etzkowitz and Leydesdorff 2000), these approaches contribute to the distortion. These perspectives capture processes linking science and technology to innovation below we 3 refer to this as STI-learning. The fact that science and codified knowledge become increasingly important for more and more firms in different industries including socalled low-technology ones does not imply that experience-based learning and tacit knowledge have become less important for innovation. To bring innovations, including science-based innovations, to the market organisational learning, industrial networks as well as employee participation and competence building are more important than ever. We refer to these processes as DUI-learning. Section 2 takes a brief look at how the NSI-concept came about and developed on the general background of the history of innovation research. 3 Section 3 confronts the theoretical foundations of the concept with standard economics; section 4 defines analytical challenges. Section 5 relates the concept to economic development, inequality and sustainability. The chapter ends with the concluding section 6. As mentioned, the literature on innovation systems has grown exponentially over the last 15 years and what follows does not aim at a full and fair survey of the literature. The issues raised and the sources cited reflect my own priorities. 2. A concept with roots far back in history Milestones in the development of the innovation system concept Basic ideas behind the concept national systems of innovation go back to Friedrich List (List 1841). 4 His concept national systems of production took into account a wide set of national institutions including those engaged in education and training as well as 3 Several authors have presented overviews of the innovation system literature and made attempts to classify different approaches. An early contribution is McKelvey (1991). More recent ones are Balzat and Hanusch (2004) and Sharif (2006). The latter s contribution builds upon a combination of littereature survey and interviews with key persons who were involved in coining the concept. An interesting critical contribution is Miettinen (2002). Miettinen points to the problematic and vague character of the concept as it is transferred back and forth between the academic and the public policy sphere. 4 Reinert (2003) argues that many of the ideas go further back to a succession of scholars belonging to the other Cannon starting with Antonio Serra. De Liso (2006) argues that Charles Babbage may be seen as another ancestor for the innovation system concept. 4 infrastructure such as networks for transportation of people and commodities (Freeman 1995a). To the best of my knowledge, the first written contribution that used the concept national system of innovation was the unpublished paper by Christopher Freeman from 1982 that he produced for the OECD expert group on Science, Technology and Competitiveness (Freeman 1982, p. 18). 5 Here he takes Friedrich List as one central point of reference. Box 1: Regional, sectoral, technological and corporate systems Over the last decade several new concepts representing the systemic perspective on innovation have been developed. The literature on regional systems of innovation has grown rapidly since the middle of the 1990s (Cooke 1996; Maskell and Malmberg 1997). Bo Carlsson with colleagues from Sweden developed the concept technological systems in the beginning of the 1990s (Carlsson and Stankiewitz 1991). While Franco Malerba with colleagues from Italy developed the concept of sectoral systems of innovation (Breschi and Malerba 1997). Ove Granstrand has proposed the corporate innovation system as perspective. Some of the crucial ideas inherent in the innovation system concept such as vertical interaction and innovation as an interactive process are central also in the literature on industrial clusters by Porter and colleagues. Of these different perspectives the regional system approach is the one that resembles most original versions of the national system of innovation. It has in common with the NSI-approach that it uses the fact that some knowledge is local and tacit to explain that innovation systems are localised. Also, both approaches attempt to explain economic performance of geographical entities. The corporate system perspective may also have economic performance at focus at the level of the single enterprise. The other perspectives aim at explaining the innovation process in relation to specific technologies and sectors. The analysis of technological systems has been especially useful in analysing how new technologies emerge. The sectoral system approach is unique among the different approaches in not defining as analytical object a vertically integrated system. The approach may be seen as the outcome of a cross fertilisation between industrial and innovation economics. In the beginning of the 1980s, the idea of a national system of innovation was immanent in the work of several economists studying innovation. Richard R. Nelson together with other US scholars had compared technology policy and institutions in the high 5 The paper was published for the first time more than 20 years later in the journal Industrial and Corporate Change (Freeman 2004). 5 technology field in the US with Japan and Europe (Nelson 1984). SPRU at Sussex University pursued several studies comparing industrial development in Germany and the UK covering for instance differences in the management of innovation, work practices and engineering education. The idea of a national system of innovation was immanent also in the research program pursued by the IKE-group at Aalborg University. 6 In several working papers and publications from the first half of the 1980s we referred to the innovative capability of the national system of production. The handier innovation system appears for the first time in Lundvall (1985) but without the adjective national. Again, it was Christopher Freeman who brought the modern version of the full concept national innovation system into the literature. He did so in 1987 in his book on innovation and innovation policy in Japan (Freeman 1987). When Freeman collaborated with Nelson and Lundvall in the IFIAS-project on technical change and economic theory the outcome was a book (Dosi et al. 1988) with a section with several chapters on national systems of innovation (Freeman 1988; Lundvall 1988; Nelson 1988). After followed three major edited volumes on the subject (Lundvall 1992; Nelson 1993; Edquist 1997). 7 The innovation system concept may be regarded as a practical tool for designing innovation policy. But it might also be seen as a synthesis of analytical results produced by scholars working on innovation. In this section we give a brief review of the history of innovation research with focus on how different generations of economists have contributed to the modern understanding of innovation systems. 6 The IKE-group had the privilege to interact with Christopher Freeman in several projects in this period and many of our ideas were shaped in a dialogue with him (see for instance Freeman 1981). 7 For an overview of the current status of innovation research see the new Oxford Handbook on Innovation (Fagerberg, Mowery and Nelson, 2005). 6 Innovation research starting with Adam Smith The idea that innovation matters for economic development is present in the work of the classical economists. Innovation plays an important role in the introduction to Adam Smith s classical work on the Wealth of Nations. It is especially interesting to note that he identifies and distinguishes two different modes of innovation (see Box 2 below). Box 2: Adam Smith on innovation and modes of learning Adam Smith (1776: p. 8) on the DUI-mode of learning: A great part of the machines made use of in those manufactures in which labour is most subdivided, were originally the inventions of common workmen, who, being each of them employed in some very simple operation, naturally turned their thoughts towards finding out easier and readier methods of performing it. Whoever has been much accustomed to visit such manufactures, must frequently have been shown very pretty machines, which were the inventions of such workmen, in order to facilitate and quicken their own particular part of the work. In the first fire-engines, a boy was constantly employed to open and shut alternately the communication between the boiler and the cylinder, according as the piston either ascended or descended. One of those boys, who loved to play with his companions, observed that, by tying a string from the handle of the valve which opened this communication, to another part of the machine, the valve would open and shut without his assistance, and leave him at liberty to divert himself with his play-fellows. One of the greatest improvements that has been made upon this machine, since it was first invented, was in this manner the discovery of a boy who wanted to save his own labour. Adam Smith (1776: p. 9) on the STI-mode of learning: All the improvements in machinery, however, have by no means been the inventions of those who had occasion to use the machines. Many improvements have been made by the ingenuity of the makers of the machines, when to make them became the business of a peculiar trade; and some by that of those who are called philosophers or men of speculation, whose trade it is not to do any thing, but to observe every thing; and who, upon that account, are often capable of combining together the powers of the most distant and dissimilar objects. In the progress of society, philosophy or speculation becomes, like every other employment, the principal or sole trade and occupation of a particular class of citizens. Like every other employment too, it is subdivided into a great number of different branches, each of which affords occupation to a peculiar tribe or class of philosophers; and this subdivision of employment in philosophy, as well as in every other business, improves dexterity, and saves time. Each individual becomes more expert in his own peculiar branch, more work is done upon the whole, and the quantity of science is considerably increased by it. The first mode is experience-based and I will refer to it as the DUI-mode learning by doing, using and interacting. The other mode refers to science-based research processes and I will refer to it as the STI-mode science is seen as the first step toward technology and innovation. In this chapter we will argue that this distinction is fundamental when it 7 comes to analyzing modern innovation systems and also when it comes to design management strategy as well as public policy. 8 Friedrich List on the need for an active state to build innovation systems While Adam Smith was propagating free trade and a liberal economy the German economist Friedrich List disagreed. He characterized Adam Smith s theory as cosmopolitan and argued that if followed by other countries, it would just confirm and reinforce the dominance of the British Empire in the world economy (Reinert 1999). He argued that for countries such as Germany, trying to catch up with the leading economy, there was a need for government intervention. List presented a broad agenda for government in the building of infrastructure that could contribute to technical advance. It is interesting to note that he referred to mental capital as the most important kind of capital. He argued that the wealth of nations more than anything else reflected the accumulation of all discoveries, inventions, improvements, perfections and exertions of all generations which have lived before us (Freeman 1995a, p. 6). Karl Marx on technological progress The historical parts of Das Kapital give deep insights in how new technologies shape the economy and society. The basic assumption in his historical analysis that new productive forces may get into conflict with production relations is a useful guideline for how to study innovation systems. At the micro-level this corresponds to the fact that radically new technologies cannot flourish in firms locked in into old organisational forms and competence sets. At the aggregate level it corresponds to the need to transform societal 8 Adam Smith s major contribution was to link the evolving and increasingly more developed division of labour to the creation of wealth. In Lundvall (2006) I have tried to reformulate his theory, emphasizing interactive learning in the context of vertical division of labour, so that it becomes more relevant for explaining innovation-based economic growth. 8 institutions, competences and organizations in order to reap the benefits of technological revolutions. 9 Marx is a pioneer also when it comes to emphasize the importance both of science as a force of production and technological competition where firms need to engage in innovation in order to gain markets and reduce costs. Many of his insights on the role of science and technology in relation to the economy are very advanced for his time (Rosenberg 1976). Marshall s contribution Marshall (Marshall 1919; Marshall 1920) is known as one of the founding fathers of modern neo-classical economics. He was also the one who introduced the concept the representative firm a concept that has contributed to the lack of understanding of economic development in modern neo-classical economics. But as documented by Metcalfe (2006) in a different reading Marshall may be seen as contributing not only to evolutionary understanding of industrial dynamics in general, but also to the idea of a national system of innovation (Metcalfe 2006: p.17). He links innovation to management competences, brings the wider institutional setting in terms of different types of research laboratories into the analysis and recognises that the overall system and mode of innovation may differ across national borders (ibid. p.19). Marshall s focus on incremental innovation rather than on the radical innovations as emphasized by Schumpeter may be seen as an important inspiration for modern innovation research. As will be argued below, any attempt to link innovation to economic growth and development needs to capture radical and incremental innovation but also the on-going processes of imitation and learning (Arocena and Sutz 2000a). As with Adam Smith it is possible to discern two types of mechanisms for the advancement of knowledge and technology and in the case of Marshall they are linked to 9 For a historical analysis of how match and mismatch is reflected in economic performance of national systems see Freeman (1995b). In (Lundvall 2002) I discuss the role of mismatches in the disappointing performance following the new economy euphoria. 9 two types of innovation systems. One refers to industrial districts where the focus is on experience-based learning (DUI) and the other refers to the national system of research (STI). Marshall is unique in being a potential source of inspiration both for mainstream and evolutionary economics. This reflects his ambition to develop a theory that explains fluctuations in supply and demand with a theory that explains economic development. His method to try to combine the short-term static analysis and the evolutionary development where innovation takes place and agents become more competent is to introduce the distinction between short period, long period and secular period. Metcalfe argues that this should be seen primarily as an attempt to link order and change. While the nati
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