National innovation systems Urmas Varblane University of Tartu

National innovation systems Urmas Varblane University of Tartu

Development and diffusion of the concept NIS • Historical roots (Friedrich List, 1841) - ’national systems of production’ - a wide set of national institutions including those engaged in education and training as well as infrastructures such as networks for the transport of people and commodities • Freeman 1982 and Lundvall 1985 – National Innovation System • innovation process should be treated in a systematic manner - need for systemic approach, which integrates institutions to create, store, and transfer the knowledge, skills and artefacts. (OECD, 1999 • understanding innovation as a complex interactive learning process • learning is important => key element in both the dynamics of the system and as a key agent in binding the whole system together. • comparative - could not be an ideal NIS, which fits different nations with their specific socio-economic, political and cultural background.

Theoretical perspective on innovation and learning: as socially embedded (Lundvall, 2003) – Innovation is a process that is: • • • Cumulative Nonlinear Path dependent Context dependent Continuous Interactive – Firms do seldom innovate alone – Innovation and learning • You learn from what you do • Innovation as joint production of innovation and competence • Learning is a socially embedded process – social capital is important

Definitions of NIS • Innovation System - a system for generating and diffusing new technologies - every country has such a system, even if it is weak or low in capacity. • C. Freeman (1987, p. 1) ‘the network of institutions in the public and private sectors whose activities and interactions initiate, import, modify and diffuse new technologies’. • B. -A. Lundvall (1992, p. 12) narrow NIS ‘organisations and institutions involved in searching and exploring – such as R&D departments, technological institutes and universities’. • broader NIS includes ‘all parts and aspects of the economic structure and the institutional set-up affecting learning as well as searching and exploring – the production system, the marketing system and the system of finance present themselves as sub-systems in which learning takes place’.

Lundvall. 1992. National Systems of Innovation. Towards a Theory of Innovation and Interactive Learning London: Pinter Publishers • Assumption One / Knowledge as key resource and learning as key process – and knowledge differs substantially from other economic resources: • “…it is assumed that the most fundamental resource in the modern economy is knowledge and, accordingly, that the most important process is learning. The fact that knowledge differs in crucial respects from other resources in the economy makes standard economics less relevant” (p. 1)

Lundvall quote about the value of knowledge: • “Knowledge does not decrease in value when used. On the contrary, its use increases its value; i. e. knowledge is not scarce in the same sense as other natural resources and technical artefacts. Some elements of knowledge may be transferred, easily, between economic agents while others are tacit and embodies in individual, or collective, agents. Knowledge is not easily transacted in markets and not easily privately appropriated. In spite of attempts to find institutional solutions to the problem (patent laws, etc. ) property rights to knowledge are not easily defined. When it comes to knowledge market failure is the rule rather than the exception” (p. 18)

Lundvall. 1992. National Systems of Innovation. Towards a Theory of Innovation and Interactive Learning London: Pinter Publishers • Assumption Two / Learning as an interactive and socially embedded process – modern nation states as a necessary prerequisite: • “… it is assumed that learning is predominantly an interactive and, therefore, a socially embedded process which cannot be understood without taking into consideration its institutional and cultural context. Specifically, it is assumed that the historical establishment and development of the modern nation state was a necessary prerequisite for the acceleration of the process of learning” (p. 1)

National Systems, Globalization and Regionalization (Lundvall, 1992) Why to focus on national systems in an era of globalization? : • “Readers might ask, why we focus on the national level, in an era where many analysts point to an accelerating process of internationalisation and globalisation, characterised by multinational firms loosening their relations to their home-country and entering into alliances with foreign firms” (p. 3) The importance and viability of national patterns: • “At the same time, a growing number of social scientists – often inspired by new sets of ideas labeled ‘flexible specialisation’, ‘networking’ and ‘post-Fordism’ – have argued that regional production systems, industrial districts and technological districts are becoming increasingly important. Some authors analyse these two tendencies as interconnected and mutually reinforcing. …that globalisation, and international specialisation have their roots in the strengthening of specialised technological districts and regional networks” (p. 3)

Lundvall’s arguments in favour of using concept of NIS 1) Communication – also, or even primarily, based upon tacit knowledge – takes place within national patterns: “… we believe that national systems still play an important role in supporting and directing processes of innovation and learning. The uncertainties involved in innovation and the importance of learning imply that the process calls for a complex communication between the parties involved. This will especially be the case when the knowledge exchanged is tacit and difficult to codify” 2)Globalization pushes strongest in science-based and codified knowledge areas: • “On the other hand, it must be recognised that important elements of the process of innovation tend to become transnational and global rather than national – and here the trend will be most important in science-based areas where the communication is easier to formalise and codify. Some of the big corporations are weakening their ties to their home-base country and begin to spread their innovative activities and to ‘source’ different national systems of innovation”

Definitions of NIS • “The elements and relationships which interact in the production, diffusion and use of new, and economically useful, knowledge… and are either located within or rooted inside the borders of a nation state” (Lundvall, 1992; p. 12) • “A set of institutions whose interactions determine the innovative performance of national firms” (Nelson, Rosenberg, 1993; p. 5) • “The national institutions, their incentive structures and their competencies, that determine the rate and direction of technological learning (or the volume and composition of change-generating activities) in a country” (Patel and Pavitt, 1994; p. 12)

Definitions of NIS • “That set of distinct institutions which jointly and individually contribute to the development and diffusion of new technologies and which provides the framework within which governments form and implement policies to influence the innovation process. As such it is a system of interconnected institutions to create, store and transfer the knowledge, skills and artefacts which define new technologies” (Metcalfe, 1995; p. 462 -463)

Definitions of NIS • C. Edquist (1997) - includes “all important economic, social, political, organizational, institutional and other factors that influence the development, diffusion and use of innovations” • Galli, Teubel (1997)- “a historically grown subsystem of the national economy in which various organizations and institutions interact and influence each other in the carrying out of innovative activity”. • NSI as the set of organizations, institutions, and linkages for the generation, diffusion, and application of scientific and technological knowledge operating in a specific country.

Systemic approach to innovation • According to Ingelstam (2002): – 1. a system consists of two kinds of constituents: there are firstly, some kinds of components and secondly, there are relations among them. The components and relations should form a coherent whole (which has properties different from the properties of the constituents); – 2. the system has a function – that is, it is performing or achieving something; • 3. it must be possible to discriminate between the system and the rest of the world; that is, it must be possible to identify the boundaries of the system. If we, for example, want to make empirical studies of specific systems, we must, of course, know their extension.

Elements in the system of innovation • Players or actors. Organizations : firms (normally considered to be the most important organizations in Sis), universities, venture capital organizations and public agencies responsible for innovation policy etc. • Rules of the game. Institutions are “sets of common habits, norms, routines, established practices, rules or laws that regulate the relations and interactions between individuals, groups and organizations, ” (Edquist & Johnson, 1997).

Edquist, 2001

Nauwelaers, 2003

National System of Innovation

A generic national innovation system (Arnold, E. , Kuhlman, S, 2001, RCN in the Norwegian Research and Innovation System. Available at www. technopolisgroup. com)

Systemic approach to innovation policy (Romanainen, 2005) Learning governance, strategic foresight, evaluation, monitoring, assessment innovation capabilities Knowledge transfer awareness, co-operation, mediation complementary resources knowledge Knowledge base education science R&D skilled labour knowledge ideas Innovation process regulation Market conditions sophisticated demand competition clustering customers competitors value-chains services money Framework conditions culture, social capital, financial services, innovation services, regulation

Boundaries of innovation systems – types of systems • Spatially, sectorally, functionally=> • National Innovation Systems (Freeman, 1987; Lundvall, 1992; Nelson, 1993); • Regional Innovation Systems (Camagni, 1991; Cooke et al. , 1997; Braczyk et al. , 1998; Cooke, 2001; and Asheim & Isaksen, 2002); • Sectoral innovation systems ( Breschi & Malerba, 1997, Malerba, 2004). • “Technological innovation systems” (Carlsson, 1995; Carlsson & Stankiewicz, 1991)

Social capital and the small country paradox (slide from B. A. Lundvall) • Small size (cf. The costs of respectively production and reproduction of knowledge) and low tech specialisation should be a serious handicap for small countries and especially for Denmark but small countries perform better than big ones in the new economy – why? • In ’the learning economy’ speedy adjustment, learning and forgetting is rooted in social relationships. Trust, loyalty and ease of communication is easier to establish in culturally homegeneous nations with shared responsibility for the costs of change.

Roots of the systemic approach to innovation • evolutionary theory (Nelson & Winter, 1982). • firms are a bundle of different capabilities and resources (Eisenhardt & Martin, 2000; Grant, 1996; Spender, 1996) which they use to maximize their profit. • knowledge is not only information, but also tacit knowledge; it can be both general and specific and it is always costly. • Knowledge can be specific to the firm or to the industry (Smith, 2000). • The innovation process is interactive within the firms and among the different actors in the innovation system.

Activities in the system of innovation (Chaminade, Edquist, 2005) function of SIs is to pursue innovation processes: to develop and diffuse innovations. ‘activities’ in SIs are those factors that influence the development and diffusion of innovations. Four approaches 1) innovation production process, looking at the different activities needed to turn an idea into a new product or process. Edquist, (2004), Furman, Porter et al. , (2002) 2) knowledge production process - how knowledge is created, transferred and exploited (emphasis on the channels and mechanisms for knowledge distribution). (David & Foray 1994; Johnson & Jacobsson, 2003; innovation systems as learning systems (Lundvall, Johnson et al. , 2002).

Activities in the system of innovation (Chaminade, Edquist, 2005) 3) organizational performance - organizations as the starting point, identifying the activities of the different organizations that have an impact in the innovation system (Borrás, 2004). 4) innovation policy as a focal point => what activities (and organizations) in the innovation system can be stimulated by public intervention (OECD and other international organizations) criticism - it considers only those activities that can be directly affected by public intervention

Chaminade, Edquist, 2005 • what is the division of labor between private and public actors in the performance of each activity. This will provide policymakers with a new perspective on: a) what role they can play in stimulating different activities in the system of innovation; b) once the complex division of labor between public and private actors has been unfolded, what could be the appropriate instruments to do this; c) how to identify future research needs.

Activities in the system of innovation proposed by Chaminade, Edquist, 2005 I. Provision of knowledge inputs to the innovation process 1. Provision of R&D - creating new knowledge, primarily in engineering, medicine and the natural sciences. 2. Competence-building (provision of education and training, creation of human capital, production and reproduction of skills, individual learning) in the labor force to be used in innovation and R&D activities. II. Provision of markets – demand-side factors 3. Formation of new product markets. 4. Articulation of quality requirements emanating from the demand side with regard to new products

Activities in the system of innovation proposed by Chaminade, Edquist, 2005 III. Provision of constituents for IS 5. Creating and changing organizations for the development of new fields of innovation (e. g. enhancing entrepreneurship to create new firms and intrapreneurship to diversify existing firms, creating new research organizations, policy agencies, etc. ) 6. Provision (creation, change, abolition) of institutions (e. g. IPR laws, tax laws, environment and safety regulations, R&D investment routines, etc) - influencing innovating organizations and innovation processes by providing incentives or obstacles to innovation. 7. Networking via markets and other mechanisms, incl. interactive learning between organizations (potentially) involved in the innovation processes. Integrating new knowledge elements developed in different spheres of the SI and coming from outside with elements already available in the innovating firms.

Activities in the system of innovation proposed by Chaminade, Edquist, 2005 IV. Support services for innovation firms 8. Incubating activities (e. g. providing access to facilities, administrative support, etc. for new innovating efforts). 9. Financing of innovation processes and other activities that can facilitate commercialization of knowledge and its adoption. 10. Provision of consultancy services of relevance for innovation processes, for example, technology transfer, commercial information and legal advice.

• • Innovation processes are path-dependent Evolutionary characteristics - we do not know whether the potentially best or optimal path is being exploited. The system never achieves equilibrium, and the notion of optimality is irrelevant in an innovation context. We cannot specify an ideal or optimal innovation system Comparisons between an existing system and an ideal or optimal system are not possible, instead comparison with the other countries is available. Instead of market failure the term systemic problems or systemic failures are used.

Systemic problems mentioned in the literature include (Smith, 2000; Woolthuis, Lankhuizen et al. , 2005): • infrastructure provision and investment, including the physical (IT, telecom, transport) and scientific infrastructure (universities, labs); • transition problems – the difficulties that might arise when firms and other actors face technological problems or changes in the prevailing technological paradigms that exceed their current capabilities; • lock-in problems, derived from the socio-technological inertia, that might hamper the emergence and dissemination of more efficient technologies; • hard and soft institutional problems, linked to formal rules (regulations, laws) or nonformal (such as social and political culture); • network problems, derived from linkages too weak or too strong (blindness to what happens outside the network) in the NIS; • capability problems, linked to the transition problems, referring to the limited capabilities of firms, specially SMEs, their capacity to adopt or produce new technologies over time.

A system failure framework for innovation policy design (Woolthuis, Lankthuizen, 2004)

Why should governments intervene in favour of (research) & innovation ? • Classic argument for ‘research policy’ is a market failure or “public good” issue. • But the rational for innovation policy is wider - market failure assumes away deficiencies of real companies: – Capability failures in business sector: • managerial deficits, lack of technological understanding – Failures in ‘institutions’: • other institutions in the national innovation system: universities, patent offices, financial system, etc. – Network or system failures: • Lack of the interaction among actors in the ‘innovation system’, etc. – Framework failures : • regulatory framework, health & safety rules, etc. As well as consumer demand, cultural and social barriers to innovation.

The need to tailor packages of support to different types of companies

From science and technology policy to innovation policy (NIFU-STEP, 2005) • 1 st generation: Science and technology policy – Focus on research and especially research in universities and laboratories – Ministries of industry/economy (industry policy) and research/education (science policy) • 2 nd generation: Innovation policy – Focus on policy measures and institutions targeting the innovative capabilities of firms – Ministries of industry/economy and research/education • 3 rd generation: holistic innovation policy – Focus on institutions and policy measures that directly or indirectly influence the innovative capabilities of firms – Most ministries

A more complex understanding of innovation • Innovation takes place in complex systems of companies, knowledge institutions, financial institutions and within a extensive regulatory, social and cultural framework. • Innovation is based on complex learning processes involving a large number of persons, all with different educational backgrounds and experiences. • Innovation thrives on spillovers and unexpected combinations of persons, existing knowledge and technologies. NIFU-STEP, 2005

A changing framework for innovation policy : National System of Innovation (Nauwelaers, 2003) Ø Increased awareness of the role of innovation as crucial ingredient for economic development Ø Interactive view of innovation: innovation differs from R&D Ø System-based approach to innovation, emphasis on learning and diffusion / absorption of knowledge Ø Mobility of tacit knowledge embedded in humans becomes a key performance factor Ø Glocalisation : localised nature of (tacit) knowledge spillovers - importance of global connections

The basis for systemic innovation policies (NIFU-STEP, 2005) Traditional industrial policies Knowledge as a “free” commodity Modern innovation policies Focus on research Including a broad set of innovation activities Competence building as learning processes (incl. development, incremental improvements, design, branding, marketing) Focus on “high tech” companies Focus on R&D institutions Including “low tech” companies and services Company centred Focus on knowledge diffusion Focus on absorptive capacities and networking

Policies for innovation systems (Nauwelaers, 2008) 8 Objective of policy intervention: from optimal allocation of resources, towards ensuring the overall coherence of the system and improving its evolution capacity. 8 Instruments’ targets: free flow of knowledge in the system, addressing lock-in situations, favouring networking between innovation actors, etc. 8 Justified by systemic failures arguments. 8“Systemic” policy instruments are gaining ground (Kuhlmann and Smits 2004): 8 oriented towards the evolution of the innovation system 8 preventing lock-ins 8 building of spaces for interactions between the actors 8 support to creativity

Policies for innovation systems From “stocks” to “flows” as main focus of policy attention 8 Flows in the system need to be addressed in priority From “raising resources” towards “promoting change” 8 Performance is affected by learning abilities of firms and others From “best practice” towards “context-specific” solutions 8 Policies should be fine-tuned to specific system failures 8 From “standard” policy-making towards policy “learning process” 8 There is a need for more strategic intelligence in policymaking Policies for “activating knowledge”

Policies for innovation systems (Nauwelaers, 2003) From “picking-the-winners” towards “addressing-weakest” 8 System performance is mainly determined by the weakest node From “stocks” to “flows” as main focus of policy attention 8 Flows in the system need to be addressed in priority From “raising resources” towards “promoting change” 8 Performance is affected by learning abilities of firms and others From “best practice” towards “context-specific” solutions 8 Policies should be fine-tuned to specific system failures From “standard” policy-making towards policy “learning process” 8 There is a need for more strategic intelligence in policymaking

Taxonomy of Innovation Policies (Georghiou, 2003, 2006)

Demand-side measures Source: Georghiou, L. et. al. (2003): Raising R&D intensity. Improving the Effectivenss of Public Support Meachanismss for Private Sector Research and Development: Direct Measures; Brussels.

A Simple Taxonomy of Science, Technology and Innovation Policies The Impact of RTD on Competitiveness and Employment (IRCE), EC, 2003

Policy Conclusions • Effectiveness of innovation systems depends on balanced combination of 3 capacities : – creation of knowledge – diffusion of knowledge – absorption of knowledge • Government’s role shifts from investor to facilitator - promotion of public/private partnerships and interface management • Growing importance of framework conditions – entrepreneurship – competition rules – labour market conditions – social capital, . . .

Policy Conclusions • Danger of fragmentation of innovation policy : need for intra-government policy coordination • Increasing role of regions for innovation : need for vertical policy coordination • More efficiency through “Policy packages” rather than isolated instruments • Need for more policy intelligence – – – monitoring and evaluation of policies sound analyses of innovation systems « intelligent » benchmarking practices long term views inclusive policy design processes

Main developments in our understanding of innovation • • • From individual entrepreneur to corporate innovator From laissez faire to government programmes From single division to multidivisional efforts From science push to demand pull? From single factor to multi-factor explanations of innovation • From static to dynamic model of innovation • From linear model to interactive ‘chain-link’ model • From one innovation process to several sectoralspecific types

Main developments in our understanding of innovation • From neo-classical to evolutionary economics • From optimising firm to resourcebased view of the firm • From individual actors to systems of innovation • From market failure to system failure • From one to ‘two faces’ of R&D • From single-technology to multitechnology firms • From closed to open innovation • From national to multi-level systems of innovation • From R&D management to innovation leadership

External R&D Policy influence Generic Education Policy External Sectoral influence Financial and Fiscal policy R&D Domain Human Capital Domain External influence IPR Policy Employment Policy Linkage Policy Finance Domain Macroeconomic Policy Innovation Domain Industry Policy Competition Policy Trade Policy Regional Development Policy Innovation Policy Defence Policy Direct policy impacts on R&D domain Direct policy impacts on other domains Environment Policy Consumer Protection Policy Health and Safety Policy External influence Indirect policy impacts on R&D and other domains External influences on all domains Source: Policy mix project, European Commission. http: //rid. intrasoft-intl. com/Policy. Mix/index. cfm R&D Domain Other Key Domains R&D domain: public and private R&D performers, e. g. universities, research institutes, government labs, high tech SMEs, large firms etc. Other key domains: e. g. private sector firms (Innovation domain); financial institutions (Finance domain); educational establishments (Human Capital domain)