Section 2 - Innovation Systems - Background
2.1 Introduction
In this section we briefly review some recent perspectives on innovation systems and the factors which shape their success in generating high levels of innovative outputs. Underlying the discussion of innovation systems is an understanding of innovation as an evolutionary process in which knowledge and information are combined to generate new product and service offerings. Market processes - competition - then work to select those innovations which will be commercially successful.
R&D, technology transfer and diffusion play key roles in the innovation process, which is also influenced by the capabilities of, and linkages between, local organisations, knowledge 'spillovers', knowledge integration through 'open systems architecture', and the potentially important influence of devolved and national innovation policy.
2.2 Systemic Perspectives for Innovation
A systems perspective enables us to embrace this range of influences on innovation, and adopt a holistic view to the description and evaluation of the SIS. One definition of a national system of innovation is:
'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 technology' 3
Figure 2.1, taken from a recent OECD report provides one perspective on the set of organisations within an innovation system and their inter-relations. At the heart of the system are the key processes of knowledge generation, diffusion and exploitation which are shaped by the capabilities of organisations and the strength of their relationships. Supporting these activities are other aspects of the commercial, technological and regulatory environment within which firms operate. The outcome of this complex set of capabilities and linkages is national innovative capacity, a key determinant of economic performance.
Figure 2.1: Actors and linkages in the innovation system
In terms of more recent academic studies, a recent article by Charles Edquist (2004) provides perhaps the most comprehensive overview of the 'state of the art' in thinking about regional and national innovation systems. Box 2.1 summarises his view of the development of thinking about the notion of innovation systems. While recognising that notions of 'innovation systems' are not formal theories, Edquist and others have argued that the 'conceptual diffuseness' of the innovation systems concept is one of its key strengths. This, it is argued:
- Enables innovation and learning processes to be placed at the centre of an understanding of regional and national economic development;
- Provides a holistic and inter-disciplinary framework within which the determinants of innovation can be addressed;
- Emphasises inter-dependency and non-linearities in the development of innovation capability;
- Emphasises the role of organisations and institutions ( i.e. the rules of the game);
- Embraces nations' historical and evolutionary development and particular technological and economic characteristics.
Two key issues arise in trying to operationalise the notion of an innovation system. First, what organisations or institutions are included within the system? And, secondly, what criteria should be used to assess whether any collection of organisations actually constitute a 'system'. Debate has surrounded both questions and there are no definitive answers. Previous studies have, however, suggested some guiding principles which we propose to adopt in our assessment of the Scottish Innovation System.
Box 2.1: The development of National and Regional Innovation Systems Thinking Edquist (2004), traces the development of the notion of innovation systems through early work by Freeman (1987) and Lundvall (1992), to the landmark book on national innovation systems edited by Nelson (1993). Edquist (2004), however, stresses the 'contrasting approaches' adopted to the NSI concept suggesting noting that 'Lundvall argues that "the structure of production" and "the institutional set-up" are the two most important dimensions, which "jointly define a system of innovation" (Lundvall 1992: 10). …. Nelson singles out organizations supporting R&D, i.e. he emphasizes those organisations which promote the creation and dissemination of knowledge as the main sources of innovation (Nelson 1993: 5, 9-13) … both Nelson and Lundvall define national systems of innovation in terms of determinants of, or factors influencing, innovation processes. 4 However, they single out different determinants in their actual definitions of the concept, presumably reflecting what they believe to be the most important determinants of innovation' (p. 4) . More recent studies, have emphasised the role of regional innovation systems ( e.g. Cooke et al., 1997; Braczyk et al., 1998) and more local innovation dynamics. |
2.3 Key Components of the SIS
As Figure 2.1 suggests, the outcome of the SIS is Scotland's innovation capability. Within the SIS, however, it is possible to identify a series of six organisational functions which together contribute to the development of innovation capability. These are identified in Figure 2.2:
- Function 1 - Policy Making - Organisations within this function will have broad social and economic agendas and a need to balance innovation along with other policy priorities. At best such organisations will take into account the potential impact of policy decisions on national innovation capability, and will act to strengthen the framework conditions within which system development can take place. A key aspect of this element of the governance system is ensuring some consistency between local and UK and EU policy measures.
- Function 2 - Innovation Policy Formulation and Implementation - Organisations within this function will generally have an emphasis on regional or national economic development but may also have specific objectives relating to innovation support. The focus is on the development and design of innovation support measures and other economic development initiatives rather than their implementation. Complementarity with UK and super-national innovation and R&D support schemes is a key focus. At best these organisations adopt a systemic perspective allowing them to address systemic failures or bottlenecks and resolving gaps or mismatches in system capabilities.
- Function 3 - Support and Direction of Innovation and R&D - Dominated by publicly funded bodies, the key activities within this function are public support for knowledge creation, business innovation and R&D. At best these organisations provide responsive and flexible support for firms, adequate financial support for socially optimal levels of R&D and innovation activity, and are accessible to firms in each sector and sub-region.
- Function 4 - Undertaking R&D - This function is dominated by organisations whose corporate objectives relate to knowledge creation ( i.e. researching organizations). This includes the universities, third-level colleges as well as public and industry research organisations. At best, this sub-system is populated by organizations with strong internal capabilities, dense and evenly distributed network links to other local organisations and 'open' external links to global centres of best practice (Braczyk et al., 1998). The key capabilities of R&D performing organisations for local innovation are threefold: the ability to generate new knowledge applicable to local firms or markets; the ability to capture knowledge with local applicability; the ability to provide training in R&D and innovation skills which are retained within the region.
- Function 5 - Facilitating and Conducting Knowledge diffusion - Intermediate organisations whose function is knowledge broking or diffusion. Key capabilities relate to the ability to identify valuable technologies or knowledge and to match this with appropriate (and local) exploitation mechanisms. Arguably such institutions play a particularly important role in mediating between knowledge generating organisations ( e.g. universities) and smaller firms who may have less capability in identifying valuable technologies and a reticence to engage directly with knowledge generators.
- Function 6 - Knowledge Exploitation - Primarily firms linked through (vertical) local supply-chains and trading relations and (horizontal) collaborative networks. Here, the main objective is the exploitation of the knowledge-base to generate competitive products and services, and so achieve enhanced profitability or business value. At best, firms have strong internal innovation capabilities; local supply-chain linkages are robust and characterised by strong knowledge flows between trading partners; and, horizontal collaboration networks are ubiquitous.
In addition, the 'region-state' status of Scotland means it is important to recognise the influence of national and supra-national policy making and innovation support organisations in influencing the SIS. In Figure 2.2 we therefore also identify two national functions which are the national allegories of F1 and F2. N1 comprises UK national policy making bodies, and N2 comprises UK bodies involved in the formulation and development of technology and innovation policy (N2). We omit any consideration of possible N3-N6 institutional functions while recognising that interactions between UK national and Scottish institutions at these levels may also be important in determining the effectiveness of the Scottish innovation system.
In addition, Figure 2.2 recognises the role of EU policy and support measures in shaping innovation policy and support measures within the SIS. EU development priorities for innovation, shaped by the Lisbon agenda, are important here, as is support for R&D and innovation in Scotland provided by the Structural Funds and Framework programmes.
Figure 2.2: Organisational Functions Within the SIS
2.4 Linkages and Spillovers
A particular focus of much recent debate in terms of innovation systems has been the importance of patterns of networking, linkages or association between organisations. The pattern of such links within an innovation system is important as it determines the extent of any positive 'spillovers' from R&D or innovation activity in the area. In other words, the extent to which R&D or innovation undertaken by one organisation positively affects either the level of innovation or performance of another organisation.
In the SIS this is particularly important due to the predominance of public sector R&D, and the concentration of private sector R&D in larger and externally-owned firms. The stronger are local linkages to these organisations, the greater will be the benefits accruing to Scottish organisations from this R&D and innovation activity.
Two sorts of knowledge spillovers occur - 'rent' and 'pure' - with the distinction being important because the mechanisms which determine the extent of each type of spillover are very different 5. Rent spillovers which are the result of local market transactions, may be mediated through the supply-chain, with positive effects on suppliers and/or customers. Other forms of rent spillovers may depend on the movement of research-trained staff who act as localised carriers of knowledge. The crucial determinants of the extent of rent spillovers from R&D in Scotland will therefore be the extent of intra-regional supply-chains, and the degree to which skilled staff are retained within the region. Or, put another way, the extent to which R&D conducting organisations and individuals are embedded in the Scottish economy.
Very different factors are likely to determine the extent to which Scotland benefits from pure knowledge spillovers from R&D investments, which are usually said to depend on the frequency of face-to-face contacts, and intentional and unintentional 'leakages' of knowledge from one organisation to another. Empirical evidence on pure knowledge spillovers is indirect, however, with the effects weakest in very small regions. Evidence from the US, however, however, suggests that Scotland is large enough geographically to capture a significant proportion of the innovation spillovers from university R&D 6. Specifically, in the US, spillovers from university research have a positive impact on levels of innovation in firms up to 75 miles from the location of the university. If this pattern was repeated in Scotland, firms in the Central Belt and on the East Coast would be deriving some benefit from current university R&D but there would be little positive effect in the majority of the Highlands and Islands region 7.
2.5 What Constitutes a System?
Charles Edquist (2004) suggests three criteria which must be met if an innovation 'system' is to be said to exist in an area:
- Coherence - an innovation system will exist when the array of organisations and their relationships in a region or nation form a coherent whole, which has properties different from the properties of the constituents. In other words, we would expect to identify feedback systems or loops, common developmental trajectories and complementary competencies between agents.
- Unified function - an innovation system has a function, i.e. it has identifiable objectives or aims to which all elements of the system contribute. This might be evident in social partnerships (either formal or informal), agreed objectives and vision.
- Bounded - it must be possible to discriminate between the system and the rest of the world; i.e. it must be possible to identify the boundaries of the system. This could be geographic but may also be sectoral or technologically based.