National Innovation Systems Research Paper

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National Innovation Systems (NIS) are nationally distinct configurations of institutions and organizations that structure the development, diffusion, and use of new technologies, products, and processes in different ways. They typically include the institutions and organizations undertaking research and development, state science and technology policies, the financial system, the education and training system, labor market institutions, and the organization and strategies of dominant firms.

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1. The Development Of The Concept Of National Innovation Systems

National innovation systems became the focus of extensive research and comparison in the mid-1980s as the result of four important factors. First, both policy makers and academics had become increasingly dissatisfied with the earlier linear model of knowledge push innovation, which viewed technical change as being largely driven by research in the pure and applied sciences. Science and technology became understood as separate arenas of knowledge production and evaluation that developed interdependently in a variety of ways, and much technical change occurs within production organizations and technical communities (Freeman and Soete 1997).

This intellectual shift was reinforced, second, by an increasing awareness of the importance of informal, tacit knowledge in developing and implementing technological changes among economists, sociologists, and other researchers studying innovations. This, in turn, emphasized the highly contextual and local nature of much technological knowledge and its dependence on historically determined skills and search routines. Rather than being seen as a publicly available and readily accessible pool of formal knowledge, technology became viewed as more institutionally variable and costly to transfer and to use.

Third, the rise of Japan as a leading industrial power, together with the rapid economic development of newly industrialized countries such as South Korea and Taiwan and the relative decline of the US economy in the 1980s, stimulated considerable interest in alternative ways of organizing capitalist economies, especially variations in the role of interfirm networks and the coordinating role of the state (see, for example, Orru et al. 1997, Whitley 1992). Together with a number of studies of different forms of European corporatism and the organization of business interests (see, for example, Streeck and Schmitter 1985), this growing concern with the differences between national and regional systems of economic coordination and control, and their institutional interdependences, highlighted the considerable variations in innovative performance between the major industrial economies.

This broad concern with national success in developing and implementing new technologies led, fourth, to more systematic comparisons of national variations in sectoral specialization and technological development as policy makers and researchers began to study how and why firms from different kinds of countries were more effective in some industries and technologies than others. These variations have increasingly been seen as depending on societal institutions as well as upon the formal system of knowledge production and diffusion.

These shifts in perceptions and concerns among researchers, policy advisors, and policy makers encouraged a number of studies of NIS in the

Americas, Europe, and Pacific Asia in the late 1980s and early 1990s, as well as leading to a series of debates about their nature and significance. Two collective volumes edited by Lundvall (1992) and Nelson (1993) brought many of these contributions together and effectively defined this new field of research. A later collection edited by Edquist (1997) provided some more systematic cross-sectoral and cross-national analyses of innovation patterns and their institutional connections.

There remain, however, considerable variations in how NIS are understood and how they are related to variations in technological specialization and performance. Beyond the broad consensus that they encompass additional organizations and agencies to those engaged in formal research and development (R&D) activities, they range from the whole network of institutions whose activities affect technological development to those more narrowly and directly concerned with innovation in firms. Most of the descriptions of NIS in Nelson’s (1993) book, for example, focus on the location of R&D activity, sources of its funding, characteristics of key firms and dominant industries, and the roles of universities and state science and technology policies. Broader institutional influences and social structures such as labor market institutions and the skill credentialing system are typically not discussed.

This variety of conceptualizations of NIS extends to the types of innovations produced by them. While many contributors focus on technological change and ignore social and organizational innovations, others explicitly refer to new ways of organizing economic activities, even if in practice they tend to restrict their concrete analyses to technical developments. Clearly, if all forms of novelty in the economic sphere are to be included in the analysis of innovations, most aspects of national economies are involved in NIS. On the other hand, much recent work has emphasized the importance of organizational change in realizing the benefits of technological improvements, and numerous studies of ‘learning organizations’ (Dodgson 1993) have highlighted the importance of organizations’ abilities to change their structure and behavior if they are to remain competitive. Just as different institutional arrangements encourage different patterns of technical change, so too they vary in their support for organizational flexibility and risk sharing, and thus in firms’ ability to reshape themselves in rapidly changing economic and technological environments.

A further aspect of innovations that has become more central to the analysis of NIS in the 1990s has been their technological and market radicalness or discontinuity. Different types of innovation have come to be seen as more or less likely to develop in contrasting institutional environments. In particular, the prevalent pattern of incremental innovations in assembly and machinery industries in the more collaborative capitalisms of postwar Germany and Japan has been contrasted with the ability of the US economy to generate radical innovations that have led to the development of new industries, such as biotechnology and computer software. In such comparisons, NIS are viewed as distinctive configurations of institutions that encourage particular kinds of innovation strategies while inhibiting other ones, and so resulting in contrasting patterns of technological development.

The concept of NIS has become significant in understanding how and why market economies develop different patterns of sectoral and technological specialization and varying rates of economic growth. As such, it contributes to the general analysis of capitalist development, especially the comparative study of differences between types of capitalism and the role of technical change in these. The importance of innovation—broadly conceived—and technological development for economic growth also means that NIS are an important concern for policy makers and advisors as well as for students of technical change. The realization that innovation patterns vary significantly between countries as a result of institutional differences, such that innovation-led economic growth involves more than narrowly economic policies, has accordingly stimulated considerable interest in NIS among policy makers, especially in the linkages between institutional arrangements, state policies, and innovation patterns.

2. Major Components Of National Innovation Systems

The comparative analysis of innovative performance and technological specialization across subnational regions, countries, and supranational regions involves a considerable variety of institutions, organizations, and collective actors. In addition to the public and private organization of R&D and allied science and technology policies, these include more general state structures and policies, the system governing the flow of investment capital and the evaluation of financial performance, the skill production, evaluation and control system, and the nature of firms’ governance structures and organizational capabilities. These components of NIS will now be further discussed.

Universities, state research laboratories (including those incorporated into national academies of science), corporate and collaborative R&D efforts, and similar organizations for producing formal scientific and technological knowledge constitute the formal research systems of industrial societies. These vary considerably between nation states in terms of: (a) the balance between public and private provision and funding, (b) the kinds of industries that conduct R&D and use its outputs, (c) the predominant kinds and objectives of research conducted in separate organizations, and (d) the overall degree of integration and coordination of research and innovative activities carried out by different organizations. Where organizational boundaries and goals are fluid and often overlap, as in the USA, knowledge transfer and the recombination of different kinds of knowledge for novel purposes are easier to accomplish than where organizational objectives and boundaries are strongly differentiated and maintained, as seems to be the case for universities and firms in Japan since the war.

A related important component of NIS that varies between countries is the style and focus of state science and technology policies. Two major types can be distinguished. First, mission-oriented approaches concentrate resources on a small number of technologies and public goals—such as military or health ones— and attempt to achieve significant breakthroughs in these. Second, diffusion-oriented policies are more concerned with the development and diffusion of a range of new technologies that improve firms’ competitiveness in existing industries. Both public resources and the state’s coordinating activities are more directed towards upgrading existing technologies and developing new products that build upon current capabilities in this approach than they are to achieving radical innovations that transform entire industries.

These contrasting state science and technology policies are linked to more general attributes of state structures and behavior that affect innovation patterns. In particular, the overall capacity and willingness of the state to coordinate and direct economic development constitute key features of market economies that structure firms’ management of risks and innovation strategies. Developmental states are those that take a leading role in organizing new industries and managing declining ones through the control of technology licenses, guidance of bank credit allocation, coordinating investment plans, and influencing market entry and exit. Japan, South Korea, and France resembled this type for parts of the postwar period.

Regulatory ones, in contrast, see their roles more in terms of maintaining general rules of the competitive game while remaining aloof from particular market processes and industry developments. The UK and USA represented this type for much of the twentieth century. In addition, states vary considerably in their involvement of intermediary associations, such as trade unions and employers’ groups, in policy development and implementation, as well as their more general encouragement of collaboration between competitors, suppliers, and customers. This, in turn, affects the willingness of firms to share risks and information in the development of new technologies.

A crucial institution in the development of new technologies is the system governing the flow of capital and the terms on which different economic agents are able to obtain investment funds. One important distinction is between capital market based financial systems, such as those of the UK and USA, and credit-based ones, such as those of most continental European countries, Japan, and South Korea. In the former, capital is largely allocated through competition between suppliers and users of funds in large, liquid stock markets. These markets facilitate investor entry and exit to and from businesses by providing low cost transfers of property rights and establishing a strong market for corporate control.

In contrast, credit-based financial systems allocate capital through intermediaries such as banks and insurance companies, sometimes under state guidance, and such capital markets as exist are small and illiquid. Entry and exit are more difficult in these circumstances as there is no large, liquid, and anonymous market for trading financial claims, which means that investments, once made, are relatively long term. Investors thus are locked in to the destinies of their major clients to a greater extent in these systems. This encourages more mutual dependence and risk sharing between credit providing organizations and their larger customers, but inhibits radical changes in industrial structure and investments in highly novel and risky ventures. As a result, the significant development of the venture capital industry in high technology sectors in the USA during the last two decades or so of the twentieth century has been less evident in credit-based financial systems.

Increased awareness of the importance of process innovation and organizational learning in developing and implementing new technologies has focused attention on the education and training system as a key component of NIS. This is significant in two major ways. First, it determines the general level of workforce skills in an economy, and therefore the ease with which new technologies can be developed, adopted, and changed. Second, it structures the kinds of skills that are available to develop and implement particular kinds of innovations. A broad distinction has been drawn between education systems that focus on academic skills to the exclusion or downgrading of practical ones, such as those in France and Japan, and those that invest considerable resources in training children and adults in manual and nonmanual skills that are prestigious and highly valued by employers.

The dual training systems of Germany and some Scandinavian societies exemplify the latter. They typically involve close cooperation between employers, unions, and local state bodies and integrate formal training in technical schools and colleges with practical apprenticeships in firms. These education and training systems provide highly skilled workers who are able to learn new technologies and adapt to innovations. When combined with corporatist systems of labor relations and restrictions on managers’ ability to hire and fire workers, such training systems develop considerable interdependences between employers and skilled workers so that they have common interests in skill upgrading and continuous improvement of products and processes. They thus enable and encourage incremental innovation strategies. Conversely, more fluid external labor markets facilitate the circulation of skills and knowledge, and enable new firms to recruit different kinds of skills more easily than they could in corporatist societies.

A further important feature of education and training systems affecting innovation patterns is of course their development of scientists and engineers, or formal knowledge producers and developers more generally. Both the sheer number of doctoral researchers and their distribution between fields are significant aspects of education systems that vary between countries. The USA, for example, has developed a large number of doctoral programs in most scientific disciplines since the war that produce many researchers every year. In contrast, the development of research training programs at the doctoral level is much less significant in Japan. The proportion of graduates and postgraduate students in the physical, biological, and engineering sciences also varies between Britain, where many more natural scientists than engineers graduate each year, and most continental European countries and Japan, where the reverse is the case. The increasing importance of formal, codified knowledge in technical change means that the production of knowledge producers has become more significant in many industries, both to generate new knowledge and to absorb, evaluate, and use new knowledge produced by others.

In addition to influencing directly the pace and type of technological change through the generation, diffusion, and use of different kinds of knowledge, these institutions and agencies in the business environment also affect patterns of innovation through their connections with forms of economic organization and types of firm. Market economies differ considerably in the extent to which economic activities are integrated through non-spot-market means, and how they are, from the industrial districts of North East and Central Italy and other European societies to the highly coordinated postwar Japanese economy, dominated by large firms, vertical partnerships, and horizontal inter-market groups. Associated with these different types of economic coordination and control, or business systems, are considerable variations in prevalent firm type (Whitley 1999). Dominant kinds of companies in twentieth century market economies vary from the small owner-controlled, highly specialized enterprise to the large, diversified managerially integrated corporation that has developed in the USA and the less vertically integrated and horizontally diversified Japanese large firm. These different business systems and firm types develop interdependently with distinctive societal institutions and tend to follow contrasting innovation strategies and patterns of technological change.

Opportunistic firms in fragmented business systems, for instance, typically compete by being highly responsive to changes in market demand and rarely commit themselves to any one technology or market for very long. Innovations made by these kinds of firms thus tend to be customer driven and imitative rather than very novel. Isolated hierarchies in compartmentalized business systems, on the other hand, develop complex organizational capabilities for introducing and marketing standardized products for large anonymous markets, but without sharing authority and risks with business partners and employees. They compete by combining mass production with mass marketing and driving down unit costs through formalized routines and systematized procedures. Innovations introduced by these kinds of firms thus tend to be restricted to products and processes that are highly standardized and capable of being sold to a mass market without being continuously improved or adapted to different users’ tastes.

Cooperative hierarchies in coordinated business systems, in contrast, rely more on risk sharing with partners and skilled workers to develop high quality products for demanding customers and to upgrade these continuously. Information in these kinds of firms and business systems is widely diffused and used to improve products and services so that innovations are often quite complex and risky, but essentially build on existing organizational capabilities and commitments. They are, then, incremental in terms of current organizations and alliances, while sometimes being technically discontinuous.

3. Current Issues And Developments

Two major concerns about the concept of NIS arise from the focus on national units of analysis, on the one hand, and the idea that institutions, firms, and technologies constitute coherent systems, on the other hand. Many have questioned the appropriateness of concentrating on the nation state as the primary level for studying technological development, as opposed to the sector or firm, and others have queried the basis for assuming that NIS are systemic. These issues are connected to broader questions about the analytical purpose of the concept and the sorts of explanations it could usefully provide. In particular, it is not always clear how differences between NIS account for variations in technological change, or indeed exactly what the concept is intended to explain.

At least three distinct kinds of intellectual enterprise can be distinguished in considering how national and systemic are patterns of innovation. First, there is the comparative analysis of formal innovative activity at the national level, especially the organization and funding of designated R&D activity. This has been the focus of numerous surveys since the war, and reflects the prevalence of the science push, linear view of innovation. Since much of this activity is undertaken in state-supported and/or controlled organizations and has been the object of many state science and technology policies, it is not surprising that it mostly deals with national units of analysis.

Second, there is the comparative analysis of innovative performance and technological development that focuses on how and why different societies, states, and regions vary in their sectoral specialization and apparent success in developing different technologies over time. Insofar as these patterns vary systematically between nation states because of national differences in dominant institutions and policies, then the national level of analysis is clearly the appropriate one. It should be noted, however, that the intellectual focus on NIS in this institutionalist approach depends on innovation patterns, business systems, and institutions varying interdependently and significantly between countries. Where they differ more between regions within states, or between types of institutional environments that are characteristic of a number of states, such as the legal and financial systems of the USA and UK, on the one hand, and those of many continental European countries, on the other hand, NIS may be less important than regional or transnational ones.

Third, many studies of technological change and industrial development focus more on sectoral differences than national ones. These concern both technological and economic characteristics of industries. Technological systems vary considerably on two dimensions. First, they differ in the degree of interdependence of their components, or the extent to which changes in any one part of the system affect the operation of other ones, and so whether innovations are systemic or modular. Second, they differ in their causal complexity and therefore in the amount of knowledge required to make them work effectively. These differences have significant implications for coordination and control mechanisms that in turn are dependent upon institutional arrangements for their development and reproduction. As a result, different kinds of national business environments encourage the development of industries with varied degrees of technological integration and complexity (Kitschelt 1991).

Economic aspects of sectoral technological regimes comprise four basic factors according to Malerba and Orsenigo (1996): opportunity conditions, appropriability conditions, the cumulativeness of technological development, and the nature of the knowledge involved. The first refers to the likelihood of significant innovations arising from investments in R&D and other forms of research, the second to the feasibility of appropriating gains from innovations, the third to the dependence of any one innovation on previous innovations and competences, while the knowledge base of a sector varies in its complexity, tacitness, specificity, and decomposability. These aspects of different technological regimes generate distinctive patterns of industrial organization and innovation between sectors that vary in terms of firm size, the concentration of innovative activities in a few firms and geographical dispersion.

In both instances of this sectoral approach, it is assumed that particular features of production chains require—through some functional logic not always explicitly stated—specific kinds of coordination and control mechanisms such that different sectoral types develop distinctive patterns of innovation and economic organization that fit different institutional contexts. Thus, the critical unit of analysis and determining factors are sectoral, not national, in this approach. Each type of industry is characterized by one dominant kind of innovative pattern and organization that is standardized across countries such that institutional variations affect the relative significance of different sectors, but not their specific pattern of coordination and control. National innovation systems from this point of view, then, are simply combinations of institutions, agencies, and policies that fit some industries more than others and so encourage nationally distinctive patterns of sectoral and technological specialization. They do not in themselves generate different kinds of innovation and technical change that compete for sectoral dominance, and so are not especially systemic.

Contrarily, the institutional approach focuses on national, or regional, or transnational innovation systems as more coherent units of analysis because distinctive institutional arrangements are seen as important influences on the kinds of firms that develop, the strategies they pursue, and the capabilities they develop. Different types of business environment, public research systems etc., generate different innovation strategies in systematic ways, in this view, and so constitute more distinctive and cohesive innovation systems than those described by the sectoral approach. Patterns of technological development are here considered to vary more between institutional contexts, and less between sectors, than in the sectoral approach. The question of how national and systemic are NIS depends, then, on whether they are conceived as varying national combinations of standardized sectoral innovation systems and technological imperatives, or as distinctive configurations of interdependent institutions, agencies, policies, business firms, and patterns of innovations that become established and reproduced most coherently at the national level in twentieth-century capitalisms. Clearly, these latter configurations are more systemic than the former ones, but need not necessarily be more nationally specific since that depends on how cohesive and distinctive are the key institutions and forms of economic organization at the national level.

This contrast in conceptions of NIS is reflected in researchers’ intellectual goals and preferred modes of explanation. The sectoral approach attempts to show how the coordination requirements of different industries are more or less fulfilled by the dominant institutions and policies of each nation state to produce nationally distinctive patterns of innovation and technological specialization. More institutionally focused oriented researchers, in contrast, focus on how particular types of institutions and agencies develop interdependently to generate distinctive innovation strategies and outcomes such that contrasting types of innovation and technical change are systematically produced by different societal arrangements.

4. Future Directions

This divergence in intellectual goals and strategies is likely to continue. Policy-oriented researchers, whether at the regional, national, or supranational levels, will focus on how public agencies and policies do, or do not, appear to enhance innovative performance in different contexts. National innovation systems here are summaries of particular structures and policies that seem to be connected to innovative outcomes and are, in theory, amenable to policy interventions. Levels of analysis are determined more by units of political and administrative action than by theoretical frameworks.

Researchers analyzing different forms of economic organization and the institutional structuring of innovations are more interested in contrasting systems of innovation than in describing different national patterns of innovative activity. They will therefore continue to see NIS as particular kinds of interdependences between institutions, firms, and technical change that are more or less approximated by those manifested in specific countries. Comparative analyses of NIS in this approach focus on how distinctive configurations of institutions develop separate patterns of innovation and technical specialization, and so reproduce different varieties of capitalist economies. Future work will concentrate on identifying the processes through which different kinds of institutions and organizations generate contrasting patterns of technical change in different state and regions.

Finally, analysts of sectoral innovation systems and technological regimes remain primarily interested in the logics through which different kinds of industries and technologies develop distinct governance structures and forms of economic organization. NIS are here constituted by the interaction between nationally specific institutions and policies and these logics resulting in nationally varied patterns of innovations. Institutions and policies in this approach are construed as the contextual contingencies that modify and guide the realization of various sectoral logics. Comparative research will therefore continue to focus on how different countries develop contrasting technologies and industrial structures as the result of such intersections.

The concept of NIS will remain, then, rather eclectic and diffuse, reflecting continuing divergences in re-searchers’ priorities and concerns. As long as the nation state remains the primary unit of political competition and controller of key resources, and national institutions and policies remain distinctive, NIS are likely to continue to be analyzed and compared. However, different researchers will also continue to understand the term in different ways and use it for different purposes.


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