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NATIONAL SYSTEM OF INNOVATION

PART 1 TECHNOLOGICAL DEVELOPMENT AND MANAGING INNOVATION INNOVATION

2.3 NATIONAL SYSTEM OF INNOVATION

The most well-known framework showing the networking between institutions or actors involved in the innovation processes in a country is known as the National Innovation System (NIS).2 According to the OECD (1997), “understanding the linkages among actors involved in innovation is key to improving technology performance” (p9). The concept of the NIS was pioneered by Freeman (1987). He defined NIS as “the network of institutions in the public and private sectors whose activities and interactions initiate, import, modify and diffuse new technologies” (p1). Freeman proposed interaction between the government, universities and industry in relation to the establishment of the system. He emphasizes four major elements for effective interaction; the role of policy3

2 Lundvall and Tomlinson (2000) explain on the concept of ‘innovation system’, “the concept of

‘innovation system’ was introduced in a booklet on user-producer interaction in the middle of the 80s (Lundvall 1995:55) to capture the relationships and interactions between R&D-laboratories and technological institutes, on the other hand, and the production system, on the other hand. The first widely diffused publication that used the concept of a ‘national innovation system’ was the analysis of Japan by Christopher Freeman (1987). The concept was definitely established in the innovation literature as a result of the collaboration between Freeman (1988), Nelson (1988) and Lundvall (1988) in the collection work on Technology and Economic Theory (Dosi et al., 1988). The concept has been further developed analytically and empirically in Lundvall (ed.) (1992) and Nelson (ed.) (1993)” (p2). Please see Lundvall and Tomlinson (2000) for further reading on this topic.

, R&D activity, human capital and the structure of firms. Lundvall (1992) and Nelson (1993) later expanded the study of NIS’s. Both authors focus on the factors that influence the processes of innovation. For Lundvall (1992), the system of innovation is

“constituted by elements and relationships which interact in the production, diffusion and use of new, and economically useful, knowledge” (p2). It is a social system with interactive learning as it central activity. Nelson (1993) on the other hand, focuses on the interaction within institutions that enable the innovative performance in a country.

Sharing similar thoughts with Freeman, Nelson also suggests the centrality of human

3 Policy in this sense is not only policy on science and technology, but includes all governmental policies that provide the foundation to the system of innovation.

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capital as an element that ‘glues’ the various parts of the NIS together 4

The key word for NIS is knowledge (Edquist, 2004, Singh, 2004 and Berger & Diez, 2006). It involves the creation, diffusion and absorption of knowledge within the organizations and institutions involved in the economic system of a country.5 Economists have differentiated organizations as: the government, institutions of higher learning, financial institutions, schools, laboratories and firms. The institutions, meanwhile, consist of all systems, routines and rules involved in the innovation process (Edquist & Johnson, 1997).

According to Edquist, (1997), Johnson, Edquist and Lundvall, (2003), Doloreux and Parto (2005), Asgari and Wong, (2007), Nelson, (2008), and Soares, Cassiolato &

Lastres, (2008), the interaction within the innovation system not only consists of organizations, institutions and the market but also involve social (e.g. history, culture, ethnicity6

4 This is also emphasized in OECD (1997) “The movement of people and the knowledge they carry with them (often termed ‘tacit knowledge’) is a key flow in national innovation systems. Personal interactions, whether on a formal or informal basis, are an important channel of knowledge transfer within industry and between the public and private sectors. Sometimes, it is not so much the specific knowledge transferred which is important, but rather the general approach to innovation and competence to solve problems. The ability to locate and identify information and to access networks of researchers and personnel is a valuable knowledge asset. In most studies of technology diffusion, it is shown that the skills and networking capabilities of personnel are the key to implementing and adapting new technology. Investments in advanced technology must be matched by this ‘adoption capability’ which is largely determined by the qualifications, overall tacit knowledge and mobility of labour force” (p18).

and religion) and political factors. For Doloreux and Parto (2005), institutions

5 According to Edquist and Johnson (1997), organizations are the ‘concrete things’ that consist of

‘….formal structures with an explicit purpose and they are consciously created. They are players or actors….’ (p47). Institutions on the other hand ‘….are sets of common habits, routines, established practices, rules, or laws that regulate the relations and interactions between individuals and groups….’

(p46). Organizations and institutions play different roles in the process of innovation. Interaction between organizations is affected by the institutional set-up.

6 Max Weber defines ethnic groups as “those human groups that entertain a subjective belief in their common decent because of similarities of physical type or customs or both, or because memories of colonization and migration; this belief must be important for the propagation of group formation;

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represent ‘social relations’ that can be classified into five types; (i) associative, that refers to socio-political structure, (ii) behavioural, which depend on routines, (iii) cognitive, associated with values and culture, (iv) regulative, that provide stability to social life, and (v) constitutive. They claim that competency is developed if it is “based on localized capabilities such as specialised resources, skills, institutions and share of common social and cultural values” (p134).

Box 2.1:

National Innovation Systems

A national system of innovation has been defined as follows:

“…the network of institutions in the public and private sectors who activities and interactions initiate, import, modify and diffuse new technology.” (Freeman, 1987)

“…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)

“…a set of institutions whose interactions determine the innovative performance…of national firms.” (Nelson, 1993)

“…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)

“…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 artifacts which define new technologies.”

(Metcalfe,1995)

Source: Organization for Economic Co-operation and Development 1997, National Innovation System, http://www.oecd.org/dataoecd/35/56/2101733.pdf, pp10

Soares, Cassiolato and Lastres, (2008) identify two approaches to explaining the concept

conversely, it does not matter whether or not an objective blood relationship exists” (cited in Hechter, 1976, p1163). Culture on the other hand is defined as “a group’s way of life: the values, belief, traditions, symbols, language, and social organization that become meaningful to the members” (Aranda & Knight, 1997, p342). Based on these two definitions, ethnicity and culture are interrelated. This is explained by Betancourt and López (1993), “the concept of ethnicity is also associated with culture and is often used interchangeable with culture as well as with race. Usually, ethnicity is used in reference to groups that are characterized in terms of a common nationality, culture, or language….Although cultural background can be a determinant of ethnic identity or affiliation, being part of an ethnic group can also determine culture ” (p631).

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of innovation system; the narrow approach and the broad approach. The narrow approach concentrates on R&D and interaction within organizations that are directly involved in the innovation process. The broader approach, on the other hand, goes beyond formal R&D activities. It includes informal contexts such as history, culture and politics where the innovation occurs. Mani (2004) explains the two approaches in the table below (see Table 2.1).

Table 2.1

Approaches to the Study of National Innovation System

Approaches Scope

Narrow definition of the NIS e.g. Nelson

Broad definition of the NIS e.g. Lundvall

The main emphasis of this framework is to analyses the impact of national technology policies on firms’ innovative behaviour. Innovative behaviour or activity is measured in terms of formal activities related to R&D system and the science base. The narrow definition of NIS includes organizations and institutions involved in searching and exploring, such as R&D departments, technological institutes and universities.

In this version, the emphasis is on learning, rather than the creation of knowledge itself. The concept of learning implies that the competitiveness of individual firms and entire systems of innovation reflects the ability to learn. The new trends in production and in the labour market, which are increasingly knowledge based, means that knowledge building and learning are becoming more and more crucial for economic growth and competitiveness. It is also argued that learning and especially learning new skills and competencies is essentially a collective and interactive process which cannot flourish in a pure market economy. Hence the emphasis in this approach is more on the efficiency of networks of firms and how they undertake innovative activity that on formal activities related to the R&D system and the science base.

Source: Mani (2004)

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Nelson (2008) discussed the term ‘institutions’ in innovation system in broader terms.

He proposes the concept of ‘social technology’ to explain the social element in

‘institutions’. ‘Social technology’ is defined as a common behaviour, existing in system and progressing over time. Using the analogy of baking, Nelson explains the concept:

Our social technologies concept involved a broadening of the way economists conceptualize an economic ‘activity’. In it standard use in economics, an activity is thought of as a way of producing something, or more generally doing something useful; Sampat and I take a broad view of what the term encompasses.

Undertaking an activity or a set of them – producing a radio, growing rice, performing a surgery, baking a cake, procuring a needed item, starting a new business – involves a set of actions or procedures that need to be done , for example as specified in a recipe for the preparation of a cake. These steps or procedures may require particular inputs (like flour and sugar for the cake cash or a credit card to procure the ingredients for the cake), and perhaps some equipment (something to stir, a stove, a vehicle to go to the store). Economists are prone to use the term “technology” to denote the procedures that need to be done to get the desired result. However, a recipe characterization of what needs to be done represses the fact that many economics activities involve multiple actors, and require some kind of coordinating mechanism to assure that the various aspects of the recipe are performed in the relationships to each other needed to make the recipe work. The standard nation of a recipe is mute about how this is done. Sampat and I proposed that it might be useful to call the recipe aspect of activity its “physical” technology, and the way work is divided and coordinated its “social” technology (p3).

In keeping with this broader focus of Nelson’s work and consistent with Marinova and Philimore’s observations many scholars have started to focus on regional culture as an important factor of interaction in the system of innovation (Asheim & Gertler, 2005, Tödtling & Tripple, 2005, Tripple & Tödtling, 2008). These scholars claim that culture embedded in the society of a nation one of the key explanations for actors’ performance in innovation activity. In fact, commonality in land of origin, traditions, language, and law, influence the process of knowledge generation and exchange in workers. Research done by Dunphy and Herbig (1994) on the Anglo-American countries found that 30

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percent to 50 percent of innovative capacity in society is influenced by national culture (cited in Mohan, Aliza & Kamarulzaman, 2004, p2). Table 2.2 summarised Dunphy and Herbig’s (1994) interrelationship factors of technology and culture.

Table 2.2

The Technology - Culture Interrelationship

Factors important in the Influence by culture adoption of an innovation

a willingness to face uncertainties and take balanced risks

Directly culturally bound

urgency and timeliness Directly culturally bound readiness to accept change Directly culturally bound dynamic long term orientation Directly culturally bound

perseverance Indirectly influenced by culture

entrepreneurship Indirectly influenced

determination Indirectly influenced

organizational skills Indirectly influenced

marketing skills Indirectly influenced

Source: Dunphy and Herbig (1994)

Asheim and Gertler (2005) explain the significance of culture in reference to industrial innovative activity. They argued that “geographical configuration of economic actors - firms, workers, associations, organizations and government agencies – is fundamentally important in shaping the innovative capabilities of firms and industries” (p309). For Tripple and Tödtling, (2008), culture and tradition play a crucial role in the innovative process. Having common understanding, values, traditions and languages makes the

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process of interaction easier. It is the factor that influences the pattern of interaction in system of innovation. In fact, local culture reduces uncertainties in technology.

Above all, NIS helps a country to formulate policies for setting the priorities, develop strategies for scientific research, train human capital skills and strengthen the technical support systems for quality invention. It is a driver towards innovative thinking and sustainable economic growth.

According to Soete, Verspagen and Weel (2010), NIS theory offers a multidisciplinary framework that provides five useful insights. First, sources of innovation are more than just research activity. The success of innovative process is very much dependent on various sources of innovation which includes both R&D and non-R&D (such as marketing, training and financing). Second, institutional and organizational factors are important as these two entities provide the direction in which the actors behave within the system. Third, the importance of interaction between different actors and sectors as efficient interaction and collaboration yield the best practice of technological management. Fourth, the centrality of social capital as a positive network of social relationships has a positive effect on investment in innovation. Fifth that innovation is developed through interactive learning. In this view, innovation is considered as a learning process that demands interaction between institutions and organizations (also individuals) in knowledge and information exchange. Interactive learning is the factor that links the NIS with human capital management.

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Whilst NIS models have been used for more than 20 years they have not avoided some criticism. Contributions to a more critical perspective of NIS theory have been made by Liu and White (2001). They criticise the NIS model as exhibiting a lack of system-level explanatory factors. They stressed that the outcomes from the NIS activities do not demonstrate its concept as a ‘system’ (Liu & White, 2001). Generally, the followers of NIS simply emphasize the roles of specific actors and the impact of specific policies and institutions. They limit their analysis to specific categories rather than taking on a general system level view. Liu and White (2001) also believe that more attention should be given to the system-level characteristics and not only on the elements of the NIS. To them, the limitation of organizational, incentive mechanisms and the actors’ competence involved in the innovation process are more significant and need to be highlighted (Liu

& White, 2001).

Liu and White’s idea is expanded by Edquist (2004). In his work, Edquist (2004) focuses on theoretical aspects of the NIS and for him the approach should not be seen as a formal theory but only an approach or a framework. NIS is not a theory since it lacks specificity and fails to justify its independent and dependent variables (Edquist, 2004).

For Edquist, scholars in the field put no limit to the elements that should be included in the system. Determinant elements of the national innovation system are often unclear and not carefully identified. Edquist also notes that more attention needs to pay to the fact that the structure of an NIS will very much depend on the country’s production structure. There are countries that are rich with natural resources and there are also countries that lack natural resources but are very advanced in their technology.

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Therefore, the elements making up the innovation system might be different for each country (Edquist, 1997). The correct structuring of the elements making up the innovation system is a factor that determines the success of innovation.

Apart from the above criticisms, there are also criticisms made on empirical grounds.

Criticisms of this kind have been was made by Wong (2001) who claimed that the NIS theory is not suitable for new industrialised countries (NICs) because in developing countries, firms are infrequently involved in cutting-edge innovation. Frequently, firms in NIC’s acquire, utilise, adopt and improve technologies that have been produced by advanced countries (Wong, 1995, 2001, Lall, 2000 and Berger & Diez, 2006). For this reason, Wong (2001) has suggested that the list of actors in NIS should be restructured so that the concept is more sensitive to this variable. The three new major actors in NIS according to Wong are firms, public research institutions and manpower development institutions. In his approach, Wong focuses on the institutions that are responsible in developing skilled human capital as the most crucial asset in making the NIS a success.

The reason is, having well-built human capital is the most essential component for NICs in developing its scientific and technological base.

Although NIS theory has been debated extensively, the concept is still being widely used as a framework that describes the institutional and supporting mechanism of innovation processes. In fact, the NIS is a significant concept that has inspired various other models of innovation including the triple helix model and Gibbon’s Mode 2 knowledge (Godin, 2007). One of the reasons for this situation is probably because there is yet an alternative

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explanatory framework that is as able to (aside from some weaknesses) as comprehensively demonstrate successful innovative flow as NIS does.

To summarize, the capability to develop technology depends on the innovation systems which act as the supporting mechanism to stimulate the interaction and networking between different actors in the system. The benefits of these collaborative efforts meanwhile will only be fully generated if all actors, particularly the institutions that support the various aspects of technological development are committed. At the same time, the culture of a society plays a pivotal role in fostering interaction between the actors in the system of innovation. Thus, collaboration between the different sectors, the role of the support institutions and a country’s socio-cultural attributes are critical to its technological growth. Furthermore, in order to be successful in the new economy, where knowledge is at the core of development, country’s need to adopt appropriate approaches to skills development to create and upgrade the value of human capital.

These points will be expanded in the next section of discussion. Part 2 and Part 3 of this chapter elaborates the relationship between human capital and skill development as well as the role of the different skills acquisition modes.