Sectoral Systems and Innovation and Technology Policy

Abstract

This paper uses the concept of sectoral system of innovation which aims toprovide a multidimensional, integrated and dynamic view of innovation in sectors.Sectoral systems have three dimensions that affect the generation and adoptionof new technologies and the organization of innovation and production at thesectoral level: knowledge (and the related boundaries), actors and networks, andinstitutions. The paper discusses the conceptual framework of sectoral systems,presents five main sectoral systems and examines their major trends, challengesand transformation. The paper then examines which are the main policyimplications and indications in a sectoral system perspective.

Full text

Revista Brasileira de Inovação 
Sectoral Systems and Innovation
and Technology Policy
Revista Brasileira de Inovação Volume 2 Número 2 Julho / Dezembro 2003
Franco Malerba
CESPRI — Bocconi University
ABSTRACT
This paper uses the concept of sectoral system of innovation which aims to
provide a multidimensional, integrated and dynamic view of innovation in sectors.
Sectoral systems have three dimensions that affect the generation and adoption
of new technologies and the organization of innovation and production at the
sectoral level: knowledge (and the related boundaries), actors and networks, and
institutions. The paper discusses the conceptual framework of sectoral systems,
presents five main sectoral systems and examines their major trends, challenges
and transformation. The paper then examines which are the main policy
implications and indications in a sectoral system perspective.
KEYWORDS Technological Innovation; Innovation Systems: Sectors; Public Policy
JEL-CODES L0, O14, O3
RESUMO
Este artigo usa o conceito de sistema setorial de inovações que permite a
utilização de uma visão multidimensional integrada e dinâmica da inovação em
seus setores. Sistemas setoriais apresentam três dimensões que afetam tanto a
geração e adoção de novas tecnologias quanto a organização da inovação e produ-
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1. Introduction
For an understanding of innovation and economic growth, sectors provide
a very important level of analysis for economists, business scholars, technologists
and economic historians. Until recently, sectors have often been examined
according to the standard industrial economics literature (the structure-conduct-
performance tradition, the transaction costs approach, sunk cost models, game
theoretic models of strategic interaction and cooperation, and econometric
industry studies) in which sectoral boundaries have been considered static and
well delimited and differences in the equilibrium structure of sectors have been
considered as determined by the underlying patterns of technology and demand,
in addition to the type of sunk costs (Bain, 1956; Scherer, 1990; Tirole, 1988;
Sutton, 1991, 1998). In most of these studies, however, not much emphasis
has been paid to the role of non-firms organizations, to knowledge and learning
processes by firms, to the wide range of relations among the agents, to the
transformation of sectors in their boundaries, actors, products and structure. A
second tradition dealing with sectors is much richer empirically but much more
heterogeneous, eclectic and dispersed. Here one finds very rich empirical evidence
on the features and working of sectors, on their technologies, production
features, innovation, demand and on the type and degree of change. But most
of the sector case studies focus on a single dimension (such as innovation, firms’
Franco Malerba
ção nos seguintes níveis setoriais: conhecimento, atores e redes e instituições. O
artigo discute o escopo conceitual dos sistemas setoriais, apresenta cinco análises
de setores principais e examina suas tendências principais, seus desafios e suas
transformações. O artigo também oferece uma análise sobre implicações políti-
cas públicas e sugestões do ponto de vista do sistema setorial de inovações.
PALAVRAS-CHAVE Inovação Tecnológica Setorial; Sistemas de Inovações: Setores;
Políticas Públicas
CÓDIGOS JEL L0, O14, O3
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Sectoral Systems and Innovation and Technology Policy
competences, structure of production and so on), ask different research
questions, are done with different methodologies and have a different level of
aggregation in terms of unit of analysis. As a consequence, the possibility of
having integrated and consistent analyses of sectors in their interrelated
dimensions and understanding fully their working and transformation is still
very limited.
This paper uses the concept of sectoral system of innovation and production
which aims to provide a multidimensional, integrated and dynamic view of
sectors. Sectoral systems have a knowledge base, technologies, inputs and a
(potential or existing) demand. The agents are individuals and organizations at
various levels of aggregation, with specific learning processes, competences,
organizational structure, beliefs, objectives and behaviors. They interact through
processes of communication, exchange, cooperation, competition and
command, and their interactions are shaped by institutions. A sectoral system
undergoes processes of change and transformation through the coevolution of
its various elements. The main advantages of a sectoral system view are a better
understanding of the sectoral structure, boundaries and transformation and the
agents and their interactions.
Sectoral systems have three broad dimensions that affect the generation
and adoption of new technologies and the organization of innovation and
production at the sectoral level:
a) knowledge (and the related boundaries)
b) actors and networks
c) institutions.
They will be discussed in the following pages.
This paper draws from the main results of the ESSY project1. ESSY has
analysed six major sectoral systems in Europe.
1 Sectoral Systems in Europe  Innovation, Competitiveness and Growth (ESSY) [Project financed within the TSER
Programme  Contract n. SOE1-CT 98-1116].
I wish to thank the main participants to ESSY: R. OBrien, W.E. Steinmueller, C. Edquist, S. Metcalfe, B. Coriat, D. Soskice,
G. Dosi , B. Dalum, F. Pammolli, M. Mckelvey, L. Orsenigo, W. Garcia, F. Montobbio, F. Lissoni,, N. Corrocher, P.
Geoffron, D. Rivaud-Danset, O. Weistein, B. Tether, A. James, M. Harvey, L.D. Adderio, L. Hommen, H. Kettler, J.
Wengel, F. Cesaroni, G. Bottazzi, M. Riccaboni.
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The paper is organized as follows. In the first part (Section 2) the conceptual
framework is briefly presented and the rationale and the basic elements of a sectoral
system of innovation and production are examined. Then in Section 3 the main
sectoral systems examined are presented and in Section 4 the major trends and
challenges in the transformation of European sectoral systems are presented. Section
5 briefly examines which sectoral systems variables affect international performance.
Section 6 concludes with some policy implications in a sectoral system perspective.
2. The building blocks and dimensions of a sectoral system
of innovation
The concept of sectoral systems may prove a useful tool in various
respects:
for a descriptive analysis of the differences and similarities in the
structure, organization and boundaries of sectors;
for a full understanding of the differences and similarities in the working,
dynamics and transformation of sectors;
for the identification of the factors affecting innovation, commercial
performance and international competitiveness of firms and countries
in the different sectors;
and for the development of new public policy indications.
In the following pages we will examine the building blocks of a sectoral
system of innovation (for a more in depth analysis see Malerba, 2002).
2.1. Knowledge, actors and networks, institutions:
the building blocks
In a sectoral system perspective, a sector is composed of three main
building blocks:
a) knowledge and technological domain
b) actors and networks
c) institutions.
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a) Knowledge and technological domain. Any sector could be characterized
by a specific knowledge base, technologies and inputs. In a dynamic way, the
focus on knowledge and the technological domain places at the centre of analysis
also the issue of sectoral boundaries, which usually are not fixed, but change
over time. Knowledge and basic technologies constitute major constraints on
the full range of diversity in the behaviour and organization of firms active in a
sectoral system. Also links and complementarities among artefacts and activities
play a major role in defining the real boundaries of a sectoral system. These
links and complementarities are first of all of the static type (as input-output
links are). Then there are dynamic complementarities which take into account
interdependencies and feed-backs, both at the demand and at the production
levels. Dynamic complementarities among artefacts and activities are a major
source of transformation and growth of sectoral systems, and may set in motion
virtuous cycles of innovation and change.
b) Actors and networks. A sector is composed of heterogeneous agents
that are organizations and individuals (e.g. consumers, entrepreneurs, scientists).
Organizations may be firms (e.g. users, producers and input suppliers) and
non-firm organizations (e.g. universities, financial institutions, government
agencies, trade-unions, or technical associations), including sub-units of larger
organizations (e.g. R&D or production departments) and groups of organizations
(e.g. industry associations). Agents are characterised by specific learning proces-
ses, competencies, beliefs, objectives, organizational structures and behaviours.
They interact through processes of communication, exchange, cooperation,
competition and command. Within sectoral systems, heterogeneous agents are
connected in various ways through market and non-market relationships.
Thus in a sectoral system perspective, innovation and production are
considered processes which involve systematic interactions among a wide variety
of actors for the generation and exchange of knowledge relevant to innovation
and its commercialisation. Interactions include market and non-market relations
that are broader than the market for technological licensing and knowledge,
inter-firm alliances, and formal networks of firms. Often their outcome is not
adequately captured by our existing systems of measuring economic output.
The focus on users and on their cognitive frameworks puts a different
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emphasis on the role of demand. Demand is composed of individual consumers
and firms characterized by knowledge, learning processes and competencies,
and is affected by social factors and institutions. Thus in a sectoral system
demand is not seen as an aggregate set of similar buyers, but as composed of
heterogeneous agents who interact in various ways with producers. The
emergence and transformation of demand play a major role in the dynamics
and evolution of sectoral systems.
The types and structures of relationships and networks differ from
sectoral system to sectoral system, as a consequence of the features of the
knowledge base, the relevant learning processes, the basic technologies, the
characteristics of demand, the key links and the dynamic complementarities.
c) Institutions. Agents’ interactions are shaped by institutions, which
include norms, routines, common habits, established practices, rules, laws,
standards and so on, that shape agents cognition and action. They may range
from the ones that bind or impose enforcements on agents to the ones that
are created by the interaction among agents (such as contracts); from more
binding to less binding; from formal to informal (such as patent laws or
specific regulations vs. traditions and conventions). A lot of institutions are
national (such as the patent system), while others are specific to sectoral systems,
such as sectoral labour markets or sector specific financial institutions.
The relationship between national institutions and sectoral systems is
quite important in most sectors. National institutions have different effects
on specific sectoral systems. For example, the patent system, property rights
or antitrust regulations have different effects as a consequence of the different
features of the systems, as surveys and empirical analyses have shown (see for
example Levin et al.,1987). However the same institution may take different
features in different countries, and thus may affect the same sectoral system
differently in different countries. Often the characteristics of national
institutions favour specific sectors that fit better the specificities of the national
institutions. In certain cases some sectoral systems become predominant in a
country because the existing institutions of that country provide an
environment more suitable for certain types of sectors and not for others. In
other cases national institutions may constraint the development or innovation
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in specific sectors or mismatches between national and sectoral institutions
and agents may take place. The relationship between national institutions
and sectoral systems is not always one-way, as it is in the case of the effects of
national institutions on sectoral variables. Sometimes the direction is opposite,
and goes from the sectoral to the national level. In fact it may occur that the
institutions of a sector, which is extremely important for a country in terms
of employment, competitiveness or strategic relevance, end up emerging as
national, thus becoming relevant also for other sectors. But in the process of
becoming national, they may change some of their original distinctive features.
2.2. The dynamics and transformation of sectoral systems
As mentioned in Section 1, during the evolution of sectoral systems
change may occur in the technological and learning regimes and in the patterns
of innovations. Over time, the knowledge base of innovative activities may
change in different ways, for example, evolving towards a dominant design
or having a drastic change. In the first case a growth of concentration and the
rise of large dominant firms may take place (Utterback,1994). In the second
case, new types of competencies may be required for innovation, with major
industrial turbulence, entry of new firms and turnover in industrial leadership
(Jovanovich & McDonald, 1994; Tushman, 1986; Henderson & Clark,
1990). Finally, changes in demand, users and applications represent another
major modification in the context in which firms operate and may favour
the entry of new firms rather than the success of established ones (Christensen
& Rosenbloom,1995). Change over time results in a coevolutionary process
of its various elements, involving knowledge, technology, actors and
institutions.
2.3. The local, national and global dimensions
National boundaries are not always the most appropriate ones for an
examination of the structure, agents and dynamics of sectoral systems. Often
a sectoral system is highly localized and frequently defines the specialization
of the whole local area (as in the case of machinery, some traditional industries,
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and even information technology). In other cases (or at the same time for
specific dimensions of a sectoral system, such as for inputs or demand) the
relevant geographical boundaries are global.
2.4. Theoretical bases
The notion of sectoral system of innovation and production complements
other concepts within the innovation system literature (Edquist, 1997) such
as national systems of innovation delimited by national boundaries and focussed
on the role of non-firms organizations and institutions (Freeman, 1987; Nel-
son, 1993; Lundvall, 1993), regional/local innovation systems in which the
boundary is the region (Cooke et al., 1997) and technological systems and the
distributed innovation system, in which the focus is mainly on networks of
agents for the generation, diffusion and utilization of technologies and for
innovation (Carlsson & Stankiewitz, 1995; Hughes, 1984; Callon, 1992;
Andersen et al., 2001). In a sectoral system perspective, it is recognised that
national and regional/local boundaries matter to varying degrees depending
upon the specific sector under consideration. Similarly, the sectoral system of
innovation approach encompasses and includes the technological system
approach, by placing it within the sectoral context and its economic activities
processes. And any analysis that takes a particular configuration of technological
systems as a “given” risks overshadowing fundamental processes that serve to
define these technological systems.
The theoretical and analytical approach from which this paper draws
comes from evolutionary theory. Evolutionary theory provides a broad
theoretical framework to the concept of sectoral system of innovation and
production. Evolutionary theory places a key emphasis on dynamics, process
and transformation. Learning and knowledge are key elements in the change
of the economic system. “Boundedly rational” agents act, learn and search in
uncertain and changing environments. Relatedly, competences correspond to
specific ways of packaging knowledge about different things and have an
intrinsic organizational content. Different agents know how to do different
things in different ways. Thus learning, knowledge and behaviour entails
agents’ heterogeneity in experience, competences, and organization and their
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persistent differential performance. In addition evolutionary theory places
emphasis on cognitive aspects such as beliefs, objectives and expectations, in
turn affected by previous learning and experience and by the environment in
which agents act (Nelson, 1995; Dosi, 1997; Metcalfe, 1998). A central place
in an evolutionary approach is occupied by three economic key processes
driving economic change: processes of variety creation in technologies,
products, firms and organizations; processes of replication, that generate inertia
and continuity in the system and processes of selection, that reduce variety in
the economic system and discourage the inefficient or ineffective utilization
of resources. (Nelson, 1995; Metcalfe, 1998). Finally, for evolutionary theory
aggregate phenomena are emergent properties of far-from equilibrium
interaction and have a metastable nature (Lane, 1993). For evolutionary theory
the environment and conditions in which agents operate may drastically differ.
Evolutionary theory stresses major differences in opportunities conditions
related to science and technologies. The same holds for the knowledge base
underpinning innovative activities, as well as for the institutional context.
Thus the learning, behaviour and capabilities of agents is constrained and
“bounded” by the technology, knowledge base and institutional context in
which firms act. Heterogeneous firms facing similar technologies, searching
around similar knowledge bases, undertaking similar production activities
and “embedded” in the same institutional setting, share some common
behavioural and organizational traits and develop a similar range of learning
patterns, behaviour and organizational forms (Nelson & Winter, 1982;
Malerba & Orsenigo, 1996).
One last remark regards boundaries and disaggregation. This issue may
refer to sectors and subsectors, agents or functions. The appropriate level of
analysis in terms of sector, agents or functions depends on the specific research
goal. For example, sectoral systems may be examined in a narrow sense in
terms of a small set of product families or in a broad way. In addition to
firms and non-firms organizations, also agents at lower and higher levels of
aggregation may be the key actors in a sectoral system. Similarly, for analytical
purposes one could examine separately a sectoral innovation system, a sectoral
production system and a sectoral distribution-market system, which in turn
could be related more or less closely.
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3. An initial typology of sectoral systems in Europe
How could we characterize the sectoral systems examined in ESSY?
Biotechnology and pharmaceuticals are characterized by major roles of
science, networks, division of innovative labour and universities, venture capital
and national health systems. Several actors are the protagonists of innovation:
large firms, new biotech firms (NBF) and small firms. In this sector regulation,
IPR (Intelectual Property Rights), national health systems, and demand play a
major role in the innovation process. Now, a wide variety of science and
engineering fields are playing important roles in renewing the search space for this
sector. New biotech firms have entered into the sector, competing as well as
cooperating (or being bought up) with, the established large pharmaceutical firms.
More recent changes in regulation and demand are squeezing the profitability of
firms and opening up new opportunities in generic drugs.
Telecom equipment and services are characterised by the convergence of
different technologies, demand and industries; by a key role of knowledge
integration and combination; and by major production specialization. The wide
variety of different specialised and integrated actors involved in innovation, ranging
from the large telecom equipment producers to the new telecom service firms is
due to the process of convergence of previously separated sectors such as telecom,
computers, media, and so on, and by the processes of privatisation and
liberalisation. In this broad sector innovation is very much affected by the
institutional setting and by standards.
Chemicals on the contrary are characterized by the continuity of large
multinational firms through R&D, scale and scope and the emergence of vertical
division of labour. Internal R&D has been complemented by external links and
the absorption of external sources of scientific and technological knowledge. The
major innovators have shown great continuity in their innovativeness due to
economies of scale and scope, cumulativeness and path dependence, as well as
research and commercialisation capabilities.
Software has a highly differentiated knowledge base, several different
subsectors, firms innovative specialization, user-producer interaction, global as
well as local innovation and production systems, advanced human capital mobility.
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In software the context of application is relevant for innovation. The role of large
computer suppliers in developing integrated hardware and software systems has
been displaced since the early 1980s, with the spread of networked computing,
the Internet, the development of open system architectures and the growth of
web-based network computing. A lot of specialized software companies innovate
either in package software, or in customized software. Here the role of the university
is important in the open source domain. IPR play a major role in innovation and
competition. Standard setting alliances support common standards in order to
facilitate the diffusion and adoption of large integrated systems.
Finally, machine tools have an application-specific knowledge base; firms
specialization and user-producer interaction, the extensive presence of local
innovation and production systems and a key role played by in-house experienced
human capital, on the shop floor level and with applied technical qualification.
Products are increasingly being modularized and standardized. Suppliers of
components are involved in innovation. Regional clusters are very important.
Thus localized user-producer interaction, learning spillovers across producers,
national differences in the structure of demand lead to international differences
in the rate and direction of the new technology.
4. Challenges for sectoral systems of innovation
Sectoral systems face new challenges in terms of knowledge and learning
processes, actors and networks and institutions.
4.1. Knowledge at the base of innovative activities is changing
continuously; this change is affecting the boundaries of sectoral
systems
In terms of knowledge base and learning processes, some common trends
may be identified.
First of all, the features and sources of knowledge continue to be different
from sector to sector, and show major changes.
Second, knowledge is relevant for an explanation of the rate and direction
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of technological change, the organization of innovative and production
activities and the factors at the base of successful performance.
Third, both science and development activities are gaining importance
in all sectors.
Fourth, the boundaries of several sectoral systems are changing over time,
as a consequence of several dynamic processes related to the transformation
of knowledge as well as to the convergence in demand and the changes in
the type of competition.
In the pharmaceutical sectoral system the advent of molecular biology
since the 1980s has led to a new learning regime based on molecular genetics
and rDNA technology, with two search regimes: one regarding cospecialised
technologies, the other generic technologies. Nowadays no individual firm can
gain control on more than a subset of the search space. Innovation increasingly
depends on strong scientific capabilities and on the ability to interact with
science and scientific institutions in order to explore the search space (McKelvey
& Orsenigo, 2001; Henderson et al.,1999).
In the telecommunications equipment and services sectoral system the
knowledge base is rapidly changing and expanding, with increasing functional
differentiation, due to the convergence of information and communication
technologies, traditional telecommunication and Internet, fixed Internet and
mobile communication, different types of receiving devices such as third generation
cellular phones for Internet, desktop computers for telephone calls, palm tops
for Internet, etc. (Edquist, 1997). Moreover subsectors such as fixed
communications (Dalum & Villumsen, 2001), satellite communications (Dalum,
2001), mobile phones (Hommen & Manninen, 2001) and Internet services
(Corrocher, 2001) present different features. With the Internet and its open
network architecture, modular components and distributed intelligence, both
the knowledge base and the types of actors and competences have changed
significantly (Corrocher, 2001).
In the chemical sectoral system advances in chemical disciplines such as
polymer chemistry and chemical engineering have created the base for greater
codificability of knowledge. In the same time firms’ behaviour has enhanced the
transferability of chemical technologies. Separability and transferability made
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possible the transaction of technology in the chemical industry and the emergence
of new markets for engineering and process design services for chemical plants.
This type of knowledge base has implied that internal R&D is increasingly
complemented by external links and knowledge. Nowadays in chemicals
innovation requires the interaction between R&D capabilities and external sources
of scientific and technological knowledge (Cesaroni et al., 2001; Arora et al.,
1998; Freeman, 1982).
The software sectoral system has a quite differentiated knowledge base,
with extended complementarities. Here the knowledge refers both to the controls
of operations of the computer system providing the platform for the different
functionalities and the software employing these functionalities. However the
boundaries between operating systems and application software are becoming
blurred, because of the dynamics of the inward and the outward integration of
software functions, upward from system level software to the user interface and
inward from software designers closer to the definition of system resources
(Steinmueller, 2001). The strength of the forces favouring the creation of generic
platforms (and therefore internationally dominant platform suppliers) is
moderated by the continuing need for variety generation in the organizations
producing the sub-systems that allow these platforms to be customised, the
potential for new methods for “platform” creation (based upon the use of the
Internet as a tool for collaborative innovation and the distribution of software
products), the identification of emerging areas where dominance in “platform”
creation remains contestable (such as embedded software), and the identification
of areas of the software industry that do not follow the “platform” model and
remain in a pre-dominant design state of variety generation such as multimedia
software. Much of the innovative challenge of the software industry therefore
involves design innovation, not only of the basic operations of the information
processing “machine” defined by software, but of the very conceptualization of
the information that needs to be processed. Nowadays the three broad subsectors
in which software could be examined require different types of knowledge and
learning processes. Global package software products are characterised by search
for generic solutions, experience as a major input for innovation and a key role of
process innovation. Situated and embedded software on the contrary have
knowledge related to specific contexts and specialised purposes. Middleware
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software and integrated software solutions — such as product data managers
(PDM) and enterprise resource planning (ERP) — aim to reach many users but
focus on situated specific applications. (Steinmueller, 2001; D’Adderio, 2001;
Mowery, 1996; Torrisi, 1998.)
In machine tools innovation is increasingly systemic. Knowledge about
applications is very important, and therefore user-producer relationships as well
as partnerships with customers are common. The knowledge base has been
embodied in skilled personnel on the shop floor level with applied technical
qualification and in design engineers not necessarily with a university degree but
with long-term employment perspectives in the company. Internal training
(particularly apprenticeships) is quite relevant. However, knowledge building and
maintaining in this way is challenged by economic/financial pressure from one
side and by labour market restrictions (currently represented by a strong competition
on experts) from the other. In small firms R&D is not done extensively and
R&D cooperation is not common. Recently, the knowledge base has shifted
from purely mechanical to mechanical as well as microelectronic based and
information intensive, with an increasing codification and an increasing use of
formal R&D. Products have increasingly been modularized and standardized. A
key role is also played by information flows about components among producers
of different technologies, such as lasers, materials or measurement and control
devices. (Wengel & Shapira, 2001; Mazzoleni, in Mowery & Nelson,1999).
4.2. Changes in the knowledge base change the types of relevant
actors and the structure of networks in a sectoral system
The changes in knowledge and learning processes discussed above imply
major changes in the organization and characteristics of R&D. In most
sectors R&D is increasingly decentralised, externalised and internationalised
(Coriat & Weinstein, 2001). This is in relationship with an increasing
focus on market oriented R&D, the growth of external sources in
knowledge and the need to obtain access to knowledge about markets or
key technological or scientific resources. (Coriat & Weinstein, 2001). The
organization and the features of R&D have greatly differed across groups
of sectors. While in chemicals and pharmaceuticals large scale internal R&D
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plays a major role with key links with universities, the emergence of
biotechnology leads to an increasingly role of science and to networks of
R&D projects between large pharmaceutical firms, new biotechnology firms
and universities. In other sectors such as telecommunications and software
R&D requires the integration of different competencies and sources, while
in machine tools little formal R&D is done in most small and medium
size machinery producers and with most of the action taking place on the
shop floor and through embodied in experienced human capital (Coriat
& Weinstein, 2001).
A rich, multidisciplinary and multisource knowledge base and a rapid
technological change implies a great heterogeneity of actors in most sectors.
Demand as composed by users and by consumers is a major factor in the
redefinition of the boundaries of a sectoral system, stimulus for innovation,
factor shaping the organization of innovative and production activity. In
addition, the emergence of new demand or the transformation of existing
demand is the major element of change in sectoral systems over time.
Suppliers and users affect the boundaries of sectoral systems, by making
both supply and demand an integrated part of a sectoral system and by
greatly affecting sectoral linkages and interdependencies.
In all sectors universities play a key role in basic research and human capital
formation and in some sectors (such as biotechnology and software) also
they are a source of start ups and even innovation.
In software or biotechnology-pharmaceuticals new actors such as venture
capital have emerged over time.
In pharmaceuticals and biotechnology the change in the knowledge base
has led to a different organization of innovative activities within and across firms
and a division of labour between NBF (lacking experience in clinical testing) and
established companies. Networks of collaborative relations facilitated by the science
base and by the abstract and codified nature of knowledge generated by the NBF,
have emerged in the sector. Also mergers and acquisitions allowed established
firms to obtain complementary knowledge for the development of innovative
products. As of now, the pharmaceutical-biotechnology sectoral system has a
structure of innovative actors which includes large firms, NBFs, small firms, and
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single individuals (such as scientists or NBF entrepreneurs), complemented by
a very rich set of non-firm organizations and institutions, ranging from
universities to the public and private research systems, the financial system and
venture capital, the legal system and IPR. Demand channelled through agenci-
es, physicians and the health system, and institutions such as regulation play a
significant role in the diffusion of new drugs. Nowadays no individual firm
can hope to gain control of more than a subset of the search space. Even the
innovativeness and competitiveness of the largest pharmaceutical firms depends
on strong scientific capabilities and on the ability to produce and interact on
one side with science and scientific institutions (in order to explore such a
complex space) and on the other with specialized innovative firms (in order to
develop new products) (McKelvey & Orsenigo, 2001).
In telecom equipment and services, convergence and expansion of the
knowledge base allow for the presence of a wide variety of actors, coming from
previously separated industries, each one emphasising different sets of
competencies. For example, in telecommunication equipment and networks
firms may range from incumbent telecom equipment suppliers and incumbent
network operators, to new entrants telecom operators, cable TV operators and
alternative network providers (Dalum & Villumsen, 2001). In Internet services,
firms may range from Internet service providers, to Internet content providers,
e-commerce companies and software and Internet specialised consulting
companies. Specialised competencies and specific knowledge have increasingly
become a key asset for firms survival and growth, but even more important in
the new telecom environment is the combination of existing and new
competencies — software programming, network management, content
provision — which traditionally belonged to different companies (Corrocher,
2001). Also in this sector networks among a variety of actors, not only firms,
but also standard setting organizations and research organizations, are relevant.
Demand plays a key role not just in terms of user-producer interaction, but
also in terms of emerging characteristics. This is particularly true in the Internet
services sector, where the changing requirements of the final users — from
standardised services like Internet access and e-mails, to more complex
applications such as Intranets, Extranets and platforms for electronic commerce
— have stimulated firms to upgrade the quality of services.
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In chemicals, the increasing reliance on external links for complementary
scientific and technological knowledge has led to the emergence of networks of
three types: interfirms, university-industry and user-producers in specialty segments.
The relevant networks have changed in relation with the type of knowledge base.
For example, in polymer chemistry and with the diffusion of chemical engineering,
networks between producers and users, industry-university networks, and verti-
cal networks between chemical companies and engineering contractors are
common, with the use of mergers and acquisitions to related and unrelated sectors
in order to acquire capabilities (Cesaroni et al., 2001).
In software the changing knowledge base and the blurring boundaries
between operation system and application software has created an evolving division
of labour among users, “platform” developers and specialized software vendors,
and a further tension between horizontal integration and specialization. The
historical role of computer producers has largely been displaced by a division of
labour between software and hardware “platform” producers, each of which is
governed by the needs of the other as well as the challenge of preserving market
position. This can be characterised in the case of the personal computer by the
existence of a large installed base with specialized applications and operating system
software with high switching costs (Bresnahan & Greenstein,1996). The sectoral
system of innovation in software, however, is incomplete without the addition
of companies that utilise these platforms to deliver enterprise-critical applications.
Many of these applications continue to be self-produced by organizations using
the tools provided as part of the platform or available from the development
tools markets. It is also true, however, that the generic platforms are creating a
market for specialised software producers whose outputs are aimed at the
customisation of the needs of a particular class of users. In some software subsectors,
such as embedded software, this division of labour is particularly high but appears
to be threatened by the needs for more consistent and reliable approaches that can
only be achieved by concentrating development resources in the production of
software platforms (Steinmueller, 2001). By contrast, in the enterprise resource
planning and open source software sub-sectors, variety generation is being
accompanied by a growing diversification of the actors and ever more complex
network relationships among them, a development that also suggests a specific
need for the development of new university and public research organization
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involvement in supporting the knowledge infrastructure for such
developments. (D’Adderio, 2001). In entreprise software a transformation
in demand by large industrial users is emerging. However, as the competencies
required by enterprise systems are so extended that no one supplier can master
the entire range required to satisfy demand in all industry and non-industry
sectors, scope is created for the growth of specialised niche software producers
and systems integrator firms to prosper (D’Adderio, 2001).
In machine tools firms are highly specialized and focussed on specific
vertical segments. Networks here differ from country to country, because the
types of products and the different users and demand structures have led to
different sectoral systems, each of which has been innovative in its own way.
In any case, local financial organizations and vertical links with users play a
major role. While “old” actors (industrial and professionals’ associations,
specialized university and research institutes, prime user firms, producers,
traditional suppliers, etc.) still dominate, “new” actors occur on the horizon
(such as “communities” related to specific technological shifts fuel cells, nano
technologies). Market mechanisms increasingly show up in yet “non-market”
relationships, such as the co-operation in industrial/professional associations,
or special customer-supplier interactions in the machine tool sector. And
industry public-private consortia increasingly complement the latter. (Wengel
& Shapira, 2001)
4.3. The role of national as well as sector-specific institutions is
relevant for innovation
Institutions play a major role in affecting the rate of technological change,
the organization of innovative activity and the performance of sectoral
systems in all ESSY sectors.
But each sector has a different set of relevant institutions, often the outcome
of the interplay between sectoral and national variables (Casper & Soskice,
2001; Coriat & Weinstein, 2001).
Some of these institutions are national, but with different effects on
innovation and performance according to the sector or the country.
Other institutions are sector specific.
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In pharmaceuticals health systems and regulations play a major role in
affecting the direction of technical change, in some cases even blocking or retarding
innovation (Lacetera & Orsenigo, 2001). In addition, the form of corporate
governance is closely related to the country of origin: the outsider system in UK
and insider system in Germany, with France in between (Geoffron & Rubinstein,
2001). Finally patents have played a major role in the appropriability of the
returns from innovations.
In chemicals patent policies still play a critical role, particularly for small
firms. Indeed, proper forms of intellectual property rights and strong enough
patent protection support the activity of smaller technology-based firms and create
the bases for a division of labour between technology suppliers and users (and
allowing for the development of markets for technology). This pattern is
particularly evident in the US, where patent protection has been properly defined
earlier on.
In software IPR play a major role in strengthening appropriability, and
have been greatly affected by the emerging open source movement. In addition,
standards play a major role (Steinmueller, 2001). Standard development
organizations, country and industry consortia, (such as PDES and ProSTEP), and
standards-setting alliances, (such as the Object Management Group) are very
important. Networks of users also play an increasingly important function, as
the involvement of the Manufacturing Domain Task Force in the development
of standards for PDM software illustrates. Users also often gather around user
mailing lists (i.e., the IPDMUG for PDM software): these are used as vehicles to
test and compare the performance and capabilities of competing software products
(D’Adderio, 2001).
In machine tools, internal and regional labor markets and local institutions
(eg. local banks) play a major role in influencing innovation and international
advantages of specific areas. There are differences in this institutional base. For
example, in the UK and the US, formal and informal institutional support for
machine tool companies has typically been “thinner“ than in Japanese, German,
and Italian regions. Trust-based, close relationships on the regional level have
obviously over a long time ensured a sufficient financing of the innovation and
expansion plans of the mostly family businesses in Germany and Italy. In Germany
vocational training has greatly fostered the development of skills in the machine
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tools industry. The “Maschinenbau-Ingenieur“ (mechanical engineer) in the
German higher education system went along with the predominance of mechanical
innovation. Rather stable employment conditions and company employment
strategies (internal labor markets) formed the background for cumulative
knowledge building and incremental innovation (Soskice, 1997). Standards are a
key institution in the machine tool sector, with a long tradition with respect to
health and safety but also with respect to economies of scale, building a basis for
the share of development tasks between the machine tool makers and the suppliers
of components and periphery equipment. The EU machine directive was funda-
mental for the realisation of the Common Market, particularly in the machine
tool industry. The “self certification” or relatively open definition in the directive
turned out in favor of the already internationally more competitive companies
rather than to open up competition. (Wengel & Shapira, 2001).
Finally, in telecommunications the role of regulation, liberalization/
privatisation and standards have played a key role in the organization and
performance of the sector. As discussed in Dalum and Villumsen (2001)
liberalization and privatization has had major effects on the behaviour and
performance of incumbents and has transformed the structure of the industry.
An example of the role of institutions is given by GSM, a standard which has
played a major role in innovation and in the success of GSM in Europe. In
particular, concerted standard settings, European and open standards have proven
a major driving force.
4.4. The coexistence of global, national and local boundaries
is present in most sectoral systems
In sectoral systems the national, the local and the global dimensions
coexist. In the pharmacetuical and biotechnology sectoral system European
countries exhibit differences in terms of national institutions, demand, networks
of knowledge acquisitions, etc., and such national differences have appeared to
historically affect the national firms (McKelvey & Orsenigo, 2001). Over time,
the markets for knowledge as well as the markets for products are becoming
increasingly international, as are regulations and scientific and technological
knowledge flows. Nevertheless, national institutional arrangements appear to
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influence not only the number and types of biotechnology firms started but
also their specialization into different areas, as evidenced by differences between
Germany and the UK (Casper & Soskice, 2001).
The chemical sectoral system has always been global, and for many years
the industry has shown considerable flows on international investments, and
systematic flows of engineering and process licenses. While up to the 1980s
foreign investments were to a large extent confined to first world countries, in
the recent decades there has been an increase in the flows towards the developing
countries as well. Analyses of investment flows (Arora et al., 1998) show that
the European chemical industry has moved abroad its investments. The same
can be said of the American and Japanese chemical industry. This means that
there has been an increasing globalisation process for this industry, that can be
translated into a significant increase in the number of chemical plants built in
Asia. In general, it can be said that there is a trend toward the location of plants
near the customers and the fast-growing regions, where the demand and
consumption may be stronger. This trend might be related to an increase in
product differentiation and customization of plants, together with an increased
concern on reducing transport costs.
In software the global (for global software products) and the local
dimension (for situated application software) coexist. In middleware software
such as enterprise software global players, while centralising R&D activities, are
forced to address the needs of customers at the local level, by locating near key
customers in order to acquire industry — sector — and firm-specific (user)
knowledge (D’Adderio, 2001). An increasing trend sees the configuration of
individual new software modules according to geographical determinants such
as the features of a leading market (i.e., the creation of SAP’s* “campus
management” module for universities according to the features of the dominant
US market). Such a (local) module is then used as a (global) standard and
implemented across all other universities worldwide which are adopting SAP.
This suggests a cycle of adaptation and a continuing tension between the local
and global levels and vice-versa, corresponding to the tension between greater
generality and greater customisation of the software product (D’Adderio, 2001).
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Machine tools are often local in the organization of supply although
they are global in terms of demand and outputs. Data from the Fraunhofer ISI
manufacturing innovation survey 1999 in Germany on mechanical engineering
underpins that while the input comes to almost one third from suppliers within
50 kilometers, only little more than 10 percent of the output is delivered to
customers within the region. Similar figures will be observed when the border
is set at the national level. The same variety holds for knowledge flows, which
could range from the very local to the very global (see Breschi & Lissoni, 2001).
The recruitment of skilled shop-floor personnel is usually a local activity. Many
institutions relevant to the sector are national (such as the educational system),
while others mainly European (though with strong national forces such as
standards) (Wengel & Shapira, 2001).
4.5. Coevolutionary processes are taking place in all sectoral
systems
Changes in the knowledge base or in demand affect the characteristics of
the actors, the organization of R&D and the innovative process, the type of
networks, the structure of the market and the relevant institutions. All these
variables in turn lead to further modifications in the technology and the
knowledge base and demand, and so on.
In pharmaceuticals, the interaction between knowledge, technology,
firms, institutions shapes the evolution of the system of innovation. On the
one hand, the changes in the knowledge base and in the relevant learning pro-
cesses of firms induce deep transformations in the behaviour and structure of
the agents and in their relationships among each other. On the other hand, the
specific ways these transformations have occurred across countries are profoundly
different, due to details of the institutional structure of each country (McKelvey
& Orsenigo, 2001). As an example, product approval regulations inserted an
incentive towards more innovative strategies, at least for those firms and countries
which had the capabilities to invest in the new technologies. Similarly, weak
patent protection induced imitative strategies, but this effect was much less
important for firms and countries which had developed strong technological
and scientific capabilities (as for example Germany until the advent of the
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molecular biology revolution). Conversely, the introduction of stronger patent
protection might have contributed to the virtual disappearance of the Italian
industry, which was until the mid-seventies one of the most successful producer
of generics. As a final example consider how the molecular biology revolution,
by creating new competencies and a new technological regime, induced deep
changes in the incentive structures within firms, universities, etc. (McKelvey &
Orsenigo, 2001).
In chemicals, processes of coevolution of technology, demand, markets,
agents and institutions have also been present. One interesting example of
coevolutionary process in chemicals is related to the environmental issue. Greater
attention paid by consumers to pollution and environmental problems result
in three different, but related consequences. First, all developed countries assist
to the rise of new markets for environmentally-safe, less pollutant products.
Second, governments pay greater attention to pollution, and try subsequently
to impose regulations and define appropriate control measure, in order to reduce
waste production and pollution. Third, as a consequence of both forces, chemical
firms have to develop and adopt new production technologies (environmental
technologies, green processes), and new products (e.g., less polluting solvents
and paints). Moreover, rigid environmental standards and strong public pressure
have a positive influence on the environmental innovative rate of chemical
firms. Another consequence of the growing attention to environmental issues
is the birth of an intermediate market for environmental technologies and
engineering services related to environmental technologies. Similarly to the birth
of SEFs providing process technologies in chemicals, new environmentally-
related SEFs have started to operate (especially in the US), and a new market for
environmental technologies and engineering services is about to emerge (Arduini
& Cesaroni, 2001).
In machine tools a major driving force for coevolutionary processes is
the demand from advanced customer sectors, namely the automotive, aeronautics
and defense industries. However the recent disillusionment from high
automation (CIM, manless factory), the engagement in new production concepts
(“lean production”, teamwork, TQM, etc.), the growing environmental concerns,
as a consequence the dominance of incremental innovation, more market like
user-relationships and the key role of product accompanying services. Another
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coevolutionary process can be observed in the context of technological
developments, namely in electronics, new materials, micro or nano
technologies. Electronic devices have an increasing share of the value of
machine tools and IT technologies (PC, operating systems, Internet) and often
determine technical solutions on how to control machine tools and on how
to integrate them in company production systems. As a consequence, besides
electrical engineers, computer scientists partly replace mechanical engineers
in the design departments of machine tool manufacturers. Some firms have
followed strategies of outsourcing. On the shop-floor level a related change
in required qualifications took place. New apprenticeships were developed
(eg. “Mechatroniker”) others are disappearing. However the institution of
the “Facharbeiter” in Germany do not seem at risk. Links to basic research are
now looked for and patenting is growing. Sector-specific associations start
cross-sectoral activities and joint organizations.
In software since the early 1980s, the spread of networked computing,
embedded software, the Internet, open system architectures, open source and
web-based network computing has led to the decline of large computer
producers as developers of integrated hardware and software systems and the
emergence of specialized software companies and an increasing role of the
university in open source. This in turn has led to the expansion and growth
of several software subsectors, each of which has different types of products,
firms and capabilities Moreover also software distribution has greatly changed
accordingly from the licensing agreements in the early days: now there are
independent software vendors, price discounts for package software, and, with
the diffusion of the CD-ROM and the Internet, shareware and freeware (this
last one particularly relevant with Linux) (D’Adderio, 2001). In the enterprise
software sub-sector higher demand for integration by user organizations
reinforces the role of existing actors (i.e., large producers of standardised
integrated software solutions) as well as creates in scope for new actors (i.e.,
systems integrators, specialised niche applications producers and software
implementation consultants) (D’Adderio, 2001). The increasingly generic
nature of large systems also creates a greater need for customization whereby
customer knowledge and requirements become an important source of input
into the development of new or revised modules. In response to the increasing
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need for customization, large software producers pursue a higher level of
internal specialization by creating sub-units that address a specific market
segment and compete for resources with other units.
In telecom equipment and services convergence and the emergence of
Internet originates a more fluid market structure with a lot of different actors
with different specializations and capabilities, and new types of users. This in
turn greatly expands the boundaries of the sector by creating new segments
and new opportunities, and also national differences in the organization of
innovation Moreover, the emergence of Internet generates more pressure in
favour of open standards and leads to the rise of new actors such as ISP and
content providers.
Coevolution leads to the emergence of new activities as a process of
fusion, such as ICT and audio-visual technologies (Corrocher & Malerba,
2002). Within this context, the fusion may occur at different levels. The
fusion of technologies drives a transformation of the existing activities into
hybrid activities, which span across different technological fields and even
across different industries. Often technology fusion concerns the emergence of
“new-science”-based technologies through the combination of older sciences
with the rapidly expanding capacities of information technology to store,
manipulate and transfer an increasing amount of digital information. Automatic
Speech Recognition and Natural Language Processing constitute two examples
of these new technologies (together with computational chemistry,
computational fluid dynamics, geographic information systems, remote sensing
and neural networks) (Mahdi & Pavitt, 1997; Koumpis & Pavitt, 1999).
The prospering of these new-science based technologies is strongly
determined by the rapid progress in the area of ICT. Their early exploitation
has occurred both within very large, multi-technology firms exploring future
options, and within very small firms investigating the opportunities emerging
from research in universities. In this respect, there is a general trend related to
this type of technology fusion, i.e. the direct involvement of university-based
research and related small-firm spin-offs, which increasingly originate from
the universities, in the initial development of fundamental and pervasive
technologies. Recent advances in the science of molecular biology and in the
technology of information processing reduce the costs of search and
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experimentation for specific technical problems and their solutions, making it
easier for universities themselves to contribute effectively in certain fields to
development as well as to research activities (Koumpis & Pavitt, 1999).
Technology fusion appears to be particularly high in telecommunications,
information technologies and Internet services. The process of fusion between
these industries generates hybrid activities, whereby the services providers
exchange knowledge and competencies on a continuous basis with manufacturers
of high-tech products. There is a close and symbiotic relationship between
services and manufacturing, so that the distinction between the two has become
blurred and sometimes arbitrary. One could ideally envisage the result of the
fusion of manufacturing and service knowledge in the activities related to the
ICT as a platform, which represents a combination of hardware, software and
specific knowledge of the service end user market. In this case, the interaction
has as a main result the fact that specialized applications provide the basis for
the development of specific hardware platforms. At the same time, technology
plays an important role in the evolution of information-intensive service
providers, since these firms rely upon technological platforms to deliver their
services. Furthermore, the growth of multimedia and new digital media has
significant implications for the emergence of new types of equipment and local
infrastructure, in that the network structure will ultimately be determined by
the availability of information services (Mansell & Steinmueller, 2000).
In the telecommunications networks for business data, the increasing
technical advancements in the infrastructure and the process of deregulation
make the range of services provided in the market more complex and wider. In
this context, network operators have traditionally collaborated on a continuous
base with manufactures suppliers for the design of switching, transmission and
terminal equipment. Turning to a different example, electronic commerce is
often conceived in terms of the “dis-intermediation” of wholesalers, retailers,
and other economic agents to provide direct marketing of goods or services to
final customers. Although electronic commerce is not a widely recognised source
of interactive relationships between manufacturers and service companies, in
areas requiring more innovative and specialist inputs, a new set of intermediaries
is established, centered around the Internet and web-based ventures. Although
most electronic commerce services are based upon “hard” technological
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innovations focused around a series of ICT platforms, non-technological service-
oriented innovations are also quite important in the development of new activities.
The new intermediaries are focusing on the establishment of innovative forms of
access routines, creating secure (encrypted) communication, the design and effective
establishment running of web site and portals (Howells, 2000; Corrocher &
Malerba, 2002).
5. International preformance seen through the lenses
of sectoral systems
What about the relationship between specific dimensions of sectoral
systems and the international innovative performance of firms and countries?
Some remarks may be advanced in this respect.
In several sectoral systems differences between European countries, the
United States and Japan in the sources of knowledge, types and
competences of actors, networks and institutions greatly affect differences
in these countries’ international performance.
The lack of success of some European countries in some sector has been
due to problems and deficiencies in their sectoral systems.
Even within the sectors in which Europe does not fare well, those European
countries that specialize in subsectors with products, knowledge and
institutional requirements that match their specific institutional
framework are successful.
A very brief discussion of the sectoral systems examined illustrate this
point (for a longer discussion see Coriat et al., 2002). In chemicals international
performance is related to ability of large multinational firms to perform R&D,
to build efficient networks (with universities or with specialized suppliers), to
expand and to adapt to the changing knowledge base. Accordingly, their location
depends upon regional characteristics including local demand and technological
and scientific research capabilities. Finally patent policies are particularly
important in support of the activity of smaller technology-based firms. In the
US a division of labour between technology suppliers and users, and the
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development of markets for technology has taken place. By contrast, European
markets for technology are far from being developed, and this requires policy
support for their formation, firstly (but not only) in terms of policy for
intellectual property rights.
In pharmaceuticals and biotechnology the main factors affecting in-
dustrial leadership are a dynamic combination of many aspects: a strong science
base created upon a high quality and efficient organization of research and
education (for scientists, entrepreneurial scientists and managers), a tradition in
the university-industry relationship and transfer, the presence of a market for
technologies within clear institutional (patent legislation) and regulatory
frameworks. The size of the domestic market, its degree of competition and
integration are also important in an industry with high fixed cost in R&D. It
also facilitates the creation of alliances between small and big firms and an
efficient division of labour. US has been able to become leader in biotechnology
at the end of the 70s and beginning of the 80s thanks to the excellence of its
scientific base and to firms start-ups, a combination of university spin-off,
scientists, professional managers, venture capital. Geographical proximity played
a major role. It is interesting to note that in UK there are most of the necessary
factors conducive to the expansion of biotechnology outlined above.
Nevertheless, despite being the first to develop in Europe, UK biotechnology is
stagnating and only one firm has been able to launch a therapeutic product in the
market. Lack of expertise at the level of scientists, managers and also technology
transfer offices in universities seem to be one of the main constraining factors.
However, in Europe, as Casper and Kettler (2001) and Casper and Soskice
(2001) show, European countries may end up specializing in subsectors of
biotechnology. In Germany biotechnology firms specialize into platform
technologies that are then sold to other research laboratories (for example
consumable kits to rationalize common molecular biology laboratory proces-
ses). These technologies are more generic and more cumulative than the standard
therapeutic products, often relate to the development of equipment for
pharmaceutical firms, have library of core technologies that are then customized
for specific market niches. These features fit better than the standard therapeutic
products with the German institutional framework (characterized by “insider”
corporate governance, internal long term relationships between firms and
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employees, investments in firms specific knowledge). On the other hand, firms
in the United Kingdom specialize in standard therapeutic products which are
related to the standard products developed by the dominant American industry
(Casper & Kettler, 2001; Casper & Soskice, 2001).
In software, European packaged software suffers primarily from the first
mover effects of the US industry stemming from the personal computer
revolution and the effects of network externalities in software. In US federal
government, military and social security system investments played also an
important role stimulating research in universities, creating infrastructures and
enhancing the supply of skilled personnel. In Europe fragmented markets were
a significant constraint and the industrial, university and public research systems
displayed feeble support to the development of personal computer applications.
Those segments that are less affected by these factors are also the ones where
there are closer and more important ties to local content or business practice
(integrated system software and multimedia software as well as the large “hidden”
sector represented by in-house development and related system integration and
consulting businesses). Open source software is an emergent area of European
participation and expertise, which offers considerable promise in revitalising
European systems integration and consulting activities. Of all of the software
sectors examined for the ESSY study, the embedded system software market
appears to show the clearest signs of a dysfunction as a sectoral system of
innovation in Europe and presents the clearest case for intervention in the form
of new interdisciplinary research programmes and a dialogue with industry
concerning their future needs.
In telecommunication equipment and services European performance
is weak. In other telecom segments like mobile phone and some Internet services
European firms are performing reasonably well. The good performances of
some European countries are the results of specific demand conditions and of
historically contingent procedures of European standard setting backed by
national telecommunications providers (then public monopolies). Since a large
market is created European firms can retain an advantage through learning effects
and innovation on the production side. In order to do so they should have the
appropriate level of skilled human resources.
However, as Casper & Soskice (2001) noticed, recently in the telecommuni-
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cation sectoral system some of the institutional features that characterize the
Swedish national framework (such as the long term relationships between firms
and employees) have been modified in order to take into account the new
characteristics of the innovation process in mobile phones. Ericsson recognized
that wireless technologies require open standards and the full exploitation of
network effects. Thus in the late 1990s Ericsson decided to make its last system
integration language open rather than proprietary, and sponsored the formation
of new start ups which are spin-offs from Ericsson and which aimed to develop
products compatible with Ericsson’s new generation of wireless technologies.
Finally liberalization and European integration (with an active competition
policy) have improved innovative and economic of European firms. This could
be not sufficient if it is not coupled with the development of a critical mass in
terms of network of cooperating and competing firms at the European level.
Finally, in machine tools linkages with research centres, producers, and
users, and codified knowledge are important and the role of strategic partnership
has increased. In Europe in face of the transformation of the knowledge bases
and the increased level of international competition, a critical factor is the
continuous upgrading of labour and engineering skills. Germany strength con-
tinues to be the integration of theory and practice, manufacturing and design.
Italian firms have greatly upgraded their human capital in terms of external
formal training. The increasing relevance of science and subsequent increasing
distance of the R&D and design processes from the production area may threaten
this strength (Wengel & Shapira, 2001). In this respect, it is interesting the
double effect of niche user-supplier interaction. On the one side it helps
preventing strong competition from standardized low cost general purpose
technologies. This is particularly true in EU. On the other side it prevents the
growth of a market leader. This is recognized as one of the major causes of the
US decline in these industries. For EU it can be worthwhile asking if this pattern
is stable or not, if there are risks of loosing the positions of leadership and which
are the possible outcomes of the process of economic integration (Mazzoleni in
Mowery & Nelson, 1999). Strong regional sectoral linkages and a close coupling
of regional production complexes with users will likely continue to be key elements
in competitive advantage in machine tools, as in the past. However, increased
investments in system integration, innovation and emerging technologies, public-
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private collaboration, formal training systems, technology and market intelligence,
and international partnerships and linkages are also likely to characterize the most
successful elements of the sector in future years.
In addition to the specific coevolution between firms’ capabilities and the
knowledge bases, actors and networks and institutions of a sector, are there
common determinants of industrial leadership?
a) Technological and scientific research capabilities. In some ESSY sectors
technological and scientific research capabilities and education are major sources
of industrial leadership. Success stories are a combination of the ability of creating
new products opening up new disciplines and markets and, at the same time,
integrating research, teaching and industrial needs. Importantly the construction
of a solid knowledge and scientific base in specific fields has often benefited from
different forms and levels of public investments in their early stages (i.e.
pharmaceutical, biotechnology and software), above all in the US. Moreover the
integration between in-house research and advancements in the relative transfer
sciences (chemical engineering, automation and robotics, computer sciences,
biotechnology, microbiology, pharmaceutical chemistry) help firms to be ahead
of their competitors product and process technologies.
b) Demand and interactions with sophisticated users. Close and
continuous interactions with sophisticated users is particularly important in the
case of machine tools and chemicals (and in some segments of software and
biotechnology). In machine tools and chemicals also co-location supported the
innovative performance of firms. However the mechanisms connecting demand
to economic success are different according to the sector. Demand can be important
in terms of level (size of the market: chemicals, pharmaceuticals, packaged
software), in terms of quality (machine tools in Europe, chemical engineering in
US), in terms of composition (software and machine tools in Europe), in terms
of specific requirements (machine tools in US and Japan, chemical engineering,
telecom), in terms of government share (biotech and Telecom in the US).
The size of the market and its degree of integration has also been a
conducive factor of US success in many sectors. EU seems to be penalized by
fragmentation in some sectors with low marginal costs (packaged software and
pharmaceuticals), and increasing returns to users adoption (segments of packaged
software). In these cases fragmentation of markets leads often to different
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monopolies or vertical integrated structures that obstruct the development of
technologies (see software, biotech, chemical engineering). At the same time
according to the characteristics of the industry, different markets and heterogeneous
users help European firms to be ahead of their competitors thanks to their ability
to create customized product and process technologies (machine tools and
integrated software solutions).
c) Technology and innovation policies. Technology and innovation po-
licies play an important role in affecting the industrial, institutional and
organizational settings and the rate of innovative activities. In most of the ESSY
sectors, agents have drawn incentives and opportunities from different types of
institutional packages: IPR systems, specific norms and laws, types of standards,
product approval, government support and corporate governance. Patent poli-
cies are particularly important in support of the activity of smaller technology-
based firms and university licensing (particularly in biotechnology and
chemicals). In the US this has created the bases for a division of labour between
technology suppliers and users, and allowed the development of markets for
technology. Finally standardization has affected the mobile telephone industry.
In particular, European firms widely benefited from the European decision of
adopting GSM technology.
d) The stage in industry life cycle and the role of science. Whilst
European performance appears to be good or relatively good in “mature” industries
and products, even for the most sophisticated parts of these industries, in emerging
industries and fields of activities — biotechnology, Internet and important
segments of IT’s (see McKelvey & Orsenigo, 2001; Casper & Kettler, 2001;
Corrocher, 2001) — Europe clearly is facing difficulties. First there is a lack of
investment in R&D in the new emerging fields of science and basic research. This
is obvious for life sciences for example, if the European investment is compared
with the American (cf. Muldur, 2000; Pavitt, 2000a, 2000b). Casper and Kettler
(2001) recall that in the case of UK biotech sector, the main problem was not the
lack of venture capitalists ready to embark on new biotech start-ups, but the lack
of good scientists able to promote this type of firms. When the scientific capacities
exist, they seem to be too highly dispersed throughout European universities and
territories. Thus no network effect can emerge and structure the right division of
labour and efforts able to ensure the promotion of these new activities. One here
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has to remember that in the USA some 80% of Venture Capitalists’ investments
are concentrated in two regions: California around Silicon Valley and Route 128.
No “regional advantages” (Saxenian, 1994) has yet emerged in Europe in these
fields. Close to this point, another argument has to do with the type of educational
systems and labour markets prevailing in Europe, specially in the field of high
skilled engineers, researchers and the like. Here the relative advantage of European
systems (largely based on internal labour markets) seems to turn into a series of
relative disadvantages. Insufficient mobility and flexibility in these specialized
labour markets makes it difficult for firms engaged in the new emerging fields to
find the right skills and to be able to gather the necessary assets to launch new
products or services. This is the case of multimedia and Internet, where innovative
firms face shortages in the supply side of the labour markets (see Corrocher,
2001). This is an institutional failure (or at least an institutional limitation) of
most of the European educational systems, unable to react with sufficient speed
and flexibility to the reorganization of the knowledge base and the recombination
of disciplines and research fields driven by the scientific and technological revolution
opened in IT and life sciences. In conclusion the European difficulties are much
more focused. The European problem is: new disciplines, new emerging fields of
knowledge and new firms’ capabilities for the industrial and commercial
exploitation of this knowledge. One has to notice that, in many respects, these
difficulties were worsened since the European (or national) authorities have failed
to provide “on time” the right non market resources and institutions required to
ease the entry into these new fields.
6. Policy implications
In a sectoral system perspective the main role of the policy maker is to
facilitate the self-organization of the sectoral innovation systems within the relevant
policy domain. An important consequence of this is that the policy making process
is itself the reflection of bounded rationality and learning in the presence of
immense heterogeneity in the phenomena defining innovation and the innovation
process. The sectoral system approach is an important alternative to the concept
of the optimizing policy maker that characterizes the market failure approach to
innovation policy (for a more detailed discussion see Edquist, 1997).
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What, then, are the reasons for public policy intervention in a market
economy? As regards, for example, technical change and other kinds of
innovations, two conditions must be fulfilled for there to be reasons for public
intervention in a market economy. First, the market mechanism and capitalist
actors must fail to achieve the objectives formulated. A problem of imperfect
self-organization must exist. Second, the state (national, regional, local) and its
public agencies must also have or be able to build the ability to solve or mitigate
the problem.
The sectoral system of innovation approach can be used as a framework
for designing specific innovation policies. The importance of the sectoral system
is that it forms the locus of intersection of numerous networks generating
particular kinds of knowledge. For example, a technologist in a firm may interact
with other technologists in the relevant disciplinary community, with industry
and government groups establishing standards and regulations, with technologists
in rival firms and with academic researchers in supporting fields. Each of these
networks has different members and different purposes but all contribute to
innovation. Indeed, innovative ability may depend on the ability to participate
in and manage these network relations. Thus, the wider significance of the
sectoral perspective is to identify the complex of networks and the dynamics of
their birth growth and even decline in relation to innovation performance.
Within a system of innovation framework, an identification of the cau-
ses behind the problems is the same as identifying deficiencies in the functioning
of the system. It is a question of identifying those systemic dimensions that are
missing or inappropriate and which lead to the “problem” in terms of
comparative performance. Let us call these deficient functions “system failures”.
When we know the causes behind a certain “problem” — for example weak
technological transfer between university and industry — we have identified a
“system failure”. Not until they know the character of the system failure, the
policy-makers can know whether to influence or change organizations or
institutions or the interactions between them — or something else. Therefore,
an identification of a problem should be supplemented with an analysis of its
causes as a part of the analytical basis for the design of an innovation policy.
Benchmarking is not enough. In terms of policy, it is possible to state the
principal contributions of the sectoral system approach.
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6.1. A sectoral system approach provides a new methodology for
the study of sectors and therefore for the identification of
variables which should be the policy targets
While up to now industrial economics has focussed on dimensions such as
structure-conduct-performance strategy in a game theoretic way, transaction costs
or sunk cost and the bounds approach, the approach suggested here is that sectoral
analyses should focus on systemic features in relation to knowledge and boundaries,
heterogeneity of actors and networks, institutions and transformation through
coevolutionary processes. As a consequence, the understanding of these dimensions
becomes a prerequisite for any policy addressed to a specific sector.
6.2. The impact of general or horizontal policies may drastically
differ across sectors
A second point is that the impact of horizontal policies may greatly differ
from sector to sector. The channels and ways policies have their effects differ
from sector to sector. For example, two of the major policy statements derived
from the innovation system approach could be further qualified looking at the
different relevance of the following phenomena across sectors.
— Cooperation and networks may have different relevance and characteristics
among sectors. In a sector, the generation and commercialization of innovation is
likely to involve extensive co-operation and division of labour, much of which is
negotiated in networks rather than governed by ordinary market clearing
mechanisms. Here the important shift in policy emphasis towards strengthening
innovation systems, organizations and institutions (rather than seeking to influence
specific innovation events) has to be supplemented by the understanding of the
relevance of the role of cooperation and networks in the specific sectoral system
of innovation.
— Non-firm organizations and institutions could have different relevance in
different sectors. The institutional setting is very important in a sectoral system
and should be monitored by public authorities. For example, the legal and
institutional rules governing cooperative exchanges are evolving within existing
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legal frameworks such as those governing intellectual property rights that were
devised for other purposes. It is very likely that there will be major unintended
consequences stemming from changes in these rules. A sectoral system of
innovation is composed of for-profit firms but its performance in any particular
sectoral setting is likely to be affected by not-for-profit organizations such as
public research institutions and universities. The interactions between all the
organizations active within a sector contribute to the sustainability and success of
commercial activities within the sector. When the role of public organizations is
well understood in the context of the innovation needs of a particular sector,
policy can have a major impact in reshaping the missions of existing or in creating
new public organizations.
6.3. The analysis of the rationale and the effects of policies
requires a deep and careful comparative analysis of sectoral
systems over time and across countries
As previously mentioned, each sector has different features, organization
and dynamics, and the actual outcome is the result of the interplay of the various
basic variables affecting a sectoral system and of their interaction over time. Thus
establishing a basis for comparative analysis of the configuration of active
institutions in any particular sector is a necessary step in policy formulation. These
configurations can differ across national or regional contexts, but the effectiveness
of variant configurations must be analysed rather than presumed to be sustainable.
Finally, different contexts may limit the transferability across borders of sectoral
policies and require different interventions.
6.4. For fostering innovation and diffusion in a sector, not just
technology and innovation policies, but a wide range of other
policies may be relevant
A sectoral system approach emphasises that innovation and technology
policy are linked with and affect other types of policies, such as science policy,
industrial policy, policies related to standards and IPR and competition policy.
In addition, a sectoral system approach highlights the interdependencies, links
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and feedbacks among all of these policies, and their effects on the dynamics
and transformation of sectors. In fact, the problems that shape innovation arise
within the context of the sector, and neither the trajectory of the technology
nor the trajectory of the market are independent of one another.
6.5. The policy maker is an active internal part of sectoral systems
at different levels
The public actor has to be aware that he or she is inside a sectoral system
at various levels. The policy maker intervenes actively in the creation of
knowledge, IPR, corporate governance rules, technology transfer, financial
institutions, skill formation, public procurement. As a consequence, he or she
has to develop competencies and an institutional setting in order to be effective
and consistent at the various different levels.
6.6. Policy should consider the different geographical dimensions
of sectoral systems
The sectoral approach takes into account the developments in the local,
national, regional, and global levels of aggregation in markets and institutions.
Developments at each of these levels influence the articulation of technological
capabilities. While political boundaries and local proximity are influential in
the generation and diffusion of innovation, modern enterprises in a liberalized
global economy must take a global perspective on actual and potential
competition. Policies that focus on only one level of aggregation are likely to
miss constraints or opportunities that are influential in the innovative behaviour
of individual organizations. While technology policies can and sometimes should
be addressed at one level of aggregation, the rationale for these policies and
their implementation must reflect a global perspective.
6.7. Policies may play a key role in periods of radical
technological change in sectoral systems
A key issue may be the choice between supporting existing systems —
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with their historically accumulated knowledge bases — and supporting the
development of new sectoral systems. Large-scale and radical technological shifts
— i.e. shifts to new trajectories — have rarely taken place without public
intervention in the OECD countries. This is true for most of electronics as well
as for aircraft and biotechnology — also in the USA. In cases where technological
change within a sector breaks from the past accumulation of knowledge and
from current expertise and capability, sectoral systems of innovation will experience
substantial stress because of the difficulties of aligning the incentives and the
capabilities of the actors. For example, incumbent actors may underestimate the
scope of change and focus on reactive rather than adaptive strategies. Adaptation
in other parts of the sectoral system may therefore be delayed, increasing the
long-term risks to the sector. Because sectoral systems are neither naturally given
nor static and their boundaries, components and connections change significantly
with the growth of knowledge and the evolution of problem sequences, a system
can become outmoded and constrain innovation performance. Radical
technological change often involves an especially pro-active role for public
organizations in recognising and promoting or even creating the conditions for
market success. Governments can play important roles as lead-users of radical
new technologies and in supporting the early use of these technologies in public
organizations. This is very clear in the case of public purchasing, in regard to
defence capabilities and public health.
Three examples from ESSY research can be proposed. First, the innovation
of the intraocular lens and the considerable changes over time in the related
innovation system in the UK and USA depended greatly on the take up of the
procedure in public and private health care systems, and on the different norms
for translating clinical needs into ‘market demand’ in the two national medical
systems.(Metcalfe & James, 2001). Second, the US government has played a
very active and decisive role in the launching of the fixed Internet (Corrocher,
2001). Finally, the Bioregio program in Germany is another interesting example.
In this respect, government capacities for monitoring the emergence of
radical technological change differ substantially across countries. It is also
particularly important to encourage transparent and open debates about the
significance of emerging technologies to support the formation of consensus as
well as to identify possibilities for experimentation and trial.
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If governments should intervene, they should intervene early in the
development of new sub-systems and new sectoral systems of innovation. Such
intervention at an early stage in the product/industry cycle may have a
tremendous impact. In the case of the public creation of the NMT 450 mobile
telecommunications technical standard in the Nordic countries about 20 years
ago this proved to be important. It was crucial for the emergence of the mobile
telephone industry and for the fact that both Ericsson and Nokia became glo-
bal leaders in this field.
On a methodological level, a sectoral system approach indicates that
existing approaches in industrial economics and standard measurement methods
are not adequate to the task of identifying the changing configurations of sectoral
systems and sub-systems of innovation, particularly the processes of knowledge
exchange between different types of organizations. The costs of constructing
new sectoral sub-systems of innovation are substantial but this activity is not
explicitly recognised in the existing literature of policy or management. There
are major strategic opportunities available in discovering better ways to monitor,
promote, and reduce the costs of reconfiguration or expansion of sectoral systems
and sub-systems of innovation.
6.8. Additional sector-specific policy conclusions
The emphasis on the diversity of sectoral systems highlights different
policy measures for different sectors. These policy implications are closely related
to the problems faced by the various actors operating in the sectoral context
and to the sectoral specificity of knowledge, boundaries, actors and networks.
Specific examples can be found in Edquist, 1997.
7. Conclusions
These general messages offer important additions to the existing body of
knowledge supporting evidence-based policy. They reflect a considerable shift
of emphasis in the formulation of innovation policies, which are, of course,
much broader than policies for science and technology. Traditional innovation
policies have been formulated in providing public resources for R&D and
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changing the incentives for firms to innovate. Tax breaks for R&D, innovation
subsidies and patents are typical examples of these policies. A sectoral system
perspective does not deny the significance of this approach but recognises that
the effects may run rapidly into diminishing returns. To offset this it is necessary
that innovation opportunities be enhanced and that this will be achieved through
connecting firms within a wider division of innovative labour. Improving the
organization of an innovation system within a sector is an almost certain route
to improving the complementary payoffs from public and private R&D.
The sectoral perspective provides a tool for policy makers to comprehend
the differences in innovation systems and for identifying the specific actors that
should be influenced by policy. The quid pro quo, however, is that policy makers
need to invest much more effort in understanding the idiosyncrasies of the
specific sectors that they use to channel the influence of policy. An approach to
innovation policy that is not sensitive to the important sectoral distinctions
may not yield much payoff to the policymaker (Edquist, 1997).
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