Innovation: an outsized ambition?

"Innovation has become the industrial religion of the 20th century."

The economist, 1999

            Innovation Union flagship initiative. EU            

          Heating, labour division, plastic, internet... innovation has always played a capital role in the development of societies. Since the 70s, economists also acknowledged its key significance for economic development, and more recently, the EU has called innovation to play an eminent role in the achievement of smart, sustainable and inclusive growth, insomuch that it has become ubiquitous across policy discourses, offering solutions to very different challenges. Putting the available scientific knowledge and policy discourses face to face, what are the actual potentials and limitations of innovation processes?

         Innovation is the creation of new products, services, organisations, or processes capable of generating added economic value in the market. Face to inventions, innovation is not only about the occurrence of a new idea, but it is about the first attempt to carry it out in practice. Sometimes, inventions and innovations are closely linked, but in many cases a considerable time lag divides the two (Fagerberg, 2006; 6). 

           Innovations such as fire domestication, potable tap water or electricity have had an undeniable positive effect on humans' well-being. However, besides its positive effects, cars or pesticides are some examples of innovations that have also had unintended negative consequences for society and the environment (Van den Hove et al., 2011; 73).

               Innovation Union flagship initiative              

      An heterodox Schumpeter introduced the concept 'innovation' in 1911, as the trigger for economic development. He gave the entrepreneur the central role in the production of such innovations, and "emphasised the fundamental uncertainty inherent in all innovation projects" (Fagerberg, 2006; 13). However, the concept of innovation in orthodox neoclassical economics has long been disregarded until the 70s, because innovation meant incremental, but also structural change, thus causing disequilibria, whereas mainstream economic though in Europe, keynesianism after WW2, based its analysis on static equilibrium. The economic crisis in the 70s contested the scientific macroeconomic mechanisms broadly used at the time, and the neoliberal ideas replaced the old paradigm. In this context of accelerating globalisation, affecting industrialised regions with economic decline and high unemployment, researchers and policy-makers rescued the Schumpeterian ideas in order to responde to these new challenges (Lamboy 2005). Restructuration resulted and knowledge-based activities became the most competitive in both the US and the EU.

          Drawing on the success of innovation during the last decades, policies in the US and the EU have placed the concept of innovation in a core position to achieve growth. Brussels is guided by the EU 2020 Strategy, calling for smart growth -developing an economy based on knowledge and innovation-, sustainable growth -more competitive, more efficient and greener economy- and inclusive growth- high employment across all the regions (EC, 2010). The key tools to deliver these policy goals are innovation, education, research and technology (EC, 2011; 16). Ehat is more, as the Innovation Union flagship initiative stressed, innovation was 'the answer' not only for "increasing competitiveness, creating millions of new jobs" and maintaining or improving the "living standards", but also for "successfully tackling major societal challenges, such as climate change, energy and resource scarcity, health and ageing" (EC, 2010b).

                Innovation Union flagship initiative              

         Economists conceive nowadays innovation as a means towards growth, through the profits made from short-term monopoly on new products and services, intellectual property rights, lower cost procsses or higher efficient organisation. After the large amount of research on innovation during the past fifty years, we know well how innovation leads to economic growth in firms and aggregated economies (Fagerberg, 2006). However, economic science has a much fuzzier idea about the elements why and the mechanisms how innovation effectively occurs (Fagerberg, 2006), and remarkably, about the positive impact of any innovation in the creation of more or better jobs. Many of the new products and services will indeed require an input of highly skilled labour from their realisation, but "they will not necessarily lead to higher numbers of jobs: some will, some will not, and some will destroy jobs" (Van den Hove et al, 2012; 76; Cooke et al. 1997).

         In the same vein, tackling global challenges such as environmental protection or the reduction of socioeconomic and territorial disparitites as by-products of innovation seems extremely optimistic since innovation is initially meant to generate economic growth, and some contradictions between these goals have been widely acknowleged (Stiglitz, Sen and Fitoussi, 2009; Jackson, 2009; Van den Hove et al, 2012).

       All in all, it is important for analysts and policy-makers to understand the limitations of innovation processes, face to the current discoursive euphoria around a concept that has been heightened to panacea for multiple and extremely complex problems. However, this does not overturn the value of the concept whatsoever. Indeed, innovation is widely acknowledged as a highly relevant means to generate gains among economic actors, and the large research undertaken allows us to better understand how it occurs, and particularly,  how to foster milieus that favour the burgeoning of innovation.
 

Cooke, P., Gómez Uranga, M., Etxebarria, G. (1997) “Regional Innovation Systems: Institutional and Organisational Dimensions” Elsevier. Research Policy 26, 475-491

European Council (2010) ”Europe 2020: A strategy for smart, sustainable and inclusive growth”. Brussels.

European Council (2010b). “Europe 2020 Flagship Initiative: Innovation Union”. Communication from the Commission, COM (2010) 546 final.

European Council (2011) “A Resource-Efficient Europe – Flagship Initiative under the EU 2020 Strategy. Communication from the Commission” COM (2011) 21.

Fagerberg, J. (2006) “Innovation: a guide to literature” in “The Oxford Handbook of Innovation”, Oxford University Press.

Jackson, T. (2009) “Prosperity without growth: economics for a finite planet” Earthscan, London.

Lambooy, J. (2005) “Innovation and knowledge: Theory and regional policy”, European Planning Studies, 13:8, 1137-1152

Stiglitz, J., Sen, A., Fitoussi, J.P. (2009) “Report by the Commission on the Measurement of Economic Performance and Social Progress”, Paris.

The Economist (1999) “Innovation gets Religion”, The Economist. Accessed on March 4^th 2013 at: http://www.economist.com/node/186620

Van den Hove, S., McGlade, J., Mottet, P., Depledge, M.H. (2011) “The Innovation Union: a perfect means to confused ends?” Environmental Science & Policy 6, 73-80. Elsevier.

Toolbox for Innovation Policy: Regional Innovation System (RIS)

       The "System of Innovation" is a tool for analysing the components, functions and activities in a region -country or sector- allowing for the development, diffusion and use of innovation (Edquist 2006). This approach was developed during the 80s (Lundvall), 90s (Freeman, Cooke) and 2000s (Asheim, Edquist), "becoming a powerful organising metaphor in policy programmes, research projects and public debate” (Miettinen 2002).

       This tool has a holistic and interdisciplinary nature, including "all important economic, social, political, organizational, institutional and other factors that influence the development, diffusion and use of innovations” (Edquist 2006; 4). A "Regional Innovation System" (RIS) is evolutionary and constructed historically in a singular place; therefore, the approach considers the dynamism and constant change of its components, functions and activities, as well as the fact that these elements are not always the same or play their role with similar intensity everywhere, but they are strongly path dependent in every geographical, social, cultural, political and economic context.

       Edquist explains the functioning of the "system of innovation" as a complex mechanism in which path-dependent institutions frame the scene and the behaviour of the actors of the system -organisations and individuals-, which bring about innovation through their interrelated activities based on competition, cooperation and transactions (2006). Although we cannot build a comprehensive, concrete and generally applicable list, we can identify however some of the most common elements in a RIS:

• Institutions are “sets of common habits, norms, routines, established practices, rules or laws that regulate the relations and interactions between individuals, groups and organisations” (Ibid.; 3), that are constructed historically, showing a strong path-dependent inertia and differing between places and along time. From a political science perspective, we could break institutions into:
  • Formal institutions: law, policy, polity, state
  • Informal institutions: traditions, social norms, and
  • Culture: attitudes, values and opinions
    
    
• The actors are an ensemble of organisations and individuals playing on the stage set by the institutional framework towards the development and diffusion of innovation. These are some of the most common actors present in a "regional innovation system" (Cooke et al. 1997; Carlsson et al. 2002):
  • Entrepreneurs
  • Firms
  • Public and private research centres (universities, labs, research institutes, etc.)
  • Skill development organisations (universities, vocational training, etc.)
  • Technology transfer agencies (science and technology parks, etc.)
  • Public investment agencies for innovation
  • Private funding for innovation (venture capital, etc.)
  • Public policy agencies related to innovation (R&D, education, enterprise, etc.)
  • Consultants on innovation
  • Non-firm organisations involved in innovation 
     
• The interrelated activities constitute the flow among the different actors that influence and are influenced by the system as a whole (Carlsson et al. 2002). They ultimately allow innovations to happen. Some of the most important activities identified by Carlsson et al. (2002) and Edquist (2006) are R&D, upgrading human capital, opening to new markets, creation and change of organisations developing new fields of innovation, networking through organisations to integrate new knowledge and technology, financing innovation processes and activities to commercialise knowledge, incubating activities for new innovative efforts, consultancy for innovation, interactive learning among organisations or government policies.
  
  

eg. Scottish RIS (by Scottish Government)*

       Since the 90s, European policy strategies -among other public authorities- have been using the RIS approach as a tool to describe, understand, explain and influence innovation processes. Due to the historically and contextually determined nature of the RIS, researchers and policy-makers are compelled to identify and operationalise for each region the concrete institutions, actors and interrelated activities present in a region. In this vein, the RIS approach attempts to provide with a comprehensive scheme of understanding allowing for rational and coordinated organisation of innovation drivers according to a collective goal.

      Nevertheless, this approach has been also criticised by some scholars. Fageberg pointed out that theorise a RIS seems highly relevant for policy-makers, but this also involves the risks of locking in a system of evolutionary nature, creating a structure that will facilitate certain patterns of interaction and outcomes constraining others, driving to a stable configuration that would hamper new fruitful exploration for the actors involved in innovation processes (2006). The extreme complexity and uncertainty involved in innovation processes has been also underlined as a reason for the impossibilty of establishing causal relations that will drive to innovation ( Cooke et al. 1997; Carlsson et al. 2002). Therefore, making innovation happen is impossible to plan.

       Yet there is little to argue to these sound criticisms, the RIS approach is still highly valuable instrument that can be used to effectively understand how innovation occurs, providing some reasonable guidance towards high-standard policies aiming at facilitating scenarios that will favour innovation.

Carlsson, B., Jacobsson, S., Holmén, M., Rickne, A. (2002) “Innovation systems: analytical and methodological issues” Elsevier. Research Policy 31, 233-245.

Cooke, P., Gómez Uranga, M., Etxebarria, G. (1997) “Regional Innovation Systems: Institutional and Organisational Dimensions” Elsevier. Research Policy 26, 475-491

Edquist, C. (2006) “Systems of Innovation: Perspectives and Challenges” in “The Oxford Handbook of Innovation”, Oxford University Press.

Metcalfe, S. (1995) “The economic foundations of technology policy. Equilibrium and evolutionary perspectives” in Stoneman, P. “Handbook of the Economic Innovation and Technology Change”. Blackwell Handbooks in Economics, Oxford.

Miettinen, R. (2002). “National Innovation System. Scientific concept or political rhetoric?” Edita, Helsinki. 

* www.scotland.gov.uk 

Toolbox for Innovation Policy: the Ecosystem of Innovation

        The "ecosystem of innovation" is a metaphore of self-governed biological ecosystems applied to innovation, aiming at analysing how agents undertake processes for the development, diffusion and use of innovation in an innovative environment (Nilsson 2013, Chukhray 2012). This approach has emerged along the 2000s in academic and policy debates on innovation from the criticisms made to the "system of innovation" perspective (Papaioannou et al. 2009), influencing for instance the rethoric of the European Commission when referring to "environment for innovative enterprises" (EC 2003; 15).

       The parallel drawn between biological ecosystems and "ecosystems of innovation" is based on the biological principle that every living elements interact among them and with the natural environment, feeding back through the ecosystem on itself (Miller 1975), while acknowledging the evolutionary nature of these interactions. Therefore, Engler et al. define an "ecosystem of innovation" as a complex environment in which the individual agents exist and interact both among other agents in the ecosystem through different activities, and with the dynamic environment itself (Engler et al. 2011; 55) in order to develop, diffuse and use innovation.

Ecosystem metaphore *

        The functioning of an "ecosystem of innovation" can be explained as a mechanism in which path-dependent environments influence the self-interested and mostly uncoordinated interactions of the agents based on competition and cooperation, bringing about innovation. These key interactions are also largely influenced by the impact of disruptive historical accidents, and the unpredictable behaviour of other agents. Although impossible to concretely state all the general elements of context dependent "ecosystems of innovation", their main characteristics will be detailed next:

• Environment (framework): Strongly dependent on local history and context, it influences agents' behaviour and set the specific 'fitness criteria' of new ideas to the given environment, like in a biological process of natural selection (Bollier 2000).
  • Soil: formal institutions
  • Climate: informal institutions, business climate, life style, social capital
    
    

• Agents: individual self-interest initiative takers responsible for innovation processes.
  • Organisations: firms, universities, governments, financial organisations, etc.
  • Entrepreneurs
    
    

• Historical accidents: an event caused by the coincidence of the right circumstances, with the right people, in the right place at the right time. For instance, the fact that A meets B, personal drifts and so on (Chukhray 2012) might initiate one economic activity in one place, which will attract other similar activities creating a cluster (Walker 2001).

• Interactions of unpredictable and uncoordinated nature among agents both with other agents and with their environment based both in cooperation and competition to develop, diffuse and use new products and services (Zahra et al. 2011), processes and organisations. There is no ideal or pre-established mechanism that will boost innovation. Spontaneity, exploration ventures and risks taken by organisations and entrepreneurs might be major drivers of innovation (Chukhray 2012), although the relevance of individual decisions might be only observable years, even decades after they occurred.

       Drawing on the extreme complexity and uncertainty intrinsic in innovation processes acknowledged by Cooke (1997) and Carlsson (2002), the "ecosystem of innovation" approach deals with the impossibility of systematising, operating, controlling or predicting how innovation will happen. Therefore, the main focus of the ecosystem perspective is on the characteristics of the innovation environment and on the observation of the actors' behaviour. This focus allows the approach to offer sound historical overviews on regional innovation processes, building up stories that identify key agents and their relevant behaviour shaped by and executed within a context dependent institutional environment.

      The application of this conceptual tool to policy strategies towards innovation underlines the importance of the provision of a long-run innovation-friendly environment for the agents to take advantage of it and unleash individual self-interested activities conducive to innovation. Therefore public action is expected to act on the background and for the long run, since it is not conceived to influence the decisions of individual agents driving to innovation.

        Some doubts have been raisen concerning the effectiveness of this tool for building policy strategies. In regions where innovation processes are weak or almost absent and lack of innovation is perceived as a public issue, the "ecosystem of innovation" sheds few light on potential initiatives to strengthen innovation. Since future historical accidents and individual behaviour or interactions that would trigger innovation cannot be foreseen, specific strategies to foster innovation can hardly be traced.

       Nevertheless, this tool counteracts the risk of locking in the system of innovation into a rigid structure, leaving wider freedom to individual potentially successful deviant explorations, that might be especially interesting in regions with a well established innovation environment.

Bollier, D. (2000) “Ecologies of Innovation: The Role of Information and Communication Technologies” The Aspen Institute, Washington, DC. 
Chukhray, N.I. (2012) “Forming an ecosystem of innovation” Economics of Development 61 (1) 12-18. 
Engler, J.; Kusiak, A. (2011) “Modelling an Innovation Ecosystem with Adaptive Agents” International Journal of Innovation Science 3 (2) 55-68. 
European Commission (2003) “Innovation policy: updating the Union’s approach in the context of the Lisbon strategy” COM(2003) 112 final. Brussels.

Miller, G.T. (1975) “Living in the Environment:Concepts, Problems andAlternatives” Wadsorth, Belmont, CA.

Nilsson, J.-E. (2013) “The eco-system perspective” Innovative Regions course slideshow. Blekinge Institute of Technology.

Papaioannou, T., Wield, D., Chataway, J. (2009) “Knowledge ecologies and ecosystems? An empirically grounded reflection on recent developments innovation systems theory” Environmental Planning C: Government and Policy 27, 319-339.

Walker, R. (2001) “The geography of production” in Sheppard, E., Peck, J., and Barnes, T.J., “A Companion to Economic Geography”. Wiley Blackwell.

Zahra, S.A., Nambisan, S. (2011) “Entrepreneurship in global innovation ecosystems” AMS Review 1 (1) 4-17. 
 * http://www.puzzlesonline.eu/puzzles-1000-piezas/1005-peces-de-arrecife-de-coral.html

Transport infrastructure and regional economic development

Lessons from Italy

     Unequal distribution of transport infrastructure is commonly assumed to be the cause of regional disparities, and investment in lacking infrastructures is equally assumed to be an effective tool to foster economic regional development in lagging regions (World Bank 2008). The North and South of Italy constitutes a paradigmatic example of regional disparities that can be traced back centuries ago. Currently, Southern regions of Italy do not reach 70% of the average EU GDP per capita, whereas Northern and Central regions reach 110% or 120% of the EU average (Eurostat, 2013). Nevertheless, regional policies in Italy have pooled “massive infrastructure investment on roads and railways building” (World Bank 2008, 184) since the 1950s, without delivering the expected results. Drawing on the lessons learnt from the Italian regional disparities experience, these lines wonder what are the opportunities and limitations of investment in transport infrastructure as a tool for regional economic development.

High Speed Railway in Italy

      The assumption of unequal transport infrastructures being the cause of regional disparities is grounded in the “modernisation theory”, extending its intellectual roots back to the mid 19^th century German-Austrian economic school, having a strong influence in policy-making from the 1950s to the 1970s. Friedrich List (1841) conceptualised several stages of economic development, associating the linear evolution towards the next stage with the idea of “progress”. A century later, Hoover and Fisher (1949) tagged these stages of development as primitive, agricultural, industrial and services stage, attributing the evolution towards the following stage to transport infrastructure improvement, through the subsequent easing of trade and increasing specialisation in the affected region. The upgrading of an existing transport paradigm occurs when technology introduces new means allowing for increased speed, capacity or reduced cost (Ausbel et al. 1998).

      These new transport technologies are not equally adopted across all the territories, but they often emerge in the most dynamic economic centres, stimulated by a higher demand from economic actors. In line with the observations made by the “modernisation theory”, in Italy the construction of railways and motorways initiated in the early industrialised Northern regions, only expanding to the South decades after their consolidation in the North. Concerning the stages of economic development, although the North developed an industrial capitalism since the mid 19^th century, the South maintained a semi-feudal economic structure until the Second World War (Martinelli 2009), and only initiated a state-led industrialisation in the 1960s under the influence of Perroux's “growth pole theory”. Today, disparities in regional GDP per capita persist, just like the infrastructure endowment gap does: the North-West concentrates the highest densities in railway, road, airway and high-speed rail transport, the ports being the only exception for which the South outperforms over the Northern regions.

Disparities GDP/cap 2008

      Inspired in “modernisation theory”, regional policies during the 1950s assumed the importance of deploying an even transport infrastucture to generate economic development, countering the market inertia to favour the economic hotspots. This was also the case in Italy with the “Intervento Straordinario” (Martinelli 2009), a wide keynesian policy which channelled important investments towards infrastructures in the Southern regions -among other key axes. Thanks to the fast take-off of the Italian economy in the Northern regions during the 1950s, these investments could increase until the 1970s, together with the previously mentioned active industrialisation policy that set new heavy industries in the South since the 1960s -to become “cathedrals in the desert”. The new infrastructures had two major effects. On the one hand, Southern markets were flooded with more competitive products from the North, wiping out Southern local less competitive production, pushing 2 million emigrants towards the North. On the other hand, the industrialisation strategy and the logistical integration of both regional ensembles pulled the South along with the fast growing North (Martinelli 2009), closing the regional gap between them for some 15 years.

      After the oil crisis in the 1970s, the improvement of communication and transport accelerated globalisation processes. The vertically integrated industrial model shifted to a more competitive international division of economic processes, resulting in industrial delocalisation to emerging economies. The Southern cathedrals in the desert collapsed, widening or maintaining the gap existing with the Northern regions. Policies kept investing in transport infrastructures, but the funding was unable to trigger economic development, becoming mere interregional transfers.

     Overall, despite the undermining of modest local production by more competitive products from the North, Southern induced industries were successfully integrated in the economic system from the 1960s up to 1975, benefiting from the demand pull of growing central markets, therefore trickling down growth to the regions. However, the short industrial experience could not generate a strong economic network, and these regions were severely affected by delocalisation. Roads and rails became escape highways for key technicians, managers, entrepreneurs, firms and investment towards more prosperous regions.

     The lesson offered by the Italian case exemplifies that “improvement of transportation infrastructure leads to a reduction of travel time or cost, and hence to an improvement of accessibility to markets or inputs” (Rietveld et al . 1992, 8). However, increased accessibility may have both a positive or a negative effect on regional economic development. It may render exports cheaper, expanding total production and generating economies of scale, that will attract capital and labour. On the other hand, an increased accessibility to markets may provoke that cheaper imports partially substitute domestic products, bringing about diseconomies of scale, thus expelling labour and capital (Ibid.). The effectiveness of improved accessibility as a tool for regional economic development will therefore be closely linked to the previous existence of a dynamic economic activity capable of competing with the newly enlarged market area.

Ausbel, J. H., Marchetti, C., Meyer, P. S. (1998) “Toward green mobility: the evolution of transport” European Review, 6 (2) 137-156.

Eurostat (2013) “Regional GDP per capita in the EU in 2010: eight capital regions in the ten first places” News release 43.

Martinelli, R. (2009) "Cassa per il Mezzogiorno" International Encyclopedia of Human Geography. Elsevier, 446-455.

Rietveld, P. and Nijkamp, P. (1992) "Transport and regional development“ Serie Research Memorandum 50, 1-21. Faculteit der Economische Wetenschappen en Econometrie, Vrije Universiteit Amsterdam.

World Bank (2008) “World development report 2009: Reshaping economic geography” World Bank Publications Herndon, VA (US).