Interactive learning perspectives on innovation

1. Interactive learningperspectives on innovation Bengt-Åke Lundvall Aalborg University NORSI Lecture October 24 2012 Kristiansand

2. My background • Professor in Economics, Aalborg University, Denmark. • Have worked on innovation and industrialdevelopmentsince the end of the 1970s. • Developed, together with Chris Freeman, the concept ’National System of Innovation’ in the firsthalf of the 1980s. • InitiatedGlobelicsnetwork 2000 with more focus on developingcountries (see www.globelics.org). • March 2012 my Anniversary Symposium in Aalborg gave myreason to reflect on what I have learnt. Theme for Today is a follow up to this symposium where I arguedthat: • ‘Innovation as an interactiveprocess’ constitutes a theoreticalcore of innovation studies.

3. Summing up the lecture • Innovation as an interactiveprocess is at the theoreticalcore of innovation studies! • Origin: The theoreticaldividebetween science-push and demandpull: Schumpeter versus Schmookler: • On the importantrole of ‘paradigmatic cases’ in innovation studies. The role of respectively the Sappho-study and the Mike-project. • Dimensions of interactionwithin and acrossorganisationalborders. • Innovation as an interactiveprocess as reflected in the most citedworks in innovation studies. • Limits of standard economics • the assumption of pure market. • the reduction of work to employment. • Toward a more general theory of innovation as an interactiveprocess and implications for future research.

4. Innovation studies: Challenging the boundaries • The entrepreneurship studies coreaccording to Shane (2000) : the key building blocks are respectively the individual and the opportunities that he/she faces. The process of entrepreneurship is one where individuals perceive, assess and act in relation to opportunities. • The innovation studies core (bal): innovation as an interactive process. The innovation process is one where individuals or organisations interact engaging in information exchange, problem solving and mutual learning . In this process they establish ‘relationships’ that may be seen as constituting ‘innovation systems’.

5. Schumpeter’ssupply side bias • Schumpeter had focus on supply side • First defining the individualentrepreneur as the most important driver of innovation – In Theory of Economic Development – often referred to as Schumpeter Mark I. • Second defining the bigoligopolistcoporations and their R&D-department as the most important driver of innovation – often referred to as Schumpeter Mark II. • Schumpeterassumedthatusers and consumerswould accept and use new processes and products. But he did not give themanyactiverole. Heneglected the demand side.

6. Schmookler’schallenge – on the importance of the demand side • Jacob Schmooklerexplored statistically the economics of technological innovation at a detailed industry level.He crystallized the notion of endogenous technological change and its influence on economic growth two decades before the concept was reinvented by macro economists. • Through analysis of time series and cross-sectional patent data and historical case studies, Schmookler demonstrated that demand-pull influences were also important: the more intense the demand, the more creative groups and individuals were drawn to work on an unsolved problem and the more patentable inventions they generated(Schmookler 1966 and 1972)

7. Christopher Freeman: The father of modern innovation theory • Economist from Cambridge – went to Keynes’ lectures, read Marx and Schumpeter. • AmongFreeman’sfavouritethemesbeginning of the 80’s were: • The need to overcome the split between innovation as driven by supply factors versus innovation as driven by demand factors. • The importance of understandinginteractionbetween agents in the innovation process. • Collaboration with Freeman in the beginning of the 1980s inspired the Mike project – seebelow.

8. In innovation studies theoriesreflectexperiences from ‘paradigmatic cases’ – • Schumpeter on Railways • Freeman on Chemical industry and the Sappho-study • Rosenberg on textiles and textilemachinery • Dosi on semiconductorindustry • Major historical and empiricalprojectsareimportantsources for theorybuilding in innovation studies. • Theory is grounded. Innovation phenomenon is seen as contextspecific and therefore the outcome is historyfriendlymodellingratherthan general theory.

9. Sappho-project 1972 wasimportant in opening up for the insightthat innovation is an interactiveprocess (cf. Chesbrough on Open Innovation) The Sappho-projectwasorganised at Science Policy Research Unit at Sussexuniversity by Freeman, Rothwell and others. On the basis of pair-wiseanalysis of successful and unsuccessful innovations it wasshownthatfirmsthatintroducedsuccessful in innovation: • Interact more closely with customers, suppliersand knowledge institutions (interorganisationalinteraction). • Are characterised by closerinteractionacrossdepartmentswithin the firm (intraorganisationalinteraction).

10. The Mike project 1980-83 anothercrucialexperience and paradigmatic case A project on the socio-economicimpact of micro-electronics. Our Method: Studying the development, diffusion and use of technology in ‘industrialcomplexes’. • Confirmed the importance of interactivelearninginvolvingusers and producers. • But wealsofoundthat the ‘quality’ of the relationshipwas as important as the strength. • Strong and closerelationshipsmay hamper innovation or give rise to ‘unsatisfactory innovation’. The problem of lock in and weakusercompetence. • Industrial complex as more than a cluster – cf. Militaryindustrialcomplex or for Financial Industrial complexwith political power.

11. Product innovation and User-producer interaction - follow up to Mike-project • Product innovation - the informationalparadox – on the information needs of Producers and Users • Product innovation neither in neoclassical pure markets nor in transactioneconomicsmarkets (Williamson 1975) • The organisedmarket as solution • Learning to communicate ( investing in codes and channels) • Building trust and patterns of dominance

12. The product innovation paradox – confrontation with transaction economics • Market where product innovations appear would be characterized by extreme uncertainty (uncertainty regarding the commodity itself). • This would according to transaction cost theory (Oliver Williamson) imply high transaction costs and result in vertical integration. Again we would expect little product innovation. This is in contrast with reality - more than 50% of innovations are product innovations (addressed to external users).

13. Whyprefer the organisedmarket to the hierarchy? • The producer who integrates with one specific user excludes himself from access to information and interactive learning with the other users – lock in. • The user who integrates with one specific producer excludes himself from access to information and interactive learning with the other producers –lock in. • Opportunism is not the general rule – it may flourish in some contexts but not in others. • To analyse vertical integration you have to include benefits from interactive learning on line with transaction costs. Is learning a transaction?

14. What is going on in the interaction between users and producers? • Analysis primarily referring to professional users – in consumer markets producers dominate the interaction and needs are fuzzy for the observer. • Producers monitoring the users in terms of their processes and products • Producers involved in the implementation of new products with feed back – learning from it • Users monitoring the new technological opportunities among producers • Users draw upon producers when installing the new product – learning from problem solving

15. Unsatisfactory innovations • Unsatisfactory innovations are innovations that do not respond to the needs of the users and that do not exploit technological opportunities. They are typically reflecting trajectories that are taken too far. • Unsatisfactory innovations appears when user or producers dominate and when innovations are systemic. • Unsatisfactory innovations may reflect missing or obsolete relationships in the context of technological revolutions.

16. Locational issues • The role of Distance • Geographical • Cultural • Depends on: • Technology lifecycles • Paradigmaticshift • Maturetechnologies • Distinctionbetween the kind of knowledgeexchanged in the interaction – tacit versus explicit

17. Units of analysis • From industries to verticals of production and industrialclusters (cf. Porter) • International competitionbetweenverticals of production and between national production systems • Industrial complexes (clusters) as elements of strength and weakness in national systems of production. • Clusters are not harmonious families of firms– there power struggleswithin and shared power in relation to society.

18. Innovation Process within the firm • Innovation needs to draw upon new knowledge (from R&D-department) • Innovation needs to match the needs of production (involves the production department). • Innovation needs to match the characteristics of new products (involves the marketing department) • Horizontal interaction across the borders of departments is crucial for the success of innovation. • This is why learning organisations are more innovative.

19. In house interaction and Learning organisations • Are more flat and allowhorizontal communication inside and outside the organisationalborders • Establishcross-departmental and cross-functional teams and promote job-circulationbetweenfunctions. • Delegate responsibility to workers and invest in theirskills • Establishcloserco-operation with suppliers, customers and knowledge institutions.

20. Conclusions of the first part • The attack on standard economics and transactioncosttheory for theirneglect of product innovation. Positive sum game. • UP-perspectivecouldbeapplied to intra-firm relationship! • But alsocriticallessons for clusteranalysis from the industrialcomplexperspective – • Lock in, imbalanced power and capability and unsatisfactory innovation • Cluster as collectivepolitical factor

21. The core literature 1990-2009 – all the five most citedworks in Handbookson innovation – areabout innovation as interactive proces and about innovation systems. Nelson, R. (1993): National Innovation Systems: A Comparative Study Porter, M. (1990):The Competitive Advantage of Nations Lundvall, B.-Å. (1992): National Systems of Innovation Cohen, W. and D. Levinthal (1990):Absorptive capacity: A new perspective on learning and innovation Saxenian, A. (1994): Regional Advantage

22. The Modernunderstanding of the Innovation Process • Most innovations areoutcomes of combinations of diverse elements of knowledge. • Suchoutcomesreflectinteractionamong agents with differentinsights and skills. • Interaction is social and reflects formal and informal institutions. • The economy is organised and constituted by social relationships – not just a set of pure markets!

23. Evolutionary socio-economics vs Standard economics – a double change of focus

24. Adam Smith on Innovation and Specialisation in Science • Many improvements have been made by …. those who are called philosophers or men of speculation … who …are often capable of combining together the powers of the most distant and dissimilar objects. • In the progress of society, philosophy or speculation becomes, like every other employment…. subdivided into a great number of different branches, each of which affords occupation to a peculiar tribe or class of philosophers; (Adam Smith 1776: p. 9) :

25. Toward a general Theory of Innovation’Dynamizing Adam Smith’ • Innovation are new combinations: they combine diverse (distant!) elements of knowledge and innovation thrives when people with different background meet and interact. • Innovation drives and shapes the division of labour. The evolution of the division of labour contributes to diversity and opens up new interfaces for interaction. But Smith forgot to tell that the formation of ’tribes’ establish communication problems. (Compare for the barriers between innovation studies, entrepreneurship studies and STS-studies) • Short social distance and low cultural barriers facilitate interactive learning and promote innovation. Tolerant environments are good for innovation (cf. Florida).

26. Innovations as outcomes of interaction between ’disparate actors’ • Innovations are new combinations of existing knowledge elements and these new combinations originate from interaction among individuals and organisations with different kinds of knowledge. • Growing specialisation increases the degree of knowledge diversity and it increates the potential for new combinations. • But there are barriers between: • Disciplines • Professions • Functional departments • Nation states

27. Someimplications for future research • One of myconclusions from studyingthisfield is thatthere is nomeaningful ’pure’ economics of innovation! • This follows from the factthat the learning processes thatare at the verycore of innovation areinteractive and thereforewillbeaffected by the existing social relationships. • This impliesthat a neglect of the social dimension in innovation studies will give misleadinginsightsalso in whatworks at the national and enterpriselevel. • Weneedmuch more systematicempirical research and theoreticalwork on interaction and relationships: • Knowledge taxonomies • Technology taxonomies • Indicators

28. THANK YOU FOR YOUR ATTENTION