Firm’s external environment

2.2.1. Innovation System – structural influences

Since the late 1980s, the term ‘National Innovation System’ (NIS) (Freeman 1982a,b, 1995;

Lundvall 1988, 1992; Nelson 1993) has become widely used to describe the framework for analysing technological change, which is considered to be an essential foundation for long-term economic growth (Intarakumnerd et al. 2002) and the competitiveness of a country. A stream of research has concentrated on different elements within innovation systems. These include universities (Gübeli and Doloreux 2005) and their collaboration with industry (see e.g. Philbin 2008; Bjerregaard 2009; and Dooley and Kirk 2007) as well as the role of regulations within the system (Cetindamar 2001; Delaplace and Kabouya 2001).

The concept of a National Innovation System was first mentioned by Freeman (1982a) and explained by Lundvall (Freeman, 1995). However, the idea was not brand new as its roots go back to Friedrich List’s conception of ‘The National System of Political Economy’, which advocated the protection of industries with policies to accelerate industrialisation through learning to implement new technologies (Freeman 1995).

NIS can be viewed as a subsystem within a national economy, where various organisations and institutions interact and influence each other in undertaking innovative activities (Balzat and Hannusch 2004). NIS describes the intersection of industry and research and development undertaken by many parties. This interaction is affected by the availability of skilled labour (education and training policies), and incentive mechanisms provided by government (Intellectual Property Rights (IPR), tariffs, subsidies, taxation etc).

A distinction has been made between ‘narrow’ and ‘broad’ definitions of national systems of innovation (Lundvall 1992; Freeman 2002; Feinson 2003). The narrow version includes institutions which are directly involved in scientific and technological innovation and promote dissemination of knowledge. The broad perspective takes into account the social, cultural, and political environment embedding the narrow NIS (Freeman 2002; Feinson 2003). Additionally, Lundvall (2007) mentions two layers of NIS and therefore two ways to study it. The core and the wider settings of the innovation system can be studied from the inside-the-firm innovation creation perspective (‘core’) and the outside-the-firm environment

(‘wider’) viewpoint. The research presented in this paper follows the second approach: the narrow interpretation of a NIS. This approach is more common in studying developing countries, where the public infrastructure is presented more openly than firms’ inner processes and the standard indicators of surveys on innovation research may not capture the reality of the innovation system (Lundvall 2007).

Most of the research on NIS has been ex-post rather than ex-ante and has tried to explain and analyse existing NIS since it was developed from studies of industrialised countries and in particular studies on northern European countries. In the case of developing countries, an ex-ante approach is required to analyse the mechanisms behind systems of innovation and to provide a comprehensive understanding of it. Such research has been undertaken on newly industrialised countries in Asia (Kim 1993; Hou and Gee 1993; Wong 1996) and also to a lesser extent on other technologically less successful countries in Asia and Latin America (Dahlman and Nelson 1995; Katz and Bercovice 1993; Arocena and Sutz 2000;

Intarakumnerd 2002). Dahlman and Nelson (1995), who draw their conclusions from a study of the technological capability in 14 developing countries, state that the promotion of human resources is the largest factor for successful development. NIS works through the introduction of knowledge into an economy and require active learning. The success of learning is determined by the absorptive capacity of individuals and organisations, as well as political, social, and economic infrastructure and institutions (Lundvall et al. 2002;

Intarakumnerd 2002; Kitanovic 2007). However, it should be noted that social absorptive capability alone is not enough to explain the differences in the performances of developing economies.

Developing economies have a tendency to adopt technologies from developed countries rather than create their own, due to the relatively low levels of education, productivity, and income (Kitanovic 2007). Gu (1999) suggests that NISs are country and development level-specific. This means that two countries with the same initial characteristics will demonstrate different NIS patterns. However, Gu (1999) also suggests that NIS in developing and developed countries can be distinguished as regards the following lines:

NISs in developing countries are less developed in terms of institutional composition and links between organisational units;

Rapid learning and innovation through imitation is a prerequisite for rapid creation of a NIS by emerging economies;

Market mechanisms are under-developed in emerging countries;

The importance of knowledge and learning are central for the success of NIS in developed countries. Although, it is not so straightforward for developing countries, they still face the need for capital accumulation to secure the operational level of NIS. One distinctive feature of the NIS in developing countries is often a proactive role by the government as a mediator of every link within the NIS.

The importance of capital accumulation (Gu, 1999) is supported by research on Foreign Direct Investment (FDI) inflows. For example, a study on knowledge absorption in emerging economies (Torkkeli et al., 2009) shows that regions with favourable absorption climates are more likely to attract FDI and portfolio investments. FDI is considered to be the major channel by which to transfer technology into a developing country, therefore the importance of absorptive capacity improvement cannot be overemphasised.

2.2.2. Institutional theory and institutional influences

Freeman (1987) defined NIS it as “network of institutions in the public and private sectors whose activities and interactions initiate, import, and diffuse new technologies”, and Lundvall defined “structure of production” and “the institutional set-up” as two most important dimensions that shape the system of innovation (Lundvall 1992). The original definition of NIS emerged from reviewing the set of institutions and their impact on new technologies. In this regard, the research on Institutional theory, seeking to examine the behaviour of organisations, individuals and other actors under institutional arrangements and settings (Ahlstrom and Bruton, 2010) cannot be neglected. Hillman and Keim (1995) state that to better understand the business-government interfaces the institutional settings should be incorporated. They stress, that apart from formal constraints (e.g. legal rules) the informal constraints (as culture and norms) should be recognised. According to North (1991), institutions together with the standard constraints of economics define the choice of a set of business operations, providing the incentive structure of the economy. Though there is a variety of approaches on how to classify various institutions (Hirsch and Lounsbury, 1997) the classification by Scott (2001) is often considered as central (Ahlstrom and Bruton, 2010).

Scott (2001) differentiates between regulatory, normative, and cognitive pillars of institutional theory. Regulatory ones give incentives and a legal framework created by an authoritative body for regulating the system actor’s behaviour (Ahlstrom and Bruton 2010);

the normative and cognitive ones are social constructs, which strongly draw upon culture.

However, the differentiation should be made as a normative pillar represents the actions the organisations ought to take, how they should behave in terms of rights and obligations (Ahlston and Bruton 2010) and cognitive ones explains the actions by rather unconscious ideation structures. Busenitz et al (2000) emphasise that organisations are embedded in country-specific institutional settings based on the legal regime and the business environment. Institutions are often viewed as stable over time (Brintand Karabe 1991), which can be argued by the assumption that e.g. the regulatory framework of the country can be changed rather rapidly by any new regulatory document issued. Table 2 summarises the main features of different approaches to innovation systems.

Therefore, the institutions and the actors within the system should be viewed with the more dynamic perspective offered by the Triple-Helix model (Leydesdorff and Etzkowitz 1996). In addition, this model introduces academic institutions and governmental agencies as the units of analysis for the industrial firms, formerly kept central in Nelson and Winter’s evolutionary view (Leydesdorff and Etzkowitz 1996). Howells (2002), among others, sees the role of universities to be central inside the system, as they are active players in knowledge creation

and transfer. The Triple Helix model emphasises the linkages between the actors in the system.

Table 2 Theoretical views on Innovation Systems

APPROACHES TO ENVIRONMENT FOR INNOVATION CREATION

CENTRAL ACTORS MECHANISMS UNIT OF ANALYSIS

Traditional NIS Industrial firms and

institutions (Lundval

“the institutional set-up” and organisations supporting R&D as the main innovation sources.

Triple-Helix Government,

University; Industry (Etzkowitz and Leydesdorff 2000)

Linkages between the actors operating in a helix mode decision making (Hitt et al, 2004 and strategies Peng and Wang, 2008)

Regulatory, Normative and Cognitive institutions (Scott 2001)

The recently emerged Quadruple Helix model (Jensen and Tragardh 2004) adds the perspective of civil society (Carayannis and Campbell 2009b). In the Quadruple Helix model academia and industry, together with a support infrastructure provide the integrated innovation ecosystem; governments provide the financial support and the regulation system for the definition and implementation of innovation activities. Civil Society demands the perpetual innovation of goods and services. Carayannis and Campbell (2009a) add that the participating elements in the Quadruple Helix Model are the government, research and development (R&D) facilities, industrial R&D facilities, university laboratories, and civil-society based sources of innovation and knowledge.