BASED ON THREE DIMENSIONS
Diagnosing innovation development needs in a peripheral region
Acta Universitatis Lappeenrantaensis 515
Thesis for the degree of Doctor of Science (Technology) to be presented with due permission for public examination and criticism in the Auditorium of 1382 at Lappeenranta University of Technology, Lappeenranta, Finland on the 25th of May, 2013, at noon.
BASED ON THREE DIMENSIONS
Diagnosing innovation development needs in a peripheral region
Acta Universitatis Lappeenrantaensis 515
Thesis for the degree of Doctor of Science (Technology) to be presented with due permission for public examination and criticism in the Auditorium of 1382 at Lappeenranta University of Technology, Lappeenranta, Finland on the 25th of May, 2013, at noon.
Lappeenranta University of Technology Finland
Reviewers Professor Helena Forsman
School of Management University of Tampere Finland
Docent, D.Sc. (Econ.) Päivi Oinas
Department of Marketing, Economic Geography University of Turku
Finland
Opponent Dean, Professor Markku Sotarauta School of Management
University of Tampere Finland
ISBN 978-952-265-401-4 ISBN 978-952-265-402-1 (PDF)
ISSN-L 1456-4491 ISSN 1456-4491
Lappeenranta University of Technology Yliopistopaino 2013
STRATEGIC INNOVATION MANAGEMENT BASED ON THREE DIMENSIONS
Diagnosing innovation development needs in a peripheral region Lappeenranta 2013
203 p.
Acta Universitatis Lappeenrantaensis 515 Diss. Lappeenranta University of Technology ISBN 978-952-265-401-4
ISBN 978-952-265-402-1 (PDF) ISSN-L 1456-4491
ISSN 1456-4491
This thesis examines innovation development needs of firms in a remote rural region. The perspective of the study is in strategic innovation management and three dimensions of innovation development: innovation environment, value delivery and innovation capability. The framework is studied with a theoretical and methodological approach in the context of the development of a regional innovation system and the defining of innovation development needs. The thesis is based on existing innovation management literature, expanding it by examining the features of the three dimensions.
The empirical data of the study comprise 50 purposefully selected firms within the region of Pielinen Karelia located in Eastern Finland. Most of the firms (70%) included in the study represent manufacturing firms, and over 90% are small and medium-sized enterprises. The research data consist of two questionnaires and an interview, which were done during 2011 in the connection of a regional development project. The point of view of the research is in regional development and harnessing the innovation capability of the firms within the region. The principal research approach applies soft systems methodology.
The study explores the means to foster the innovativeness of firms from the viewpoints of innovation environment, innovation capability and value delivery.
In closer detail, the study examines relations between the innovation capability factors, differences in innovation development needs within the value delivery system, between sectors and between firm size categories.
The thesis offers three major contributions. First, the study extends earlier research on strategic innovation management by connecting the frameworks of innovation capability, innovation environment and value delivery process to the defining of innovation development needs at the regional level. The results deepen knowledge especially concerning practice-based innovation, peripheral regions and smaller firms. Second, the empirical work, based on a case study, confirms
the research provides a methodological contribution by applying the innovation matrix in the defining of the innovation development needs of firms. The study demonstrates how the matrix improves possibility to target policy instruments and innovation services more efficiently through indicating significant differences between the innovation support needs regarding various time horizons and phases of innovation process.
Keywords: strategic innovation management, regional innovation system, value delivery, innovation capability, innovation environment
UDC 334.71:608.2:65.011.8:911.373
great possibilities of an innovative small firm in global markets, nevertheless also the challenges which a small firm can face. The CoCo-project administrated by Karelia University of Applied Sciences provided an opportunity to realize this issue in the form of this thesis.
First of all, I would like to express my gratitude for my supervisor, Professor Tuomo Kässi, for his guidance, support and patience throughout the process.
Additionally, I would like thank other people at Lappeenranta University of Technology and especially Professor Olli Kuivalainen, Professor Timo Pihkala, Professor Sanna-Katriina Asikainen and Professor Kaisu Puumalainen for their helpful comments and critiques during the work. I would also like to acknowledge Dean, Professor Vesa Harmaakorpi. In addition, I acknowledge the work of Professor Helena Forsman and Docent, Dr Päivi Oinas as the reviewers of the thesis.
Special thanks belong also to the firms within Pielinen Karelia for their cooperation, time and interest for innovation development issues. This work would not have been possible without them, and my sincere hope is that my short work period with these firms was beneficial for them. It was great to see that such a small remote region involves so many innovative and enthusiastic persons and entrepreneurs.
Additionally, many other people have provided support and contribution for the project at Karelia University of Applied Sciences, the Pielinen Karelia Development Center, the University of Eastern Finland, Savonia University of Applied Sciences, and the city of Lieksa. Specially, I would like to remember the initiators of the project Dr Asko Saatsi from the city of Nurmes and Kari Kallberg and Harri Mikkonen from Karelia UAS. Special thanks also to Dr Miika Kajanus from Savonia UAS for his consultancy during the project.
Last but not least, wholehearted thanks to my dear spouse Markku who has been my most important supporter during this work. This thesis is dedicated to the memory of my mother Liisa, who unexpectedly passed away during this project, reminding us about the vulnerability of life.
Ars longa, vita brevis.
Kuopio, May 2013 Minna Sarkkinen
List of Figures ... 9
List of Tables ... 10
List of Appendices ... 11
Abbreviations ... 12
1 Introduction ... 14
1.1 Background ... 14
1.1.1 Characteristics of RIS ... 16
1.1.1.1 Innovation development programs ... 16
1.1.1.2 Location ... 17
1.1.1.3 Education and population ... 18
1.1.1.4 Economic development ... 18
1.1.1.5 Innovation policy ... 19
1.2 Research objectives ... 20
1.2.1 Earlier research regarding the topic ... 22
1.2.1.1 Innovation environment ... 22
1.2.1.2 Innovation capability ... 25
1.2.1.3 Value delivery ... 26
1.2.1.4 Summary ... 27
1.2.2 Research gap ... 28
1.2.3 Research questions ... 29
1.2.4 Positioning of the study ... 31
1.3 Research structure ... 33
1.4 Summary ... 34
2 Theoretical Foundation ... 35
2.1 The strategy frame ... 36
2.1.1 Strategic thinking ... 38
2.1.2 Systems perspective ... 41
2.1.3 Strategic innovation capacity ... 43
2.2 Innovation and value delivery ... 46
2.2.1 Innovation ... 46
2.2.2 Value delivery ... 48
2.2.3 Co-Creation and users’ involvement in innovation ... 51
2.2.4 Evolution of innovation processes ... 53
2.2.5 Specified focus area ... 54
2.2.5.1 Time horizons ... 58
2.2.5.2 Summary ... 59
2.3 Innovation environment ... 59
2.3.1 Networking and innovation environment ... 60
2.3.2 Regional innovation environment ... 61
2.3.3 Innovation systems ... 62
2.3.4 Regional innovation system ... 64
2.3.5.4 Innovation support services ... 73
2.4 Innovation capability ... 75
2.4.1 Innovation capability variables ... 77
2.4.2 Relationships between innovation capability variables ... 80
2.4.2.1 Networking capability as the independent factor ... 81
2.4.2.2 Marketing capability as the independent factor ... 82
2.4.2.3 Knowledge absorption capability as the independent factor ... 84
2.5 Conclusions ... 86
3 Research Approach ... 89
3.1 System approach to research ... 89
3.2 Case study strategy ... 92
3.3 Soft systems methodology ... 93
3.4 Mixed methods research ... 98
3.5 Measure of innovation ... 99
3.6 Interviews ... 100
3.6.1 Analyzis of the interviews ... 101
3.7 Surveys ... 103
3.7.1 Innovation capability ... 104
3.7.1.1 Partial least squares structural equation modeling ... 105
3.8 Summary ... 109
4 Results and Analyzes ... 110
4.1.1 Description of the regional innovation system ... 110
4.2 Results of interviews (value delivery dimension) ... 113
4.2.1 Time horizons and phases ... 114
4.2.2 Firm size and value delivery ... 115
4.2.3 Sectors and value delivery ... 116
4.2.4 Innovation grade in various phases and horizons ... 117
4.2.5 Innovation service needs in various phases and horizons ... 117
4.2.6 Needs of service provides in various phases and horizons ... 119
4.3 Innovation environment dimension... 120
4.3.1 Importance of innovation activities ... 121
4.3.2 Importance of innovation types ... 123
4.3.3 Importance of innovation goals ... 125
4.3.4 Importance of innovation barriers ... 127
4.3.5 Used idea sources ... 129
4.3.6 Cooperation in innovation ... 131
4.3.7 Innovation service needs ... 133
4.3.8 Correlations between the main results ... 134
4.4 Survey on innovation capability dimension ... 135
4.5 Root definition ... 138
4.6 Concept model and hypotheses for theory testing ... 141
environment and value delivery describe the innovation situation of firms? ... 149
5.1.1 Innovation environment ... 150
5.1.2 Innovation capability ... 152
5.1.2.1 Relationships between innovation capability factors ... 153
5.1.3 Value delivery ... 155
5.2 RQ2: How does the framework comprising the three dimensions of innovation capability, innovation environment and value delivery describe the improvement needs of the RIS in question? ... 157
5.3 Results in relation to the scientific research in the area ... 161
5.4 Practical implications ... 163
5.5 Reliability and validity ... 167
5.5.1 Maxwell’s validity criteria ... 168
5.6 General conclusions and recommendations ... 170 Appendices
Figure 3 The analytical framework. ... 30
Figure 4 Strategic reasoning process. ... 32
Figure 5 Structure of the thesis. ... 33
Figure 6 Transformation process from the viewpoint of a firm. ... 35
Figure 7 The strategy frame ... 37
Figure 8 Three various thinking processes ... 39
Figure 9 Elements of influence on strategic thinking . ... 40
Figure 10 The difference between systems theories ... 42
Figure 11 Change of competitive space of innovation ... 47
Figure 12 Traditional market concep and new market concept . ... 52
Figure 13 Value delivery matrix . ... 55
Figure 14 Schematic descripon of a regional innovation environment ... 61
Figure 15 Principal structure of a regional innovation system ... 65
Figure 16 A framework for the regional development platform method ... 69
Figure 17 Absorptive capacity . ... 85
Figure 18 Research approach. ... 91
Figure 19 SSM process applied in the study . ... 96
Figure 20 Analyzis process. An example. ... 101
Figure 21 Example of a path model ... 107
Figure 22 Innovation system of Pielinen Karelia. ... 111
Figure 23 Distribution of the sectors in the study. ... 113
Figure 24 Innovation capability of firms. ... 136
Figure 25 Innovation capability relationships between status and goals. ... 137
Figure 26 Root definition ... 140
Figure 27 Theoretical model between the factors. ... 142
Figure 28 PLS-SEM.. ... 144
Figure 29 Summary of the results of PLS-SEM. ... 154
Figure 30 RIS with the statistically significant relationships. ... 159
Table 3 Classification of innovation support services for SMEs ... 74
Table 4 Classifications of innovation capabilities and related references. ... 78
Table 5 Summary on references describing the connections ... 87
Table 6 Research approaches according to Neilimo and Näsi (1980). ... 89
Table 7 Structure of the analyzis of the open interviews. ... 101
Table 8 Structure of the questionnaire on innovation environment………..103
Table 9 Structure of the survey on innovation capability. ... 105
Table 10 Relations between three horizons and three phases. ... 114
Table 11 Relation between the firm size categories ... 115
Table 12 Comparison of service and manufacturing firms ... 116
Table 13 Innovation grades and differences. ... 117
Table 14 Service needs and differences. ... 118
Table 15 Service provides and differences ... 119
Table 16a Importance of innovation activities and differences (size). ... 121
Table 16b Importance of innovation activities and differences (sector) ... 122
Table 17a Importance of innovation types and differences (size). ... 123
Table 17b Importance of innovation types and differences (sector). ... 124
Table 18a Importance of innovation goals and differences (size) ... 125
Table 18b Importance of innovation goals and differences (sector) ... 126
Table 19a Importance of innovation barriers and differences (size). ... 127
Table 19b Importance of innovation barriers and differences (sector) ... 128
Table 20a Used idea sources and differences (size) ... 129
Table 20b Used idea sources and differences (sector) ... 130
Table 21a Cooperative actors and differences (size) ... 131
Table 21b Cooperative actors and differences. (sector) ... 132
Table 22a Service needs and differences (size) ... 133
Table 22b Service needs and differences (sector). ... 134
Table 23 CATWOE analyzis. ... 139
Table 24 Overview of the quality criteria of factors. ... 145
Table 25 AVE values and squared correlations of factors. ... 146
Table 26 Relationships of the PLS-SEM model. ... 147
Table 27 Comparison stage for action plan. ... 164
Annex C Innovation environment: statistical details Annex D Innovation capability: statistical details Annex E Details of PLS-SEM
Annex F Coding of interviews
CATWOE Customers, Actors, Transformation, Weltanschauung, Owner, Environmental constraints
CR Composite Reliability CV Cross-Validated
CVC Continuous Value Creation DUI Doing, Using, Interacting
EC European Community
EFI European Forest Institute EIS European Innovation Scoreboard
ELY Center for Economic Development, Transport and the Environment EN Normed Entropy Statistic
ERIS Entrepreneurial Regional Innovation System
EV Exchange Value
HAS Human Activity System
ICT Information and Communication Technology IPR Intellectual Property Rights
IRIS Institutional Regional Innovation System KIBS Knowledge-Intensive Business Services NBIC Networked-Based Innovation capability
KM Knowledge Management
LV Latent Variable
NEIC New Economy Innovation Systems
NESTA National Endowment for Science, Technology and the Arts OECD Organization for Economic Co-operation and Development PACAP Potential Absorptive Capacity
PLS-SEM Partial Least Squares Structural Equation Modeling RACAP Realized Absorptive Capacity
RD Root Definition
R&D Research and Development
RDI Research, Development, Innovation RIS Regional Innovation System
RPDM Regional Development Platform Method SD Standard Deviation
SECI Socialization, Externalization, Combination, Internationalization SEM Structural Equation Modeling
SME Small and Medium-sized Enterprise S&T Science & Technology
STI Science, Technology, Innovation
SWOT Strengths, Weaknesses, Opportunities, Threats TEM Ministry of Employment and the Economy
UV Use Value
VDS Value Delivery System
1 Introduction
The first chapter concerns the overall rationale of the thesis. It describes the general background of the study, as well as the objectives and scope of the work.
It presents the positioning of the research and the connection of the thesis to earlier research in the field. Furthermore, it identifies the research gap and related research questions. In the end of the chapter, the structure of the thesis is illustrated.
1.1 Background
There is one thing stronger than all the armies in the world, and that is an idea whose time has come.
Victor Hugo High innovation capability of firms, regions and nations is an important factor for economic survival, success and growth. However, the globalization of the business has changed the nature of innovation processes. At regional level, globalization is a challenge and an opportunity. Instead of the ownership of resources, firms need improved capabilities to gain access to global networks of resources and knowledge (Prahalad & Krishnan, 2008). Also the capability of firms to use external knowledge is a key factor from the viewpoint of the success of their innovation operations (OECD, 1999). This challenges national and regional innovation systems to meet the changing requirements of the global business and firms.
From the point of view of strategic management, innovation is an important source of competitive advantage (see e.g., Wen-Cheng et al., 2011; Porter &
Stern, 2001; Zawislak et al., 2012; Lawson & Samson, 2001). Thus, the question regarding the means to stimulate innovativeness is important from the perspective of firms and policy-makers. Innovation can be considered as a strategically critical instrument, while the purpose of innovation is to create future (Morris, 2010).
This is supported by the well-known statement that the future cannot be created, but futures can be invented (Gabor, 1963). Today, many scholars and public authorities think that from the perspective of national economy, the quality of enterprises is more important than the number of enterprises, referring to the need of growth enterprises (e.g., Sorama & Saarakkala, 2009). Correspondingly, we can say that the quality of innovations is more important than the number of innovations to ensure success for firms. The common definition of innovation (commercial exploitation of ideas) is limited, and innovation should be considered as strategic conduct regarding processes and structures accounting for knowledge
creation in the context of firms’ business systems (Edwards et al., 2004). In line with this, it has been stated that managers typically try to add a value proposition to the old framework, although the approach should commence from the identification and choice of the value proposition, continuing with consideration on how to provide the desired experience and how to communicate it to the users (Lanning, 1998).
A change in the paradigm of the scientific, technology and innovation (STI) policy can be identified within the EU and Finland in the rise of models that emphasize the development of interaction, innovation processes and innovation capabilities, instead of development of conventional regional clusters only (Viljamaa et al., 2009). A change of the paradigm can also be recognized in the national innovation strategy of Finland, which emphasizes the development of innovations in a limitless world, the development of demand and user-based innovations, and the importance of innovative individuals and firms, in addition to the systemic nature of innovation (TEM, 2011). The role of regional innovation systems in the development of the innovation performance of firms has aroused increasing interest in this respect. The interest in regional innovation systems can be explained partly by regional discrepancies in economic growth and social welfare (Fagerberg & Verspagen, 1996). Additionally, innovation systems involve a role as a political tool at the regional level (Asheim et al., 2003).
The present study focuses on defining the innovation development needs of firms located within a peripheral region. Innovation services, support and technology transfer for firms in rural and remote regions have received considerably less interest and resources in comparison with firms located in university cities and densely populated areas (Lemola & Lievonen, 2004; Suorsa, 2007). However, the importance of studying innovation possibilities and prerequisites in rural environments will increase in future, if we wish to develop the economic structure of rural regions (Lemola & Lievonen, 2004). The change of the paradigm of innovation policy is also seen be of increasing importance in practice-based innovation (Viljamaa et al., 2009), which is more characteristic for small city regions and has typically focused on the development of innovation capabilities (Harmaakorpi & Melkas, 2008).
The three dimensions of strategic innovation management stem from the background of the research. The research is based on a regional cohesion and competitiveness (CoCo) development project that connects the research to the dimension of the innovation environment and the regional innovation system (RIS). The principal objective of the regional development project was to improve the economic performance and competitiveness of the firms and the region referring to the dimension of value delivery. The purpose of the project was to find firms which have the need and aim to develop their products and operations, but insufficient innovation capability to use the required resources, which connects the research to the dimension of innovation capability.
1.1.1 Characteristics of RIS
Rural and remote regions are typically said to have some common characteristics hindering innovation. It is generally argued that the development of innovation systems in peripheral regions is difficult due to lack of complementary technologies and relevant actors, that is, organizational thinness (Tödtling &
Trippl, 2005). Structural problems of less-favored regions can comprise features such as: poor capacity of firms to identify their innovation development needs, lack of innovation intermediaries, weak financial systems, lack of efficient business services, weak co-operation between public and private sectors, sector- based specialization, low participation in international RDI networks, weak public assistance for innovation, and poor suitability of aid systems for the innovation needs of SMEs (Landbaso et al., 1999). Furthermore, the emergence of a regional innovation paradox of small firms in peripheral regions can be identified in the limited availability of resources in comparison with large city areas, in the firms’
low knowledge of the availability of resources and services outside the region, and in the underdeveloped innovation systems (Landbaso et al., 2001). Many of these features can also be recognized within the region in question. However, precisely these regions have the highest need to promote the use of public financing to support innovation, to improve the prerequisites of firms for innovation, and to search and use innovation services (Charles et al., 2000).
Despite the many problems, some statistics indicate that remote and rural regions may have good innovation potential. For example, Hyvönen and Saarinen (2009) have studied the geographical distribution of innovations in Finland. The study divides areas into three categories where the central areas represented current growth centers, intermediate areas were located close to the growth centers within the distance of the working area, and the periphery represented other areas outside these. The corresponding R&D investment in the central and intermediate areas was 81.5% (Statistics Finland, 2005). According to the study, the number of innovations in the growth centers has decreased during the last 60 years, while it has been constantly close to 40% in the periphery, despite the low percentage of R&D-investments. In addition, the study analyzed the geographical distribution and development of innovations in individual sectors (traditional sectors, machinery, electronics, software and no-innovations) over two time periods. Based on the study, the region of Pielinen Karelia had no innovations during 1945-84, however during 1985-2005, innovations increased especially in traditional sectors (Hyvönen & Saarinen, 2009).
1.1.1.1 Innovation development programs
The innovation environment of Pielinen Karelia is part of the innovation environment of North Karelia. The Regional Strategic Program 2030 (Regional
Council of North Karelia, 2010) defines the long-term development strategies of North Karelia, including the main targets of innovation policies. The strategic program of North Karelia emphasizes the importance of entrepreneurship and internationalization, competitive trade and business activity (Regional Council of North Karelia, ibid.). The innovation development program of North Karelia contains four focus areas including a common development program and networking that support the production of innovation solutions in firms (AKO, 2010). Additionally, focus areas aim to development of clear service offering and customer-based product and innovation development for advancing the business development of organizations. An aim is to adopt innovation thinking in firms to promote the production of innovations, and to promote utilization of new funding instruments and renewal through product and service development to enable firms to create new products, services and solutions for customers continuously. The defined innovation activities include for example an innovation forum, commercial innovation services, activation of firms for innovation development, and promotion of user and demand-based innovation approaches (AKO, 2010).
The program involves the aim to solve the identified problems in the RIS regarding low networking with research organizations and low R&D investment.
1.1.1.2 Location
Location matters for example when competing for customers and best employees, and the physical infrastructure is a typical problem especially for firms that need to transport products for long distances (Viljamaa et al., 2008). This is linked to policies concerning climate change and reduction of emissions, which may include a higher price for rural regions, if for example the rural residents and industry must pay the same taxes as the people and firms operating in regions where distances are short (OECD, 2009a).
Location is an issue also in the region of Pielinen Karelia, which is situated in a peripheral area in Eastern Finland next to the Russian border, which is challenging from the perspective of global markets. Pielinen Karelia is a sub- region of the region of North Karelia and a part of the province of Eastern Finland. The region consists of two towns and one municipality. According to the EU (2008), the region is classified as a predominantly rural and remote region, which means that more than 50% of the population live in local rural units and less than 50% of the population can reach a city of at least 50 000 inhabitants within 45 minutes. In Pielinen Karelia the accessibility by road to the closest city Joensuu is more than 60 minutes (approx. 100km), and it can be thus classified as a rural and remote region. The nearest airport is in Joensuu. The distance from the region to the capital Helsinki is about 500 km. Furthermore, according to the
application of a pan-European accessibility model, the region is classified as either extremely or very peripheral (Spiekermann & Aalbu, 2004).
1.1.1.3 Education and population
A policy area is the availability of public services, such as education and health care, which usually contain higher unit costs in rural regions (OECD, 2009a). The region includes three vocational schools. The closest university town is Joensuu.
Additionally, the nearest university of applied sciences is located in Joensuu. Lack of education possibilities and lack of educated workers are typical problems of remote regions (Viljamaa et al., 2008). Education is concentrated on middle-level knowledge and skills, the educational and research institutions are small, their resources are limited, and people need to move outside the region to find education, which causes brain drain from rural regions. Nevertheless, the benefit of these areas is that the local educational institutes normally produce knowledge and skills especially required in the region, they can provide innovation services especially needed in the region, and communication is easy due to geographical proximity (Viljamaa et al., ibid.).
In addition to the remote location, the region of Pielinen Karelia faces challenges due to low density of population and ageing. The population of the region is 23 431 according to statistical databases (Statistics Finland, 21.12 2011), and the area of the region is 5.800 km2 (PIKES, 2011). The Ministry of Employment and the Economy (TEM, 2010a) has studied the development of population and workplaces in various regions of Finland during 2000-2009. The studies indicate that the population reduced significantly in the whole region over the period, the number of workplaces increased in the cities of Lieksa and Nurmes and decreased in the municipality of Valtimo during 2000-2007.
1.1.1.4 Economic development
In general, promoting economic growth is a primary policy area of rural regions, requiring self-sufficiency and access to financial capital and innovations (OECD, 2009a). In this respect, typical characteristics and problems of peripheral regions include: a high degree of unemployment and difficulty in generating new jobs, a high number of people moving away from the region, a low number of expanding or dynamic sectors, marginal importance from the viewpoint of the national innovation system, and low amount of available political RDI resources (NIC, 2005). This is reflected in innovation debates dealing with regional economic development, which have generally focused on densely populated, technologically advanced areas and around university cities, undervaluing rural regions and their integration in national innovation systems (NIC, ibid.). An identified common
challenge of remote and rural regions is financing, since investors prefer firms in new economies locating in growth centers, and the small size of firms implies typically limited resources for R&D, causing more dependence on funding from outside the region (Viljamaa et al., 2008). Considering the strengths of the region, in addition to forest industry, the main and increasing strength of the region of Pielinen Karelia in global scale is ecotourism, which is also a focus of innovation development plans (Synocus, 2011). Additionally, general strengths of peripheral regions are high motivation of workers and independency of firms from universities in innovation, as well as functional flexibility of firms (Viljamaa et al., 2008). However, changes in the economic environment such as rapid development of ICT, structural changes especially regarding expansion of service sector, and developments in transport and communication technology involve an impact on the concept of peripheral region (Copus, 2001).
1.1.1.5 Innovation policy
The innovation policies of small and large city regions comprise general differences: small-city regions emphasize practice-based innovation policies, whereas the policies of big-city regions are more research-oriented (Harmaakorpi
& Melkas, 2008). The characteristics of the region in question, and this study, thus emphasize a practice-based innovation policy. A challenge in the planning and implementation of innovation policies in peripheral regions is path- dependency with regard to the local environment, which can form a risk if it focuses the support too considerably on existing traditional production systems, which can prevent recognizing new potential development targets and adaption of new innovation processes (Kautonen et al., 2002). The path-dependency can also form a functional, cognitive or political lock-in effect, when regional resources and support actions contain a too narrow focus on only one or a few sectors (Grabher, 1993). Other potential problems are a transfer problem, which refers to firms that possess strong RDI competence in their own sector and weak outside their own region (Smith, 2000), and a learning problem, which refers to the too slow ability of firms to learn (Marleba & Orsenigo, 1996). Furthermore, an appropriation trick refers to a problem related to a restricted capability to adapt new technology, which is a consequence of trying to hide knowledge (Marleba &
Orsenigo, ibid.).
1.2 Research objectives
The aim of the study is to analyze the specific features of one region. Regional discrepancies in innovation require tailored decision-making and tailored political actions, suggesting lack of a one-size-fit-all policy portfolio (Nauwelaers &
Wintjes, 2000; Cooke, 2008; Wintjes & Hollanders, 2010; OECD, 2011).
Furthermore, the results of the Regional Innovation Monitor (Walendowski et al., 2011) state existence of a great diversity in the performance of innovation patterns between European regions. Thus, a prerequisite for the customizing of a policy portfolio for regional specific features is to understand the specific innovation development needs of firms and opportunities for innovation support (Nauwealers
& Wintjes, 2000; OECD, 2010), which is the objective of this research.
The principal perspective of the research is in regional innovation management and strategic thinking. Strategic thinking focuses on strategists and their reasoning processes (De Wit & Meyer, 2010). Strategic thinking is based on the systems perspective, where a strategist creates a mental model on the system and interdependencies within the system (Liedtka, 1998). This reflects the framework comprising the innovation environment, innovation capability and value delivery and the connections between and within the dimensions. In this research, strategic thinking considers and combines various viewpoints of innovation development. Innovation management is actually the development of business because the purpose of innovation is to improve the growth of business, profitability and competitiveness (Malinen & Haahtela, 2007). Malinen and Haahtela describe value creation, innovation environment and innovation capabilities as the three main dimensions of innovation operations, which are connected by strategic management. Within the model, understanding value delivery forms a prerequisite for strategic planning and management, innovation capabilities are required to be able to create value, and environmental factors include a connection to the innovativeness of organizations. Figure 1 illustrates the three angles of the theoretical framework that are connected via strategic innovation management.
Region Innovation environment
Strategic innovation management
Innovation capability Value delivery
Figure 1 Theoretical framework of the research (applied from Malinen &
Haahtela, 2007).
The objective of the present research is to apply the proposed theoretical framework in the context of strategic innovation management at the regional level. More precisely, the purpose is to study the characteristics of the region from the three various angles to form a comprehensive understanding on the innovation development needs of firms. The principal problem is limited to the region and the economic growth of the region and the firms within the region. This is tackled through defining the most essential innovation development needs of the firms concerning innovation environment, value delivery process, and innovation capabilities.
The theoretical framework used within this work uses the term value delivery instead of value creation. Value creation is considered as a part of the broader concept of value delivery, although the concepts are often used interchangeably.
The business should be managed as a value delivery system with focus on value delivery, instead of the conventional focus on a product supply system and product supply (Lanning, 1998).
Additionally, the concept of innovation capability demands clarification. The definitions of the concepts of capabilities and capacities are diverse, and clear consensus on the definition of innovation capability is still missing among scholars (Zawislak et al., 2012). Several attempts have been made to clarify these concepts. For example, from the viewpoint of Wang and Ahmed (2007), capabilities are based on resources, which represent the bottom of the hierarchy.
Capabilities are at the next level of the hierarchy and they are considered as a firm’s capacity to deploy resources. Some terms are related to capability, such as core capabilities, which refer to strategically important capabilities and resources.
Innovation capability belongs with adaptive capability and absorptive capability to dynamic capabilities, which refer to processes aiming at the renewal, reconfiguration and re-creation of capabilities and resources. Adaptive capability focuses on the adaption of internal organizational factors along with external factors, and absorptive capability aims to capture external knowledge, to integrate and use it with internal knowledge. Innovation capability refers to a firm’s ability to develop new products and other choices by considering strategic innovative objectives, suggesting that innovation capability links the resources and capabilities with the markets. Capability development is a time-dependent outcome of dynamic capabilities that is typically directed by strategic actions.
Capability development and dynamic capabilities are linked to firm performance, which is typically measured by market and financial indicators, which can be linked to the value delivery ability of firms. (Wang & Ahmed, 2007)
The development of innovation capabilities is considered as a central issue for the improvement of the innovativeness of the firms and the region (AKO, 2010).
The issue is an interest to the regional decision-makers, and therefore the aim of the study is to provide information for regional strategic planning. This study concerns regional innovation system (RIS) as a system. It has been argued that the
capabilities of the actors are the main features of the system, determining the characteristics of the system (Carlsson et al., 2002). The development of the capabilities reflects also the dynamic properties of the system, that is, the ability to change and renew.
1.2.1 Earlier research regarding the topic
Several earlier researches have concerned the regional innovation environment, value creation, and the innovation capability of firms. This section discusses some of the relevant studies from the perspective of this research, their main results and gaps in relation to the present thesis. The review emphasizes the studies concerning innovation environment and its connection to other dimensions and RIS.
1.2.1.1 Innovation environment
For example, trans-national Nordic project concerning innovation systems and the periphery (Norden, 2005) has explored how innovation capabilities of firms in peripheral regions could be enhanced through the regional policies and the development of innovation systems. The research was based on case study approach including 14 peripheral regions from five Nordic countries. The key findings of the project showed that innovation can take place in the peripheral regions and rural lifestyle can be a potential source of innovations. However, the results showed that insufficient visibility of regional innovation policy and associated services is a problem, cross-sectoral policies are needed to avoid sectoral lock-in, knowledge and competence base of the firms needs improvement, entrepreneurial culture needs facilitation, use of networks should be improved, the framework conditions for business competitiveness should be stronger, and continuing research is required. Nevertheless, the study was limited only to a few specific sectors and general themes such as innovation activity, knowledge and competence base, networking and innovation conditions, excluding value delivery concept and various innovation capability factors.
Furthermore, Zygiaris (2012) has studied features of the regional innovation systems through the framework consisting of analytical capabilities. According to the results, the regional innovation systems of the weaker regions need also other support actions in addition to increased spending on R&D, which supports need to study innovation development needs accounting various viewpoints.
Van Hemert (2012) has studied the influence of innovation sources and networks on the performance of SMEs. The study focuses on the influence of regional and national innovation systems on the competitiveness of Dutch SMEs.
The results highlight the usefulness of the voucher support system for promoting
the innovation of small and micro-size firms with insufficient resources of their own. The lack of financial and human capital resources are considered as significant barriers for small and micro-size firms. The results indicate a need of networks with universities to support the creativity of SMEs. The study shows that the exploration and exploitation of innovations are based on separate sources and networks. The study also shows that external support activities can enhance the innovation of SMEs. In general, the results indicate that the influence of the networking capability of firms is worth a closer study in the area of this research.
Furthermore, the findings on differences between the exploration and exploitation stages support the use of a value delivery system model that creates a distinction between value identification, development and communication. However, the study is limited to the effects of networking and innovation sources on the competitiveness of the firms, thus concerning a relatively narrow area of variables and the causal relationships between them.
Several other studies have concerned some specific issues regarding innovation environment. Many of them have investigated barriers to innovation within some specific area, industry or firm size. For example, Scozzi et al. (2005) have studied methods for modeling and supporting innovation processes in SMEs.
The study identifies the problems facing firms in the innovation processes and the potential support through techniques for process modeling and analyzis.
Kaufmann and Tödtling (2002) have studied effectiveness of innovation support for SMEs within one region in Austria. The study considers innovation barriers of SMES and concludes that some of the support instruments do not meet the needs of the SMEs. Furthermore, the European study “The regional impact of technological change in 2020” (Wintjes and Hollanders, 2005) includes statistical researches about barriers hampering research and innovation and supporting policy measures in addition to analyzes on regional disparities. The results emphasize the great diversity between the regions regarding development pathways and trajectories of innovation. In general, the results support especially the need to diagnose closer the innovation development needs of smaller firms in the region in this study. The importance to increase understanding on innovation behaviour of firms is also supported by the study of Sternberg and Arndt (2001), arguing that internal firm specific determinants of innovation are more important than regional and external factors. Laforet and Tann (2006) have focused in their research on drivers of innovation in small manufacturing firms. The findings define differences between small and large firms with regard to various aspects of innovation such as risk-taking attitude and flexibility to change, hence emphasizing importance to investigate the impact of firm size to innovation situation.
Studies of Ranta (2011), Kautonen (2006), Uotila (2008), and Harmaakorpi (2004) concern some issues regarding innovation environment within a few regions in Finland. Ranta (2011) has studied network intensity and organization
modes in a regional innovation environment. He analyzed the characteristics of networks and cooperation in regional innovation environments from the perspective of organization and network research. According to the study, strategic, structural and social dimensions are central in the organization of the innovation environment. However, the forms of the organization of collaboration vary between regions. Additionally, dealing with the issue of the innovation environment and networking, Kautonen (2006) has studied various elements of the innovation system. The research concerns firm-level innovation activities and their spatial relationships, with special emphasis on networking with other organizations and firms at the regional level. The results show lack of any special innovation related forms of organization between firms at the regional level, in other words, the innovation environments and systems are spatially multi-level ones. The study also indicates regional level linkages that are important for innovation activities, such as universities and labour markets. To sum up, the studies of Ranta (2011) and Kautonen (2006) focus on networking and the organizational characteristics of the innovation environment, highlighting the role of the innovation environment. Nevertheless, they do not consider various aspects of the value delivery process or innovation capability.
Moreover, Uotila (2008) has studied the utilization of future-oriented knowledge in regional innovation processes in Finland. The work emphasizes the use of foresight activities at various levels of innovation systems and the integration of future-oriented knowledge with innovation activities, especially in practice-based innovation processes. The results emphasize the use of futures research for the improvement of visionary capability at the regional level.
Visionary capability is considered significant for the definition of future optional development paths and for improving the efficiency of regional thematic innovation networks. The results indicate also a need for improvement in the interpretation of the foresight results into a useful form. The study highlights the role of the absorptive capacity of future-oriented knowledge as a dynamic capability required for competitiveness. In general, the study focuses on futures research and reflects its connection to networking and absorptive capacity as a dynamic capability. The study also indicates that networking is an important issue at the regional level in addition to absorptive capacity, implying that these capability components are worth a closer study.
Harmaakorpi (2004) focuses on innovation development tools for a regional innovation system. The study emphasizes the importance of regional dynamic capabilities to support regional competitiveness, based on regional resource configurations. The main result of the study is a new tool (the regional development platform method RDPM) for regional innovation policy, which helps to understand the effects of techno-economic changes, path-dependency and agglomeration, avoid lock-in, define resource configurations, create networks and improve absorptive capacity, create social capital, advance dynamic capabilities,
and support the understanding of the governing environment for policy forming.
The results of Harmaakorpi (ibid.) highlight the important role of dynamic capabilities, which supports the importance of studying the impact of various capability variables.
1.2.1.2 Innovation capability
Considering the earlier studies dealing with issues of innovation capability, for instance Martinez-Roman et al. (2011) have presented an innovative capability- based non-linear model, which was used in a study aiming to analyze innovative outcomes of SMEs within an area characterized by low level R&D activity. The model accounted also environment and contextual variables of the firms. A multiple linear regression and quadratic model was used in the analyzis. The test indicated good relevance of innovation capability and lower importance of contextual and environmental factors. The study supports use of innovation capability as an indicator in measuring innovation of SMEs representing various sectors and located in a rural area where traditional indicators do not provide sufficient data for policy-making. The study also supports diagnosing of innovation development needs at the firm level. However, the study was geographically limited, including only one region in Spain, relationships were based on linear regression instead of structural model, limited number of innovation capability variables was used in the study, and the focus of the study was in innovative outcomes instead of value delivery process. With regard to other studies on innovation capability, for example Fuhl (2006) discusses the importance of dynamic capabilities as a source of competitive advantage.
However, the research is limited to two firms within Korea. The results emphasize the importance of the context, structure and best practices as influencing factors of dynamic capabilities. Furthermore, the results show that the influencing factors do not depend solely on environmental factors or organizational factors.
Berghman (2006) examines learning mechanisms in the context of strategic innovation capacity. Berghman deals with issues of the strategic innovation, development of the strategic innovation capacity of firms, and dynamic and absorptive capabilities. The study identifies factors which promote the strategic innovation of firms and analyzes their causalities through structural equation modeling. The study involves several theoretical and managerial contributions.
The theoretical contributions clarify the concept of strategic innovation and development of strategic innovation capability within firms. The study also integrates the concept of strategic innovation capacity with dynamic capabilities and absorptive capacity. Additionally, the study contributes to the measurement of absorptive capacity, and supports the use of mixed methods in strategic management research. The empirical results indicate positive effects of proactive
market orientation of firms on strategic innovation, which denotes development of a learning relationship with customers in practice. The study shows that the improvement of strategic innovation capability should be based on integrated marketing approach instead of investment in traditional market research. The results support also the application of a value delivery system-based method in diagnosing the innovation development needs of firms, through indicating a positive influence of proactive market orientation in firms. However, the study does not consider its connection to the innovation environment or value delivery systematically.
In general, the studies focusing on innovation capability emphasize the important role of innovation capability. Nevertheless, studies on causal relationships between innovation capability variables are limited in number.
1.2.1.3 Value delivery
The concept of value delivery has been studied from diverse perspectives and in various contexts, emphasizing its connection to marketing. For instance, Weerawardena and Mavondo (2011) highlight the need to study relationship between dynamic capabilities and competitive advantage and organizational performance. According to their literature review, a direct relationship between dynamic capabilities and a firm’s value delivery and competitive advantage is not clear. Instead, they see that dynamic capabilities provide only foundation for competitive advantage through new resources deployed through dynamic capabilities. In other words, the value of dynamic capabilities is in operational capabilities that they create. Especially, the relationship between dynamic capability, operational capability and value delivery calls closer examination, which is partly reflected in this study.
1.2.1.4 Summary
Table 1 depicts a summary on the referred earlier studies in the area and their relationships to the RIS, three dimensions and analyzis of innovation capabilities.
Table 1 Summary of the earlier studies regarding innovation environment.
Reference RIS
context
Dimensions:
IE=innovation environment, IC=innovation capability, VD=value delivery
Causal analyzis of innovation capability factors
IE IC VD
Norden, 2005 x x x (x)
Zygiaris, 2012 x x x (x)
Van Hemert, 2012 x x (x) (x) (x)
Scozzi et al., 2005 x x
Kaufman & Tödtling, 2002 x x (x)
Wintjes & Hollanders, 2005 x x (x)
Laforet & Tann, 2006 x (x)
Ranta,2011 x x
Kautonen, 2006 x x
Uotila, 2008 x x (x)
Harmaakorpi, 2004 x x (x) (x)
Martinez-Roman et al., 2011 x x x (x) x
Fuhl, 2006 x x
Note: (X) addressed partly or indirectly.
In general, many of the studies indicate a connection between two or three dimensions, supporting a need to study the issue from the perspective of the proposed three-dimensional framework. However, the studies are not systematic theoretical or empirical studies including all three viewpoints in the context of RIS and the diagnosing of innovation development needs at the firm level.
Additionally, the studies on the relationships between innovation capability variables are limited, typically including only a few variables and without a connection to the two other dimensions. Furthermore, the angle of value delivery and the related innovation development needs of firms in various phases or horizons have not been directly considered in any of these studies.
1.2.2 Research gap
The present research is based on the framework of value delivery, innovation environment and innovation capability. There have been several valuable studies on innovation development at regional level from various perspectives.
Nevertheless, none of these studies integrates all three dimensions of innovation development in the context of diagnosing innovation development needs at the regional level. Furthermore, little has been written on the integrated influence of the three specific dimensions or the relationships between the innovation capability factors in the context of RIS. Therefore, the purpose of this study is to provide more information and theoretical contribution within this specific area (3D) and context (RIS). Figure 2 sums up the identified research gaps.
Figure 2 Research gaps. Note: 3D refers to three-dimensional and RIS to a regional innovation system.
This study proposes using the framework as a theoretical and methodological approach in the context of the development of a regional innovation system and diagnosing innovation development needs. The research builds on existing theories on the three dimensions of innovation management, elaborates the theories and provides new insights by:
examining the features of the three dimensions through defining innovation development needs at the firm level, and providing information on specific innovation development needs within the region to improve the regional innovation system;
using structural equation modeling (SEM), the research offers information on the structural relationships between the innovation capability factors in the context of the three dimensions and RIS; and
Theory exists on the 3D model of strategic innovation development, however, application on diagnosing of innovation
development needs in RIS context is missing.
Gap1
Research results exists on diagnosing of innovation
development needs based on individual dimensions, however not on simultaneous integration of three dimensions.
Gap2
Research results exist on singular relationships between the innovation capability factors, however not structural equation model in the context of 3D and RIS.
Gap3
by making suggestions for good practices to be used in diagnosing innovation development needs on the basis of the studies.
1.2.3 Research questions
To make correct and efficient decisions on regional policy instruments, strategies and development programs, there has to be sufficient understanding of the innovation development needs of firms. It is crucial for policy-making to know why firms innovate, to be able to improve their performance (OECD, 2005). It has been argued that the current measures of innovation are not sufficient, and new analytical methods are required to improve the understanding of innovation processes (OECD, 2010). The importance of understanding micro-behavior in the core of the system in addition to broader settings of operation has been emphasized by scholars (see e.g., Lundvall, 2005). It is known that firms involve the most important role in the innovation system, and thus the first step is to analyze the behavior of firms in studying national and regional innovation systems. Furthermore, it has been stated that policy-makers have great difficulties in making relevant policy prescriptions, and accounting for diverse needs of firms and decisions are often based on unconfirmed presumptions, concepts and intuitions (Landry & Amara, 2012). Features such as uncertainty, complexity, interconnectivity, and contradictory and ambiguous priorities in addition to unclear consequences of solutions are characteristic for the environment of decision-making presently (Jacobs, 2010). Innovation policies are typically based on the number of patents and spending on R&D although they in reality depend on many other determinants (Amara, 2012). The studies on the innovativeness of firms indicate that firm-specific factors are more important than region-specific effects in explaining the innovativeness of firms (Beugelsdijk, 2007). The stated need to improve diagnosing methods for innovation development, the still widely prevailing top-down approach and policy-making in the development of regional innovation systems, the narrow focus on concrete outcomes of innovation activities, radical innovations and the number of patents, the focus on central university towns, densely populated areas, large multinational firms, and high- tech innovations form drivers for this research, in addition to the specific development needs of the region in question (Pielinen Karelia in Finland).
The background of the study is a regional development project that connects the three dimensions of the innovation environment, value delivery and innovation capability of firms. It is known that firms have a central role in the development of regions. Small and medium-size enterprises (SMEs) account for over 95 % of firms in the OECD countries, they are responsible for more than two-thirds of the GDP on the EU and for over 60 % of job creation (OECD, 2011). Especially new firms, SMEs and innovations are considered important for
the economic development of the region in question. Innovations and SMEs involve a potential to promote economic growth and thus the expectations for the development of firms through innovations have increased in the region (PKAMK, 2010). However, especially many small firms have insufficient innovation capability in the region (PKAMK, 2010). The focus of the project and the research is within this gap, aiming to analyze and identify various approaches of how to fill the gap, in other words, how to improve the innovation capability of the firms. Thus, the research questions include a practical and a societal purpose based on problem solving. Moreover, improvement of the competitive capability of the firms is the first focus point of the economic strategy plan of the region (PIKES, 2010). The goal of the project is to promote the improvement of the innovation capability of the firms, the development of innovation activities, and efficient interaction within the innovation environment, as these are the strategic goals of the innovation development plan of North Karelia (AKO, 2010).
The analytical framework of the research based on the three main dimensions of innovation management is presented in Figure 3.
Economic dynamics, regulations, laws, infrastructure, authorities, quality of life etc.
INNOVATION ENVIRONMENT
VALUE DELIVERY INNOVATION CAPABILITY
Value for customers, owners, and shareholders
Skills, resources, processes, performance etc.
Figure 3 The analytical framework (applied from Malinen & Haahtela, 2007).
The innovation environment includes a variety of actors, such as various authorities, financing instruments, structural and economic factors. The value delivery dimension indicates value identification, value development and communication of value for customers, in addition to value for other shareholders and parties. The innovation capability dimension includes the capacity to deploy the various tangible and intangible resources required for value delivery. The three dimensions are described in closer detail in Chapter 2.
Against this background, the central research questions that motivate this thesis are:
RQ1: How do the three dimensions of innovation capability, innovation environment and value delivery describe the innovation situation of firms?
RQ2: How does the framework comprising the three dimensions of innovation capability, innovation environment and value delivery describe the improvement needs of the RIS in question?
The research is limited to 50 purposefully selected firms within one rural and remote region in Finland. The material for the analyzis was collected by the author in the connection of the CoCo (Cohesion and Competitiveness) project to advance practice-based innovation in the region during 2011.
1.2.4 Positioning of the study
The innovation literature distinguishes four orientations:
individual-oriented, covering individual factors such as creativity;
structure-oriented, considering organizational characteristics and the relationship between the environment and an organization;
interactive orientation, which is focused on the interaction between actions and structure in the innovation process; and
systems of innovation concerning the influence of regional and national innovation systems to the innovativeness of firms. (Johannessen et al., 2001)
Within this categorization, this study is mainly focused on the systems of innovation. In addition, the study considers factors from other classes including organizational characteristics, the relationship between the environment and the organization, innovation activities, and the creativity of firms to obtain a comprehensive and holistic view on the situation.
Strategic thinking (i.e., cognitive activities) needs structuring into a process of strategic reasoning. Figure 4 on the next page presents strategic reasoning divided into two main categories; defining a strategic problem and solving a strategic problem (De Witt & Meyer, 2010).
Figure 4 Strategic reasoning process (adapted from De Witt & Meyer, 2010).
The focus of this research is in identifying and diagnosing, which are included in the defining phase. Defining a strategic problem consists of two elements, the first generally referred to as identifying, recognizing and sense-making, and the second element one as diagnosing, analyzing or reflecting (De Witt & Meyer, 2010). The first element helps to understand the structure of the problem, also reflected in the systems research approach applied in this study. The purpose of the second element dealing with solving a strategic problem is to consider alternative solutions (conceiving, formulating or imagining), and the other part concerns the activities that are required to achieve the result and evaluate the quality of the results (realizing, implementing or acting). The applied systems research methodology (soft systems methodology SSM) includes in principle also these parts. This study proposes and considers alternative solutions. However, their implementation is outside the scope of the study. De Witt and Meyer (ibid.) refer to the systemic nature of strategic problems by stating that they are typically complex, unique, link with other problems, contain sub-problems, and can be interpreted in many ways. Furthermore, the formulation and implementation a plan is an interactive and iterative process where actions, reactions and reconsideration follow each other (De Witt & Meyer, 2010), which is also in line with the fundamental concept and process of SSM.
IDENTIFYING DIAGNOSING
CONCEIVING REALIZING
DEFINING
SOLVING
