The National Innovation System Management Essay

The National Innovation System Management Essay Firms describe innovation an essential factor to increase sustainable profits and market share due to the rapid globalisation and commoditization in goods and services (Westland, 2008). Miozzo and Walsh (2006) also state that firms effectiveness in competitive international trade in goods and service depend on two factors, which are: The scale of RD and other technological activities. The way in which the available resources are managed and organised both at the level of enterprise and at the national level. Thus, National Innovation System (NIS) will enable a country with limited resources to make rapid progress through suitable combinations of imported technology and local adaption and development (Freeman, 1987). With these combinations, national firms will transform to a market leader and countrys economy to flourish. Hence, in my essay, I will define meaning of NIS, my understanding of systemic aspect of innovation and discuss the different institutions involved in NIS in section 2. Section 3 and 4 will discuss how interaction in NIS can affect the innovative performance of national firms with a case study of Taiwan innovation system in section 5. Lastly, section 6 will provide a conclusion of my findings, and the gaps identified for future research. National Innovation System Since the 1980s, various authors (Freeman, 1987; Lundvall, 1992; Nelson, 1993) studied the concept of national innovation system (NIS) which is used as a main conceptual framework for analysing technological change, and to lay the foundations to improve the economic development of a nation. NIS can be categorized under narrow and broad definitions. The narrow approach (Lundvall 1992) is further defined by both Nelson (1993) and Freeman (1987). Freeman (1987) defined NIS as The network of institutions in the public and private sector whose activities and interaction initiate, import, modify and diffuse new technologies and Nelson (1993) defined NIS as a set of institutions whose interactions determine the innovative performance of national firms. Lundvall (1992) defined the broach approach of NIS by saying that NIS includes all parts and aspects of the economic structure and the institutional set-up affecting learning as well as searching and exploring the production system, the marketing system and the system of finance present themselves as sub-systems in which learning takes place. To summerise all the definitions above, I will use the definition by Metcalfe (1995). Metcalfe (1995) defined NIS as That set of distinct institutions which jointly and individually contribute to the development and diffusion of new technologies and which provides the framework within which governments form and implement policies to influence the innovation process. As such it is a system of interconnected institutions to create, store and transfer the knowledge, skills and artefacts which define new technologies. This led me to understand that NIS is a system to manage innovation and the meaning of systemic aspect of innovation. The system consist of various actors and institutions which the main components of the system. The term systemic aspect of innovation refers to how all these actors and institutions interact with each other in order to implement NIS effectively. Innovation is based on learning by collaborating and interacting with organisations and not by innovating in isolation (Edquist 1997:7, p20-22). This is further supported by Fagerberg (2005) who emphasis the systemic aspect of innovation processes. Lundvall (1992) and Nelson (1993) also stress that for innovative performance to improve, it is necessary to understand the linkage among the institutions involved in the innovation process. Main Component of NIS Before we understand the interaction among institutions that is important in NIS, it is necessary to understand what are the different institutions involved. However, the term institution is very subjective as different authors themselves have their own definition. Nelson and Rosenberg (1993) defined institutions as organisations, whereas Lundvall (1992) defined institutions as the rules of the game. This makes the understanding of institutions confusing. Therefore, to make a clear distinction for institutions in the essay, I shall use the definitions made by Edquist and Johnson (1997). Organisation Organisations are the formal structure where the players or actors in NIS are created with a purpose and goals (Edquist and Johnson 1997: 47). They are a total of four players (Pavitt. K and P.Patel, 1994; Capron et al., 2000). Institutions of Industrial RD (Capron et al., 2000). They are the business firms who are the major investors on Research Development (RD) in each nation economy for technological change activities (Pavitt. K and P.Patel, 1994). Institution of education (Capron et al., 2000). They are the universities providing basic research for the business firms and related training to the undergraduates (Pavitt. K and P.Patel, 1994). Institutions of public/private research (Capron et al., 2000). They are the public/private institutions providing general education and vocational training for the workforce (Pavitt. K and P.Patel, 1994). Institutions of technology bridging (Capron et al., 2000). They facilitate the interaction of institution in the innovation process to resolve mismatch or exploit the result of research performed by public research institutions to enhance the absorption power of existing firms and promote the creation of new-venture firms and university spin-offs. Institution Institutions, on the other hand, are the rules of the game which consists sets of common habits, routines, established practices, rules, or laws that regulate the relation and interactions between individuals, groups and organisations (Edquist and Johnson 1997: 46) which shape the behaviour of firms and other organisations by creating constraints and/or incentives for innovation (North 1990) that affect learning, searching and exploring activities (Bozeman and Dietz, 2001). There are a total two institutions. Institution of policy formulation (Capron et al., 2000). They are the government bodies performing a variety of activities to promote and regulate technological change (Pavitt. K and P.Patel, 1994). Institution of promotions of entrepreneurship (OECD, 1999). It is the ethos, culture, and attitude towards entrepreneurship and risk taking that can have an important influence on the innovative performance of firms (Miozzo and Walsh, 2006). Interaction of organisations and institutions in NIS In the past, NIS takes the form of a linear model in knowledge flow (Stoke, 1993). However, there are limitations to the linear model. This is because, in practice, ideas innovation derives from various sources and can be from any point of stage in the linear model. Furthermore, OECD (1997) said that innovation occurs from complex interaction between institutions instead in a linear sequence enabling knowledge flows to other institutions. As economic activities are becoming more knowledge-intensive, the success of firms, regardless of size, depends on how effective it is in gathering and utilizing knowledge from various institutions. OECD (1997) identified four main interactions that occur within NIS. Chang and Shih (2004) made some changes to the main interactions identified in OECD (1997). They combined the concept of joint industry activities and public/private interactions and named it as RD collaboration, retained technology diffusion and personnel mobility, and added a new interaction called informal interaction. Lundvall (1985) also identified the user-producer interaction. Appendix 1 summarizes the main components of institutions and the interaction among institutions which are discussed below. RD Collaboration The benefits of joint activities and public/private interaction have provided the firms a competitive advantage and a positive effect on the firms innovative performance. This is proven by several empirical studies from Klomp and van Leeuwen (2001), Janz et al. (2003) van Leeuwen (2002), Loof and Heshmati, (2002), Criscuolo and Haskel (2003) and Faems et al. (2004). RD collaboration enables risk and cost sharing in times of uncertainty in technological developments (Das andTeng, 2000;Tyler and Steensma, 1995), shorter innovation cycles (Pisano, 1990), pooling of resources to achieve economies of scale and scope and gaining synergies from complementary human and technical assets (Kogut, 1988; Das and Teng, 2000; OECD, 1997) and increase firms competences and skills by monitoring technology and market developments (Hamel, 1991; Roberts and Berry, 1985; OECD, 1997). RD collaboration also enables firms to discover new markets or market segment (Tether, 2002; Monjon and Waelbroeck, 2003). Furthermore, public/private interaction in RD collaboration enables firms to internalise and manage knowledge spillovers and remove the negative effect of spillovers on RD (Amir, 2003; De Bondt, 1996; Kamien et al., 1992; Suzumura, 1992; Leahy and Neary, 1997). In addition, RD collaboration also enables knowledge to be transferred voluntarily to firms (Katsoulacos a nd Ulph, 1998). Informal Interaction Informal interaction normally occurs in personnel communicating with one another in order to gain tacit knowledge and information more efficiently for problem solving and learning which is beneficial for the firm (Chang and Shih, 2004). This is because individuals can elaborate or modify what was said to handle objections and misunderstandings effectively (Kraut et al., 1982). Furthermore, informal interaction can overcome different frames of reference or clarify ambiguous issues to change understanding in a timely manner (Daft and Lengel, 1986, p.560) and when coordination is need in times of uncertainty and equivocality (Daft and Lengal, 1986). This is proven by Argote (1982) literature as it shows that people are more successful in performing their work. Technology Diffusion Technology diffusion is the dissemination of technical information and know-how from products developed by customers, suppliers, competitors and public institutions and the sequence adoption of new techniques and technologies by users (OECD, 1997; Tassey, 1992). Despite technology diffusion is slow-moving process, it is still important because the innovative performance of firms, regardless whether it is from manufacturing or service industries, depends on technology diffusion (OECD, 1997). This is because the innovative performance of firms depends heavily on innovation and products developed elsewhere (OECD, 1997) to obtain the foundations for high-technology development in the firm (Hsu and Chen, 1998). Personnel Mobility As tacit knowledge and skills are important to a firm, the mobility of personnel has become increasing important (Gruenfeld et al., 2000; Kraatz and Moore, 2000; Rao and Drazin, 2002). Personnel mobility is the movement of people and tacit knowledge that moves within industries and between public and private institutions (OECD, 1997; Chang and Shih, 2004). This may cause knowledge and skills to overlap which might result a firm in either reinforcing the firms current way of organizing or questioning the efficacy of existing organizing patterns (Tammy et al., 2003). In addition, Research from Argote and Ingram (2000) has shown firms knowledge library is initially facilitated by individuals. Hence, this determines that personnel mobility is important to the firms innovative performance. User-Producer Interaction Producers and users both have strong incentives to interact with one another (Lundvall, 1985). This kind of interaction is commonly found where the products are specialized and expensive capital goods. Producers can monitor process innovation within user firms and if it is successful, producers can use it to present to other users as product innovation. At the same time, users can monitor the competence of producers to identify which producers are competent to assist them in developing new product innovation. Hence, this helps to improve the innovative performance of firms as it enables them to produce new process or product innovation. Systemic Failure in NIS Despite that NIS approach is successful in various countries, there are still instances whereby systemic imperfections can occur leading to slowing down the innovation as a whole. Literatures from Carlsson and Jacobsson (1997), Smith (1997), Malerba (1997), Johnson and Gregersen (1994) and Edquist et al. (1998) focused on systemic imperfections, leading to a summerised list of systemic imprefections: Infrastructural failure (Smith, 1997; Edquist et al., 1998) is the physical infrastructure that actors need to use and the science and technology infrastructure. Soft and hard institutional failure (Smith 1999; Edquist et al., 1998; Johnson and Gregersen 1994) that may regulate economic behavior and interaction which may hinder innovation. Interaction failure (Carlsson and Johnson, 1997) from both strong and weak network failure can hamper innovation. Capabilities failure (Smith 1997; Malerba 1997) due to the lack of capabilities to learn and absorb knowledge effectively resulting in lock-in with existing technologies and unable to use new technologies. Although there are four factors involved in systemic failure, I will only discuss on how interaction failure can affect the innovative performance of national firms of any sizes in relation to the essay topic. Interaction Failure The innovative performance of firms is dependent on the interaction between institutions to develop and design products (Smith 1999). In the next few sub-sections below, I will discuss how both strong and weak network failure can hamper innovation. Strong network failure Carlsson and jacobsson (1997) describe strong network failure happens when individual actors are guided by other network actors in the wrong direction and consequently fail to supply each other with the required knowledge. These could be caused by the following factors: Myopia due to internal orientation. When relationships established for a long period of time results in trust relationship and habituation, this causes a certain degree of closure (Bogenrieder and Nooteboom, 2002). The group will be unwilling to exit the group or permit new entrants in leading to myopia and inertia (Nooteboom, 2000). This results insufficient attention to the development outside causing a lock-in to existing products. Lack of weak ties. Weak ties are the bridges to industries, educational and cultural background outside their inner circle. Granovetter (1983) and Burt (1987) emphasis the importance of weak ties leading to new knowledge and impulses or provide the knowledge that the individual firm lacks. These linkages can keep them updated with new developments and keep track on new knowledge, skills and resources. Dependence on dominant partners. The dependence may be due to asset specificity, switching costs or due to a lack of alternative partners that results in difficulty to find new partners for new innovation products or process. Weak Network failure Weak network failure (Carlsson and Jacobsson, 1997) happens when connectivity between complementary technologies and actors are poor, causing the possibilities for interaction learning and innovation to be under-utilised and failure to adapt new technological development. In addition, this will hinder the coordination of research efforts and investment due to a lack of shared vision for future technology development. Taiwan Innovation System In 1970s, Taiwan was an island nation with limited natural resources and a scarce domestic market. The government, local and foreign scholars recognized this problem believed they should set up an export-orientated strategy to develop high-technology industry to ensure a sustainable economy in Taiwan (Hsu and Chen, 2003) Hence, there was a joint effort by institutions and organizations to stimulate the development of high-tech industry. ST policies were formulated to assist the framework of Taiwan NIS (Hsu and Chen, 2003) shown in Appendix 2. Interactions in Taiwan NIS: The Case Study of IC Industry To illustrate the interactions in Taiwan NIS, this essay will be how the interaction of institutions (Appendix 3) led the growth of the IC industry in Taiwan (Appendix 4) to become the fourth largest producer in the world. As Fig. 3 shows, the Ministry of Economic Affairs (MOEA) is the main agency responsible for industrial technology development in Taiwan. Their role is to transfer the research results to the private institutions for product development and commercialization through technical assistance, information diffusion and manpower training. MOEA also works to strengthen the interaction between industry, government, universities and research institutions with the goal of optimizing the facilitation of industrial technology innovation. (Hsu and Chen, 2003) Industrial Technology Research Institute (ITRI) was contracted by the government to act as the bridging institutions between industry firms and overseas public/private institutions. They interact with the private sector via technology transfer and collaboration to assist in technology development. National Science Council (NSC) also sponsored universities to collaborate with private sectors in joint research projects. By doing so, it provides technical assistance, technical information, and personnel training to the private sector. In addition, the introduction of new technologies, joint research, overseas investment and strategic alliance via the interactions between overseas corporations and research organizations also benefited the industry firms. (Hsu and Chen, 2003) Interaction Failure in Taiwan NIS: The Case Study of Biotechnology Industry Despite the successful implementation of NIS in the IC industry as mentioned earlier, the Taiwans innovation system in Taiwans biotechnology industry, consisting mainly SMEs, is still fragmented as the current status of industry is still insignificant in the world (Sun, 2005). In Sun (2005) survey for the biotechnology industry, he identified several systemic failures. However, according to the essay objectives, we will only focus the interaction failures that were identified. They are: Knowledge of public research made not available to public which prevented the transmission of the knowledge to the industries to develop (Porter, 1990). Insufficient supply of scientific research causing a lack of linkage between firms and research institutes (Sun, 2005). Lack of cross-border RD collaboration prevented local biotech firms to have access to foreign knowledge (Bartholomew, 1997). Hence, all of these points mentioned pointed that a weak network failure, one of the causes for interaction failure, was the cause that prevented innovative performance of Taiwans biotechnology firm. Conclusion This essay aims at discussing the interaction of institutions which will affect the innovation performance of national firms of any sizes. Based on the above discussion, I conclude that interaction of institutions can improve innovative performance of firms, but it can also hinder the innovative performance of firms as well. Strong interaction of institutions enables knowledge flows from one actor to another which is important to stimulate innovation. This enables firms to develop new technologies, products or processes to maintain its competitiveness for the firm or achieve cost savings which are crucial for its survival in the industry. At the same time, interaction of institutions can also hinder the innovation performance of firms. This is due to the factors mentioned above in interaction failure. Firms will not have access to new knowledge and technologies make them unable to innovate. Despite various literatures identifying the types of interaction among institutions, there is still room for improvement for future research in identifying the different types of interactions involved in institutions. Limited literature has been found to mention the types of interaction between government and the various organizations and institutions that helped to implement the preferred policies to enhance the innovative performance of firms. The interaction between them seems to be a one-way process. Hence, this calls for future research to identify what are the other interactions that can also help to improve the innovative performance of firms of any sizes.