Systems of Innovation

Abstract

We review the literature on national innovation systems. We first focus on the emergence of the concept of innovation systems, reviewing its historical origins and three main flavors (associated to three “founding fathers” of the concept). After this, we discuss how the notion of innovation systems filled a need for providing a broader basis for innovation policy. We conclude with some perspectives on the future of the innovation systems literature.

Introduction

The particular focus on invention and technical change as central factors behind economic growth and development is, as Joel Mokyr illustrates in Chapter 1, of relatively recent origin (Mokyr, 2010). While early classical economists were well aware of the critical role of technology in economic progress, they would typically consider such technical progress as fully embodied within the notion of capital, a vision which remained dominant up to the late 1950s. At that point it was recognized that “something” (a residual, Solow, 1957), a measure of our ignorance (Abramovitz, 1956), appeared behind most of the economic growth in the twentieth century and the acceleration in the postwar period. Thus, while Adam Smith did observe in his Wealth of Nations that improvements in machinery came both from the manufacturers of machines and from “philosophers or men of specialization, whose trade is not to do anything but to observe everything …,” he considered such advances of technology as largely due to the inventiveness of people working directly in the production process or immediately associated with it: “… a great part of the machines made use of in those manufactures in which labor is most subdivided, were originally the inventions of common workmen” (Smith, 1776, p. 8).

This view on technological advances led to a strong critique from Friedrich List who, back in 1841, wrote: “Adam Smith has merely taken the word capital in that sense in which it is necessarily taken by rentiers or merchants in their bookkeeping and their balance sheets … He has forgotten that he himself includes (in his definition of capital) the intellectual and bodily abilities of the producers under this term. He wrongly maintains that the revenues of the nation are dependent only on the sum of its material capital” (p. 183). List's contribution is particularly important in this context because he was one of the first economists to recognize the crucial role of the “systemic” interactions between science, technology, and skills in the growth of nations. For classical economists, such as Smith, “innovation” (though they did not use that particular term) was a process fed by experience and mechanical ingenuity, which enabled improvements to be made as a result of direct observation and small-scale experiments. For List, the accumulation of such knowledge became an essential factor for the growth of nations: “The present state of the nations is the result of the accumulation of all discoveries, inventions, improvements, perfections, and exertions of all generations which have lived before us: they form the intellectual capital of the present human race, and every separate nation is productive only in the proportion in which it has known how to appropriate those attainments of former generations and to increase them by its own acquirements” (p. 113).

List's recognition of the interdependence of tangible and intangible investments has a decidedly modern ring to it. He was probably the first economist to argue consistently that industry should be linked to the formal institutions of science and education: “There scarcely exits a manufacturing business which has no relation to physics, mechanics, chemistry, mathematics, or to the art of design, etc. No progress, no new discoveries and inventions can be made in these sciences by which a hundred industries and processes could not be improved or altered” (p. 162). His book entitled The National System of Political Economy might just as well have been called The National System of Innovation. List's main concern was with the problem of how Germany could overtake England. For underdeveloped countries (as Germany then appeared relative to England), he advocated not only protection of infant industries but a broad range of policies designed to accelerate or to make possible industrialization and economic growth. Most of these policies were concerned with learning about new technology and applying it. In this sense List anticipated and argued in accordance with contemporary theories of “national systems of innovation.”

Table 1 illustrates the characteristic features of the British national system of innovation (NSI) in the eighteenth and early nineteenth century and of the US NSI in the late nineteenth and twentieth century, following List's historical interpretation of NSIs. In this by and large descriptive interpretation of the most striking historical institutional features of a country's science and technology-based growth performance, what is most striking is the particular importance given to the state in coordinating such long-term policies for industry and the economy. In fact, the role of the Prussian state in technology catch-up in the mid-nineteenth century resembled very much that played by the Japanese state a couple of decennia later, the Korean state a century later, or China today. At each time the coordinating role of the state was crucial, as were the emphasis on many features of the NSI which are at the heart of contemporary studies (e.g., education and training institutions, science, universities and technical institutes, user–producer interactive learning, and knowledge accumulation).

In short, the systems of innovation approach spells out quite explicitly the importance of the “systemic” interactions between the various components of inventions, research, technical change, learning, and innovation; the national systems of innovation brings to the forefront the central role of the state as coordinating agent. Its particular attractiveness to policymakers lays in the explicit recognition of the need for complementary policies, drawing attention to weaknesses in the system, while highlighting the national setting of most of those institutions. The concept of “national systems of innovation” as it was developed in the 1980s by Freeman, 1987, Lundvall, 1992, Nelson, 1993 owes much to these historical insights. It provided a view on innovation next to the more traditional market failure approaches to research and innovation policy, which are reviewed in the chapter by Steinmuller (2010).

In this chapter we first describe the various concepts and definitions used in the NSI literature (Section 2). In Section 3, we discuss some of the reasons for the popularity of the NSI with policymakers. As highlighted above, the origins of the NSI are closely linked to the central role industry is playing as engine of productivity growth, continuous technological improvements and innovation, and the central role of the state in organizing, improving, and evaluating the various institutions dealing with science, technology, innovation, higher education, skills, and more broadly learning and development. The NSI concept represented for policymakers an alternative to industrial policies, while at the same time providing strong support for the role of public authorities in creating the “right” institutional conditions for a knowledge-driven economy to flourish. In Section 4 we discuss the limits of the NSI approach: the new patterns of innovation outside of the traditional industrial technology frameworks (innovation without industrial R&D), and the emergence of global value and knowledge chains questioning the national focus of policies in this area. We conclude the chapter by summarizing five main points about the NSI approach and its policy relevance.