Carla I. Koen. Comparative International Management

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same time, and as a result of this discussion, you will become aware of the importance of

‘location’ to successful innovation (Porter and Stern, 2002). Innovation-centred organiz-

ations should not be driven only by input costs, tax incentives, subsidies or even wage

rates for scientists and engineers; they should also take into consideration locational

advantages – rooted in, for example, special relationships with local universities and

companies, preferential access to local institutions, and so on.

Finally, the case study at the end of the chapter, on the pharmaceutical industries in

Germany and Japan, is intended to help you understand the application of the innovation

system approach at sector level.

8.2 Technological Advancement: a Taxonomy

In order to be able to understand the innovation process and national innovation systems,

one has to have some notion of the types of technological development that occur in the

modern world. This section provides a brief overview of existing types of technical

change.

The taxonomy of innovations, which is discussed below, is based on empirical work.

It distinguishes between:

incremental innovation

radical innovation

new technology systems, and

changes of techno-economic paradigms.

We will now look at each of these in turn.

Incremental innovations

These are small-step innovations that occur more or less continuously in any industry or

service activity, although at differing rates in different industries and different countries,

depending on a combination of demand pressures, socio-cultural factors, technological

opportunities and trajectories.

They may often occur not so much as the result of any deliberate research and devel-

opment activity, but as the outcome of inventions and improvements suggested by

engineers and others directly engaged in the production process, or as a result of initia-

tives and proposals by users.

They are frequently associated with the scaling-up of plant and equipment, and

quality improvements to products and services for a variety of speciﬁc applications.

Although their combined effect is extremely important in the growth of productivity, no

single incremental innovation has dramatic effects, and they may sometimes pass unno-

ticed and unrecorded.

MANAGING RESOURCES: NATIONAL INNOVATION SYSTEMS 361

This section is based on Freeman and Perez (1988: 45–7).

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Radical innovations

These are discontinuous events and in recent times are usually the result of a deliberate

research and development activity in enterprises and/or universities and government lab-

oratories. There is, for example, no way in which nylon could have emerged from

improving the production process in rayon plants or the woollen industry.

Radical innovations are unevenly distributed over sectors and over time, and when-

ever they occur, they are important as a potential springboard for new markets, and for

the surges of new investment associated with economic booms.

They may often involve a combined product, process and organizational innovation.

Over a period of decades, radical innovations, such as nylon or the contraceptive pill, may

have fairly dramatic effects (i.e. they do bring about structural change but, in terms of

their aggregate economic impact, they are relatively small and localized, unless a whole

cluster of radical innovations are linked together in the rise of new industries and serv-

ices, such as the synthetic materials industry or the semiconductor industry).

Changes of ‘technology system’

These are far-reaching changes in technology, affecting several branches of the economy,

as well as giving rise to entirely new sectors. They are based on a combination of radical

and incremental innovations, together with organizational and managerial innovations

affecting more than a few companies. An example is the cluster of synthetic materials

innovations, petro-chemical innovations, and machinery innovations in injection

moulding and extrusion.

Changes in ‘techno-economic’ paradigm

Also known as ‘technological revolutions’, these are far-reaching changes in the tech-

nology system that are such that in their effects they have a major impact on the

behaviour of the entire economy.

A change of this kind carries with it many clusters of radical and incremental inno-

vations, and may eventually embody a number of new technology systems.

A vital characteristic of this fourth type of technical change is that it has pervasive

effects throughout the economy – that is, it not only leads to the emergence of a new

range of products, services, systems and industries in its own right, it also affects, directly

or indirectly, almost every other branch of the economy.

The expression ‘technological paradigm’ is used because the changes involved go

beyond engineering trajectories for speciﬁc product or process technologies, and affect the

input cost structure and conditions of production and distribution throughout the

system. Moreover, once this new technological paradigm is established as the dominant

inﬂuence on engineers, designers and managers, it becomes a ‘technological regime’ for

several decades. From this perspective, cycles of economic development can be linked to a

succession of ‘techno-economic paradigms’ associated with a characteristic institutional

framework, which, however, only emerges after a painful process of structural change.

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MANAGING RESOURCES: NATIONAL INNOVATION SYSTEMS 363

8.3 Innovation: Overview of the Major

Institutions Involved

The rise of science-based technology has led to a dramatic change in the nature of the

people and institutions involved in technological advance. Through much of the nine-

teenth century, strong formal education in a science provided an inventor – such as, for

example, Thomas Alva Edison – with little or no advantage in problem-solving. By 1900,

formal training in chemistry was virtually becoming a requirement for successful inven-

tive effort in the chemical products industries. Indeed, the days when unschooled geniuses

such as Edison could make major advances in the electrical technologies were coming to

an end, and the major electrical companies were busy stafﬁng their laboratories with uni-

versity-trained scientists and engineers (Nelson and Rosenberg, 1993).

In general, industrial innovation depends on ‘the complex interweaving of basic

research’, which is concentrated primarily in research institutes and universities, ‘and

market-induced applied R&D’ (Tapon, 1989: 199). However, the integration of basic

research with market opportunity does not happen automatically. ‘Investments in basic

research, while important in seeding possibilities for commercial innovation, will not lead

to competitive advantage unless transmitted to and further developed by industry’ (Porter,

1990: 80–1). Below, we explain the mechanisms that shape the interplay between basic

and industry-speciﬁc research. We do so on the basis of a discussion of the major features

of the national institutional context that affect national innovation patterns. These are:

tradition of scientiﬁc education

patterns of basic research funding

linkages with foreign research institutions

degree of commercial orientation of academia

labour mobility

venture capital system, and

national technology policy.

Most of these features will crop up again in the sections on the speciﬁc country expla-

nations. While the ﬁrst three features affect the stock of knowledge in research institutes,

the others affect the ﬂow of knowledge between research institutes and industry. In

addition, in the following, we also explain two types of organizational practice that affect

the stock of knowledge in industries: inter-ﬁrm collaboration and exploitation of foreign

technology.

Institutional features affecting the stock of knowledge in

research institutes

National tradition of scientiﬁc education

A nation’s pool of specialized human resources – such as molecular biologists, for

example – is created through investments made by individuals seeking to develop their

skills. The particular choices of skill development made by individuals are reinforced by

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social institutions or governments that hope to beneﬁt society or the economy (Porter,

1990). A strong tradition of scientiﬁc education endows a country with a base of well-

developed institutions devoted to scientiﬁc research, which signals to that society’s

members that scientiﬁc research is a worthwhile calling (Locke, 1985). Countries in

which it is socially desirable and ﬁnancially rewarding to pursue a scientiﬁc career will

tend to produce a greater number of scientists per capita.

National funding of basic research

Advances in basic scientiﬁc research are not driven by a motive of return on investment,

but rather by ‘the logic of scientiﬁc advance as perceived by academic scientists’ (Tapon,

1989: 199). Because of the very long research cycles in sciences like molecular biology,

for example, and the enormous costs of laboratory equipment and materials, long-term

government support of most fundamental research is a critical factor affecting a

country’s stock of scientiﬁc knowledge (Mowery and Rosenberg, 1993). The manner in

which research funding is allocated is also important, as it inﬂuences which types of insti-

tution (e.g. universities, government laboratories) become the central performers of

scientiﬁc research.

Linkages with foreign research institutions

The openness of a nation’s research institutions to scientiﬁc development in other parts of

the world can be important for the stock of knowledge. Strategically tapping into the

knowledge bases of other countries can help a country’s research institutions to develop

expertise in areas in which the country lags, thus complementing its existing knowledge

base (Porter, 1990; Shan and Hamilton, 1991).

Nations vary in the degree to which their research institutions seek to learn from

foreign research (Yuan, 1987, cited in Bartholomew, 1997), reﬂecting differences in his-

torical development of the country’s educational institutions. While countries that have

been ‘early industrializers’ (e.g. the UK) have a tendency to focus on domestic invention,

‘late industrializers’ (e.g. Japan) have a stronger pattern of borrowing and adapting

knowledge from other countries (Hampden-Turner and Trompenaars, 1993; Westney,

1993).

Institutional features affecting the flow of knowledge

between research institutions and industry

Degree of commercial orientation of research institutions

In most societies, research institutions and ﬁrms have profoundly different missions. While

the central goal of universities and research institutes is to create and disseminate knowl-

edge, the principal mandate of ﬁrms is to maximize the wealth of shareholders (Swann,

1988; Nelsen, 1991). The degree of cultural distance between academia and industry,

however, is rooted in the historical foundations of the educational system unique to each

country (see e.g. Mowery and Rosenberg, 1993). A greater commercial orientation in a

nation’s research institutions translates into a smaller cultural distance between the worlds

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of academia and industry, which in turn facilitates the ﬂow of knowledge between the two

communities. National differences in the commercial orientation of academia, and/or dif-

ferences in government programmes for technology diffusion have an impact on the extent

to which ﬁrms collaborate with research institutions (Kenney, 1986; Ergas, 1987).

Labour mobility

Greater movement of individuals between university and industry promotes greater accessi-

bility of ﬁrms to the stock of human and technological capital (Ergas, 1987: 201), and

greater awareness among academics of commercial markets, thus enhancing the ﬂow of

knowledge between research institutions and ﬁrms (Swann, 1988). The norms and practices

of a nation’s research institutions affect the degree to which scientists move between aca-

demia and industry. For example, evaluation and promotion systems in universities that

allow scientists to pursue contracts in industry can provide an incentive to academics to

blend academic and industrial research in their careers, including engaging in industrial

consulting (Bartholomew, 1997). Labour mobility between research institutions and ﬁrms

also reﬂects the relative ‘opportunity cost’ of leaving academia for industry (i.e. the potential

loss of social prestige or academic standing) as well as the opportunity cost of staying in aca-

demia (i.e. the forfeiting of signiﬁcant ﬁnancial reward) (Sharp, 1989). How a society confers

status on its members – whether according to social position, academic achievement or

ﬁnancial status – thus inﬂuences the mobility of scientists between academia and industry.

Availability of venture capital

One option open to scientists is to leave their research institution to start up their own

ﬁrm. In the ﬁeld of biotechnology, in particular, start-up companies funded by venture

capital serve a particularly important role in diffusing scientiﬁc knowledge from research

institutions to industry: not only does vital scientiﬁc knowledge ‘walk out the door’ with

the academic scientist who establishes the new ﬁrm; the new ﬁrm also gains an immediate

social network of scientists in academia to facilitate ongoing knowledge diffusion

(Bartholomew, 1997). The availability of venture capital markets to fund start-up ﬁrms

varies substantially cross-nationally (Ergas, 1987; Porter, 1990) and is an institutional

reﬂection of a society’s degree of individualism and its related view of speculative ﬁnance

(Lodge, 1990; Hampden-Turner and Trompenaars, 1993).

National technology policy

Nations vary substantially in the underlying orientation of the state towards industry

(Lenway and Murtha, 1994). In nations with an individualistic orientation, government

assumes a limited role in industrial development, allowing the marketplace to regulate

competition among ﬁrms. By contrast, in nations with a more collectivist orientation,

government takes a more direct role in deﬁning the needs of the community and setting

the direction of industrial development to help meet these needs (Lodge, 1990).

Differences in the fundamental orientation of the state also have direct implications

for the manner in which technology is diffused from research institutions to industry.

Collectivist-orientated states often follow ‘diffusion-orientated’ innovation policies,

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in which technology diffusion is considered to be an explicit part of the government’s

mandate; accordingly, programmes, institutions and structural linkages are established

by government expressly for this purpose of facilitating industry’s appropriation of new

scientiﬁc developments (Ergas, 1987; Ostry, 1990). By contrast, individualistic-orientated

states leave the ﬂow of knowledge between research institutions and ﬁrms to be carried

out by market forces.

Organizational practices affecting the stock of

knowledge in industry

Inter-ﬁrm collaboration

Inter-ﬁrm collaboration can be advantageous as a research and development (R&D)

strategy because it allows partnering ﬁrms ‘to realize economies of synergies as a result of

pooling resources, production rationalization, risk reduction, and utilization of assets to

the efﬁcient scale and scope’ (Shan and Hamilton, 1991: 420).

Countries vary in the extent to which inter-ﬁrm collaboration is a favoured practice,

reﬂecting historically based societal differences in the underlying view of the nature of

cooperation and competition (e.g. Hamel et al., 1989; Hampden-Turner and Trompenaars,

1993).The practice of inter-ﬁrm cooperation may be further reinforced by a strong govern-

ment role in coordinating pre-competitive cooperative R&D (Saxonhouse, 1986; Brock,

1989; Westney, 1993). An example of the latter is the organization by the Japanese

Ministry of International Trade and Industry (MITI) of research consortia (see Section 8.5

for an extended explanation).

Exploitation of foreign technology

Cross-border R&D alliances, whether among ﬁrms, or between ﬁrms and research institu-

tions, contain an additional beneﬁt for ﬁrms beyond those gained from domestic

collaboration. Although a ﬁrm may form one or more international cooperative relation-

ships for economic, strategic and other reasons similar to those that drive it to domestic

partnerships, an international cooperative venture may provide the ﬁrm with access to

country-speciﬁc advantages embedded in its partners (Shan and Hamilton, 1991: 419).

For example, cross-border collaboration can offer biotechnology ﬁrms access to the stock

of knowledge created by other national systems of biotechnology innovation.

Firms from different countries vary in how much they strategically source external

technology and engage in international R&D activity, reﬂecting differences in the his-

torical context of economic development (Mansﬁeld, 1988). For example, reliance on

foreign technology can be instrumental in late-industrializing economies trying to ‘catch

up’ with economies that industrialized at an earlier date (Hikino and Amsden, 1994).

However, in the process of borrowing technology developed by ﬁrms from more advanced

countries, the late-industrializing country also acquires distinct capabilities in importing

and adapting foreign knowledge. This strategy of ‘learner’ may thus be retained by ﬁrms

long after the economic ‘catch-up’ has occurred (Westney, 1993).

The following explanation of the main features of the national innovation systems of the

USA, Japan, Germany and France illustrates the importance of each of the

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MANAGING RESOURCES: NATIONAL INNOVATION SYSTEMS 367

aforementioned institutional and organizational features for the speciﬁc innovation tra-

jectories in these different countries.

8.4 The American Innovation System

The period between 1900 and 1940 witnessed the formation of the structure of the

private sector component of the US national innovation system. The turn of the century

ushered in the rise of the giant multi-product corporation; this development was sup-

ported by industrial research, which ensured the survival of such initiatives. Since federal

funding for non-agricultural research was sparse until about 1940, state government

support, particularly to universities, provided the primary impetus. Universities rose to

the occasion to accommodate and recognize the requirements of industry, agriculture

and mining. Although by later standards their research budgets could be seen as minute,

to say the least, university research thrived and eventually included collaborations of all

sorts with ﬂourishing research departments within private ﬁrms.

What distinguishes the US innovation system from its counterparts in other coun-

tries? The most obvious trait is its scale: US R&D investment – for most of the post world

war era – exceeded the combined investment of all other OECD countries. Another key dif-

ference in the innovation system in the US can be seen in the triad structure of industry,

universities and the federal government in the performance and funding of research.

Unique to the US innovation system is the extent to which new ﬁrms have been behind

the commercialization of new technologies in the economy. Development and diffusion of

microelectronics, computer hardware and software, biotechnology and robotics: these

have all been developed and diffused in the last 40 years by rather small startup ﬁrms – to

a much greater extent in the US than in any other country (with the possible exceptions

of only Denmark and Taiwan).

What lies behind the contrasts in structure between the US national innovation

system and that of other countries? Antitrust statutes in the US importantly affected

the structure and performance of the national innovation system. In the late 19th

century, the increasingly stringent judicial interpretation of the Sherman Antitrust Act

escalated the civil prosecution of agreements among ﬁrms regarding price and output

controls. In the period 1895–1904 (and particularly after 1898), ﬁrms seeking to control

prices and protect markets reacted to this new legal environment through mergers, par-

ticularly horizontal mergers. As the US Justice Department used further interpretations of

the Sherman Antitrust Act to prosecute a wider range of ﬁrms, corporate America was

compelled to greater reliance on industrial research and innovation. Corporate

diversiﬁcation and the use of patents provided ﬁrms some maneuvering room, within the

law, to attain or retain market power.

Invention and development of new technologies were not the only core tasks of ﬂedg-

ling corporate research laboratories. These in-house labs were also charged with

monitoring the environment for technological threats, and with acquiring new tech-

nologies through the purchase of patents or ﬁrms. Dupont, for example, can attribute

much of its success to acquiring many of its major product and process innovations early

This section draws essentially on Mowery and Rosenberg (1993: 29–64).

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on in its development – often based on the advice of its research lab. Similar monitoring

roles were played by research facilities at AT&T, General Electric, and Eastman Kodak

(although the latter to a lesser extent).

If Sherman Antitrust legislation spurred on the development of US innovation in the

early 20th century, military R&D and procurement contracts were the driving force

in the latter half of the century. For the past three decades, the federal R&D budget has

been dominated by military services, the allotment of which fell below 50 percent of

federal R&D obligations in only three years during this time. During the early postwar

years, this high level of military R&D investment bolstered high-technology industries. In

the semiconductor sector, for example, military procurement may have played an even

more important role than direct military R&D outlays. Product development in the elec-

tronics industry was determined from the outset by the procurement needs of the military

and NASA. Such industries subsequently poured proﬁts and overheads from military pro-

curement contracts into company-funded R&D to generate lucrative spillovers for civilian

use.

Another factor setting apart innovation in the US from that of Germany or Great

Britain, for example, is the parallel way that industrial and academic research

developed in the US. Already at the end of the 19th century, the pursuit of research –

within both US industry and higher education – was recognized as an important pro-

fessional activity. German industry and academia had set the example, and competitive

pressure from the Germans (felt keenly by industry) provided the impetus. How did the

two kinds of research become so interrelated? The answer is to be found in the

decentralized structure and ﬁnancial support of the US higher education system, particu-

larly public universities. Public funding of US higher education led the system to grow

far beyond that of Great Britain, for example. The nature and politics of public support –

state rather than federal funding – created unique advantages for the US system. State

funding led to curriculum and research at universities becoming more closely tied into

commercial opportunities than could be the case in many European systems. State uni-

versity systems, attuned to the requirements of the local economy, were able to introduce

new programs in a timely fashion in emerging sub-ﬁelds such as engineering, and, to

some extent, mining and metallurgy.

Of vital importance to scientiﬁc knowledge and problem-solving techniques are the

people trained to use them. The pool of technically trained personnel in the US pre-

pared to contend with the rise in scientiﬁc know-how, particularly engineers, grew rapidly

at the end of the 19th century, in part due to the increased number of engineering schools

and programs. Although the training of these engineers was rather rudimentary before

World War II, it met the basic needs of the expanding industrial establishment for tech-

nicians trained to cope with the larger body of scientiﬁc knowledge. Cutting-edge science

would come later. At the time, there were far more technicians than ‘scientists’. The dif-

fusion and utilization of advanced scientiﬁc and engineering knowledge was supported by

the broad-based system of training in the US. Higher education during the early 20th

century, although basic, proved to be more than sufﬁcient to power scientiﬁc and engin-

eering development.

A dramatic shift took place from World War II onwards. Scientiﬁc research, both

industrial and academic, was then bolstered by dramatically expanded federal govern-

ment funding. Post-war federal R&D funding has continued to comprise a substantial

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fraction of an already impressive national R&D budget. The amount of resources dedi-

cated to R&D since the end of World War II is staggering, not only compared with

expenditures during other periods in history, but also compared with the investment of

other OECD countries. Federal support for university research has led to an immense

expansion of academic research, tied into contracts and grants for speciﬁc research proj-

ects. These are issued, for the most part, by a centralized federal authority, although

several other federal agencies, each with their own agendas, have contributed to the huge

increases in research demand.

Although federal funds have been especially important to basic research,

only 15 per cent of federally funded basic research is currently performed within the

federal research establishment. Universities became more important players in basic

research during the postwar period – now accounting for a growing share of total US

basic research, which stimulates even more collaboration between university and

industrial research. This collaboration was well established before 1940, underwent a

weakening during the 1950s and ’60s, and has now been restored to prominence.

Support of industry for university research can be seen in ﬁnancial support from industry

in establishing on-campus facilities for research with potential commercial value. The

spectrum of collaborations is too broad to allow generalizations, and each industry has its

own peculiarities regarding the industry/university relationship. Biotechnology provides

one example of an extremely close connection between university research and commer-

cial technology. The closeness can be attributed perhaps to the radical nature of

biotechnology: scientiﬁc breakthroughs in recombinant DNA and genetic engineering

techniques are quickly transferred to industry and put into practice.

What other roles did the federal government play in the development of university

research? On the supply side, federal actions enlarged the pool of scientiﬁc personnel and

supported high quality research and teaching by funding acquisition of the necessary

physical equipment and facilities. The federal government also fostered the universities’

commitment to research – which before World War II had a lower priority than teaching.

This was done by simultaneously providing funds for education and the support of

research within the university community. The US mix of research and teaching in higher

education went much further than policies elsewhere in the world. More research is

carried out in specialized institutes in Europe and Japan, for example, and in government-

run labs.

Despite the shifts in federal government ﬁnancial support, however, private industry

has retained its position as a forerunner in research. In 1985, industry performed 73

percent of total US R&D, and took on more than 50 percent of the total funding. As men-

tioned earlier, established ﬁrms in the US expanded their R&D greatly in response to the

war effort and subsequent Cold War hostilities. Yet, interesting to note is the prominent

role played by relatively young industrial ﬁrms in developing the postwar US indus-

trial innovation system. These new ﬁrms, which pioneered the commercialization of new

product technologies such as semiconductors, computers, and biotechnology, presented a

new way forward, compared with the pattern in Japan and Western Europe, where new

technology development was the province of established ﬁrms in electronics and pharma-

ceuticals, among others.

What is behind the prominent role taken by new, small ﬁrms in the postwar inno-

vation system in the US? One factor is certainly the labor mobility in and out of the large

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basic research ‘incubators’ in universities, the government and some private ﬁrms.

Individuals involved in the development of certain technologies were not adverse to

taking their innovations with them and founding ﬁrms to pursue commercialization.

Biotechnology, microelectronics and computer industries were particularly affected by

this pattern. Moreover, within regional agglomerations of high-tech ﬁrms the above-men-

tioned labor mobility had other consequences: channeling technology diffusion and

attracting other ﬁrms in similar or related industries.

Another important factor behind the success of small, new ﬁrms in the US has been

the US venture capital market, which played, for example, a particularly important

role in establishing many microelectronics ﬁrms in the 1950s and ’60s. This sophisticated

private ﬁnancial system also contributed to the growth of the biotechnology and com-

puter industries. Eventually, the supply of venture capital was supplemented by public

equity offerings.

A relatively permissive intellectual property regime in certain industries (par-

ticularly microelectronics and biotechnology) also supported the commercialization of

innovations by new ﬁrms, thereby promoting technology diffusion and shielding young

ﬁrms from litigations over innovations that may have had their roots, in part, in the R&D

departments of established ﬁrms or other research labs. The 1956 consent decree that

settled the federal antitrust suit against AT&T led, among other things, to more liberal

licensing and cross-licensing policies for microelectronics. Litigation with regard to

biotechnology may have been discouraged by the continuing uncertainty over the nature

of intellectual property protection.

Startup ﬁrms beneﬁted importantly also from post-war antitrust policy.

Settlement of the AT&T suit in 1956 had two ramiﬁcations for new microelectronics

ﬁrms: ﬁrst, liberal patent licensing terms set down by the consent decree, and second, pro-

hibitions constraining AT&T from business activities beyond telecommunications. AT&T,

with at the time the greatest technological capabilities in microelectronics, was thus

blocked from entering into commercial production of microelectronic devices, which

paved the way for startup ﬁrms. IBM also lost an antitrust suit in 1956, which mandated

liberal licensing of the ﬁrm’s punch card and reasonable rates for computer patents..

Indirectly, major postwar antitrust suits probably supported startup ﬁrms by deterring the

established ﬁrms from continuing their prewar pursuit of new technology through acqui-

sitions of smaller ﬁrms.

A ﬁnal postwar stimulant for new ﬁrms was US military procurement policy,

which in the 1950s and ’60s opened the doors, through low marketing and distribution

entry barriers, to startup ﬁrms in microelectronics and computers. The possibilities for

technological spillovers from military to civilian applications, fueling the already substan-

tial beneﬁts for such ﬁrms, were, in fact, often based on military policy. In contrast to its

European counterparts, the US military took a chance on awarding major contracts to

ﬁrms as yet unproved – by the military or any other market. Such contracts attracted

startup ﬁrms in industries such as microelectronics. Also ﬁrms well-established in civilian

markets applied for these contracts, eager to extract any commercial applications from

their military R&D efforts.

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