The national innovation system as analytical concept and as development tool DRUID Summer Conference June 2005 Bengt-Åke Lundvall Aalborg University and Tsinghua University

Introduction §List as the Grandfather and Freeman as the Great Father. §SSI (Franco), RSI (Phil and Peter) and TS (Bo) as prominent sisters and brothers. §My own version is highly dependent on interactive learning with Esben Sloth Andersen, Björn Johnson, Bent Dalum, Gert Villumsen and Jan Fagerberg and many others §Today: a kind of ex post reconstruction not necessarily true to the real history.

Four different perspectives on the NSI l Descriptive – mapping institutions and organisations that shape innovation. l Hermaneutic – interpreting the history of economic development (the rise and fall of nation/city states). l Analytical – as based on abstractions and aiming at explaining what appears as paradoxes (success of small nations). l Normative – how to promote the contribution of innovation to economic development? Today I will discuss NSI from the Analytical and the Normative perspective.

What characterises good theory in social science? §Simplícity by abstracting from context. (Natural science as ideal.) Relevance calls for taking context into account. (The historical school and grounded theory). §The pragmatic compromise - abstractions with reference to historical context (Schumpeter, Freeman and Nelson). §Cumulative case studies and comparative studies result in local theories. No (hopeless) ambition to end up with ’general theory’ (Lars Mjøset). §Theory (and NSI) as ’focusing device’.

Basic hypothesis about historical context §Hypothesis: l The most important ressource is knowledge and the most important process is learning (Lundvall 1992 p.1). §Specifying the hypothesis: l The learning economy (Lundvall and Johnson 1994), From the knowledge-based to the learning economy (Foray and Lundvall 1996, OECD-chapter 2001). §Empirical work based on the hypothesis l Innovation Economic Growth and Social Cohesion (Ludvall 2002). §Philosophy l Pragmatism, Interactionism (Dewey and G.H.Mead)

Which is the fundamental component: N, S or I? §The understanding of innovation as an interactive learning process is fundamental. §Learning implies irreversibility and historical time! §Learning is located –and the N-component. §Learning as interactive brings the S-component into focus. §But it raises the issue of how innovation and learning relate to each other!

Defining innovation broadly l Including processes of: Introduction of new combinations in the economy Adaptation of new combinations in the context of diffusion. Implementing combinations new to the firm. l But not including Fine-tuning of processes, products and routines. l Innovation as objective or subjective category (with reference to user competence)

Defining learning as multi- dimensional l Individual, organisational and relational learning. l DUI- versus STI-learning l Learning different kinds of knowledge – know what, know-why, know-how and know-who l Learning tacit and codified knowledge.

Learning is not just incremental adaptation §Plateaus and jumps in insight and competence. §Learning fills out construction skeletons and from time to time it gives rise to new skeletons. §Learning involves more or less space for the creative mind – learning may support or undermine creativity. §Learning is dependent on diversity.

The intricate connection between innovation and learning IV §Interactive learning involves communication. Therefore a common language and relational learning is important – favors the national context. §Learning leading to innovation needs to feed upon diversity. Interacting with agents with different experiences is important – favors open systems. §The trade-off between proximity and diversity appear differently in different technologies and sectors. Modularisation may substitute for relational learning and lead to ’globalisation’.

The intricate connection between innovation and learning V §Programmatic ideas for linking innovation to learning l Distinguishing between DUI- and STI-modes of innovation in case studies and in surveys. l Linking learning and innovation to each other at the sectoral level and defining the locality of these processes. l Develop as new concept ’national learning systems’ (not about school systems!)

What about entrepreneurship? §Is ’individual entrepreneurship’ a real asset in innovation systems or is it a historical concept. §Can it be substituted for by collective entrepreneurship with autonomy in work. §From Schumpeter I to SchumpeterMark II and further to ’collective entrepreneurship’ - networks. §Discovery as the outcome of learning by searching – and discovery as reflecting serendipity. §Learning and searching as building up pressure for radical change - as eruptions and radical breakthroughs – not just adaptation process.

Comparing NSI-abstractions with standard economics I §Basic analytical units in standard economics are market exchange and economic man. With performance linked to allocation. §We take into account the current context where learning is as important as exchange and innovation outcomes are as important as allocation outcomes. §’Learning men and women’ and ’learning organisations’ as agents – not one-dimensional ’economic man’. §New question: To what degree do markets and other institutions support interactive learning and innovation?

Comparing NSI-abstractions with standard economics II Rational choice Learning AllocationStandard economics Austrian economics InnovationNew growth theory Innovation system theory

Comparing explanatory power with standard economics. §NIS-theory gives better explanation of: l The success of certain small countries l On lack of catch-up l On the Russian paradox §NIS-theory has little to offer on: l Monetary issues l Public fínance l Welfare economics

The tension between ’system’ and ’evolution’ §Systems as (static) constellations of organisations defined by components and interrelationships within which new technologies are evolving. §Systems responding to transformation pressure by public policy and incremental institutional change. Installing learning organisations. §Systems responding to transformation pressure by institutional crisis, disruption and radical institutional change.

The tension between nation-specific analysis and global innovation-chains §STI-mode may result in innovation through global interaction But §To absorb innovation national STI-capacity is necessary. §DUI-mode may result in products that are globally distributed. But §To use the outcome DUI-capacity is necessary.

Do less developed economies innovate? l Not many new technologies brought to the world market (but this is true also for Denmark but less so for BRICS-countries). l But highly dependent on using technologies radically new for domestic users. ’Transfer’ and even ’Absorption’ understate the challenge. l There is no clear distinction between institutions that promote innovation and institutions that promote ’Absorption’.

A small country paradox in the knowledge based economy l The production of new knowledge is expensive while it’s repeated use is cheap – should give big country systems a scale advantage. l True that small countries have a weak international specialisation in high technology and science based sectors l But Western small countries (Nordic countries, Holland, Belgium, Austria, Switzerland) do very well in terms of GNP per capita – why? l To resolve the puzzle - new perspectives on growth and on knowledge production in the learning economy.

New perspectives on Growth and Develop- ment –four kinds of capital

What can be learnt for less developed countries High Tech strategy is costly, risky and slow - might be tried but needs to be combined with upgrade of low tech! Promote incremental product innovation and organisational change - Learning organisations and competence building is the key to success for small countries! Social cohesion and social capital matters - NEW NEW DEAL mechanisms to distribute the costs and benefits of change!

A national system’s approach to innovation and competence building §Look for missing links and weak user competence as well as for weak knowledge base! §Look at networks as constituted by people’s relationships and experiences. §Not one best-practise (the limits of bench- marking). Best-practise varies with the systemic context.Problems with transplanting foreign practises. §Managing the openness of the system is becoming increasingly important.