Tuesday, May 20, 2014

Macro-Innov 11: 'innovation systems' history and difficulties

So in my previous post I outlined briefly conventional macro-economics. In a number of ways I was overly generous to the field, alluding to developments since the early 1990s when the NIS concept was developing. Institutions where not on the radar, heck people like Romer were just beginning to publish on endogenising R&D (lets not call it technology). Economists like Douglass North have been influential in the shift to institutional economics but so has the innovation studies literature. History is relevant here of course, although technology has always been important, apart from the mega consumer technologies of auto, telephone, and TV etc, technologies have often been in the background - progressively making communications easier and making the making of products cheaper. However, since the late 1980s the computer revolution has made technologies obvious to all - even and I have say it - to Economists!

In this blog I want to contrast that with the direction innovation systems - particularly the path National Innovation Systems research took over the 1990s and 2000s.

The key points of the history are:

  • policy relevant - what can shift growth
  • policy focus - what effects technological competitiveness
  • theory focus - do businesses compete as atoms - to which we know have a resounding NO. It is far more complex than that - businesses compete, clusters compete, business networks compete.

So lets revisit where NIS came from.

National Innovation Systems

Sharif in his excellent 2006 Research Policy article traces the emergence of the national innovation systems concept.

Keith Smith is unequivocal in his view that the concept had policy roots: “[T]he key thing about it [NIS]. . . is that it wasn’t really developed as a theoretical concept. It wasn’t a properly elaborated conceptual apparatus. It was really developed as a policy concept” (Smith interview, 13 October 03). Similarly, in the view of Staffan Jacobsson, the Innovation Systems concept took off because a policy vehicle/agency in Sweden – the Swedish Board for Technical Development – initiated a study in 1988 by asking a number of researchers to discuss and conduct research on what they called Sweden’s Technological System (Jacobsson interview, 17 October 03).....

For Bengt-Ake Lundvall, determining the NIS concept’s origins is to some extent an arbitrary chicken or-egg exercise: “[I]t’s difficult to say whether it was primarily an academic approach to inform policymaking or the otherway around” (Lundvall interview, 20 October 03). Lundvall claims that the two major contributions in academia and policymaking that launched the NIS concept were a major book edited by Giovanni Dosi, Christopher Freeman, Richard Nelson, Gerald Silverberg, and Luc Soete on technical change published in 1988 (discussed below), and a report published by the Technology/Economy Programme (TEP) in the OECD in 1992. Dosi et al. (1988) combined the writings of economists and non-economists who had been involved in critical assessments of the way in which orthodox economic theory deals with technical change. The book was supported by the International Federation of Institutes for Advanced Study (IFIAS) within the framework of their project, “Rethinking Economic Theory.” Financial support in the final phases of the project was also provided by the Maastricht Economic Research Institute on Innovation and Technology (MERIT) and a grant from the Dutch Ministry of Economic Affairs......

In the academic realm, there is a gracious rivalry between Lundvall and Freeman, with each giving credit for the introduction of the NIS concept to the other. While it is often observed that the concept of ‘National Innovation Systems’ was first introduced in academic circles by Freeman in 1987 in his book on Japan, Lundvall in fact used the concept ‘Innovation Systems’ in 1985 in a booklet on user–producer relations published at Aalborg University ....

Freeman’s usage of the concept in explaining national differences between economies, particularly with reference to Japan, was the first widely published use of the concept. Freeman formally introduced the Innovation System concept to the literature in Technology, Policy, and Economic Performance: Lessons from Japan (1987), in connection with his analysis of the institutional reasons for the ‘developmental gap’, that is, differences in the rates of economic growth among nations. Preceding both these developments, however, was the first use of the terminology in written form by Christopher Freeman in August 1982 in a paper titled, ‘Technological Infrastructure and International Competitiveness’, which was presented at the OECD’s expert group on Science, Technology and Competitiveness, but which went unpublished at the time. Freeman was working then as an advisor to the OECD ad hoc group on science, technology, and competitiveness, chaired by John Ingram. In a paper presented to the group, Freeman described in detail Friedrich List’s advice to Germany on catching up with the UK, staunchly defended Listian economics, and also described why qualitative, history-friendly (indeed historically deterministic) economic analyses have a place in economic thinking. In the paper, Freeman rather casually mentions the ‘National Innovation System’ concept when discussing the role of ‘creation’ in technological innovation.

Freeman's 1982 OECD paper (finally published in ICC in 2004) 

The paper states in parts:

If it is accepted that success in technical innovation is a crucial element in competitiveness and if we wish to place it at the heart of our analysis, instead of relegating it to a peripheral or residual role, then it follows that some basic characteristics of innovation must be taken into account. These may be summarised as:
I. Coupling (of changing technology, production and markets)II. Creating (new products, processes, systems and industries)III. Clustering (of groups of related innovations)IV. Comprehending (new skills, new technologies, new markets)V. Coping (with the technical and market uncertainty of innovation)

For 1982 that is fairly impressive categorisation of the stylist facts which we have been filling in ever since but have we gone beyond them yet?

The first use of systems was in relation to entrepreneurship.

2. Creating: As has already been indicated above, creativity is an essential element of entrepreneurship, since it involves the bringing together of what were previously disparate and scattered pieces of knowledge to create something new. Sometimes the term ‘creativity’ is reserved for those abilities of the scientist, which lead to new discoveries or of the artist, which lead to new works of art. These kinds of creativity are important for innovation too. But when we are considering national innovation systems (as opposed to global civilisation and the world economy) then at least in the past they have not been so central to innovative success as those types of creativity which are characteristic of the engineer in the work of invention and design and of the entrepreneur. In these entrepreneurial/engineering types of creativity the synthesis and creative application of information from a variety of different sources (including the arts and sciences) is, critical. Another contention of this paper is that the capacity for such creative synthesis has become increasingly related to more effective modes of coupling with the arts and sciences and their creative initiatives.

In essence this paper by Freeman as the introduction by Lundvall to the 2003 Globelics Conference version notes is a paper about systems of systems.

First, there is a chain of links established in the paper that helps us to understand the evolution of the innovation system perspective. It begins with the work by Pavitt and Soete on how R&D and patenting affect international specialisation and links it to competitiveness. It goes on to point to a much broader set of factors such as financial markets, education systems and working organisation hereby already signalling the broad definition of the national innovation system. It brings in the long historical time by telling stories about how catching-up can be understood in the context of long waves, new technological systems and national innovation systems.

 So it is, that national systems from the beginning had an institutional framing, except for the point about entrepreneurship. Macro-economic settings are far from the vision.

Problematically 'institutions' refers both the organisations in law - universities, government organisations etc and the rules of the game; for example Australia has long supported the idea of living wage and thus higher minimum wages than the USA. However, institutions in the second sense are hard to define and measure so the fall back has been institutions in primary sense.

The Institutional Paradigm

Across a number of publications the concept of NIS has been depicted as a series of linked institutions.

OECD 1999 Managing National Innovation Systems.

Holbrook 1997 (CPROST 1997-06)

And you can google image search to find many more NIS diagrams, almost all of which follow similar patterns. Regional innovations systems have been depicted with a large variety of diagrams, but institutional analysis has been a part of that spectrum.


Clusters research, on the other hand have focused on more tangible features - actual firms, technological strengths and linkages between universities and businesses.

The primary problem

I see the biggest failing of 'innovation systems' has been to develop anything coherent enough to be debated. I think it is a test of of a concept / paradigm or theory that it can be debated. I don't remember ever seeing an article that contests some 'stylised fact' of the NIS model - except maybe the 'N' - which I more strongly than many even now dispute.

You can not debate IS because it is not debatable - will a million case studies, but not foundational principles every case is simply a new twist.

Second Problem: What is it exactly - where is the systemness in the 'systems'

The first problem leads to the second. NIS has proven to be incredibly difficult to operationalise, it is not a concept that can easily be measured. This has led to many now focusing on microdata - the microeconomics of innovation at the firm level. But the question is does micro scale to macro.

Well of course in many ways it does but in many important ways it doesn't. So we then have the void - the nothingness that I call macro-innovation.

Third Problem: What shapes the institutions

History, resources etc..
Nelson in the last chapter of his book on Innovation systems and also printed in Industrial and Corporate Change 1992 states.

Whether or not a country had rich natural resources or ample farming land clearly is another important variable influencing the shape of its innovation system. It turns out that all our 'small' high income countries also were well endowed in this respect. Among the large high income countries the US was far and away the best endowed here. Countries that possess resources and good farm land face a different set of opportunities and constraints than countries without these assets. Countries that lack them must import resources and farm products, which forces their economies towards export-oriented manufacturing, and an innovation system that supports this. One sees this strikingly in the cases of Germany, Japan, and Korea. On the other hand, countries with a rich resource base can support relatively high living standards with farm products and resources and the affiliated industries providing exports to pay for imported manufactured goods. The countries that have been able to do this—Denmark, Canada, and Australia stand out in our set—have developed significant publicly supported R&D programs to back these industries. So also has the United States. While effective agriculture and resource exploitation does require R&D, compared with 'high tech' industry the R&D intensity here is low. The discussion above suggests that, to some extent at least, a nation's innovation system is shaped by factors like size and resource endowments that affect comparatively advantage at a basic level. But it also is true that a nation's innovation system tends to reflect conscious decisions to develop and sustain economic strength in certain areas, that is, it builds and shapes comparative advantage.

So lets make a stark point; Australia and Argentina had similar resources and living standards at the turn of 19 century, but they went in two different directions. Also the quotes above fails to acknowledge just how important science has been for Australian farming, given it exists on the driest continent (except for Antarctica).

An assesment

When you read through these comments it becomes clear that in some foggy way NIS is both a response to macro-economics but still not divorced from it. The arguments try and improve on macro but some of the deeper assumptions about the construction of the economy appear to remain. The best imagery I can come up with is this.

The twin analysis are linked but don't really 'talk' to each other either. So we are left heading off in the distance without an assessment of where we are and where we are going. What do we need to study in innovation studies at the macro level. In my next blog I will compare macro-economics and innovation systems perspectives to find the black holes in their worldviews. Both are incredibly useful but both have missed important intersections and both have often missed the same phenomena.

Tuesday, May 13, 2014

Macro-Innov 10: Macro-economics and innovation

In my previous blog here, I explained that I am interested in deep structure - the new combinations that Schumpeter implied at the whole economy level. But to establish a case that there is hole at the centre of the 'economics of innovation' it is best to first establish what macro-economics is all about and from there discuss what innovation systems theory is all about.

So to begin: Macro-economics

There are two important elements of macro-economics that are linked but can be treated separately. First, what may be called the aggregate monetary structure of the economy.

Source: Parkin, M. and Bade, R. Macroeconomics : Canada in the global environment 5th ed. Toronto : Pearson, c2003.

As an approximation of the the way money flows around economies for much of the 20th Century, this is not bad. However, increasingly even for money flows this is a bad representation. In 2006 global flows of capital had reached at least 16 % of global GDP. Even the Economist seems almost to be saying there should be greater cooperation between countries on macro-economic policy even if they don't believe it will happen.

So we should start drawing the diagram more like this.

The global is important, more and more so even for the basic macro-economic management - lets ditch the single economy diagram..

Two important criticisms have often been made of the circular flows diagrams. 

The first by ecological economists is that the real world does not exist - natural resources such as minerals, air, water etc and waste are not part of the flows. However, it would be very hard to incorporate material flows and environmental services into this diagram. In any case that is not the point of this diagram, this diagram is of particular use when thinking of the monetary economy - of inflation, interest rates, fiscal policy (in grand terms), unemployment, trade and so forth. help . That does not mean that resources should not be incorporated in an enlarged conceptualisation of the economy, but it doesn't fit here and that is partly the point of my deep structure.

The second is that a dynamic is missing. Search the web and you will see dozens of circular flow diagrams that include an 'entrepreneurial' segment. Again, fundamentally I think this misses the point this diagram is about money flows.

So both of these commentaries are suggestive of the deeper issues, including the powerful nature of visualisations. The criticism are valid, first, these macro-economic flows only represent cash accounting and thus we have no idea of the asset bases of economies. What business would derive its profits statement from just the cash book? Second there is no agency in these diagrams or notations for the changing nature of the structures that operate. Labour has gone through a number of phases - agrarian/feudal, factoryisation - servicisation and now fragmentation. There are others.


The second half of macro-economics is growth accounting. I am not a growth metrics expert so I will keep this short.

For something as conceptually simple as economic growth, it sure causes lots of problems. Sure we can measure increases in expenditure or income year on year - or recessional periods but what is behind the growth. A simple question but it still seems to remains a mystery (Economist 1999 and Helpman 2005).
Productivity matters - it frees up resources to invest elsewhere, but productivity measures are in my opinion increasingly iffy (if you think of servicisation measurement). Even when you accept productivity measures then you have to ask where do they come from. Helpman argues technological change and institutions - because of course as we know technological change is dependent of institutions and institutions that can themselves drive change.

Okay but then we have the paradoxes. High growth old manufacturing industries - the Austrian Paradox. We could go further and claim that Australia and Canada are simple anomalies for whichever theory - technological or comparative advantage (trade theories) you want to bet on as they are high income largely resource based economies.  Another problem for these two is a different kind of productivity paradox. Canada is supposedly way behind the USA but on life indexes such as that developed by the OECD , while the USA compares well on material living standards (no surprise) it compares less well on other measures of well being.

And now there is a new paradox - that of New Zealand. So in this paradox NZ under-performs on growth and productivity, despite having implemented neoclassical policies over many years. So NZ it seems has under-invested in innovation and human capital as well physical infrastructure - including communications. But it turns out just sheer distance matters alot. So short of towing NZ north closer to markets and sources of inputs the country will suffer a productivity gap.

So whats the state of play - well this is what the Economist said in 2006:

How much guidance do these theories offer to policymakers, such as those sitting on the World Bank's commission? In Mr Solow's model, according to a common caricature, technology falls like “manna from heaven”, leaving the bank's commissioners with little to do but pray. Mr Romer's theory, by contrast, calls for a more worldly response: educate people, subsidise their research, import ideas from abroad, carefully gauge the protection offered to intellectual property.

But did policymakers need Mr Romer's model to reveal the importance of such things? Mr Solow has expressed doubts. Despite the caricature, he did not intend in his 1956 model to deny that innovation is often dearly bought and profit-driven. The question is whether anything useful can be said about that process at the level of the economy as a whole. That question has yet to be answered definitively. In particular, Mr Solow worries that some of the “more powerful conclusions” of the new growth theory are “unearned”, flowing as they do from powerful assumptions.

At one point in Mr Warsh's book, Mr Romer is quoted comparing the building of economic models to writing poetry. It is a triumph of form as much as content. This creative economist did not discover anything new about the world with his 1990 paper on growth. Rather, he extended the metre and rhyme-scheme of economics to capture a world—the knowledge economy—expressed until then only in the loosest kind of doggerel. That is how economics makes progress. Sadly, it does not, in and of itself, help economies make progress.

Deep structure 

I started by stating I am interested in something I call deep structure - but there is noting of that kind emerging in macro-economics.