Organisations, Innovation and Complexity: New Perspectives on the Knowledge Economy

University of Manchester
9-10th September 2004

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Innovation systems as the setting for the co-evolution of technologies and institutions

Timothy Foxon

t.j.foxon@imperial.ac.uk

Dept. of Environmental Science and Technology,
Imperial College London, UK

Abstract

This paper investigates innovation systems as a useful meso-level concept linking co-evolutionary change of technologies and institutions to macro-level systems functions.

An innovation system may be defined as “the elements and relationships which interact in the production, diffusion and use of new, and economically-useful, knowledge” (Lundvall, 1992). Thus, innovation is seen as a process of matching technical possibilities to market opportunities, involving multiple interactions and types of learning (Freeman and Soete, 1997). Empirical and comparative studies have found that differences between national innovation systems reflect different institutional arrangements, including: systems of university research and training and industrial R&D; financial institutions; management skills; public infrastructure; and national monetary, fiscal and trade policies (Nelson, 1993). More recent work has identified five functions served by a technological innovation system: to create and diffuse ‘new’ knowledge; to guide the direction of the search process among users and suppliers of technology; to supply resources, including capital, competencies and other resources; to create positive external economies through the exchange of information, knowledge and vision; and to facilitate the formation of markets (Johnson and Jacobsson, 2001).

Though work on innovation systems has been developed in an evolutionary economic context, how the chararacteristics and functions of innovation systems relate to evolutionary foundations has been little studied. This paper builds on recent work of Nelson (2002) and the author (Foxon, 2004) to investigate how these characteristics and functions may arise out of a process of co-evolution of technologies and institutions. The basic element of modern economic evolutionary theory is the ‘routine’, thought of as any process used by a firm as part of its normal business activities (Nelson and Winter, 1982). Routines change by a process of searching for better processes, with successful routines being selected by the process of market competition. Nelson and Sampat (2001) proposed that a routine in general consists of a ‘physical technology’ and a ‘social technology’, with the latter identified with a standardized pattern of behaviour, i.e. a simple institution. In this picture, (physical) technologies are selected on the basis of satisfying technical potential and meeting user needs, whilst social technologies compete to provide the most useful solution for a particular social context, in a process of co-evolution. This paper investigates how innovation systems provide the (dynamic) setting for this process of co-evolution of physical and social technologies, and how, in turn, the functions of innovation systems emerge out of this process of co-evolution.

References

Foxon, T J (2004), ‘On the co-evolution of technologies and institutions’, submitted to Research Policy

Freeman, C and Soete, L (1997), The Economics of Industrial Innovation (Third Edition), Pinter, London

Johnson, A and Jacobsson, S (2001), ‘Inducement and blocking mechanisms in the development of a new industry: the case of renewable energy technology in Sweden’, in Coombs, R, Green, K, Richards, A & Walsh, V (eds.), Technology and the Market: Demand, Users and Innovation, Edward Elgar, Cheltenham

Lundvall, B-A (ed.) (1992), National Systems of Innovation: Towards a Theory of Innovation and Interactive Learning, Pinter Publishers, London

Nelson, R (1993), National Innovation Systems: A comparative analysis, Oxford University Press, New York

Nelson, R (2002), ‘Technology, institutions and innovation systems’, Research Policy, Vol. 31, pp. 265-272 [Erratum, Vol. 31, p. 1509]

Nelson, R and Sampat, B (2001), ‘Making sense of institutions as a factor shaping economic performance’, Journal of Economic Behaviour & Organization, Vol. 44, pp. 31-54

Nelson, R and Winter, S (1982), An Evolutionary Theory of Economic Change, Harvard University Press, Cambridge, MA

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