Transformation of the Finnish Innovation System: a Network Approach
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Gerd Schienstock Timo Hämäläinen Transformation of the Finnish innovation system: A network approach Sitra Reports series 7 2 TRANSFORMATION OF THE FINNISH INNOVATION SYSTEM: A NETWORK APPROACH Authors: Prof. Dr. Gerd Schienstock is the Scientific Director of the Work Research Centre, University of Tampere. He is the coordinator of the Sitra’s Research Programme on the Finnish Innovation System. Dr. Timo Hämäläinen is the Director of Sitra's Innovative operations. He holds a Ph.D. in International Business from Rutgers University, New Jersey. Dr. Hämäläinen has previously worked for the Finnish Ministry of Trade and Industry in industrial policy planning. Sitra Reports series 7 Copyright: the authors and Sitra Graphic design: Leena Seppänen Editor: Soma Kaitila ISBN 951-563-388-5 (print) ISSN 1457-571X (print) ISBN 951-563-389-3 (URL: www.sitra.fi) ISSN 1457-5728 (URL: www.sitra.fi) The Sitra Reports series consists of research publications, reports and evaluation studies especially for the use of experts. To order copies of publications in the Sitra Reports series, please contact Sitra at tel. +358 9 618 991 or e-mail [email protected]. Printing house: Hakapaino Oy Helsinki 2001 CONTENTS 3 Foreword 7 Suomenkielinen tiivistelmä 9 1 INTRODUCTION 14 2 SYSTEMIC TRANSFORMATION CHALLENGE 19 The transformation argument 19 Driving forces 21 Global competition and increasing innovation pressures 21 Deregulation and liberalisation of markets 23 ICT revolution 24 Increasing complexity of science and technology 25 Changing demand patterns 27 Conclusion 28 3 TRANSFORMATION OF THE FINNISH ECONOMY 31 Theory of catching up and forging ahead 31 Post-war growth experience in Finland: catching up and forging ahead 33 Structural adjustment and national competitiveness in the late 1990s 38 Coordination mechanisms in Finnish innovation policy 44 Conclusion 45 4 INNOVATION AND LEARNING 48 The nature of the innovation process 49 From a transcendental to a mechanistic perspective of innovation 49 The linear model of innovation 49 Different modes of innovation 52 Technical and social innovations 55 Learning processes 58 Individual learning 59 Organisational learning 60 Integrating the individual and the organisational levels: the ba-model 62 The cycle of exploitation and exploration 64 User orientation and communities of practice 66 Linux and the open source development model 68 Conclusion 71 5 THE NATIONAL INNOVATION SYSTEM 73 The system concept 74 The innovation system as a knowledge-transforming system 75 Different types of knowledge 75 Sticky knowledge as competitive edge 77 Unresolved questions and new perspectives 78 Actors and governance in the innovation systems 78 The exogenous dimension of the innovation system 82 The bridging function of KIBS firms in the innovation system 84 National, sectoral, and regional innovation systems 86 From path dependency to path creation 90 Conclusion 93 4 TRANSFORMATION OF THE FINNISH INNOVATION SYSTEM: A NETWORK APPROACH 6 INNOVATION PROCESSES IN LOW-TECH, HIGH-TECH AND SERVICE INDUSTRIES 95 From high-tech to knowledge-based industries 95 Value creation and innovation processes in different industrial sectors 96 Innovation in high-tech industries 97 Value creation in low-tech industries 99 KIBS firms and innovation processes 101 Competing paradigms 104 7 INTRA-FIRM RESTRUCTURING 106 The paradigm shift in the use of modern ICTs 107 Innovation processes are less amenable to automation 108 The informating function 109 The communication function 109 New organisation forms 111 ICT and organisational restructuring 111 Changing restructuring practices 112 The servicisation of production processes 113 The changing configuration of work relationships 114 Trust-based business culture 116 Human resources 118 A general trend towards up-skilling? 118 New skills and competencies 119 Dynamic development of expertise 122 Conclusion 124 8 INTER-FIRM NETWORKING 126 Different types of networks 127 When are networks efficient? 129 When are networks innovative? 134 Why have networks become so important in recent years? 138 Social capital and networks 142 Network failures 149 Conclusion 150 9 INSTITUTIONAL SETTING, INNOVATION AND SOCIAL WELFARE 152 University-industry relationships 153 Science as a public good 153 Basic research and competitive funding mechanisms 153 The nature of the linkages between university and industry 155 Networking between universities and industry 156 The role of social sciences 157 Problems in university-industry cooperation 158 Trend towards internationalisation of research cooperation 159 Organisational problems 159 Vocational education in Finland: the polytechnics 160 Combining theoretical and practical knowledge 160 Cooperation involving polytechnics and universities 161 A trend towards academic drift? 163 CONTENTS 5 The role of polytechnics in the regional economy 163 Intra- and inter-organisational aspects 164 Implications of rapidly outdated knowledge 165 Regulation and innovation: the competition law 165 Social welfare: low prices or innovative products? 165 Schumpeterian and Arrowian approaches 166 Networks and dynamic efficiency 167 How to reform the competition law? 168 The labour market 169 Increasing instability of work careers 170 Growing dynamics of the labour market as an opportunity 171 A new perspective on labour market policy 172 Flexible work and the labour law 173 The concept of flexibility 173 Some aspects of flexible work 174 Towards a company-based welfare capitalism? 176 Conclusion 177 10 TOWARDS A NETWORK-FACILITATING INNOVATION POLICY? 178 Traditional technology and innovation policy 179 New rationale of innovation policy 180 The network approach to innovation policy 182 Matching policies to stages of networking 183 Local, sectoral, national and international network policies 187 International approaches to network-facilitating policy 189 Network-facilitating policy in Finland 190 National workplace development programme 191 Tekes’ technology programmes 193 Benchmarking and policy learning 195 Networking in the public sector 197 Conclusion 199 11 POLICY AND RESEARCH CHALLENGES 200 Policy challenges 201 Techno-organisational restructuring and competence-building at the firm level 201 Modernisation of low-tech industries 204 Development of knowledge-intensive business services 205 Supporting inter-organisational network formation 207 Strengthening basic research in universities 207 Adapting the education system 209 Preventing social segmentation and social exclusion 211 Strengthening regional innovation policy 213 Policy coordination and policy learning 214 Research challenges 215 References 222 Appendix 239 Reports in Sitra's Research Programme on the Finnish Innovation System 247 6 TRANSFORMATION OF THE FINNISH INNOVATION SYSTEM: A NETWORK APPROACH List of Figures Figure 1. Specialisation and innovation in an uncertain environment Figure 2. Traditional (linear) models of innovation Figure 3. Modern coupling model of innovation Figure 4. Cycle of exploitation and exploration Figure 5. Functional perspective of the innovation system Figure 6. Dimensions of holistic business restructuring Figure 7. Coordination of interdependent activities Figure 8. Point of maximum inventiveness List of Tables Table 1. Structural competitiveness of nations in the new techno-economic paradigm Table 2. Depth of economic crisis in 1991—1993 and changes in the structural competitiveness rank of OECD countries between the early and mid- 1990s Table 3. Overall competitiveness of economic systems in the late 1990s Table 4. The frequency with which certain key words appeared in the leading Finnish business daily 1 January 1990 – 31 December 2000 Table 5. Innovation modes in low-tech industries, high-tech industries and knowledge-intensive business services Table 6. Various functions of modern ICT Table 7. Techno-organisational restructuring and new qualification needs FOREWORD 7 FOREWORD The world economy has surprised many economists and economic policy makers in recent years. During the 1980s and early 1990s, the growing investments in information and communications technologies had very little impact on aggregate productivity. In the late 1990s, the strong economic growth of the United States did not increase inflation as expected. At the same time, the traditional macro- economic policies proved highly ineffective in Japan: even zero interest rates and large public deficits could not revive the economy from its decade-long recession. Also the empirical studies of economic growth in industrialised countries continued to leave a large unexplained residual. In this year, the economic forecasts of national and international institutions have proved highly over-optimistic and they have revised down their growth estimates by several percentage points in just a few months. The economic analysts and policy makers are not the only ones surprised by the rapid transformation of the world economy. Indeed, the fundamental transformation of techno-economic environment has challenged all decision makers in modern societies. The old mental models, theories and behavioural rules, developed in quite different circumstances, do not work as well today as they did in the past. Moreover, the established social structures and institutions, which are based on these models, theories and rules, face major adjustment challenges. These challenges can only be met if decision makers are willing to fundamentally rethink these structures and institutions in the light of the changed techno- economic environment. Even the most