Century st INNOVATION INNOVATION Perspectives for the 21 for the Perspectives

Innovation: Perspectives for the 21st Century

InnovaTiOn Perspectives for the 21st Century For this third book in the BBVA series, we have chosen innovation as the central theme. It was chosen for two fundamental reasons: the first was the decisive importance of innovation as the most powerful tool for stimulating economic growth and improving human standards of living in the long term. This has been the case throughout history, but in these modern times, when science and technology are advancing at a mind-boggling speed, the possibilities for innovation are truly infinite. Moreover, the great challenges facing the human race today— inequality and poverty, education and health care, climate change and the environment—have made innovation more necessary than ever.

Our economy and our society require massive doses of innovation in order to make a generalised improvement in the standards of living of nearly 7 billion people (the number continues to grow) compatible with the preservation of the natural environment for future generations.

The second reason for choosing this theme is that it is consistent with

BBVA’s corporate culture. Our group’s commitment to the creation and dissemination of knowledge ties in directly with the vision that guides every aspect of our activity: “BBVA, working towards a better future for people.” People are the most important pillar of our work, and the work we do for and on behalf of people is supported by two other pillars of our culture and strategy: principles and innovation. Index

10 Innovation for the 21st Century Banking 107 Culture, values and the long waves of Industry capitalist development Francisco González Francisco Louçã

23 The Roots of Innovation 129 Technological change and the evolution Alex Pentland of the U.S. “National Innovation System”, 1880 – 1990 33 The Archaeology of Innovation: lessons for David C. Mowery our times Sander van der Leeuw 143 Mapping Creativity in the European Union: Edward Lorenz and Bengt-Åake Lundvall 57 Innovation:It is generally agreed that science shapes technology, but is that the 163 Innovative Organizations: whole story? Structure, Learning and Adaptation Nathan Rosenberg Alice Lam

73 Two Knowledge Dynamics for Innovation 181 Innovation by Users Hiroyuki Itami Eric von Hippel

85 Innovation Inside and Outside the Company: 199 The Power of Creative Freedom: How Markets for Technology Encourage Open Lessons from the MIT Media Lab Innovation Frank Moss Alfonso Gambardella 211 Creating Abundance through the application of a discipline of innovation Curtis R. Carlson 229 Designing Radical Innovation 333 Innovation and Climate Change Harry West Edward S. Rubin

241 Innovation: Behind the Buzzword 351 Life Innovation with Therapeutic Robot, Paro Pascal Sobol Takanori Shibata

255 Innovative Culture: Values, Principles and 367 Innovation: Changing the Face of Disability Practices of Senior Executives in Highly Hugh Herr and Ernesto Martinez-Villalpando Innovative Companies Joaquim Vilá 383 The City to Come Carlo Ratti and Nashid Nabian 269 Economic development revisited: How has innovation contributed towards 399 Future Opera for Robots and People Too easing poverty? Tod Machover Manuel Mira Godinho 409 Biographies 287 Innovation and the Service Economy Ian Miles 415 List of artists

305 Financial Innovation: A Balanced Look Robert E. Litan

321 The Financial Industry and the Crisis: The Role of Innovation Xavier Vives Innovation for the 21st Century Banking Industry

Francisco González Chairman of BBVA

This book, Innovation: Perspectives for globalisation, which today deeply affects the 21st Century, is the third in a series of every aspect of people’s lives. annual publications by the BBVA Group. In order to give the collection a sense of The motivation behind these publications continuity, we have chosen innovation as is to publish expert knowledge on the key the central theme of this third book. It was issues shaping the future course of the chosen for two main reasons: the first was 21st century and relay this knowledge to the decisive importance of innovation as the society. To this end, we seek out leading most powerful tool for stimulating economic researchers and creative minds from around growth and improving human standards of the world and ask them to address rigorously living in the long term. This has been the and objectively the latest developments case throughout history, but in these modern in knowledge and the ongoing debates on times, when science and technology are research and artistic creation in their own advancing at a mind-boggling speed, the fields, using a language and approach that possibilities for innovation are truly infinite. non-specialised readers can understand. Moreover, the great challenges facing the The first book in the series, Frontiers of human race today—inequality and poverty, Knowledge, was published in connection with education and health care, climate change the institution of the Frontiers of Knowledge and the environment—have made innovation Awards granted by the BBVA Foundation. more necessary than ever. Our economy It focused on recent breakthroughs and and our society require massive doses of key challenges in each of the eight award innovation in order to make a widespread categories: biomedicine; ecology and improvement in the standards of living of conservation biology; climate change; nearly 7 billion people (the number continues information and communication technologies; to increase) compatible with the preservation economics, finance and business of the natural environment for future management; development cooperation; and generations. the contemporary arts. The second reason for choosing this The second book offered a comprehensive theme is that it is consistent with BBVA’s overview of the complex phenomenon of corporate culture. Our group’s commitment

10 to the creation and dissemination of to make these solutions available to more knowledge ties in directly with the vision that and more people. Innovation is a vital tool; guides every aspect of our activity: “BBVA, with it, our daily efforts can achieve the best working towards a better future for people”. results, and BBVA can become, as we want it People are paramount in our work, and the to be, the best universal bank worldwide—in work we do for people is supported by two other words, the bank that offers the best other pillars of our culture and strategy: and most varied solutions for people and for principles and innovation. companies. BBVA’s principles can be summed up in I will return to this later, but first I would the belief that ethics are not only desirable like to say that the undertaking of publishing but also profitable. Acting in accordance these books over the past three years has with strong values of honesty, integrity and been an extremely gratifying experience. transparency is essential for establishing a Each year we have been privileged to work close and lasting relationship of trust with with some of the world’s leading experts on all our stakeholders: our shareholders, truly fascinating subjects. The opportunity suppliers, regulators and, above all, our to interact with them and their ideas has employees and our customers. enriched us all. This ethical commitment extends to all This year, again, I am very proud of the the societies in which we operate and to calibre of the authors who kindly agreed to society as a whole because we believe that participate in our project. The book boasts economic development and social stability texts written by a select group of the world’s are the keys to ensuring BBVA’s continuous, best and most prestigious experts in their profitable growth . For this reason, BBVA respective fields. Some are repeating the is actively involved in a variety of social experience—like Professor Rosenberg, projects, with a particular focus on promoting who contributed a magnificent article on education and knowledge. This is the context globalisation to last year’s publication— that has inspired the publication of these which constituted a great honour and books as well as a host of other initiatives, show of support for our project. Others such as the Frontiers of Knowledge Awards have collaborated with BBVA on different and the different activities organised by the innovation projects, or represent institutions BBVA Foundation, in addition to ambitious with which we have signed agreements or educational programmes launched by the established partnerships in this field. And bank in every country in which we have a all have made valuable contributions that presence. give us a glimpse of the “state-of-the-art” in However, although these actions are innovation.1

1 Here I would like to offer a undeniably important, at BBVA we believe we I wish to express my gratitude and that of special tribute to the memory make our greatest contribution to improving the entire BBVA Group to all the authors for of Professor Chris Freeman of the University of Sussex, one of people’s lives through diligently performing participating in this book entitled Innovation: the pre-eminent contemporary our daily activity. The banking industry, and Perspectives for the 21st Century. On reading experts on economic cycles and the economics of innovation. the financial industry in general, carry out it, I trust that all of you will find a rich, His untimely passing this tasks essential to people’s everyday lives and varied and thought-provoking discussion summer precluded the possibility of recruiting him for to economic development and social stability. of innovation--a complex phenomenon of this project, in which a number BBVA strives to offer its customers a wider paramount importance for the society and of his colleagues, collaborators st and disciples have participated. and better range of solutions each day, and economy of the 21 century.

Francisco González 11 AN OPEN, PLURALISTIC VIEW OF INNOVATION to be introduced into the market. This is why Innovation is extremely hard to define. economic and business texts dealing with Schumpeter, the great economist who innovation are just as concerned with the positioned innovation at the centre of “sources of innovation” and the processes the economic debate, made a distinction that encourage the generation of potentially between invention, defined as the useful ideas as they are with the best manifestation of a new idea or a previously mechanisms, structures or incentives for unknown fact, and innovation, the ability transforming those ideas into goods and to successfully apply that idea in practice services that can effectively create value on (Schumpeter, 1934). Thus, innovation can the market. be very loosely defined as “a change in the The connection between science, thought process for doing something, or technology and innovation, the relationship the useful application of new inventions or between academic research and companies, discoveries” (McKeown, 2008). public policy and the role of the market, Working on the premise of these general government and corporate structures, ideas, innovation has been analysed in business management in the area of countless contexts and from very different innovation—all of these subjects have been perspectives—always associated with the focus of special attention in the literature “positive change”—in such disparate on innovation. This diversity of themes and fields as technology, economics, business, their complexity explain both the importance sociology, the arts or the multiple branches and the difficulty of developing a Theory of of engineering. Innovation (see Nelson and Winter, 1977). Schumpeter supplied us with a definition A wide range of scholarly approaches of economic innovation which lists the to the concept of innovation is documented different forms that innovation can take: in Fagerberg (2004), which I recommend to 1. the introduction of a new good or interested readers as a helpful reference for service; becoming familiar with the prolific and varied 2. the introduction of a new method of bibliography on innovation. production; Given the diversity of approaches, aspects 3. the opening of a new market; and ramifications of innovation and its 4. the conquest of a new supply source of practical applications, in this book we have raw materials or semi-manufactured goods; chosen to offer a very wide spectrum of 5. the implementation of a new articles addressing the most relevant aspects organisation in any industry. of innovation, all written by authors at the The importance of innovation in the field of very top of their respective fields. economics has even given rise to a discipline The first segment of essays, which provide known as Neo-Schumpeterian Economics, crucial insights for understanding innovation, which views all economic development as focuses on its deepest roots. Sandy Pentland the result of innovation (see, for example, traces the roots of creativity—and, by Freeman, 1982). extension, innovation—back to their source Every innovation is the result of a process in biology, and shows how communication in which the idea for a possible practical and interaction among the members of each application of an invention is first posited species, including (of course) humans, are and subsequently developed until it is ready essential for development. Sander van der

12 Leeuw points out that the cognitive abilities David Mowery’s essay offers an analysis of of the human brain do not seem to have the US National Innovation System over more changed in the last 50,000 years; however, than a century and concludes that its results thanks to cultural elements (in other words, have largely depended on the decisions made the experience of learning to exploit those by private companies. For this reason, public abilities to the fullest), combined with innovation policies should remain consistent advances in information and communications, over time and seek the approval and support the human species still has plenty of room of the private sector. for improvement in terms of managing its Using data compiled by European natural environment, and that improvement economists, Edward Lorenz and Bengt-Åke is made possible by innovation. Lundvall empirically prove that the structural The second segment of essays focuses traits of economies, like education systems on the institutional aspects of innovation. and labour market structures, have a Nathan Rosenberg discusses the complex significant impact on creativity, and therefore relationship between science and technology. on innovation. The traditional view is that science “leads” The third section of essays examines and technology “follows”, but Professor innovation from a “micro” perspective, Rosenberg points out that technology is exploring how innovations are generated much more capable of “explaining” scientific and what plans and mechanisms should progress than we have been led to believe. be introduced in organisations to generate Hiroyuki Itami underscores the role that and disseminate ideas and, above all, to organisations (corporate, government, or turn those ideas into innovative goods and non-profit) play in knowledge accumulation services on the market. mechanisms, which are vital for innovation, Alice Lam analyses the organisational while Alfonso Gambardella focuses on aspects of the innovation process and how market mechanisms can encourage points out the need to cultivate the innovation—mechanisms that are primarily learning and knowledge-building capacity fuelled by the utilisation of that accumulated of human resources, but also to design knowledge. flexible organisations that can adapt to new Francisco Louça, on the other hand, technologies and processes. demonstrates the importance of the In a revision of the conventional intricate network of cultural values, social “producer-centred” approach to innovation interactions and institutions of each society analysis, Eric von Hippel reveals how for understanding innovation processes, users have become an important source of and discusses how the match or mismatch innovation thanks to advances in computer between socio-institutional systems and the science and improved connectivity. degree of techno-economic development in Consequently, it is essential for companies to each period determine the long or Kondratiev maintain a constant dialogue with users and waves of economic growth and recession. devise mechanisms for working with them Based on this reasoning, the current and making the most of their abilities. crisis can be chalked up to the inability of Frank Moss describes the key cultural economic structures, institutions, regulations aspects of the MIT Media Lab’s “research and social values to keep pace with the style”, one of which is the creation of an technological revolution we are experiencing. environment of creative freedom that

Francisco González 13 encourages people to ask bold questions, the necessary policies for handling where failure is perfectly acceptable environmental problems. and where learning is an integral part of the As one might expect of a book published creative process (learning by doing). by a financial institution, this volume pays The essay written by Curtis Carlson special attention to innovation in the service illustrates the “best practices” for innovation industry, and more specifically in the world of developed at the Stanford Research Institute, finance. Ian Miles points out that conventional designed to improve the odds of success for academic publications on innovation have the innovative efforts of organisations. tended to focus on manufacturing industries; Harry West focuses on “radical innovation” yet services represent a very large (and and outlines the principal elements of constantly growing) chunk of the economy, Continuum’s process for designing and and innovation in this sector presents developing this type of innovation, which is distinctive traits and demands. Developing the hardest to standardise but has a much cross-disciplinary teams is a necessity in greater impact. the service industry, because innovations Pascal Soboll offers a complementary in this field usually involve the combination perspective—that of the consulting firm of multiple goods and services, requiring Ideo—on how to create an innovative culture knowledge of technologies, institutions, in organisations, in such a way that innovation regulations and social habits as well as of is a priority for all departments rather than specific types of customers and customer the exclusive concern of a small group of interfaces. “experts”. Robert Litan reviews the history of This third section concludes with Joaquim financial innovation in recent decades and Vilá, who highlights the pivotal role that concludes that in many cases it has had senior executives must play in implementing a positive effect, similar to that achieved by the changes required for an organisation innovation in any other industry, generating to achieve a robust innovative culture, and goods and services that are better, cheaper enumerates the fundamental cultural factors and delivered to the buyers more quickly. that these executives must embrace and It is only when financial innovation focuses preach by example. on the search for mechanisms to increase The fourth and final segment is dedicated leveraging to dangerous levels that it has to the application and impact—present and/or a negative impact, as the recent crisis clearly future—of innovation in a number of relevant proves. Therefore, the competent authorities areas, sectors or activities. must introduce policies that will prevent Manuel Mira Godinho shows us how the proliferation of “destructive” financial innovation is largely responsible for the innovations without stifling true, positive reduction of extreme poverty in the world financial innovation. over the past several decades, and how it Xavier Vives picks up where Litan leaves off, can continue to eradicate this problem in discussing the role that financial innovation the future. For this to happen, developing has played in the crisis and reminding us nations must acquire policies and tools that every major technological change (the that will allow them to obtain know-how, railway or the automobile in their day and the compete for R&D funding, and join the internet in ours) has been accompanied by a global institutional framework, including speculative bubble. Nevertheless, innovation—

14 particularly financial innovation—is essential transformation, and the driving forces behind for economic development. Consequently, we it—technological progress and the social must concentrate our efforts on designing changes it is bringing about—are equally appropriate regulations for the development intense and inevitable. of financial innovations that will bring private We are currently witnessing the most incentives into line with general welfare disruptive technological revolution since interests. the advent of the Industrial Revolution two Edward Rubin views innovation as centuries ago. The difference is that only a fundamental tool for solving the problem a small portion of the world took part in of climate change. If we hope to achieve the the technological progress of the 18th and international goal of stabilising the levels of 19th centuries, while today’s revolution is greenhouse gases in the atmosphere, we will spreading like wildfire across the entire have to apply technologies that are still being planet. The reason for this is simple: ours is developed or have not even been invented on not a revolution of the tangible (production a massive scale. Public policy should focus on or transport of goods) but of the intangible. providing the proper incentives. It is a revolution of information. The cost of Takanori Shibata addresses innovation in collecting, storing, processing and sending the medical field, discussing the development information is falling rapidly. And just as of robots that can be used as pets and important—or perhaps even more so—is the have proven to be therapeutic. Hugh Herr fact that these new possibilities are within and Ernesto Martínez-Villalpando explain reach of almost everyone on the planet, the tremendous potential of technological thanks to the advent of personal computers, innovations for improving the quality of life the internet and, increasingly, mobile of the 650 million people around the world phones. who live with some kind of physical or mental This phenomenon is changing people’s disability. habits and behaviour in every area of their Carlo Ratti and Nashid Nabian show how lives: the workplace, recreational activities, innovation can generate “intelligent” cities communication and even interpersonal that will provide access to useful information relationships. Although all companies in real time and a platform for collaboration must deal with these changes in their among their inhabitants, radically improving customers’ lifestyles and in the production their quality as living and working spaces. and distribution processes, nowhere are Finally, Tod Machover explores the their effects more drastic than in the service applications of innovation in music through industry, where the information component musical “tools” that allow anyone to make carries much more weight (see Miles, 2000). music. This technology has great therapeutic Banks are at the epicentre of this change. potential; however, on a more general level, Technological evolution and social changes it also offers a new model of interaction have a deeper and more direct effect on the between people and music that is much more financial industry than on most other sectors, direct and creative. for its basic raw materials are information and money. And money, in turn, can INNOVATION IN THE FINANCIAL INDUSTRY dematerialise and transform into accounting The financial industry is already caught entries—in other words, into data that can up in an intense, inevitable process of be stored, processed and transmitted in real

Francisco González 15 time and at costs so low that they are on the into to saving banks has severely tarnished verge of disappearing altogether. the reputation of financial institutions and the It is true that banking has not entire industry in the eyes of ordinary citizens. experienced—up until now—a transformation Trust is what gives banks their competitive on a par with that undergone by other edge, but over the past several years they information-based sectors, such as the have lost much of their customers’ trust, and music industry. This is largely owing to the trust of society in general. the fact that banking has historically been In addition, the crisis has triggered a a highly-regulated industry, subject to close process of sweeping changes in banking scrutiny and control by public authorities. regulations: borrowing limits, higher capital It is also partly due to the exceptionally and reserve requirements, the need for major benign economic and monetary climate investments to improve risk and compliance of the past several decades, which fuelled systems, etc. All of this boils down to less the intense growth of financial activity and revenue and more expenditure—in other permitted a relatively high level of inefficiency words, a reduction in the current and future in the industry, including the survival of a profitability of financial institutions. staggering number of financial institutions In short, banks must respond to the around the world—or, to put it another way, a new demands of their customers and of severe excess plant capacity. society, and they must face this challenge However, not only is the transformation of with a damaged reputation, lower profits the industry inevitable, but it is also picking and slow growth in the traditional banking up speed with each passing day. The primary business. This situation calls for a radical reason is that the technological revolution is transformation: banks must dramatically introducing daily new and different ways of revise the way they interact with their doing things, and increasing the potential for customers and take a qualitative (not cutting costs, while the number of users who quantitative) leap forward in efficiency. resort to non-traditional banking methods To a degree, these advances in efficiency continues to grow. will be achieved by a drastic consolidation of The second reason is that the current the banking sector, which has already begun. crisis is imposing changes in various But the industry’s true transformation will directions. Banks are perceived as the be effected with the widespread and, above “culprits” of the recession, and with good all, intelligent use of technology as part of reason, for a large number of institutions a sustained process of innovation. made some very serious mistakes and chose In recent decades, banks have been to ignore the basic principles of banking: among the most important users of prudence, transparency and even integrity information and communication technologies, (for a more detailed discussion of this issue, which they have adopted with two primary see the essays by Edward Litan and Xavier goals in mind: to cut costs and streamline Vives). As a result of these mistakes, many processes to increase profit margins, and to banks have experienced serious difficulties develop channels of communication other which caused some to go under and others than the conventional branch office. to go through a complete restructuring, Yet the original technological platforms generally funded by government bailouts. The used by banks were first introduced several colossal amount of taxpayer resources poured decades ago (in the 1960s and 1970s) and,

16 in most cases, subsequent improvements in access to data storage and processing at functions were developed based on different, very low cost, and will undoubtedly have far- more modern technologies, architectures reaching implications. and programs that were later added and/or Internet usage has also received hooked up to the old system ad hoc. a tremendous boost from advances in If it were possible to visualise the mobile phone technology. Thanks to these complete systems network of an average new devices, nearly 4.5 billion people bank, it would probably resemble nothing so (almost three-quarters of the human race) much as a plate of spaghetti: a tangled web are “online” and have almost ubiquitous of connections linking very different systems access to some level of information services, that have undergone a long string of changes which has a tremendous effect—yet to be and partial updates over time. quantified—on productivity. This situation generates high maintenance Mobile phones come equipped with costs (for example, it is estimated that banks increasingly more powerful and varied in the United States devote 80% of their total functions, functions that will gradually be investment in systems to maintenance and incorporated into other devices that people only 20% to new developments). And, most can use anywhere, anytime (what has been importantly, it quickly becomes untenable dubbed the “Internet of Things”). given the pace at which new technologies All this opens up countless windows of appear and customers’ habits and demands opportunity, not only to cut costs but also, change. and most importantly, to increase revenue. Meanwhile, the internet revolution In the most technologically advanced continues to spread (internet users now countries, the challenge is to offer customers account for nearly 30% of the world’s a wider array of information-based products population). And the uses, capabilities and and services—and not just of the financial functions of the internet are proliferating day variety—with a cost so nominal it is close by day. The internet has become the leading to zero, and to do it in the way that is most source of information, an indispensable efficient, rapid and convenient for users. pastime (today Europeans spend more time Technology also offers unprecedented online than they do watching television), and possibilities for tailoring services to meet the even a forum for personal relations: over users’ needs and demands. To this end, the 500 million people around the world now use bank must provide customers with tools that social networks like Facebook which did not will allow them to participate in the actual even exist until a few years ago. process of designing the service they wish to With each passing day, the internet is receive. gaining importance as a commercial and In developing nations, we find an array advertising space and as a place where of truly historic opportunities: firstly, people on opposite sides of the globe can because the majority of global growth will work together as a team. The web is also be concentrated in these countries in the the driving force behind the fragmentation coming decades; and secondly, because only of production chains which facilitates the 900 million people in the world are currently outsourcing of services. In this field, services bank customers, and there are over 2 billion offered via cloud computing represent a people—most of whom live in the world’s major breakthrough in terms of universal least developed countries—who do not have

Francisco González 17 access to financial services. This situation of branch offices must be given a complete exists because, in the conventional model overhaul: physical distribution networks of production and distribution, providing are only logical if they can offer the users financial services that involve small amounts added value and are perfectly integrated in to a scattered population is not a profitable a physical-virtual platform. This platform activity. should allow customers/users to interact However, technology facilitates the with the bank at any time, through any introduction of much more efficient models channel, with no interruptions or time lapses, for producing and distributing financial in order to quickly obtain financial or non- services—for example, through the use financial solutions at minimal cost that are of mobile phones. In addition to opening perfectly suited to their specific needs, and up a huge new market for banks, such a which customers can even help to design if measure would have a tremendously positive they so wish. effect on the economic development of these Parallel to this technological revolution, countries and facilitate the inclusion of the banks must also undergo a sweeping most disadvantaged collectives. organisational and cultural transformation—a The technology needed to do all this transformation that will allow them to restore already exists and is improving every their reputation by offering transparency in day. A new scenario of competition in the dealings with customers, speed and flexibility financial industry is taking shape, a stage on in responding to their demands, and the which new competitors will soon emerge: creation of an innovative culture that allows companies, many of them internet-based, them to find solutions to the new challenges with high brand awareness and none of which technology and social changes will the legacies encumbering banks (obsolete continue to pose. systems, costly physical distribution Only those banks which are capable of networks, etc.), and with the potential ability undertaking this transformation will be able to introduce highly efficient models for to participate in the financial industry of the offering financial services. 21st century: an industry that will be much The banks that want to compete in this more competitive than in the past, but which new league will have to undergo a profound will also present tremendous opportunities transformation, but they do have a few given the possibility of meeting people’s competitive advantages for initiating this needs much more efficiently and providing change, the most important being the vast universal access to financial services in the amount of information they already possess world’s least developed regions. about their customers. This knowledge must become the foundation for building a new BBVA: AN INNOVATIVE PROJECT business model, one that is firmly entrenched At BBVA, long before the current crisis, in technology. we have always tried to stay one step ahead The fundamental tool of this new model of the pack, and we have already started to will be a much more modern and flexible build this new business model. Our project is technological platform capable of absorbing upheld by three pillars: principles, people and all that information about customers and innovation. exploring all possible points of contact with Principles are the cornerstone of our them. In this new model, the existing network project. At BBVA, our efforts have always

18 been guided by the premise that ethics are edge technology. At BBVA we are leading the not only desirable but also profitable. way in the application of data-mining and Sustaining a corporate culture of creating intelligent algorithms that will allow prudence, transparency and integrity at any us to anticipate the future demands of our cost is a difficult, time-consuming task, and customers at any given time. in some cases it even means sacrificing At BBVA, we have initiated a profound short-term profits. But in the medium and transformation of our distribution network. long term, it is the only way to ensure a We are already the world’s most efficient project’s sustainability. bank, but we continue to work on new branch Thanks to this culture of principles, BBVA office configurations that are even more has managed to avoid the pitfalls that many efficient, streamlined and able to provide of our competitors have stumbled into in the better service. Another project underway recent past, and consequently our relative is the design and construction of the best position in the global banking industry has remote channels, equipped with the best and been strengthened. most varied functions, so that customers can The number-one priority of our project interact with BBVA in whatever way is most is people, just as our vision states: “BBVA, convenient for them and help us perfect the working towards a better future for exact kind of service they prefer. The phone people.” We strive to build stable, long- and the computer were followed by the term relationships with our customers, mobile phone, and these will soon be joined relationships of trust based on strict ethical by the iPad, television and any other devices conduct and an effort to provide them with to which customers have access. the best solutions to meet their needs At BBVA, we are moving towards efficiently, conveniently, and at the best price. a distribution model that goes beyond the And here is where the third pillar of our contemporary concept of multi-channel project comes in: innovation. Creating a truly communication, where the physical office groundbreaking, “customer-centric”, rapid, is the heart of the system and the other simple and efficient model of interaction, channels are just useful accessories. We are in which the customer receives the best his developing a seamless physical/virtual space bank has to offer, requires constant efforts where customers can come and go between to innovate in both the organisational and the branch office and the virtual world as they cultural arena and in the technological field. please and in perfect continuity. I would like to mention just a few of the This space will give rise to a new definition initiatives we are working on at present. of a bank: a company that will offer other non- If we want to offer customised solutions, financial, information-based services which the first order of business is to know our incorporate the users’ own contributions customers well. At BBVA, like all banks, we and tap the potential of social networks. And have compiled a huge amount of information all this will be achieved by taking advantage about our customers. But turning that data of the growing ubiquity and functionality of into knowledge that can be used to design mobile phones and the ability of cloud products that will meet each customer’s computing to offer cheap universal access to unique needs and determine fair prices in all kinds of information-related services. accordance with his/her situation means In pursuing this goal, BBVA has an that we must equip ourselves with cutting- important competitive advantage: a cutting-

Francisco González 19 edge technological platform, a platform that inexpensive models to provide large sectors goes far beyond the conventional model of of the population with access to banking (as banking systems and is capable of integrating we are already doing in Latin America with all channels and all sources of information. mobile phones, agents and bank cards) and Thanks to this platform, a customer who to operate in huge markets where we do not accesses the bank by any channel will have a strong physical presence. always find the same BBVA, with the same In summary, we have already made capacities, and will be able to jump from tangible progress in our transformation one channel to another as he/she pleases process. However, we have also made other without a hitch. This platform, which we have “intangible” advances—or, if not strictly been building since 2007, is currently 80% intangible, at least difficult to quantify— complete and will be fully operational in less derived from what we have learned after than two years. all these years of constant work, and these BBVA has a vision for the industry’s future are no less important for the future of our and has been working for years to make institution. it a reality. But it also has a strategy that Firstly, over the course of these years combines this vision of the future with the we have refined and perfected our model of current reality and the prospects of each innovation. The journey began back in 2004 market and each type of customer. with the creation of a Corporate Innovation At BBVA we want to leverage the potential Department, and our initial approach was, in of our model in high-growth markets. For relative terms, more focused on technological this reason, in addition to our strength possibilities than on the demands of the in Latin America, we are building a solid market and/or the customers. franchise in the United States (the world’s This centralised department laid the largest market), we have a strong presence groundwork for evolving towards an in China and other Asian countries, and we innovation “spread” among the different are in the process of acquiring significant areas of the group. At the same time, interests in Turkey. In this way, BBVA the people who are in direct contact with combines its strength in developed markets customers have become our principal source with a growing presence in emerging of ideas, and technology is now viewed as a economies, where most of the global tool—an indispensable one—for materialising economic growth will be concentrated in the those ideas. coming decades and where a high percentage Meanwhile, at BBVA we have evolved of the population still does not have access towards a more open model of innovation to financial services—which means that the in which we cooperate with a variety of potential for growth in the financial sector is institutions; in fact, representatives of many staggering. of them (MIT, SRI, Continuum, Ideo, etc.) Our highly efficient model, firmly contributed essays to this book. This model rooted in technology, gives us a significant also factors in the increasingly important competitive edge over other banks when it element of customer input, opening up a new comes to meeting the needs of customers space for innovation promoted by the users in developed nations (highly sophisticated themselves—which, as Von Hippel points and with intensive technology usage). But out, is quickly becoming a major source of it is also essential for developing simple, innovations (Von Hippel, 2005).

20 However, the most important thing may BIBLIOGRAPHY be that this process of “learning by doing”, Fa g e r b e r g , J. (2004), “Innovation: a Guide to the Literature”, in the practice of innovation, has brought about J. Fagerberg, D. C. Mowery and R. R. Nelson, The Oxford Handbook of Innovation, London: Oxford University Press, pp. 1-26. a profound cultural change in the people Fr e e m a n , C. (1982), The Economics of Industrial Innovation, London: who work for our organisation. Today BBVA Frances Pinter. McKe o w n , M. (2008), The Truth About Innovation. London: Prentice has more and better leaders, leaders who Hall. Mi l e s , I. (2000), “Services Innovation: Coming of Age in the are spearheading the transformation of Knowledge-Based Economy”, International Journal of Innovation Management 14(4), pp. 371-389. BBVA. And the entire BBVA organisation has Ne l s o n , R., and S. Winter (1977), “In Search of a Useful Theory of embraced a new culture that is open, Innovation”, Research Policy 6(1), pp. 36-76. Sc h u m p e t e r , J. (1934), The Theory of Economic Development. Boston, has a positive attitude towards change, and MA: Harvard University Press. Vo n Hi p p e l , E. (2005), Democratizing Innovation, Cambridge, MA: accepts and encourages flexibility, initiative, The MIT Press accountability, learning and knowledge as values that will give us a decisive competitive edge. This culture also responds to the growing demands and high standards of society with solid ethical principles, transparency and good governance as the keys to earning and maintaining the trust of our customers. In short, at BBVA we have gone from a traditional corporate culture, with elements inherited from a time when banking was a semi-official, micromanaged industry, to a culture that will allow us to achieve our ambition, which is nothing less than to lead the transformation of the financial industry in the 21st century. The end goal of this transformation is a new financial system, capable of stimulating growth and sustainable development and of offering more useful, high-quality solutions to meet the needs of more people around the world. The force that fuels this transformation can only be the thirst for knowledge. This is the driving force behind the project of the BBVA Group, and the publication of this book was inspired by our desire to express and share that motivation.

Francisco González 21

The Roots of Innovation

Alex Pentland Decades of research in social psychology It’s likely that human ancestors used such Massachusetts Institute of Technology (MIT) have captured the surprising ability of signals to coordinate their actions long before people to “read” one another. In contexts as sophisticated human language evolved. A different as evaluating classroom teachers, relative newcomer in hominid evolution, selecting job applicants or concluding jury language was likely layered upon older deliberations, human judgments are made primate signaling mechanisms that used on the basis of extremely thin slices of social network strategies to find resources, observational data. Across a wide range of make decisions and coordinate group action. studies, psychologists find that research By better understanding their influence subjects on average accurately predict today, we can shed light on the structure outcomes in such pursuits 70% of the time. and function of modern social networks. For That success rate holds when predicting instance, honest signals can increase the end results occurring days, weeks or even energy level within a hunting team or, for that months later. matter, a creative team through contagious How is this possible? My theory is that excitement. They create a more cohesive our ability to read each other starts with family group by increasing empathy and trust what are known in biology as honest signals. through mimicry signaling. Evolutionary models predict that all social When we watch a conversation between species are likely to develop honest signals, two people and carefully measure the timing, a reliable communication system that energy and variability of the interaction, we develops to coordinate behavior between find several examples of honest signals. individuals. Typically the signals include My research group concentrates on four gestures, expressions or calls. Not only are components of this human signaling. Mimicry they usually trustworthy cues, honest signals is the reflexive copying of one person by are also unusual because they appear to another during a conversation, resulting trigger changes in people receiving signals in an unconscious back-and-forth trading that are advantageous to the people who of smiles, interjections and head nodding.

send them. Activity indicates interest and excitement,

Alex Pentland 23 familiar to us from the connection between signaling-induced effect on mood serves excitement and the activity level of children. to lower perceptions of risk within groups Influence of one person over another can be and increase bonding. Similarly, people measured by the extent to which one person tend to mimic each other automatically and causes the other person’s pattern of speaking unconsciously. Despite being unconscious, to match theirs. And consistency, or fluidity, this mimicking behavior has an important of speech and movement is perceived as a effect on participants: It increases how much marker of expertise. they empathize with and trust each other. To measure the impact of these very Not surprisingly, negotiations with lots of ancient social signals, we developed some mimicry tend to be more successful, no very modern tools and practice what we matter which party starts copying the other’s call reality mining. We collect data mostly gestures first. with custom-designed electronic badges Each of these signals likely has roots in and sometimes with “smart” phones and biology, specifically in our brains. Mimicry other electronic devices. The instruments is believed to be related to cortical mirror uncover and quantify the role that some neurons, a distributed brain structure that social signaling mechanisms play in everyday seems to be unique to primates and is decision-making. By examining the back especially prominent in humans. Mirror and forth of signaling behavior in dyads neurons react to other people’s actions and and small groups—paying no attention to provide a direct feedback channel between words or the identity of individuals—we can people. Newborns, for instance, mimic their accurately predict outcomes of speed-dating parents’ facial movements despite their encounters, job interviews, even salary general lack of coordination. Similarly, our negotiation outcomes to within $1,000. In activity level is related to the state of our a wide variety of situations ranging from autonomic nervous system, an extremely business management to first dates to the old neural structure. Whenever we need to effects of political opinion, we find that react more vigorously—say in fight-or-flight roughly 40% of variation in outcomes can be situations or when sexually aroused—this attributed to signaling-based models of social system increases our animation levels. information processing. That is equivalent to On the other hand, we tend to be listless the estimated influence of genetic makeup and less reactive when our autonomic on individual behavior and is far too large, we nervous system is blunted, as during clinical believe, to ignore. depression. The relationship between autonomic nervous system function and Influential Communication activity level is sufficiently close to enable us Honest signals influence critical activities to use it accurately to estimate the severity of including negotiation, group decision making depression. and group management. In fact, they are accurate predictors of human behavior. The Habitual and Attentive Mind For example, if one member of a group How do social signals interact with is happy and bubbly, others will tend to language? Evolution rarely discards become more positive and excited—an effect successful working parts. It generally known as mood contagion. Moreover, this either builds additional structures while

24 The ability to go beyond association-based The ability to go beyond learning may be the key contribution that “ the attentive mind makes to the fitness of association-based learning may our species. There are inherent limitations on what associational mechanisms learn be the key contribution that the and Kahneman has speculated that these limitations probably spurred the evolution of attentive mind makes to the the attentive mind. In addition, the linguistic capabilities of the attentive mind can allow fitness of our species much faster spreading of new behaviors ” among a population.

Of Kith and Kin retaining the old capabilities or subsumes One of the surprising conclusions from old structures as elements of the new. When our studies of social signaling in everyday our language capabilities began to evolve, our situations is that the attitudes and actions existing signaling mechanisms most likely of peers, rather than logic or argument, were incorporated into the new design. The often dominate people’s beliefs and actions. question, then, is how has modern human It seems that our forebears understood society been shaped by our ancient signaling this intuitively and even had a name for it: mechanisms, and to what extent do these kith. “Kith and kin” is a thousand-year-old mechanisms still govern our lives? phrase that still rings familiar, but most of A partial answer to this question can be us don’t know the meaning of “kith.” The found in the work of psychologist Daniel word derives from the old English and old Kahneman and artificial intelligence pioneer German word for knowledge, and it means Herb Simon, both Nobel Prize winners. Each a more or less cohesive group with common embraced a model of a human mind with beliefs and customs. These are also the roots two parts: a habitual, automatic, and largely for “couth,” which means to act with a high unconscious mind, along with an attentive, degree of sophistication, as well as its more reasoning and largely conscious mind. It is familiar counterpart, uncouth. Thus, your likely that the habitual mind represents an kith is the circle of peers (not just friends) older system and is similar to the mental from whom you learn sophisticated habits of capabilities of early humans: fast, good action. at complex trade-offs and associations, It seems that 1,000 years ago the but not very adept at what we think of as English had the right idea about how people abstract reasoning. Correspondingly, the learn. We are ruled by common sense, communication abilities of this early human the habits our kithmates have in common. mind would likely be limited to signaling and This social learning works by modifying us simple signs. Although this habitual mind through social pressure (usually mediated is quite capable of learning new behaviors by social signaling), instead of through through experience or mimicry, such learning critical reasoning. The use of kithmates to is likely limited to associations among form “common sense” habits of action is perceptual features. another clue to how early humans may have

Alex Pentland 25 leveraged the social signaling mechanisms to to understand how social signaling make better decisions. mechanisms help people decide when to be It is possible that allowing for more time guided by kithmates and when to follow a around the water cooler or coffee pot may separate path. From a theoretical point of be the simplest way to increase workers’ view, perhaps the simplest, most effective productivity. Why? In our studies of more way to integrate common sense into than a dozen organizations, we have found people’s actions is through an idea market. that cohesion among peer employees Idea markets resemble voting but instead —kithmates—is one of the largest factors of building on single votes per person, we in both productivity and job satisfaction. allow people to express their expectation In these instances, cohesion is defined as of the returns associated with multiple how connected kithmates are with each courses of action. For instance, how much other. That is, do the people you talk to also food will we find if we go over the hill? How talk to one another? How tightly woven and much will we find if we go across the river? interconnected is your peer network? And so forth for each alternative. One can In one study in Chicago, we used think of these expectations as bets and electronic badges to monitor the social use standard probability theory to weight signaling and conversational patterns of the bets in proportion to their expected information technology. The badges were payoff. In this way we can select the action fitted with infrared sensors, Bluetooth that maximizes the expected return and location measurement and accelerometers minimizes the risk. to measure body movement, and recorders It is easy to create idea markets using that captured the pitch and pace of voices. social signaling. Everyone bets on each We found that peer-group cohesion was suggested action by signaling a level of a central predictor of productivity. In fact, interest. Then group members “add up” the workers whose group cohesion was in the top signaling to pick the option with the most third had more than 10% higher productivity positive signaling. This method of decision- when compared to the mean. This result making doesn’t require language. In order underscores the extent to which we are to pick the winning course of action, each social animals and that our connection with participant must only signal to the rest of our peers at a local level is vitally important. the group how interested they are in each With increased cohesion comes an increase alternative and then be able to read the in things such as shared tacit knowledge, group’s combined signaling. Animal behavior attitudes and work habits, and social support. research supports the idea that this is what In other words, much of the important both bees and ape troops do when deciding information about how to be successful and about group movements. It also is similar to productive at a job is likely to be found around the initial reaction signaling seen in business the water cooler. meetings. Those “ums,” “ahs” and “hmms” so common in conference rooms, along with Tapping Collective Intelligence the animated or slack body postures, suggest But are people always confined by how our modern decision- making processes common sense—that is, the beliefs of those preserve and leverage these ancient around them? To answer that, it is important mechanisms.

26 Still, the challenges individuals face that when people are faced with important change dramatically over time. As a decisions, they do tend to form into cohesive, consequence, social signaling mechanisms reinforcing peer groups, providing the social must be able to quickly select the right context and reinforcement for their choices. kithmates to help solve the newest problems. This really is a question of identity: The Whence Creativity? character of the problem determines who We have seen that these signals have a will be the best kithmates for learning new, major effect on person-to-person interactions effective actions. This poses a problem and on group behavior, but do they influence for decision making by social signaling, even our most sophisticated abilities? As it however, because when people are faced turns out, the humble honeybee has much to with new important decisions, they need to tell us about the flow of information in social quickly form peer groups that are relevant species. The notion that worker bees search to the problem. Thus, we need to determine for good food sources and then return to whether or not people dynamically form the hive and use waggle dance signaling to problem-defined kith groupings in modern communicate the distance and direction of daily life. the food source is common knowledge. Less To test this idea we monitored the social well known, though, is that bees use this signaling and patterns of interaction for 81 same mechanism as the basis for an elegant residents in an MIT dormitory during the approach to group decision-making. 2008 presidential elections, giving them One of the most important group decisions smart phones that could track who spoke made by a bee colony is where to locate face-to-face with whom. What we found a nest. Bees seem to use a kind of “idea is that when politics became especially market” to guide their discovery: the colony prominent, as during a presidential debate, sends out a small number of scouts to the students shifted their groupings and survey the environment. Returning scouts began to selectively spend time with others who have found promising sites signal their who shared the same ideological position, discovery with an intense, active dance. excluding those holding opposing opinions. As a result of this social signaling, more This was not true of more remote channels scouts are recruited to the better sites. This of communication such as phone calls; those cycle of exploration and social signaling remained unchanged, perhaps because they continues until, eventually, so many scouts are less effective at conveying social signals. are signaling in favor of the best site that a Further, the extent to which students tipping point is reached and the hive moves formed a cohesive kith with people with en masse.1 similar opinions predicted their level of The bees’ decision-making process interest in the presidential race, their liberal- highlights information integration as well as conservative balance and even their eventual information discovery, two processes crucial voting behavior. For first-year students, to every organization, but each with different the magnitude of this effect was similar to requirements. The solution suggested by the

1 See, for example, “Group the effects detected in other experiments bees is to alternate between the multiple Decision Making in Honey Bee evaluating political advertising and media networks that are best for discovery and the Swarms,” American Scientist, May–June 2006. exposure. The finding reinforces the view richly connected single network that is best

Alex Pentland 27 for integration. Networks—whether apian or human—that vary their communication We can understand at least structure as needed are able to shape “ information flow to optimize both discovery a pedestrian sort of charisma if and integration. Our studies at MIT have shown that this we define it by its operational same sort of oscillation between discovery and integration seems to be characteristic characteristics: an unusual ability of creative teams of people. In one study we tracked employees in the marketing division to convince others to try out a of a German bank, capturing information about their social signaling during each new behavior encounter. Analysis of the data showed ” that teams charged with creating new marketing campaigns oscillated between two communication patterns. In one they leaps and find new, creative analogies. It placed themselves in the middle of multiple can take the experience of a new situation, streams of communication, what we call a let it “soak in” for a while and then produce centralized communication pattern that is an array of analogous actions. There associated with discovery. In the second, they is considerable literature showing that engaged in a densely interconnected pattern unconscious cognition is more effective than of communication where most conversations conscious cognition for complex problem were with other team members. In contrast, solving. The habitual mind seems to work members of production groups showed best when the more logical attentive mind little oscillation, speaking almost entirely isn’t interfering, such as during sleep or to other team members. A second study when we are “turning it over in the back of demonstrated that creative teams not only our mind.’ In contrast, the attentive mind had more variation in the shape of their provides insights into our actions, helping us social communication network, but also detect problems and work though new plans that the range of variation in network shape of action. correlated with how creatively productive the groups judged themselves to be. In other The Power of Charisma words, oscillation in the shape of these Although using social signaling networks can predict creative productivity, mechanisms for making decisions appears at least as defined by the people in the to be good for combining action alternatives networks. and interests, it is likely not to be good for Why might this pattern promote greater learning new behaviors. This is because creative output? One way to interpret these the “idea market” combination mechanism findings is that this pattern of oscillation tends to select only consensus views and is brings new information to a group for unfriendly to new or unusual alternatives. integration into our habitual minds. Because It leads to a very stable, conservative social the habitual mind uses association rather group. This resistance to change raises the than logic, it can more easily make intuitive important question of how social signaling

28 mechanisms might have facilitated learning know much about the subject, the speaker’s of new action habits from examples outside presentation is fluid and practiced. Also, the the community. speaker is noticeably energetic and clearly One possible mechanism is the excited. Your habitual mind says to itself, phenomenon of charisma. Although no one “Well, I may not know much about this, has fully defined charisma, research subjects but she is clearly expert and she is excited reliably agree on its characteristics. In … so I guess it must be a good plan.” This particular, most report that charisma is much successful presentation style is charismatic more than just word choice or argument. We by our definition because it is effective at can understand at least a pedestrian sort convincing people to consider new behaviors. of charisma if we define it by its operational Similarly, another recent study from characteristics: an unusual ability to convince our research group focused on executives others to try out a new behavior. Under this attending a one-week intensive executive definition, people who are good at pitching education class at MIT where the final business plans, building high-performance project, again, was pitching a business plan. teams and succeeding at similar activities This time we used our electronic badges to demonstrate the quality. Importantly, many observe the executives during a mixer on of these charisma-like effects seem to the first evening of the course. And we found involve social signaling. In our studies, we that their social styles at the mixer were have observed that there is a certain style of predictive of how well their teams’ business social interaction—one that we can identify plans would be perceived at the end of the quantitatively and automatically by computer course. The most successful style is what processing of voice and gesture—that is we call the “charismatic connector”. These highly predictive of success at influencing people circulated in the crowd, practiced others’ behavior in a variety of situations. intense listening, had fluid speaking styles To illustrate, consider our study on and tended to drive conversations with business-plan pitches. In that study, a group questions. of rising-star business executives gathered The more charismatic connectors a given at MIT for an important task. Each executive team had among its members, the better presented a business plan to the group, and the team was judged during the business- the group then chose the best ideas. The plan pitch. The reason seemed to be that executives wore our badges, which captured the members worked together better. In their styles of social signaling. By analyzing teams whose social style is dominated that signaling, we were able to predict with a by these charismatic connectors, team high degree of accuracy which business plans discussions were characterized by more the executives would choose. Our executives, even-handed turn-taking, high levels it seems, were busy measuring the social of engagement and higher productivity. content of the presentations, quite apart from These two characteristics—charisma and the spoken, informational part. connector—usually go together. We have To understand why this makes sense, found that the people who have the most consider the situation in more detail. Imagine consistent and influential style of speaking you are listening to a business plan pitch are also the people who are the greatest on an unfamiliar topic. Although you don’t connectors. People whose social networks

Alex Pentland 29 cross many different groups are exactly Reality mining offers insights this those people who display a charismatic style promising because its large datasets reveal of interaction. social patterns that once were invisible. And they can embed, in real-time, pictures of Under the Signaling Influence hundreds, even thousands, of people working Our research suggests that people’s together. Of course this method raises ethical behavior is much more a function of their issues that must be addressed. Such data social network than generally imagined. also pose a potential threat to individual Humans truly are social animals, and privacy. Because of that, it is important that individuals are best likened to musicians in individuals rather than corporations own data a jazz quartet, forming a web of unconscious resulting from reality mining. To my mind, reactions tuned to exactly complement that would place control of their use with the others in the group. These various the observed individuals, where it belongs. studies from my research group all serve to And it would also allow the owners to derive demonstrate that this immersion of self in personal value from the data. That would the surrounding social network is the typical create a fair market for public use of such human condition, rather than an isolated an important knowledge source as we strive example found in exceptional circumstances. to understand how it really is that we work Our ancient reflexes for unconscious social together. coordination fuse us together into problem- oriented peer groups—our kith. And those groups strongly influence our actions every day. What practical conclusions can we draw from this? These results tell us that individuals should consciously work toward having a cohesive, engaged set of kithmates, helping them adopt more effective habits of action. There is solid evidence that people with cohesive and engaged kithmates are not just more productive and creative but that they are also happier, more resilient and more satisfied. And how can one go about collecting this set of valuable mates? The charismatic connector style of signaling we have uncovered may be the single most important factor in promoting the success of group activities, by creating a contagious positive mood, increasing trust and encouraging more even, socially aware participation. It may be time to begin training people to become more like these connectors.

30 Acknowledgements References

I would like to thank the students and faculty Am b a d y , N., and R. Ro s e n t h a l (1992), “Thin Slices of Expressive who collaborated in the research discussed in Behavior as Predictors of Interpersonal Consequences: A Meta- Analysis”, Psychological Bulletin 111, pp. 256–274. this article. Tanzeem Choudhury, Taemie Kim, Ba r s a d e , S. (2002), “The Ripple Effect: Emotional Contagion and its Influence on Group Behavior”, Administrative Science Quarterly 47, Daniel Olguin Olguin and Ben Wabe helped create pp. 644–675. Bu c h a n a n , M. (2007), “The Science of Subtle Signals”, the sociometric badges and conduct the related strategy+business 48, pp. 1–10. experiments. Nathan Eagle, Anmol Madan and Bu c h a n a n , M. (2009), “Secret Signals. Does a Primitive, Non- Linguistic Type of Communication Drive People’s Interactions?”, Harvard University Professor David Lazer helped Nature 457, pp. 528–530. Co u z i n , I. D. (2009), “Collective Cognition in Animal Groups”, Trends create conduct the smart phone experiments. MIT in Cognitive Sciences 13, pp. 36–43. Ia c o b o n i , M., and J. C. Ma z z i ot ta (2007), “Mirror Neuron System: Assistant Professor Sinan Aral, MIT Professor Erik Basic Findings and Clinical Applications”, Annals of Neurology 62, Brynjolfsson, Tracy Heibec and Lynn Wu helped pp. 213–218. Pe n t l a n d , A., and T. He i b e c ( 2008), Honest Signals: How They Shape with the analysis of the experiments. Research Our World, Cambridge, MA, The MIT Press. Za h a v i , A., and A. Za h a v i (1997), The Handicap Principle: a Missing papers discussing the resulting research can Piece of Darwin’s Puzzle, Oxford: Oxford University Press. be found at http://hd.media.mit.edu. An earlier version of this paper was published in American Scientist 98, pp. 204-210.

Alex Pentland 31

The Archaeology of Innovation: lessons for our times

Sander van der Leeuw Introduction Lane et al., 2009), it focuses on ‘organization Arizona State University and Santa Fe Institute In this paper, I have tried to bring together thinking’—studying the evolution of the ways a number of strands of work carried out over in which human beings process information, the last thirty years, both as an archaeologist organize themselves, and transform the and as a generalist social scientist, world around them. concerned with the very long-term history of Necessarily, this paper takes the shape human evolution and some of its implications of an introductory summary of many of the for the challenges of the 21st century. The underlying arguments about the trajectory result is a very personal perspective that of human evolution and the aspects of that notably differs from the contributions of many history that are particularly relevant to the colleagues in that I have from the outset present and the future. Where possible, I have posited that what characterizes modern referred to papers and other publications that human (Homo sapiens sapiens)1 behavior elaborate my main train of thought. However, I and modern human societies is information have kept other references to a minimum, not processing that includes learning and wanting to load the argument with the many learning how to learn (second-order learning, doubts and discussions that have occurred see Bateson 1972), as well as categorization, in the anthropological and archaeological abstraction, (hierarchical) organization community over the period of gestation. I

1 The distinction between and related phenomena. Moreover modern have thus been able to reserve space to point humans (Homo sapiens) and humans communicate between themselves out some of the implications of this approach modern humans (Homo sapiens sapiens) referred to here follows by various kinds of symbolic means, and have for present-day challenges, in particular the current custom among paleo- the capacity to transform their natural and contradiction between two of today’s favorite anthropologists. The transition is estimated to have occurred material environment in many different ways, buzzwords: ‘innovation’ and ‘sustainability’. somewhere around 200,000 and at many spatial and temporal scales. As a The evolutionary history of the human years BP. result, this paper does diverge from the usual species, and in particular its cognitive and population-based Darwinian thinking about organizational capacity, is here seen as human evolution (e.g. Boyd and Richerson, consisting of two parts, the first of which is 1985 etc.) in that, for the later periods (cf. essentially biological (the growth of our brain

Sander van der Leeuw 33 and its cognitive capacity), whilst the second constraints and opportunities afforded by the is essentially cultural (learning to exploit the bio-social nature of our species to explain full capacity of the brain). Hence, this paper is observed phenomena in human history, divided into three major sections, describing and couching the explanation in systemic respectively 1. the biological evolution, 2. the terms, which many archaeologists and most cultural evolution and 3. the implications of historians would have difficulty recognizing. the species’ past history for our present-day And to add insult to injury, I am doing so at challenges. a level of generalization that is beyond any It should be emphasized that each of commonly used in these disciplines. these three sections is based on insights My justification for doing this is the and knowledge from different disciplines fact that most, if not all, trans-disciplinary and sub-disciplines. The first part derives research must aim to “constructively upset from arguments in evolutionary biology the practitioners of all the disciplines and evolutionary psychology, and therefore involved” in order to raise new questions is based on an essentially life-science and challenges to be considered by the epistemology and argument, and data communities practicing these disciplines as deriving from ethology, palaeo–anthropology well as by others, and thus to ‘stretch the and cognitive science. It attempts to envelope’ of our knowledge and insights. The reconstruct the evolution of the human direction in which I have attempted to stretch species leading up to its present-day that envelope is given by the fact that this capabilities by comparing living primates, paper intends to make a contribution to the the fossil remains of—and the artifacts current sustainability debate. made by—humans at various stages of their In the third part of the paper, I have tried development, and the physical and behavioral to outline how the bio-social nature of human characteristics of modern human beings. This beings and the course of the history of the leads to a patchwork of data-points and ideas species over the last 12,000-15,000 years that, in so far as it coherently holds together, have conspired to create the dilemma that derives its principal interest from the fact that we face today: “How do we use the human it raises new questions and provides a basis capacity to innovate, the unbridled use of for the arguments in the second part. which during the last three centuries has That part, on the other hand, derives caused the unsustainability of our current from arguments in archaeology and history, mode of life, to attain a more sustainable which are based on humanities and social society?” The short answer is clearly: “We science epistemologies respectively, and data must use our capacity to innovate in a and insights from archaeological, written different way!” This third part of the paper historical and modern observational sources. therefore ends with some suggestions derived It attempts to outline the development of from observing a fundamental weakness of societal organization from small roaming our current scientific thinking—the capacity gatherer-hunter-fisher bands, via villages, to derive lessons from the past for the future. urban systems and empires to the present day global society, with a focus on the role The evolution of the human brain and forms energy and information play in The first part of the story concerns the that development. In doing so, I am using the physical development of the human brain and

34 its capacity to deal with an increasing number nut and a hammerstone) in the act of cracking of simultaneous information sources. The the nut, which leads us to think that the STWM core concept that is most relevant here is the of chimpanzees is 2 ± 1 (because 25% of them evolution of the short-term working memory never master this). Experiments with different (hereafter STWM), which determines how ways of calculating the human capacity to many different sources of information can combine information sources, on the other be processed together in order to follow a hand, seem to point to an STWM of 7 ± 2 for particular train of thought or course of action. modern humans. This difference coincides There are different ways to reconstruct this nicely with the fact that chimpanzees reach evolution (Read and van der Leeuw, 2008, adolescence after 3-4 years, and modern 2009). Indirectly, it can be interpolated by humans at age 13-14. It is therefore assumed comparing the STWM of chimpanzees (our that the growth of STWM occurs before closest common ancestor in the evolutionary adolescence in both species, and that the tree that produced modern humans) to that of difference in age of adolescence explains the modern human beings. 75% of chimpanzees difference in STWM capacity (Figure 1, cf. Read are able to combine three elements (an anvil, a and van der Leeuw, 2008: 1960).

Figure 1. The relationship between cognitive capacity and infant growth in Pan and in Homo sapiens sapiens. The trend line is projected from the regression of time-delay response (Diamond and Doar, 1989) on infant age. Data are rescaled for each dataset to make the trend line pass through the mean of that dataset. Working memory scaled to STWM = 7 at 144 months. The ‘Fuzzy’ vertical bars compare the age of nut cracking among chimpanzees with the age for relative clause acquisition and theory of mind conceptualization in humans. [Data on STWM are here represented by the following symbols: • = Imitation (Alp 1994); + = time delay (Diamond and Doar, 1989); ✳ = number recall (Siegel and Ryan 1989); x = total language score (Johnson et al. 1989); x = relative clauses (Corrêa, 1995; ■ = count label, span (Carlson et al., 2002); o = 6 month retest (Alp, 1989); ▲ = world recall (Siegel and Ryan, 1989); ● = spatial recall (Kemps et al., 2000); ♦ = relative clauses (Kidd and Bavin, 2002); - = spatial working memory (Luciana and Nelson, 1998); — =linear time delay (Diamond and Doar, 1989)]

Homo working memory development

7

6

Pan working memory 5 development

4 Relative clause acquisition, theory of mind (5 years) 3 Working memory (seven-point scale) Working 2 y = 0.1744x -1.0868 R² = 0.9884

1 Nut cracking (chimpanzee) (3-4 years)

0212 4364860728496 108 120 132 144 156

Mean age (months)

Sander van der Leeuw 35 Another approach to corroborating the above three variables, and a fourth one: the growth of STWM is by measuring the succession of the blows in a line. STWM encephalization—the evolution of the brain- is therefore 4 (figure 2b). Next, the edge is to-body-weight ratio of modern humans’ closed: the toolmaker goes all around the ancestors through time. The evolution of pebble until the last flake is adjacent to the these ratios is based on the skeletal remains first. By itself, this is not a complete new of each subspecies found and, as shown in stage, and we have called this STWM 4.5. But Figure 3, corresponds nicely to the evolution once the closed loop is conceived as defining of the STWM as has been established a surface the knapper has two options. Either based on the way and extent to which these to define a surface by knapping an edge ancestors were able to shape stone tools (cf. around it and then taking off the centre, or Read and van der Leeuw, 2008: 164). to do the reverse—take off the centre first, Whereas both these approaches depend and then refine the edge. The conceptual in fact on extrapolation and therefore do reversibility shows that the knapper has now not provide any direct proof for our thesis, integrated five dimensions, and that his or the study of the way and extent to which the her STWM is 5 (figure 2c). The next stage various subspecies and variants preceding again develops sequentiality, but in a more modern humans have been able to shape complex way. In the so-called ‘Levallois’ stone tools does provide some direct technique, making one artifact serves at evidence, which is summarized in Table 1. the same time as preparation for the next, That table links the evolution of actions in by dividing the pebble conceptually in two stone tool making with the concepts that parts along its edge. And finally, the knapper they define, the number of dimensions and works completely in three dimensions, the STWM involved with the stone tools that preparing two surfaces and then taking provide examples of each stage. flakes off the third. At this stage, STWM 7 In order to explain the development (figure 2d), for the first time the knappers are involved, I will use an example: the mastering able not only to work a three-dimensional of three-dimensional conceptualization and piece of stone, but also to conceive it as manufacture of stone tools (cf. figure 2 a-d) three-dimensional and adapt their working (Pigeot, 1991; van der Leeuw, 2000). The first techniques accordingly, greatly reducing loss tools are essentially pebbles from which at and increasing efficiency. one point of the circumference (generally Closely observing the tools and other where the pebble is pointed) a chip has been traces of human existence available around removed to create a sharper edge (fig. 2a). 50,000 BP indicates that, after some Removing the flake requires three pieces 2,000,000 years, people at that time could of information: the future tool from which (van der Leeuw, 2000): the flake is removed, the hammerstone with • distinguish between reality and which that is done, and the need to maintain conception; the two at an angle of less than 90º at the • categorize based on similarities and time of the blow. Here, we therefore have to differences; do with proof of STWM 3. In the next stage, • in their thinking, feed-back, feed-forward this action (flaking) is repeated along the and reverse in time (e.g. reverse an edge of the pebble. That requires control over observed causal sequence, in order to

36 conclude from the result what kind of • conceive of relationships between a action could achieve it); whole and its constituent parts (including • remember and represent sequences reversing these relationships); of actions, including control loops, and • maintain complex sequences of actions conceive of such sequences that could be in the mind, such as between different inserted as alternatives in manufacturing stages of a production process; sequences; • represent an object in a reduced set of • create basic hierarchies, such as point- dimensions (e.g. life-like cave paintings). line-surface-volume, or hierarchies of size or inclusion;

Figure 2. Graph of encephalization quotient (EQ) estimates based on hominid fossils and Pan (Chimpanzees). Early hominid fossils have been identified by taxon. Each data point is the mean for hominid fossils at that time period. Height of the ‘fuzzy’ vertical bars is the hominid EQ corresponding to the data for the appearance of the stage represented by the fuzzy bar. Right vertical axis represents STWM. Data are adapted from the following: triangles: Epstein 2002; squares: Rightmire, 2004; diamonds: Ruff et al., 2004. EQ= brain mass/(11.22 body mass0.76), cf. Martin, 1981.

6 Short-term working memory, encephalization, time

7

stage vii 5

6

stage vi 4 5 H. erectus memory

H. habilis g 4 3

A. robustus A. africanus

stage v(b) Encephalization quotient Encephalization 3 stage v(a) Short-term workin A. boisei A. afarensis 2

2 stage iv

Pan

1 stage iii

0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500 6000 6500

Time (kyr BP)

Sander van der Leeuw 37 Table 1. Evolution of stone tool manufacture from the earliest tools (stage 2, > 2,6 M. years ago; found in Lokalalei 1) to the complex blade technologies (stage 7, found in most parts of the world c. 50,000 BP). Columns 2-5 indicate the observations leading us to assume specific STWM capacities; Column 8 (bold) indicates the stage’s STWM capacity and column 9 the approximate age of the beginning of each stage. Column 10 refers to the relevant artifact categories documenting the stages. For a more extensive explanation, see Read and van der Leeuw, 2008: 1961-1964).

Stage Concept Action Novelty Dimensionality Goal Mode ST WM Age BP Example 1 Object Repetition Functional attributes already 0 Use object 1 attribute possible present; can be enhanced 1A Rela- Using more than one object to 0 Combine 2 tionship fulfill task objects between objects 2 Imposed Repetition Object modified to fulfill task 0 Improve 2 > 2,6 My Lokalalei 1 attribute possible object 3 Flaking Repetition Deliberate flaking, but without 0: Incident angle Shape flakes 3 2,6 My Lokalalei 2C overall design < 90° 4 Edge Iteration: each Débitage: flaking to create ad 1: Line of flakes Shape core 1 4 2,0 MY Oldowan flake controls edge on a core creates partial chopper the netxt boundary 5 Closed Iteration: each Débitage: flaking to create an 2: Edges as Shape biface 2 4,5 curve flake controls edge and a surface generative elements from edge the next of surfaces 5A Surface Iteration: each Façonnage: flaking used to 2: Sufraces intended Shape 2 5 500 Ky Biface flase controls make a shape elements, organized biface from hand‑axes the netx in relation to one surfaces another 6 Surface Algorithm: Control over location and angle 2: Surface of the Serial 3 6 300 Ky Levallois removal of flake of flaking to form surface flake brought under production of prepares next control but shape tools constraint 7 Intersection Recursive Prismatic blade technology; 3: flake removal Serial 4 7 > 50 Ky Blace of planes application of monotonous process retains core shape— production of technologies algorithm no more shape tools constraint

38 Figure 3. For humans to attain the capacity to conceive of a three-dimensional object (a pebble or stone tool) in three dimensions takes around 2 million years. a. Taking a flake off at the tip of the pebble is an action in 0 dimensions, and takes STWM 3; b. successively taking off several adjacent flakes creates a (1-dimensional) line, and requires STWM 4; c. stretching the line until it meets itself defines a surface by drawing a line around it and represents STWM 4.5; distinguishing between that line and the surface it encloses implies fully working in two dimensions, and requires STWM 5; c. preparing two sides in order to remove the flakes from the third side testifies to a three-dimensional conceptualization of the pebble, and requires STWM 7. (From: van der Leeuw, 2000)

Dimension 0: the point

Flaking creates

First Dimension: the line

first dimension first dimension The flaking secuence

surface sharp angle

Second Dimension: the surface

co se

The flaking secuence nd dimension nd second dimension

surface

superficie sharp angle

first dimension

first dimension

Third Dimension: the volume

The flaking secuence second dimension second

third dimension second dimension

surface

first dimension

first dimension

Sander van der Leeuw 39 The innovation explosion: mastering matter • the combination of different materials into and learning how to put the brain to best one and the same tool (e.g. hafting small use sharpened stone tools into a wooden or After 50,000 BP2, and especially after bone handle); around 15,000 BP, we see a true ‘innovation • the inversion of the manufacturing sequence explosion’ occurring just about everywhere from reductive (one that begins with a big on Earth. The sheer multitude of inventions object (a block of stone) and successively in every domain is truly astonishing, and takes smaller and smaller pieces off it) accelerates up to the present day. There is to gain control over the shape, to additive no reason to assume further developments (where tiny particles (clay, fibers) are of the human STWM, as the experimental combined into larger, linear objects evidence indicates that modern humans (threads, coils) and then into a two- currently have the capacity to deal dimensional object (such as a woven simultaneously with at most seven, eight or cloth), that is then given shape (by sewing) sometimes nine dimensions or sources of to fit a three-dimensional object (a piece of information, but even a superficial scrutiny of clothing), etc. This implies the cognition of modern technologies, languages and other a wide range of scales; achievements shows the wide variety of • stretching and chunking the sequence of things that can be achieved with a STWM actions kept in the mind: distinguishing of 7±2. We would therefore argue that for between (complex) preparation stages this next phase, from about 50,000 BP to the (e.g. gathering of raw materials, preparing present, the biology of the mind does no longer them, shaping of pottery, drying, impose any constraints, and the emphasis decorating, firing) yet being able to link the is on acquiring the fullest possible range of logic of manufacture across these stages techniques exploiting the STWM capacity (adapt the clay to the firing technique, etc.), available. The resulting explosion of new tools characterizes the period until about 13,000 The emergence of improved technologies BP (in East Asia) or 10,000 BP (in the Near We can distinguish several phases in that East). But the subsistence mode was still process. In the first, the toolkit explodes, but characterized by a multi-resource strategy the gatherer-hunter-fisher mobile lifestyle of harvesting various foodstuffs in the remains the same. Some of the many environment, but now including a wider cognitive operators that emerge in that first range facilitated by the new toolkit, adapting stage are (van der Leeuw, 2000): to change (weather, availability of food) • the use of completely new topologies (e.g. by moving around, albeit over increasingly that of a solid around a void, such as in the limited distances, so as to always stay below case of a pot or basket); the carrying capacity of the environment. In • the use of many new materials to make effect, people lacked the know-how to inter- 2 All the dates mentioned tools with. Although it is difficult to prove act with their environment; they could only in this paper are not only that these materials were not used earlier, re-act to it. Uncontrollable change and risk approximate, and differ between different parts nevertheless, one observes from this time were the order of the day, but people did of the world, but are also onwards objects in bone, as well as wood minimize risk where they could (cf. van der continually subject to revisions as archaeological research and other perishable materials; Leeuw, 2000). progresses.

40 The first villages, agriculture and herding and specialization (cf. van der Leeuw, 2000). In the next stage, c. 13,000-10,000 BP, The new subsistence techniques introduced, the continued innovation explosion changed including horticulture, agriculture and the whole lifestyle of many humans. The herding, narrowed the range of things people acceleration was so overwhelming that in a depended on for their subsistence. In the few thousand years the whole way of life of process, certain areas of the environment most humans on earth changed: rather than were ‘cleared’ and dedicated to the specific live in small groups that roamed around, purpose of growing certain kinds of plants. people concentrated their activities in smaller This required investment in certain parts of territories, invented different subsistence the environment, devoting those areas to strategies, and in some cases literally settled specific activities and delaying the rewards of down in small villages (van der Leeuw, 2000, the investment activities. Clearing the forest 2007 and references therein). and sowing resulted only a year later in a Together, these advances greatly harvest, for example. increased the number of ways at people’s The resulting increase of investment in disposal to tackle the challenges posed by the environment in turn anchored different their environment. That rapidly increased communities more and more closely to the our species’ capability to invent and innovate territory in which they chose to live. People in many different domains, allowed it to now built permanent dwellings using the meet more and more complex challenges in new topology (upside down containers), and shorter and shorter timeframes, and thus devised many other new kinds of tools and substantively increased humans’ adaptive tool–making technologies facilitating the new capacity. But the other side of the coin was subsistence strategies practicable in their that these solutions, by engaging people in environment (e.g. the ard, the domestication the manipulation of a material world that they of animals, baskets and pottery for storage, now partly controlled, ultimately led to new, pottery for boiling). Without speaking of (full- often unexpected, challenges that required time) ‘specialists’, certain people in a village the mobilization of great effort in order to began to dedicate more time, for example, to overcome them in due time. weaving or pottery-making, and in doing so As part of this process, a number of provided the products of their work to others fundamental changes occurred. First of in exchange for some of the products these all, the relationship between societies and others produced. Differences in resource their environments became reciprocal: the availability and technological know-how thus terrestrial environment from now on did led to economic diversification and, in order not only impact on society, but society also to provide everyone with the things they impacted on the terrestrial environment. needed, the emergence of trade. As a result, sedentary societies tried to The symbiosis that thus emerged between control environmental risk by intervening in different landscapes and the ways invented the environment, notably by: 1. narrowing and and constructed by human groups to deal optimizing the range of their dependencies with them, by narrowing the spectrum of on the environment; 2. simplifying or even adaptive options open to the individual societies homogenizing (parts of) their environments; concerned, drove each of them to devise more and 3. spatial and technical diversification and more complex solutions, with more and

Sander van der Leeuw 41 more unexpected consequences that then one needed to communicate (by adopting a needed to be dealt with in turn. sedentary lifestyle). In keeping with my fundamental tenet Finally, as the social system diversified, that information processing is crucial to and people became more dependent on such changes, I attribute the changes each other, the risk pattern increasingly outlined in this section to the beginnings of also included social stresses caused by a new dynamics, in which learning moved misunderstandings and miscommunications. from the individual to the group because Handling risks therefore came to rely the dimensionality of the challenges to increasingly on social skills, and the be met increased beyond the capability of collective invention and acceptance of individuals to deal with them. This involved organizational and other tools to maintain the emergence of the following feedback loop social cohesion. (van der Leeuw, 2007): Problem-solving structures knowledge —>­ The first towns more knowledge increases the information From this point in time, I will no longer processing capacity —> that in turn allows try to point out any novel innovations or the cognition of new problems —> creates cognitive operations emerging as human new knowledge —> knowledge creation societies grew in size and towns spread involves more and more people in processing over the surface of the earth. Instead, I will information —> increases the size of the focus on how the feedback system that drove group involved and its degree of aggregation societal growth as well as the conquest of —> creates more problems —> increases the material world through innovation posed need for problem-solving —> problem-solving some major challenges. Overcoming these structures more knowledge … etc. ultimately enabled the emergence of true It enabled the continued accumulation ‘world systems’ such as the colonial empires of knowledge, and thus of information- of the early modern period (van der Leeuw, processing capacity, which in turn enabled 2007) or the current globalized world. a concomitant increase in matter, energy Throughout the third stage, from around and information flows through the society, 7,000 BP, communication remained a major and thus the growth of interactive groups. constraint because more and more people But this growth was at all times constrained were interactive with each other as the size by the amount of information that could be of settlements involved grew to what we now communicated among the members of the call a town. This stage—again—sees the group, as miscommunication would have emergence of a host of new innovations, such led to misunderstandings and conflicts, and as writing, periodic markets, administration, would thus have impaired the cohesion of the laws, bureaucracies, specialized full-time communities involved. Communication stress communities engaged in specific activities did in my opinion provide the incentive for (priests, scribes, soldiers, different kinds 1. improvements in the means of communication of craftsmen and women, etc.). Many of (for example by ‘inventing’ new, more precise, these had either to do with improving concepts with which to communicate ideas communication (such as writing and (cf. van der Leeuw, 1982), and 2. a reduction in scribes), social regulation (administration, the search time needed to find those with which bureaucracies, laws), the harnessing of more

42 and more resources (mining) or the exchange very small teams. Hence, in its early stages of objects and materials in part over longer it is related to a relatively small number of and longer distances (markets, long-distance cognitive dimensions—it solves challenges traders, innovations in transportation). But that few people are aware of. As such as larger groups aggregated, the territory inventions become the focus of attention (‘footprint’ to use a modern term) upon of much larger numbers of people, they which they depended for their material and simultaneously become cognized in many energy needs expanded exponentially, and more dimensions (people see more uses the effort required to transport foodstuffs and for them, ways to slightly improve them, other materials did the same. This caused etc.), and this in certain cases triggers an the emergence of energy as a major constraint ‘innovation cascade’—a string of further that did handicap the evolution of societies for innovations, including new artifacts, new millennia to come. uses of existing artifacts, and new forms To deal with this constraint, an interesting of behavior and social and institutional core-periphery dynamic emerged to exploit organization. In this process, clearly, towns that ever-growing footprint—the exchange and cities are more successful than rural of organization against energy. Around towns, areas because of the greater number of dynamic ‘flow structures’ emerged in which interactive individuals in such aggregations. organizational capacity was generated in the That is corroborated by the fact that when towns and then spread around them, extending scaling a number of urban systems of the town’s control over a wider and wider different sizes against respectively metrics of territory; in turn, the increasing quantities of population, energy and innovation, population energy collected in that territory (in the form scales linearly, energy sub-linearly of foodstuffs and other natural resources) and innovation capacity super-linearly flowed back towards the city to feed the (Bettencourt et al., 2006) ever-increasing population that kept the flow structure going by innovation (creation of Empires new organization and information-processing The above ‘flow structures’ kept growing capacity). These ‘flow structures’ became the (albeit with ups and downs) until, after ‘bootstrapping’ drivers that created larger several millennia (from about 2500 BC in the and larger agglomerations of people and the Old World, and about 500 BC in the New), territories to go with them. they were able to cover very large areas, such What enabled the urban populations to as the prehistoric and early historic empires keep innovating, and thus to maintain the (The Chinese, Achaemenid and Macedonian flow structures, was—again—the growing and Roman Empires, for example, in the Old capacity of more and more interacting minds World, the Maya and Inca Empires in the to identify new needs, novel functions and New World, and later the European colonial new categories, as well as new artifacts Empires), which concentrated large numbers and challenges. Underpinning that dynamic of people at their center (and, in order to is one that we know well in the modern feed them, gathered treasure, raw materials, world. Invention is usually (and certainly crops and many other commodities from in prehistoric and early historic times) their hinterlands). Throughout this period something that involves either individuals, or communication and energy remained the

Sander van der Leeuw 43 main constraints, impacting on cities, states in systemic terms. In that sense, these last and empires. Thus we see advances in the three centuries do not differ from what went harnessing of animal energy (including before, but they have seen an unbridled slavery), wind power (for transportation in acceleration of our species’ innovative sailing vessels and for driving windmills), activity, initially because the ‘taming’ falling water (for mills), etc., but also in the of fossil energy removed the energetic facilitation of communication, (e.g. long- constraint from much human activity, and distance ‘highways’ over land, the sextant and subsequently because the introduction compass to facilitate navigation at sea), and of electronics enabled the separation of in all kinds of ways to create and concentrate information from most of the substrates used wealth serving to defray the costs of for its transmission until then. These two managing societal tensions, maintaining an developments together have engendered a administration and an army, etc. ‘quantum jump’ or ‘state change’ in societal Those costs effectively limited the extent dynamics, which has been at the root of many of Empires in space and time. Tainter (1988), of today’s challenges, but also introduces for example, argues convincingly that only potential ways to deal with them that were the treasure accumulated outside the Roman not available thus far. Empire in the centuries before the Roman conquest enabled Rome to maintain the large The introduction of fossil energy and society’s armies and bureaucracies to keep its Empire. dependence on innovation As soon as there was no more treasure to be The (for the moment) last phase of this gained by conquering, and the Empire was long-term process of social evolution through thrown back upon a dependency on recurrent innovation involves the last two and a half (in essence solar) energy, he argues that it centuries, in which first the energy constraint could no longer maintain the flow structure. was removed by the introduction of plentiful This reduced the advantages of being part of fossil energy, and recently the communication the Empire, so that it began to lose control and information- processing constraint over its wide territory, causing people to fall is in the process of being removed due to back on smaller, regional or local networks. the development of new technologies. The Thus disaffection, or even dispersion of the introduction of fossil energy first brought in population, followed the cessation of the its wake new technologies to enable, facilitate flows that generated the coherent socio- or reduce the cost of transportation (railroads economic structure of an Empire in the first steamers, cars, etc.), manufacturing (steam- place. driven factories), and energy itself, as well as (later) technologies to reduce the amount of The last three centuries energy needed to fulfill societal needs. The last three centuries have seen the Without immediately having a clear (provisional) culmination of the trajectory explanation, however, I would like to signal I have outlined in Part II. That trajectory another emergent driver that, in this period, shows how the constraints and opportunities transformed innovation from a demand- afforded by the bio-social nature of our driven activity to a supply-driven one. For species explain a number of observed most of human (pre-) history, it seems that phenomena if human history is conceived inventions were either the result of perceived

44 tools. The introduction of iron technology Between the 18th and the therefore enabled large numbers of people to “ manufacture and use much better tools and 20th centuries, and particularly weapons and had, in a sense, a democratizing effect. in the second half of the latter, Between the 18th and the 20th centuries, and particularly in the second half of the with respect to innovation, latter, with respect to innovation, the balance between supply and demand shifted in favor the balance between supply of supply. Rather than societal needs driving innovation, innovation came to drive societal and demand shifted in favor needs. Companies competed to lay their hands on inventions (or developed them of supply. Rather than societal internally), and then created markets for them, forcing their use on society in order to needs driving innovation, enhance their profit. This has led to a situation in which innovation has become endemic to our innovation came to drive societal societies, and those societies, through their dependency on ever-increasing GDP and profit needs figures, have become dependent on innovation ” for their continued existence. This is a novel dynamic that has major consequences for the way we might deal with the challenges of the needs, or were not really introduced on a 21st century, sustainability among them. I will large scale in societies until such a need come back to this in a later section. emerged. It took, for example, roughly 1000 This phenomenon has emerged in a years after the invention of ironworking period that saw the transformation of our to actually see that technique spread society’s perspective on time. Whereas until throughout Europe at a fairly rapid pace (cf. the 17th century, the most frequent vision Sørensen). In that case, the initial brake on explained the present by invoking ‘History’ the transformation of this invention into an or ‘The Past’ or ‘It has always been like innovation seems to have been related to the this’, whereas invoking something ‘new’ or social structure of society. In the Bronze Age, ‘an innovation’ was socially heavily frowned hierarchies emerged that controlled wide upon. With the enlightenment this changed, exchange networks because they controlled ultimately leading to our current attitude, in the sources of bronze, which was relatively which the ‘new’ is mostly preferred over the easy to do because accessible sources to this ‘old’, the ‘proven’ or the ‘heritage’ (Girard, metal were relatively few and far between. 1990). Interestingly enough, this change That is not the case with iron—it can be in perspective was accompanied by the found in virtually every water-rich place in institutionalization of the universities and Europe, and once the technology to use it academic disciplines as ‘research crucibles’, spread, no one could any longer derive riches initially on the expectation that, ultimately, from controlling the manufacture of iron something useful would be invented, but

Sander van der Leeuw 45 increasingly with the expectation that such However that may be, after the mastering economic advantages are what research of ‘matter’ by devising ways to conceptually exists for. separate manipulating it from the time/ space in which that process occurred, which Separating information from its material and took humanity about two million years, and energetic substrates the mastering of energy by separating it Although ‘information technology’ has conceptually from movement and change, been in existence for many thousands of which took the next 7000 years, it took only years, in the form of gestures, language, 200 years more to conceptualize information writing, accounting, and many other things by separating it from its material or energetic including North American smoke signals and substrate. Our collective capability to process African tamtams, the second half of the 20th information has therefore accelerated Century saw the definition of the concept of more or less exponentially, as has the size ‘information (Shannon and Weaver, 1948) of Earth’s human population and—more and rapidly thereafter the mechanization important from our perspective—the size and of information processing, initially in the number of the cities that are the principal domain of communication, but then also in source of new inventions and innovations. the domains of calculation, representation Having identified the driver behind this and many others. Hence, the current process, as with any such exponential growth, emphasis in certain quarters on our present- we have to ask: “How much longer can this day society as the ‘information society’ is go on?” In order to answer that question, we misguided—every society since the beginning must look at the long-term consequences of of human evolution has been an ‘information the ‘innovation explosion’, from the Neolithic society’. to the present. Clearly, as we are only at the beginning of a process that will eventually harness The challenge of the future—Innovation, electronic and other forms of information Sustainability and ‘Unanticipated processing throughout all aspects of our Consequences’ thinking and our society, and offer many new One way to introduce this topic, to which solutions to existing challenges and equally we will devote the last part of this paper, many new challenges, we cannot presently is to point out the contradiction in the fact outline the higher-level ‘drivers’ that may that innovation is seen as the way out of emerge as a result of that process. However, the present syndrome of overpopulation, we do note that, again, these will accelerate looming or current resource shortage, the dependency of our society on innovation. omnipresent pollution, etc., even though Indeed, massive information collection and two centuries of unbridled innovation treatment, as well as the application of the are responsible for bringing about the concept of information to physical, biological consumer society as well as the current and societal processes, is emerging as a new sustainability challenge. One must conclude challenge: the NBIC ‘revolution’, under which that innovation as it is presently embedded we understand the encounter (and potential in our societies is hardly the panacea to get interaction) of nano- bio- information- and us out of the sustainability predicament that communications technology. many claim it is. That in turn prompts the

46 question whether there are any alternatives the environment becomes so degraded to ‘innovating ourselves out of trouble’, and if from the perspective of the people involved there are, what could they be? that they either move to another place or It seems to me that the root of this change the way they are interacting with the challenge lies in the relationship between environment. the fundamental limitations of the human How does this happen? Imagine a group mind, whether collective or individual, and of people moving into a new environment, the complexity of the world outside us. I about which they possess little knowledge, would argue that, over the millennia, that such as the European settlers into the relationship has changed as a result of Eastern North American forests (Cronon, the innovation explosion itself. In order to 1983). After a relatively short time, they understand the nature of that change, we will observe challenges or opportunities need to look at the relationship between to interact with this environment, and people and their environment. they will ‘do something’ about them. Their Human cognition, powerful as it may have action upon these challenges is based on become in dealing with the environment, is an impoverished perception of them, which only one side of the (asymmetric) interaction mainly consists of observations concerning between people and their environment, the short-term dynamics involved. Yet these the one in which the perception of the same actions transform the environment multidimensional external world is reduced in ways that affect not only the short-term, to a very limited number of dimensions. The but also the long-term dynamics involved other side of that interaction is human action in unknown ways. Over time, little by little on the environment, and the relationship all the frequent challenges become known between cognition and action is exactly and are modified by the society’s interaction what makes the gap between our needs and with the environment, while the unknown our capabilities so dramatic. The crucial longer-term challenges that are introduced concept here is that of ‘unforeseen’ or accumulate. Or to put this in more abstract ‘unanticipated’ consequences. It refers to terms, due to human interaction with the the well-known and oft-observed fact that, environment, the ‘risk spectrum’ of the socio- no matter how careful one is in designing environmental system is transformed into human interventions in the environment, one in which unknown, long-term (centennial the outcome is never what it was intended or millennial) risks accumulate to the to be. It seems to me that this phenomenon detriment of shorter-term risks. is due to the fact that every human action Ultimately, this necessarily leads to upon the environment modifies the latter ‘time-bombs’ or ‘crises’ in which so many in many more ways that its human actors unknowns emerge that the society risks perceive, simply because the dimensionality being overwhelmed by the number of of the environment is much higher than challenges it has to face simultaneously. can be captured by the human mind. In It will initially deal with this by innovating practice, this may be seen to play out in every faster and faster, as our society has done instance where humans have interacted in a for the last two centuries or so, but as this particular way with their environment for a only accelerates the risk spectrum shift, this long time—in each such instance, ultimately ultimately is a battle that no society can win.

Sander van der Leeuw 47 There will inevitably come a time when the accompanying urbanization, etc. But others society drastically needs to change the way have not been given much attention; such as it interacts with the environment, or it will its impact on our language and the way we lose its coherence. In the latter case, after have done (and often still do) science. a time, the whole cycle begins anew—as Let us look at language first. Initially, one observes when looking at the rise and as small groups lived together most of the decline of firms, cities, nations, empires or time, humans had the opportunity and time civilizations. for multi-channel communication—spoken What is the effect of an exponential language, gestures, body language, eye increase in information-processing capacity contact and any other kind of communication. on this asymmetry between human This allowed for the long-term accumulation understanding and human action? Clearly, of trust and understanding that allows as the information-processing capacity for the reduction and correction of a wide increases, the total number of (collectively) range of communication errors. But as the cognized dimensions involved in the process groups involved grew, and the time devoted does so more or less commensurately. The to each interaction therefore shortened, human actions on the environment therefore fewer channels of communication were affect more and more dimensions of the available, and spoken language won out as processes going on in that environment. the main channel of communication between As the multiplier between cognized human people meeting each other infrequently and dimensions and unknown environmental for short periods of time, mainly because dimensions affected by human actions is spoken language is a relatively precise large, this implies that due to the exponential way to communicate concepts. Ultimately, increase in the number of human cognized as networks of communication grew even dimensions, the number of affected further, the need to avoid misunderstandings environmental dimensions grows even and errors must also have had an impact on more rapidly, posing ever more rapidly ever language itself, requiring the communities more complex environmental challenges for concerned to develop more and more precise humankind to deal with. ways of expressing themselves in a shorter This permanent, and increasing, tension and shorter time. That impact, it seems to between the total cognitive capacity of a me, must have been visible in a proliferation society and the complexity of its environment of more and more, but ever narrower, has in itself been a, if not the, major concepts (categories) at any particular level driver behind the increase in information- of abstraction—thus reducing the number of processing capacity of human beings and dimensions in which these concepts could societies. As such, it has had important be interpreted. The multiplicity of meanings consequences for the information-processing attached in different contexts to the same structure of the societies involved. Several words—or the same roots—that one sees in of these have already been mentioned in any etymological dictionary bears testimony this paper: population increase, aggregation to this process, as does the proliferation of of human populations in villages and then artifact categories through time, each with cities, the invention of writing, markets, more and more precise and limited functions. administration and other phenomena Simultaneously, an increase in the number of

48 levels of abstraction itself did compensate for to understand the full complexity of the this fragmentation, so that one could still find processes going on around us. Moreover, ways to ‘lump’ over these increasingly narrow the interpretations linked the phenomena concepts along crosscutting dimensions. investigated to processes that preceded ‘Information’ is but one of the last major the time at which these phenomena were abstractions introduced. observed, rather than to what was still to In western science, a similar process of come (and therefore could not be observed). fragmentation has been observable at least Scientific reasoning therefore emphasized since the 14th century, and for very similar the explanation of extant phenomena in reasons (cf. Evernden, 1992). During these terms of chains of cause-and-effect and (much centuries, science has emphasized the later) an emphasis on feedback loops, in need to solidify as much as possible both cases linking the progress of processes the relationship between observations through time to their antecedent trajectory. In and interpretations, and thus between the particular, it has emphasized thinking about realm of the real, with its infinite number “origins” rather than “emergence”, about of dimensions, and the realm of ideas, in “feedback” rather than “feed-forward”, which only a limited number of dimensions about “learning from the past” rather than is cognized. Much scientific explanation “anticipating the future”. Hence, it is no therefore consisted of reducing the large surprise that ‘thinking about the future’, number of dimensions involved in the whether one calls it ‘futurology’, ‘forecasting’, processes observed into a much more ‘scenario construction’ or ‘foresighting’ is limited number that was manageable in the actually a stepchild in our current academic (individual or collective) human brain, and and research institutions, and is principally could thus be shaped into a coherent and developed in industry or government. comprehensible narrative. Hence the fact that As a result of these tendencies, both in such science was generally ‘reductionist’. A our societies’ communication and culture, corollary of this is the fact that, particularly and in our scientific research, we have now in empirical science, each complex come to a point where the unanticipated phenomenon was ‘broken up’ into component consequences of our interventions in parts in the hope that once these components the environment threaten to overwhelm had been explained, they could be put us because of their complexity. So many together to explain the whole phenomenon in unknown dimensions are involved in the all its complexity. This led to the same kind dynamics of our socio-natural environment of fragmentation that occurred in languages that we increasingly feel we no longer have in general, observable at the highest level any means to understand, limit or control in the current division of human inquiry into their effects. That feeling is experienced as a disciplines, sub-disciplines, specializations, ‘crisis’, and we encounter it more and more etc., each practiced by its own community frequently—whether in the financial domain, that has developed its own epistemology, or in those of food security, natural hazards, perspective, language, concepts, methods, the security of our societies from terrorism techniques and values. or other undermining activities, etc. We now see that fragmentation as one One could effectively define such ‘crises’ of the main handicaps in our attempts as temporary incapacities of our society to

Sander van der Leeuw 49 process the information necessary to deal interactive population, the nature of many of adequately with the external and internal our languages, the under-determination of dynamics it is engaged in. In our perspective, our theories by our observations (cf. Atlan, these incapacities are the result of the 1992; van der Leeuw) and the limitations fact that the gap between the number of of our human short-term working memory dimensions cognized in the society, and the are as many challenges to our capacity number of dimensions playing a role in the to fundamentally change the nature of socio-natural dynamics it is involved in, is our thinking, and more specifically to our crossing a threshold beyond which the former capacity to explicitly focus on the future and is inadequate to deal adequately with the extrapolate new dimensions from the ones latter. In the run-up to that threshold, a clear we know at any particular point in time. There ‘early warning’ signal is the fact that society are many examples of individuals or (small) increasingly suffers from ‘short-termism’, groups of people who have nevertheless a focus on the immediate challenges that it done so with some degree of success, from encounters, without taking the longer term classical Greek philosophers via Leonardo into account: in other words, the fact that da Vinci to 18th and 19th century science- tactics come to prevail over strategy in much fiction authors (such as Jules Verne or Paul decision-making. Deleutre3). They have been able to design The core of the challenge seems to be utopias or to extrapolate positively from that we must find ways to turn lessons their lifetime observations into the future, from the past into lessons for the future! even though some of these ideas were To do so, we must devise ways to argue never implemented or only realized years coherently—and as far as possible falsifiably or centuries later. Inventors have also been in Popper’s (1959) sense—from the simple to able to anticipate, and most of us call on our the complex in order to better anticipate the “intuition” when we need to do so. complex consequences of our actions. That Moreover, there are some (shy) beginnings would enable us to re-emphasize long term, of a wider trend in this direction that we can strategic thinking and a holistic vision that point to. The kind of reductionist, fragmented favors intellectual fusion between different and ‘explanatory’ science that resulted from scientific communities and perspectives. To these tendencies has in the past twenty-five do so, we must crucially acquire the capacity years come under increasing attack from the to increase, rather than reduce, the number ‘Complex Systems’ perspective emerging in of dimensions that we can harness in order the 1980’s (e.g. Mitchell, 2009). It assumes to understand complex phenomena, so that that in order to get a realistic representation we may attain a better understanding of of reality, we need to study emergence, feed- the consequences of our actions because forward and develop a generative perspective we can consider more dimensions in our to which the amplification of the number of decision-making about interventions in the cognized dimensions is essential. In other environment. quarters, ‘foresighting’ is spreading from the relatively limited field of industrial and 3 Writing under the pseudonym Conclusion: Is there a way out? economic decision-support tools to academic Paul d’Ivoi, this French author It initially seems as if our intellectual practitioners who actually delve into the anticipated the idea of modern telecommunications (wireless and scientific tradition, the size of our epistemological and other challenges that and television)

50 need to be met for this kind of science to developing conceptual and mathematical flourish (Wilkinson and Eidinow, 2008; Selin, tools as well as appropriate software. 2006). And yet elsewhere, under pressure from the looming environmental challenges Overcoming the under-determination of our of the 21st century, the scientific community theories by observations is beginning to look ahead at ‘unanticipated Similarly, and with the same caveat that I consequences’ and what these may imply am not a professional in this field, I am under for the challenges of the future (e.g. Ostrom, the impression that the very recent revolution 2009). This seems to indicate that the current in IT capacity to continuously monitor predicament is more due to over-investment processes on-line, and to treat and store in the long-standing reductionist approach the exponentially increased data streams than anything more fundamental, and that, that are generated by such monitoring, at least in theory, it should be possible to points to the fact that we may indeed be on transcend our relative incapacity to deal the brink of (at least partly) overcoming the with the complexities of the dynamics we are under-determination of our theories by our involved in. observations, and that this is the corollary of the dimension-reduction traditional science Overcoming the limitations of human STWM practices (Atlan, 1992). The reduction in the Although I am not an expert in the field size and cost of the monitoring equipment at all, it seems to me that the ICT revolution is quickly bringing such massive data has indeed created the conditions for us to collection within reach. Simultaneously, the overcome the limitations to our cognitive development of novel data-mining techniques capacities that are inherent in our short-term is helping us to make sense of the data working memory. Present-day computers thus collected, or at least in selecting the do have the capacity to deal with an almost appropriate data to be scrutinized in order to unlimited number of dimensions and better inform our theories. information sources in real time, and thus to overcome what appeared at first sight Transforming our scientific and intellectual to be the most fundamental of the barriers tradition mentioned above. But that capacity has Although I am not among those who fall not been fully exploited because of our easily for panaceas, I do believe that the long-standing and ubiquitous scientific and complex (adaptive) systems approach is a intellectual tradition, which has emphasized useful first step on the way to fundamentally the use of such equipment as part of the transforming our scientific and intellectual process of dimension-reduction that provides tradition from studying stasis and preferring acceptable explanations, rather than as a tool simple to complex explanations, to studying to increase the number of dimensions taken dynamics, with an emphasis on emergence into account in our understanding of complex and inversion of Occam’s razor (increasing phenomena. Under the impact of complex the number of dimensions taken into systems science this is clearly changing account). Clearly, we have a long way to go (as seen, for example, in the increased use in this domain, but the rapid and substantive of high-dimensional Agent Based Models, advances in certain fields, including physics, but much more needs to be done, mainly in biology and economics, coupled with the

Sander van der Leeuw 51 rapid recent spread of this approach in widely spread in our culture and our kinds universities in many parts of the world and of science that changing our thinking will the growing awareness of the need for more require a major effort. Our world view, our holistic approaches in such domains as language, our institutions all militate against sustainability and health, cause me to be such a change, and most importantly, we are moderately optimistic about our chances of for the moment lacking a coherent alternative transforming our scientific and intellectual way of thinking against which we can leverage tradition. our present-day science. By far the greatest challenge from the perspective of human and The communication challenge financial capital and effort therefore appears The underlying communication to me to be in the domain of education, from challenge is how to communicate other the earliest childhood throughout university than linearly and in writing or speech with and into adult life. The current education an increasingly large number of partners system in the developed world is, overall, no at very variable distances. This is the trend longer adapted to the challenges of the 21st that was, in my opinion, responsible for century, among which sustainability looms so the particular development referred to large. We have to move away from knowledge above: narrower and narrower concepts, acquisition aimed at question-driven research and the consequent fragmentation of our towards challenge-focused education perspective on the world. Contrary to that aims to help deal with substantive some, I do not think language is subject challenges, from ‘linear explanation’ in terms to deliberate change—it adapts itself to of cause-and-effect to ‘multi-dimensional human needs and ideas in a ‘bottom-up’ projection’ in terms of alternatives, from process. But even if it were possible to one-to-many teaching (in which an instructor transform the ways in which we speak and tells students what to do, what is right and write, we would still have an essentially what is wrong), to many-to-many teaching in linear communication tool. The question which instructors and students all interact, is therefore whether the radically different learn and teach. At the same time, we must ways of interactively communicating that are develop education systems that stimulate made possible by modern communications the acquisition of creativity, risk-taking and technologies, and in particular the collective diversity rather than conformity and risk- building of knowledge using multimedia, adverseness. In doing so we must harness as is made possible in web 2.0, will allow the tools referred to above, but more than us to communicate non-linearly and in anything we must ‘bend’ minds around to more dimensions. This would entail the thinking in new, uncharted, ways. In doing directed use of visuals, which generally so, we are handicapped by the fact that can communicate more dimensions economics, career structures, evaluations, simultaneously than spoken or written disciplinary momentum and many other language. factors and dynamics are stacked against success in this area. There is a lot of work to Transforming our thinking be done! The kind of reductionist thinking that I am referring to is so heavily ingrained and so

52 References Ru ff , C. B., E. Tr i n k h a u s and T. W. Ho l l i d ay (1997), “Body Mass and Encephalization in Pleistocene Homo”, Nature 387, pp. 173–176. Al p , I. E. (1994), “Measuring the size of working memory in very Se l i n , C. (2006), “Trust and the Illusive Force of Scenarios”, Futures young children: the imitation sorting task”, International Journal of 38(1), pp. 1-14. Behavioral Development 17, pp. 125–141. Sh a n n o n , C. E. and W. We av e r (1948), “A Mathematical Theory of At l a n , H. (1992), “Self-organizing networks: weak, strong and Communication”, Bell System Technical Journal 27, pp. 379-423 intentional. The role of their under-determination”, La Nuova and 623-656. Critica, N. S., 19-20(1/2), pp. 51-70. Si e g e l , L. S. and E. B. Rya n (1989), “The Development of Working Ba t e s o n , G. (1972), Steps to an Ecology of Mind, New York: Ballantine Memory in Normally Achieving and Subtypes of Learning-Disabled Be t t e n c o u r t , L. M. A., J. Lo b o , D. He l b i n g , C. Kü h n e r t and G.B. We s t Children”, Child Development 60, pp. 973–980. (2007), “Growth, Innovation, Scaling and the Pace of Life in Cities”, Ta i n t e r , J. A. (1988), The Collapse of Ancient Societies, Cambridge Proceedings of the National Academy of Sciences (US) 104(17), pp. (UK); Cambridge University Press. 7301-7306. v a n d e r Le e u w , S. E. (1986), “On Settling Down and Becoming a Bo y d , R., and P. J. Ri c h e r s o n (1985), Culture and the Evolutionary ‘Big-Man’”, in M. A. van Bakel, R. R. Hagesteijn and P. van de Velde Process, Chicago: University of Chicago Press (eds.), Private Politics: a Multi-Disciplinary Approach to ‘Big-Man’ Ca r l s o n , S. M., L. J. Mo s e s and C. Br e t o n (2002), “How Specific is Systems, Leiden: Brill Academics Publishers, pp. 33-47. the Relation between Executive Function and Theory of Mind? v a n d e r Le e u w , S. E. (1990), “Archaeology, Material Culture and Contributions of Inhibitory Control and Working Memory”, Infant- Innovation”, SubStance 62-63, pp. 92-109. Child Development 1, pp. 73–92. v a n d e r Le e u w , S. E. (2000), “Making Tools from Stone and Clay”, Co r r ê a , L. M. S. (1995), “An alternative assessment of children’s in A. Anderson and T. Murray (eds.), Australian Archaeologist: comprehension of relative clauses”, Journal of Psycholinguistic Collected Papers in Honour of Jim Allen, Coombs: Academic Research 24, pp. 183–203. Publishing. Cr o n o n , W. (1983), Changes in the Land: Indians, Colonists, and the v a n d e r Le e u w , S. E. (2007), “Information Processing and its Role Ecology of New England, New York: Hill and Wang. in the Rise of the European World System”, in R. Costanza, L. Di a m o n d , A. and B. Do a r (1989), “The Performance of Human Infants J. Graumlich and W. Steffen (eds.), Sustainability or Collapse?, on a Measure of Frontal Cortex Function, the Delayed-Response Cambridge, MA: The MIT Press, Dahlem Workshop Reports, Task”, Developmental Psychobiology 22, pp. 271–294. pp. 213‑241. Ep s t e i n , H. T. (2002), “Evolution of the Reasoning Brain”, Behavioral Wi l k i n s o n , A. and E. Eidinow (2008), “Evolving Practices Brain Science 25, pp. 408–409. in Environmental Scenarios: a New Scenario typology”, Ev e r n d e n , N. (1992), The Social Creation of Nature, Baltimore: Johns Environmental Research Letters, 3(4) 045017. Hopkins Press. Jo h n s o n , J., V. Fa b i a n and J. Pa s c u a l -Le o n e (1989), “Quantitative Hardware Stages that Constrain Language Development”, Human Development, 32, pp. 245–271. Ke m p s , E., S. De Rammelaere and T. Desmet (2000), “The Development of Working Memory: Exploring the Complementarity of Two Models”, Journal of Experimental Psychology 77, pp. 89–109. Ki d d , E. and E. L. Ba v i n (2002), English-speaking Children’s Comprehension of Relative Clauses: Evidence for General– Cognitive and Language-Specific Constraints on Development”, Journal of Psycholinguistic Research, 31, pp. 599–617. La n e , D., R. Ma x f i e l d , D. W. Re a d and S. E. v a n d e r Le e u w (2009), “From Population Thinking to Organization Thinking”, in D. Lane, D. Pumain, S. E. van der Leeuw and G. West (eds.), Complexity Perspectives on Innovation and Social Change, pp. 11-42, Berlin: Springer (Methodos series). Lu c i a n a , M. and C. A. Ne l s o n (1998), “The Functional Emergence of Prefrontally-Guided Working Memory Systems in Four-to-Eight- Year-Old Children”, Neuropsychologia 36, pp. 273–293. Ma r t i n , R. D. (1981), “Relative Brain Size and Basal Metabolic Rate in Terrestrial Vertebrates”, Nature 293, pp. 7–60. Mi t c h e l l , M. (2009), Complexity: a Guided Tour, New York: Oxford University Press Os t r o m , E. (2009), “A General Framework for Analyzing Sustainability of Social-Ecological Systems”, Science 325(5939), pp. 419-422. Pi g e o t , N. (1991), “Reflexions sur l’histoire technique de l’homme: De l’évolution cognitive à l’évolution culturelle”, Paléo 3, pp. 167- 200. Po p p e r , K. (1959), The Logic of Scientific Discovery, London: Hutchinson. Re a d , D. W., D. A. La n e and S. E. v a n d e r Le e u w (2009), “The Innovation Innovation”, in (D. A. Lane, D. Pumain, S. E. van der Leeuw and G. West (eds.) Complexity Perspectives on Innovation and Social Change Berlin: Springer Verlag. Re a d , D. W. and S. E. v a n d e r Le e u w (2008), “Biology Is Only Part Of The Story…”, Philosophical Transactions of the Royal Society, Series B 363, pp. 1959-1968. Re a d , D. W. and S. E. v a n d e r Le e u w (2009), “Biology Is Only Part Of The Story…”, in A. C. Renfrew and L. Malafouris (eds.), The Sapient Mind, Oxford: Oxford University Press, pp. 33-49. Rightmire, G. P. (2004), “Brain Size and Encephalization in Early to Mid-Pleistocene Homo”, American Journal of Physical Anthropology 124, pp. 109–123.

Sander van der Leeuw 53

Innovation: It is generally agreed that science shapes technology, but is that the whole story?

Nathan Rosenberg Not to prolong your suspense, the correct term “endogenous” from the perspective of Stanford University Stanford Institute for Economic answer to the question in the subtitle of my the economist and not from the perspective Policy Research paper is the obvious one: causation runs both of the scientist. Thus, when I refer to the ways. But I want to persuade you that the endogeneity of science, I am referring to causation running from technology to science the extent to which scientific progress has is vastly more powerful than is generally been directly influenced by the working out realized. of the normal forces of the market place. The reasoning is straightforward. A My justification is that I will be trying to market economy generates powerful identify forces that emerged in the course incentives to undertake certain kinds of of the twentieth century that made scientific scientific research. This is because the research more responsive to economic eventual findings of such research can be incentives. made to improve the performance, or to I also need to emphasize one caveat reduce the cost, of technologies that are vital that I cannot emphasize too strongly. I am to the competitive success of profit-making not implicitly suggesting that the financial firms. Further, I want to suggest that there support of the country’s scientific research were powerful forces at work in the course should be left to the market place. Rather, of the 20th century that had the effect of I will be calling attention to the operation of expanding the ways in which changes in the market forces that have become increasingly realm of technology have led to changes in supportive of scientific research. I believe that the various realms of science. I want to call these developments were crucial to the rapid your attention to some of the most significant expansion of American industry, but that is organizational changes, and associated very different from suggesting that market changes in incentives, that were responsible forces, by themselves, were sufficient. for strengthening the causal forces that flowed from technology to science. Corporate Research Labs In order to do this, I will need to introduce The proposition that scientific research just one single bit of jargon: I will use the became increasingly endogenous in the

Nathan Rosenberg 57 applied nature. This was especially true of A market economy generates state universities, where it was essential “ to provide evidence of assistance to local powerful incentives to undertake industry [agriculture, mining, railroads] in order to justify the imposition of taxes certain kinds of scientific upon the citizens of each state. In fact, with few exceptions, funds raised by state research. This is because governments went overwhelmingly to support teaching and not research. the eventual findings of such This situation was totally transformed in the post World War II period when the federal research can be made to improve government became, overwhelmingly, the dominant patron of scientific research, and the performance, or to reduce universities became the primary locus of such research. It is important to note that the cost, of technologies that are the concentration of basic scientific research in the university community where, I think vital to the competitive success it is fair to say, it has flourished, has been an organizational arrangement almost of profit-making firms unique to the US. Unlike the situation in ” Western Europe, where basic research has been concentrated in government labs (Max Planck, CNRS), federal laboratories in US course of the 20th century must necessarily have accounted for less than 10% of basic begin by focusing on a key organizational research (9.1% in the mid-1990s). innovation: the industrial research lab. It was A further distinctive feature of great these corporate labs that determined the importance in the US is the very large extent to which the activities of the scientific commitment of private industry to scientific community could be made responsive to research that the NSF defines as basic. the needs of the larger economy. But such a Private industry accounted for slightly over statement, by itself, cannot stand alone. That 30% of all basic research in the year 2000 is because these research labs depended (probably declining slightly in the last few for their effective performance, in turn, years). Although at last count there were upon a network of other institutions. These around 16,000 private firms that had their included, above all, research at universities. own corporate labs, the vast majority of these Before the Second World War, university firms conduct research of a predominantly research depended heavily for its financing applied nature. Only a very small number do on private philanthropic foundations, such as basic research. Nevertheless, over the years, the Rockefeller, Guggenheim and Carnegie a few of these corporate labs have conducted foundations. In the pre-war period, as well, research of the most fundamental nature— universities often relied on financial support General Electric, IBM and, most important from local industry for carrying out certain of all, Bell Labs before the divestiture of certain classes of research, mostly of an AT&T in 1984. Researchers in a number of

58 corporate labs have won Nobel Prizes: most societies that are now simply flooded with recently Jack Kilby, of Texas Instruments, the flow of information, not only from won the Prize for Physics in the year 2000, universities, but from professional journals for research leading to the development on library shelves or electronically via of the integrated circuit [Kilby’s research Internet search engines such as Yahoo and received financial support from the federal Google, the exploitation of this vast flow of government]. information requires an internal competence Having said this, it is essential to realize that, typically, only in-house scientists can that the research activities of industrial provide. Indeed, America’s remarkable labs should not be evaluated, as they often commercial successes in high tech markets are by academics, by the usual academic over the past 50 years have owed a great criteria—such as publications in prestigious deal to these internal competences in private professional journals or the winning of industry. Industrial scientists have played Nobel Prizes. Such labs have a very different a critical role in the transfer of potentially purpose. The industrial lab is essentially an useful knowledge generated by university institutional innovation (of German origin) in research, not only because of their scientific which the research agenda is largely shaped sophistication, but also because they by the short-term needs but also, in a few have had a deep awareness of their firms’ notable cases, by the longer-term strategies commercial priorities and technological of industrial firms. Within the industrial capabilities (Rosenberg, 2002; Mowery and context, the intended role of corporate Rosenberg, 1998). scientists is to improve the performance of their respective firms in the competitive How Engineering Disciplines have Shaped context of (mostly) high tech sectors of the Science economy. Thus the critical achievement I would now like to call your attention of the growth of the American industrial to another major force for advancing the lab in the course of the 20th century has endogeneity of science in the course of been to subject science, more and more, to the 20th century. I would like to pose the commercial criteria. In so doing, it rendered question: what specific role is played by science an activity whose directions were engineering disciplines in determining the increasingly shaped by economic forces and scientific agenda of private firms? Let me were concentrated on the achievement of respond first by offering a clarification. It is a economic goals—which is to say that such common practice to characterize engineering scientific research should be regarded as disciplines as being essentially applied largely endogenous. science. This is, in my view, a seriously One further strategic role of the corporate misleading characterization. A more careful lab arises from the fact that a firm cannot unwinding of the intertwining of science and effectively monitor and evaluate the findings, technology suggests that the willingness and the possible implications, of the huge of profit-seeking firms to devote money to volume of university research unless it has scientific research is very much influenced its own internal capability for doing such by the prospect of converting such research things. The importance of this point cannot findings into finished and marketable be overestimated. In advanced industrial products. The actual conduct of scientific

Nathan Rosenberg 59 research may not be undertaken with highly to constitute an entirely new subsector of specific objectives in mind, but rather with the petrochemical industry after the Second an increased confidence that, whatever World War. But it is doubtful whether du Pont the specific research findings, an enlarged would have committed itself to Carothers’ engineering capability will substantially costly, fundamental researches in polymer increase the likelihood of being able to use chemistry in the first place, in the absence of these findings to bring improved or new the progress in chemical engineering in the products to the market place. decade preceding 1928. Thus, progress at the From this perspective, there is a serious technological level (chemical engineering) sense in which the economist may argue that increasingly strengthened the willingness the science of chemistry should be thought to spend money on science, which I regard of as an application of chemical engineering! as a growth in the endogeneity of science Alternatively put, the growing sophistication (Rosenberg, 1998). of engineering disciplines has had the result Let me sketch out the intermediate of strengthening the endogeneity of science. steps that underlie my argument. The I do not want this point to be made to sound discipline of chemical engineering really too paradoxical. I mean to suggest that the had its beginnings in the second and third willingness of private industry to commit decades of the 20th century, mainly at MIT financial resources to long-term scientific in response to the spectacular expansion research has been considerably strengthened of the automobile industry and, along with by the progress of the appropriate that industry’s growth, a voracious demand engineering disciplines. Such progress raises for refined chemical products (primarily, the confidence of corporate decision makers of course, for high octane gasoline). The that the findings of basic research may scale of that growth can be captured in the eventually be converted to profitable uses. following numbers: In 1900 the automobile This argument seems particularly industry was so insignificant that the Census pertinent to the specialty of polymer Bureau classified cars under the category chemistry, a field that was opened by the “Miscellaneous.” [In that year there were only researches of Staudinger, Meyer and Mark 8,000 registered cars in the US]. By 1925 the in Germany in the 1920s. In the US at least, automobile industry had leaped to the status polymer chemistry is a field that has long of the largest manufacturing industry in the been dominated by the industrial research whole country (measured by value added). community. The fundamental research It was the growth of the automobile that contributions to polymer chemistry of gave birth to the discipline of chemical Wallace Carothers at du Pont, beginning in engineering. Chemical engineers, during 1928, owed a great deal to the increasing the 1920s and later, transformed the maturity of chemical engineering in the petroleum refining industry from small- preceding decade or so—an engineering scale batch production into one of vastly discipline to which du Pont had made larger scale and continuous processing. important contributions (Hounshell and The emerging chemical engineering Smith). Carothers’ research findings led discipline accomplished this by developing directly to the discovery of nylon, the first of a new conceptual framework within which a proliferation of synthetic fibers that came it became possible to introduce scientific

60 concepts and methodologies from such fields as fluid flow (fluid dynamics), heat transfer The actual conduct of and, in the 1930s, the pervasive power of “ thermodynamics. In other words, the design scientific research may not of chemical process plants could now draw heavily upon a number of different scientific be undertaken with highly realms. Thus, it was the establishment of a new engineering discipline, in responding to specific objectives in mind, the rapid expansion of a new transportation technology that, in turn, laid the basis for the but rather with an increased profitability of scientific research, not only in du Pont and petroleum-refining firms, but confidence that, whatever the in a very wide range of industries that also made use of chemical process plants. It is specific research findings, an worth emphasizing how pervasive chemical process plants became in the course of the enlarged engineering capability 20th century. Large chemical plants could be found in petroleum refining, rubber, will substantially increase leather, coal (by-product distillation plants), food-processing, sugar refining, explosives, the likelihood of being able ceramics and glass, paper and pulp, cement, and metallurgical industries (e.g., aluminum, to use these findings to bring iron and steel). improved or new products to the How New Products Have Shaped Science The next related observation with respect market place to the growing endogeneity of scientific ” research goes beyond the role played by engineering disciplines in strengthening the private incentives to perform scientific explanation at work here. A major research. The argument here is that the technological breakthrough typically provides development of some specific new product, a strong signal that a new set of profitable that is perceived to have great commercial opportunities has been opened up in some potential, may provide, and often has precisely-identified location. Consequently, provided, a powerful stimulus to scientific it is understood that scientific research that research. This proposition is surprising can lead to further improvements in that only if one is already committed to a rigid, new technology may turn out to be highly overly simplistic linear view of the innovation profitable. process—one in which causality is always The problems encountered by expected to run from prior scientific sophisticated industrial technologies, and research to “downstream” product design the anomalous observations and unexpected and engineering development. There is in difficulties that they have encountered, fact, however, a straightforward endogenous have served as powerful stimuli to much

Nathan Rosenberg 61 fruitful scientific research in the academic buildup of resources devoted to solid-state community as well as the industrial research physics, although it was of course also laboratory. In these ways the responsiveness true that some of the twentieth century’s of scientific research to economic needs most creative physicists had been devoting and technological opportunities has been their considerable energies to the subject. powerfully reinforced. Rather, it was the initial breakthrough This was dramatically demonstrated in of the transistor, as a functioning piece the case of the advent of the transistor, the of hardware, that set into motion a vast discovery of which was announced at Bell subsequent commitment of financial Labs in the summer of 1948. Within a decade support for scientific research. Thus, the of that event solid-state physics, which had difficulties that Shockley encountered with previously attracted the attention of only a the operation of the early point-contact small number of researchers and was not transistors led him into a systematic search even taught at the vast majority of American for a deeper explanation of their behavior, universities (mainly MIT, Princeton, and expressed in terms of the underlying Cal Tech) had been transformed into the quantum physics of semiconductors. This largest sub-discipline of physics. It was the search not only led eventually to a vastly development of the transistor that changed superior amplifying device, the junction that situation by dramatically upgrading the transistor; it also contributed to a much potential financial payoff to research in the more profound understanding of the science solid state. J. A. Morton, who headed the of semiconductors. Indeed, Shockley’s fundamental development group that was famous and highly influential book, Electrons formed at Bell Labs after the invention of and Holes in Semiconductors, drew heavily the transistor, reported that it was extremely upon this research, and the book was the difficult to hire people with a knowledge direct outgrowth of an in-house course that of solid-state physics in the late 1940s. Shockley had taught for Bell Labs’ personnel. Moreover, it is important to emphasize Moreover, Shockley also found it necessary to that the rapid mobilization of intellectual run a six day course at Bell Labs in June 1952 resources to perform research in the solid for professors from some thirty universities state occurred in the university community as part of his attempt to encourage the as well as in private industry, immediately establishment of university courses in after the announcement of the momentous transistor physics. findings of Shockley and his research Clearly, the main flow of scientific colleagues at Bell Labs. As one strong piece knowledge during this critical period was of evidence for this view, the number of from industry to university, and not the publications in semiconductor physics rose other way around. Indeed, for a considerable from less than 25 per annum before 1948 period of time, Stanford and the University to over 600 per annum by the mid-1950s of California at Berkeley had to employ (Herring). scientists from local industry to teach The chronology of the events to which courses in solid-state physics/electronics. I have just referred is essential to my A similar sequence can be seen in the argument. Transistor technology was not commitment of funds to research in surface the eventual consequence of a huge prior chemistry, after problems with the reliability

62 lasers gave rise to different categories of Under modern industrial fundamental research. As Harvey Brooks “ noted, “While the solid-state laser gave a new conditions, technology has come lease of life to the study of insulators and of the optical properties of solids, the gas laser to shape science in the most resuscitated the moribund subject of atomic spectroscopy and gas-discharge physics” powerful of ways: by playing a (Brooks, 1968). I draw the conclusion from this major role in determining the examination that, under modern industrial conditions, technology has come to shape research agenda of science as science in the most powerful of ways: by playing a major role in determining the well as the volume of resources research agenda of science as well as the volume of resources devoted to specific devoted to specific research research fields. One could examine these relationships in much finer detail by showing fields how, throughout the high tech sectors of the ” economy, shifts in the technological needs of industry have brought with them associated shifts in emphasis in scientific research. of early transistors pointed in that direction. When, for example, the semiconductor More recently, and to compress a much more industry moved from reliance upon discrete complex chain of events, the development circuits (transistors) to integrated circuits, of laser technology suggested the feasibility there was also a shift from mechanical to of using optical fibers for telephone chemical methods of fabrication. When transmission purposes. This possibility Fairchild Semiconductors began to fabricate naturally pointed to the field of optics, integrated circuits, they did so by employing where advances in scientific knowledge new methods of chemical etching that printed could now be expected to have potentially the transistors on the silicon wafers and also high economic payoffs. As a result, optics laid down the tracks between them. This as a field of scientific research experienced chemical technique did away with expensive a great resurgence in the 1960s and after. wiring, and also produced integrated circuits It was converted by changed expectations, that operated at much higher speeds. At based upon recent and prospective the same time, the increased reliance technological innovations, from a relatively upon chemical methods brought with it an quiet intellectual backwater of science into increased attention to the relevant subfields a burgeoning field of research. This growth of chemistry, such as surface chemistry. of activity in the discipline was generated I cite the experience of changing methods not by forces internal to the field of optics, of wafer design and fabrication to indicate but by a radically altered assessment of the ways in which the changing needs and the potential opportunities for laser-based priorities of industry have provided the basis technologies. Moreover, different kinds of for new priorities in the world of scientific

Nathan Rosenberg 63 research. But it is essential to emphasize that might later have shared a Nobel Prize with these new priorities exercised their influence, Owen Richardson who analyzed the behavior not only upon the world of industrial of electrons when heated in a vacuum, or research, but upon the conduct of research conceivably even with J. J. Thomson for the within the university community as well. I initial discovery of the electron itself. Edison’s need only point out that Stanford University “prepared mind,” however, was prepared only has for some time had, its own Center for for observations that were likely to have some Integrated Systems. This Center is devoted practical relevance in the short run. to laboratory research on microelectronic A distinctive feature of the 20th century materials, devices, and systems, and is jointly in dynamic capitalist economies was the financed by the federal government and vastly-increased numbers of scientifically private industry. “prepared minds” in both the universities and private industry. The pursuit of the possible SERENDIPITY implications of unexpected observations There is a further source of causation became the basis on many occasions for running from technology to science to which fundamental breakthroughs that occurred I would like to call your attention. I refer to serendipitously when “prepared minds” the role of serendipity. It is, of course, to be were available to pursue the possible expected that well-trained scientific minds implications of the unexpected. Surely the are likely to turn up unexpected findings most spectacular instance of serendipity in in many places. As Pasteur expressed it in the 20th century—not achieved in an industrial the mid-19th century, “Where observation is laboratory—was Alexander Fleming’s brilliant concerned, chance favors only the prepared conjecture, in 1928, that the unexpected mind.” By way of contrast, consider Thomas bactericidal effect that he had observed in Edison, by universal consent a brilliant the bacterial cultures in his Petri dish, was inventor, but someone who had little interest caused by a common bread mould that had in observations that had no immediate accumulated on his slides. Fleming published practical relevance. In 1883 he observed this finding in 1929, but no substantial the flow of electricity across a gap, inside a progress was made in producing a vacuum, from a hot filament to a metal wire. marketable product until more than a decade Since he saw no practical application and had later, when the exigencies of wartime led to no scientific training, he merely described a joint, Anglo-American “crash” program to the phenomenon in his notebook and went on accelerate the production of the antibiotic to other matters of greater potential utility (Elder, 1970). in his effort to enhance the performance It is at least a plausible speculation that, of the electric light bulb. Edison was, of had Fleming made his marvelous discovery course, observing a flow of electrons, and while working in a pharmaceutical lab, the observation has since even come to be penicillin would have become available, in referred to as the “Edison Effect”—named large quantities, far more swiftly than was in after the man who, strangely enough, had fact the case. For a contrary view, see Bernal: failed to discover it. Had he been a curious vol. 3, 926-927). In the context of this paper (and patient) scientist, less preoccupied it is also worth pointing out a little-known with matters of short-run utility, Edison historical fact, that the technology to produce

64 the antibiotic in bulk was achieved not, as difficult to make in practice. Fundamental would ordinarily have been expected, by a scientific breakthroughs often occur while pharmaceutical chemist, but by chemical dealing with very applied or practical engineers. It was the chemical engineers problems, especially problems relating to who demonstrated how a technique called the performance of new technologies in an “aerobic submerged fermentation,” which industrial context. became the dominant production technology, But the distinction breaks down in another could be applied to this complex product way as well. It is essential to distinguish (Elder, 1970). between the personal motives of the The growth of organized industrial labs individual researchers and the motives of in 20th century America vastly enlarged the the decision makers in the firm that employs number of trained scientists in the industrial them. Many scientists in private industry world who encountered strange phenomena could honestly say that they are attempting that were most unlikely to occur, or to be to advance the frontiers of basic scientific observed, except in some highly specialized knowledge, without any concern over industrial context. In this sense, the huge possible applications. At the same time, the increase in new high-tech products, along motivation of the research managers, who with dense concentrations of well-trained decide whether or not to finance research in scientific specialists in industry, sharply some basic field of science, may be strongly increased the likelihood of serendipitous motivated by expectations of eventual useful discoveries in the course of the twentieth findings. century. This certainly appears to have been the Consider the realm of telephone case in the early 1960s when Bell Labs transmissions. Back at the end of the 1920s, decided to support research in astrophysics when transatlantic radiotelephone service because of its potential relationship to the was first established, the service was whole range of problems and possibilities discovered to be poor due to a great deal of in the realm of microwave transmission interfering static. Bell Labs asked a young and especially in the use of communication man, Karl Jansky, to determine the source satellites for such purposes. It had become of the noise so that it might be reduced or apparent that, at very high frequencies, eliminated. He was given a rotatable antenna annoying sources of interference in to work with. Jansky published a paper in transmission were widely encountered. 1932 in which he reported that he had found This source of signal loss was a three sources of noise: Local thunderstorms, matter of continuing concern in Bell Labs’ more distant thunderstorms, and a third development of the new technology of source which he described as “a steady hiss satellite communications. It was out of such static, the origin of which is not known”. It practical concerns that Bell Labs decided was this “star noise” as Jansky labelled it, to employ two astrophysicists, Arno Penzias which marked the birth of the entirely new and Robert Wilson. Penzias and Wilson would science of radio astronomy. undoubtedly have been indignant if anyone Jansky’s experience underlines why the had suggested that they were doing anything frequent attempt to distinguish between basic other than basic research. They first observed research and applied research is extremely the cosmic background radiation, which is

Nathan Rosenberg 65 now taken as confirmation of the “Big Bang” would solve serious problems connected with theory of the formation of the universe, while the performance of a new communications they were attempting to identify and measure technology. In one sense it is fair to say the various sources of noise in their antenna that important scientific findings by profit- and in the atmosphere. It seems fair to say making firms are sometimes achieved that this most fundamental breakthrough in unintentionally—they have discovered things cosmology in the past century was entirely that they were not looking for, which I take to serendipitous. Although Penzias and Wilson be the generic meaning of Horace Walpole’s did not know it at the time, the character of mid-eighteenth century neologism— the background radiation that they discovered serendipity. Such breakthroughs in the private was just what had been postulated earlier sector, moreover, are difficult to understand by cosmologists at Princeton who had if one insists on drawing sharp distinctions devised the Big Bang theory. Penzias and between basic and applied research on the Wilson shared a Nobel Prize in Physics for basis of the motivations of those performing this finding. Their findings were as basic the research. I find it irresistible here to as basic science can get, and were in no invoke, once again, the shade of the great way diminished by observing that the firm Pasteur: “There are no such things as applied that had employed them did so because sciences; only applications of science.” the decision makers at Bell Labs hoped to In fact, I would go much further: when improve the quality of satellite transmission. basic research in industry is isolated from The parallelism between the fundamental the other activities of the firm, whether discoveries of Jansky and Penzias and Wilson organizationally or geographically, it is likely is, of course, very striking. In both episodes, to become sterile and unproductive. Much the Bell Labs researchers stumbled upon of the history of basic research in American discoveries of the greatest possible scientific industry suggests that it is likely to be most significance while involved in projects effective when it is highly interactive with the that were motivated by the desire of Bell work and the concerns of applied scientists Labs to improve the quality of telephone and engineers within the firm. This is transmission. In the case of Penzias and because the high technology industries have Wilson, they were conducting their research continually thrown up problems, difficulties with a remarkably sensitive horn antenna and anomalous observations that were most that had been built for the Echo and Telstar unlikely to occur outside of specific high satellite projects. Wilson later stated that technology contexts. he was originally attracted to work at Bell The sheer growth in the number of trained Labs because working in the Labs would scientists in industrial labs, along with the provide access to a horn antenna which was growth of new, highly complex, specialized one of the most sensitive of such antennas in products that appeared in the course of existence (Aaronson, 1979: 13). the 20th century, powerfully increased the I have called attention to two episodes at likelihood of serendipitous findings. High- Bell Labs in which industrial researchers tech industries provide a unique vantage discovered natural phenomena of immense point for the conduct of basic research but, scientific significance, while the firm that in order for scientists to exploit the potential employed them did so in the hope that they of the industrial environment, it is necessary

66 upon science have been completely ignored The sheer growth in the here, such as the pervasive impact of “ new instrumentation, i.e., technologies number of trained scientists in of observation, experimentation and measurement. Indeed, scientific instruments industrial labs, along with the may be usefully regarded as the capital goods of the research industry. Much of this growth of new, highly complex, instrumentation, in turn, has had its origins in the university world and, to underline specialized products that the extent of the intertwining of technology and science in recent years, some of the appeared in the course of the most powerful of those instruments, such as Nuclear Magnetic Resonance, had 20th century, powerfully increased their origins in fundamental research that was originally undertaken in order to acquire the likelihood of serendipitous some highly specific pieces of knowledge, such as a deeper understanding of the findings magnetic properties of atomic nuclei. Indeed, ” Felix Bloch was awarded Stanford’s first Nobel Prize in physics for precisely such research (Rosenberg, 1997; in the same to create opportunities and incentives for volume, Kruytbosch, 1997). Nuclear Magnetic interaction with other components of a Resonance spectroscopy, in turn, became an firm. Bell Labs before divestiture (1984) invaluable tool in chemistry for determining is probably the best example of a place the structure of certain molecules—e.g., where the institutional environment was hydrogen, deuterium, boron and nitrogen most hospitable for basic research. I do not atoms (Kruytbosch, 1997: 32‑34). suggest that Bell Labs was, in any respect, Clearly, instrumentation and techniques a representative industrial lab. Far from it. It have moved from one scientific discipline was a regulated monopoly that could readily to another in ways that have been highly recoup its huge expenditures on research. consequential for the progress of science. But, perhaps even more important, it came In fact, it can be argued that a serious to occupy a place on the industrial spectrum understanding of the progress of individual where, as it turned out, technological disciplines is generally unattainable in the improvements required a deeper, scientific absence of an examination of how different exploration of certain portions of the natural areas of science have influenced one another. world that had not been previously studied. This understanding is frequently tied directly to the development, the timing and the mode INSTRUMENTATION of transfer of scientific instruments among Of course my examination of the disciplines. The flow of “exports” appears to endogeneity of science has been no more have been particularly heavy from physics than a very modest and partial sketch. Entire to chemistry, as well as from both physics categories of the influence of technology and chemistry to biology, to clinical medicine

Nathan Rosenberg 67 and, ultimately, to the delivery of health care. The German physicist, Max von Laue, There has also been a less substantial flow discovered the phenomenon of X-ray from chemistry to physics and, in recent diffraction in 1912. Its applications in the years, from applied physics and electrical early years were employed by William Bragg engineering to health care. NMR eventually and his son, Lawrence Bragg, primarily in became the basis for one of the most the new field of solid-state physics but also, powerful diagnostic tools of twentieth (and later on, in developing the field of molecular twenty-first) century medicine (MRI). biology. The main center of the methodology The transistor revolution was a direct of X-ray diffraction was for many years the outgrowth of the expansion of solid-state Cavendish Laboratory, presided over by physics, but the successful completion Lawrence Bragg. Numerous scientists went of that revolution was in turn heavily there in order to learn how to exploit the dependent upon further developments in technique, including Max Perutz (at the time a chemistry and metallurgy which provided chemist), James Watson, Francis Crick, John materials of a sufficiently high degree of Kendrew, all later to receive Nobel Prizes purity and crystallinity. Finally, physics has in Physiology and Medicine. The transfer spawned sub-specialties that are inherently of skills in X-ray diffraction was facilitated interdisciplinary: for example, biophysics, by the unusual step of the establishment astrophysics and materials science. of a Medical Research Council unit at the One further point, however, is implicit in Cavendish, headed by Perutz but under the what has already been said. The availability general direction of the physicist Lawrence of new or improved instrumentation or Bragg (Crick, 1988: 23). James Watson (1968: experimental technique in one academic 220) later reported Bragg’s obvious delight discipline has often been the source of over “...the fact that the X-ray method he interdisciplinary collaboration. In some had developed forty years before was at the critical cases, it has involved the migration heart of a profound insight into the nature of highly trained scientists from one field of life itself”. To infer the three-dimensional to another, such as those physicists from structure of very large-molecule proteins by the Cavendish Laboratory at Cambridge the new technique of X-ray crystallography, University who played a decisive role in which offered only two-dimensional the emergence of molecular biology. This photographs of highly complex molecules, emergence had depended heavily upon appears to have been a hellishly difficult scientists trained in physicists’ skills at enterprise, but it provided much of the basis Cavendish, who transferred the indispensable for the new discipline of molecular biology. tool of X-ray crystallography into the very Rosalind Franklin who, sadly, died very different realm of biology. Molecular biology young, is widely agreed to have been the most was the product of interdisciplinary research skilful practitioner of X-ray crystallography. in the special sense that scientists trained in Moreover, it is important to observe that one discipline crossed traditional scientific the two separate communities—university boundary lines and brought the intellectual scientists (including medical school tools, concepts and experimental methods clinicians) and commercial instrument into the service of an entirely new field makers—interacted with and influenced one (Judson, 1979). another in ways that were truly symbiotic.

68 Precisely because these two communities BIBLIOGRAPHY marched to the tunes of very different Aa r o n s o n , S. (1979), “The Light of Creation—an Interview with drummers, each was ultimately responsible Arno A. Penzias and Robert C. Wilson,” Bell Laboratories Record, January, p. 13. for innovative improvements that could Br o o k s , H. (1968), “Physics and the Polity”, Science, vol. 160. Cr i c k , Francis (1988), What Mad Pursuit, London: Penguin, p. 23. not have been achieved by the other, had El d e r , A. L. (ed.) (1970), The History of Penicillin Production, New York: American Institute of Chemical Engineers. the other been acting alone (Gelijns and Ge l i j n s , Annetine, and Nathan Ro s e n b e r g (2000), “Diagnostic Rosenberg, 2000). It should be added that the Devices: An Analysis of Comparative Advantages”, in D. Mowery and R. Nelson (eds.), Sources of Industrial Leadership, Journal of applications of physics research have usually Economic Literature, 38, chapter 8. He r r i n g , unpublished manuscript, n.d. moved more readily across disciplinary Ju d s o n , H. (1979), The Eighth Day of Creation, New York: Simon and Schuster. boundary lines in industry than they have Kr u y t b o s c h , C. (1997), “The Role of Instrumentation in Advancing the in the academic world. Profit-making firms Frontiers of Science”, in John Irvine et al., Equipping Science for the 21st Century, Edward Elgar, chapter 2. are not particularly concerned with where Mo w e r y , D., and N. Ro s e n b e r g (1998), Paths of Innovation: Technological Change in 20th Century America, Cambridge: those boundary lines have been drawn in Cambridge University Press Ro s e n b e r g , N. (1997), “The Economic Impact of Scientific the academic world; they tend to search for Instrumentation Developed in Academic Laboratories”, in John solutions to problems regardless of where Irvine et al., Equipping Science for the 21st Century, Edward Elgar. Ro s e n b e r g , N. (1998) “Technological Change in Chemicals: The those solutions might be found (NRC, 1986). Role of University-Industry Relations,” in A. Arora, R. Landau and N. Rosenberg (eds.), Chemicals and Long-term Economic Growth, Thus, the technological realm has not Wiley. only played a major role in setting the Ro s e n b e r g , N. (1990), “Why do firms do Basic Research?” Research Policy 19(2), pp. 165‑174. research agenda for science, as I have Ro s e n b e r g , N. (2002) “America’s University/Industry Interfaces, 1945-2000”, unpublished manuscript, May. argued. Technology has also provided new Wa t s o n , J. (1998), The Double Helix, New York: Simon Schuster. and immensely more powerful research tools than existed in earlier centuries, as is obvious by mere reference to electron microscopy in the study of the micro-universe, to the Hubble telescope in the study of the macro-universe, and to the laser, which has become the most powerful research instrument throughout the realm of the science of chemistry. In addition, the laser has found a wide range of uses in medical care. Finally, since this article was written within easy walking distance of the Stanford Linear Accelerator, it seems appropriate to close with the following observation: in the realm of modern physics it appears that the rate of scientific progress has been largely determined by the availability of improved experimental technologies. In the succinct formulation of Wolfgang Panofsky, the first director of SLAC, “Physics is generally paced by technology and not by the physical laws. We always seem to ask more questions than we have tools to answer.” Exactly.

Nathan Rosenberg 69

Two Knowledge Dynamics for Innovation

Hiroyuki Itami 1. Introduction Our two main conclusions are: first, Graduate School of Management of Science and Technology Innovation is the engine of progress organizations are good at accumulating Tokyo University of Science in our society. We can define innovation knowledge, and markets are good at using as “dramatically changing people’s lives knowledge and second, too much emphasis through the introduction of new products on the market mechanism can be detrimental or services”. Thus, innovation is not a to the continuation of innovation since mere technological discovery nor an there must be someone who accumulates experimentation of a new product idea. knowledge in the first place. Unless it impacts people’s lives, its social significance is minimal. Only when dramatic 2. a Tale of Three Innovators: Apple, changes occur in people’s lives, does it Microsoft and Google deserve to be called innovation. Nowadays, the pace of innovation For innovation to be realized in the form worldwide is accelerating. For example, many of new products or services, two knowledge amazing innovations have been achieved in dynamics are necessary—i.e., knowledge- connection with the personal computer over accumulation dynamics and knowledge- the past three decades, truly changing our utilization dynamics. Corporations usually lives dramatically. Among the firms which introduce new products or services to society have led this innovation, all of us know that and in so doing they utilize various types of three innovators stand out: Apple, Microsoft knowledge, such as technology and other and Google. Apple introduced one of the first intangibles which have been created and commercially successful personal computers accumulated by themselves and others in into our lives and then led the innovation of society—e.g. in universities. Thus, for us the user-friendly PC with a mouse and icons. to understand innovation in our society, we It is now changing the way we read books, need to understand two dynamics concerning through iPad. Microsoft is another innovator knowledge: how knowledge was accumulated in personal computer software, introducing and how knowledge is used. That is the topic the first widely-used operating system for the of this essay. Intel chip PC, DOS, and then the user-friendly

Hiroyuki Itami 73 Windows operating system, with huge unfortunately failed to become the market success. Indeed, it is not too much to say that innovator for the personal computer. Even these two firms have been writing the history though the technology developed for the of personal computers. personal computer was successful as a After the PC became everybody’s result of the large resources devoted to it by tool, the arrival of the internet age led to Xerox, the accumulated knowledge was not communication between them, and it brought used well by them for their own commercial the famous Google, which made the PC the success. gateway to the wide world of information Feeling disappointed, many engineers on the internet. Google’s innovation was the left PARC. One group went to Steve Jobs of fabulous search engine and super-powerful Apple and created Lisa and Macintosh, the data centers with innumerable servers forerunner of today’s personal computers. which search the web unceasingly. These Another group of engineers from PARC was data centers are now the source of the next invited by Bill Gates to join Microsoft, where generation of computer-related innovation: they developed the Windows operating cloud computing. system. Thus, Xerox accumulated most of the All three firms started as small ventures necessary basic knowledge for the personal in the US not too long ago, each led by a computer age at PARC, but this was later quintessential entrepreneur—Steve Jobs at used for commercialization by the small Apple, Bill Gates at Microsoft, and Sergey venture firms in Silicon Valley. Entrepreneurs Brin (together with Larry Page) at Google. with an acute business sense detected the However, these individuals did not fight potential of the technology accumulated single-handedly to make their innovations by large organizations and capitalized on possible. Behind their entrepreneurial it by appropriating it through the market activity lies a huge amount of knowledge mechanism. accumulated by large organizations. For Jobs For Sergey Brin, the co-founder of Google, and Gates, the large organization was Xerox the main large organization on whose Corporation, and for Brin it was Stanford knowledge accumulation he was able to University. capitalize was Stanford University. Wikipedia The basic technology for the user-friendly describes his life story until he founded personal computer that we know today was Google as follows: developed by Xerox Corporation’s Palo Alto Brin immigrated to the United States Research Center (PARC). This technology was from the Soviet Union at the age of six. first applied in a workstation called “Alto”, Earning his undergraduate degree at the which was the precursor of the modern University of Maryland, he followed in his personal computer. However, despite the father’s and grandfather’s footsteps by technical success of the technology, Xerox studying mathematics, double-majoring in failed to allocate sufficient resources to this computer science. After graduation, he moved project as a result of various administrative to Stanford to acquire a Ph.D in computer troubles within the company and the science. There he met Larry Page, whom poor financial success predicted to the he quickly befriended. They crammed their management by the corporate-marketing dormitory room with inexpensive computers and accounting departments. Thus, Xerox and applied Brin’s data mining system to

74 build a superior search engine. The program the third stage the societal moving stage. became popular at Stanford and they Only when the third stage is successful does suspended their Ph.D studies to start up innovation finally become a reality. Google in a rented garage. Knowledge plays an essential role Education at Stanford and the network of at every stage of innovation. In the first professors and students there provided both stage, the technological nurturing stage, the accumulated knowledge he could use technological knowledge has to be and the seedbed of ideas and feedbacks for created and accumulated to make the new the technological development of the Google technology applicable in reality. Knowledge search engine. accumulation dynamics is the key to the first stage. Note that we include knowledge 3. Two Knowledge Dynamics by Two Different creation in knowledge-accumulation Groups? dynamics, since knowledge accumulation The tale of three innovators shows that for presupposes creation of new knowledge an innovation to succeed, the two functions of to be accumulated. During the second knowledge about innovation (accumulation stage of innovation, the market-entry of the necessary knowledge and the use of stage, knowledge utilization dynamics is knowledge), are often performed by two the main knowledge activity. Here, not only separate groups of people or organizations. the technological knowledge that has been There are those who accumulate knowledge accumulated during the first stage, but also and others who use it. Of course, there may market knowledge is necessary in order be happy cases where the same individuals or to develop a new product. During the third organizations both accumulate and use, but stage of innovation, the societal moving that is an exception rather than the rule. stage, large-scale knowledge diffusion has Why so? The reasons seem to lie in the to occur so that many people may recognize nature of the innovation process itself. the new product and be interested in trying Usually innovation is a long process and has it out. This is a kind of knowledge use in that to go through three very different stages. many people end up sharing the knowledge First, there is a technology-nurturing stage. about the new product, and the result of A new technology is nurtured and developed, knowledge use is its wide dissemination. using a variety of knowledge that has been Thus, knowledge use is the central activity in accumulated. Second, the new technology the last two stages of the innovation process. must find an entry point into the market Although we categorize the knowledge- in the form of a new product. Let us call relating activity into knowledge- this second stage the market-entry stage. accumulation process and knowledge- Third, the new product introduced must be utilization process here, each process is a accepted by a large number of people so that very dynamic and closely-linked activity. For a small entry into the market will become a example, knowledge-accumulation itself huge outpouring of demand. Only when this includes some form of utilization of old outpouring occurs, will the new product knowledge to create new knowledge, and actually be used by many people and thus then the combined total of all knowledge, change their lives. In a sense, society agrees old and new, is accumulated. On the other and moves with the new product. Let us call hand, in the process of knowledge-utilization,

Hiroyuki Itami 75 a situation is often faced in which the and Stanford University, while knowledge is knowledge one starts to use is not enough used by the entrepreneurs like Jobs, Gates to develop a new product for market entry, and Brin, in the market place. It transpires and therefore it is necessary to create new that organization accumulates knowledge knowledge in order to fill the gap. The newly and then market uses the accumulated created knowledge will not disappear after knowledge. it is used. It will certainly be accumulated Organizations are the places where people in some way after creation. In this sense, get together and form teams, building a knowledge use may be the beginning of stable human network. In that network, another round of knowledge accumulation. people learn and accumulate together and Viewed this way, we can find at least two from each other. Organizations are good reasons why two separate groups are often at knowledge accumulation. However, necessary for the entire process of innovation they are often not very good at using the to be successful. One reason is that it is accumulation themselves, as in the case usually a long process from the beginning of Xerox. Organizations, both corporate of an innovation—the technology nurturing and non-corporate, have hierarchical stage, till the end—the societal moving stage. mechanisms of decision-making and Since it is such a long process, a single group resource allocation within their boundaries. of people often cannot last the entire process This hierarchy often becomes an obstacle to alone and different groups have to take turns free entrepreneurial experimentation inside and pass on the baton. Another reason is the the organizations, especially when it involves difference between knowledge accumulation a large amount of investment. But that kind and knowledge utilization. Those who are of investment is inevitable in the second stage good at accumulating knowledge may not be of innovation, the market-entry stage. The good at using it in the market place. amount of money involved often becomes Even though knowledge accumulation huge, whereas at the technology-nurturing and knowledge utilization are intertwined, stage it is much smaller. The organizational it is still meaningful to conceptualize both hierarchy is generally not good at selecting knowledge-accumulation dynamics and the worthwhile risks and thus is not so good knowledge-utilization dynamics as two at knowledge utilization. separate concepts. Our main point here Xerox’s failure to invest in the personal is that, in order for innovation to occur, computer is an example of such hierarchical both knowledge-accumulation dynamics failure. Xerox is not, however, an abnormal and knowledge-utilization dynamics are example. Many large IT firms, like IBM and necessary and responsibility for these two ATT (American Telephone and Telegraph) dynamics often lies with two different groups accumulated much of the basic knowledge of people or in two different places. that we have today of IT and communication technology in their labs, at Watson Research 4. oRGanizations Accumulate and Markets Center for IBM and Bell Laboratory for ATT. Utilize They were unable, however, to realize the The tale of three innovators also tells full business potential of their knowledge. us that knowledge-accumulation dynamics Entrepreneurs and the spin-offs from these often occurs in large organizations, like Xerox organizations, like Steve Jobs at Apple, Bill

76 Gates at Microsoft, Scott McNealy at Sun a large organization by recruiting talent Micro Systems, Larry Ellison at Oracle, and from it or by learning themselves through John Chambers at Cisco Systems, reaped the working for it. Resources can be recombined huge economic benefits from the knowledge and reallocated as a result of intelligent that IBM and ATT had accumulated. moves, thereby enabling the opportunities Moreover, those entrepreneurs who envisioned to become a reality. The market succeeded in the final two stages of works as the place for experiment. However, innovation, the market entry stage and the the market is not very good at knowledge societal moving stage, were often former accumulation. For knowledge accumulation, employees of these big firms. Among the a stable human network is needed, like a entrepreneurs I have mentioned here, team, in which learning takes place among McNealy, Ellison and Chambers all worked its many members. The market is not easily once either for IBM or ATT. Only Jobs equipped with the capacity to foster such and Gates were entrepreneurs from the a stable human network since freedom beginning. Ironically, IBM and ATT not only of action by market participants, and in contributed greatly to basic knowledge particular the freedom of entry and exit, is accumulation for today’s IT industry, but also the basic principle of market transactions. supplied many entrepreneurs who completed In any market economy, we have innovation in this industry. corporate organizations as its main economic Restructuring at IBM and ATT in the players and we also have non-corporate 1980’s under anti-trust pressure from the organizations like universities which US Government was the major trigger for specialize in knowledge accumulation. these entrepreneurs to spin off. Thus, the These organizations are linked together by IT revolution in the US would have been the markets through market transactions impossible without the basic accumulation in to complement their division of labor. those large firms. But it would also have been Markets also link corporate organizations to impossible without the restructuring of these consumers. Thus, organizations and markets firms who not only released many future are two very basic units in any market entrepreneurs into the new business market economy, be it a national or a regional but also supplied many engineers who had to economy. leave these big organizations and enter the If we imagine the total picture of labor market. knowledge-accumulation dynamics and A significant advantage of the market knowledge- utilization dynamics in the entire in knowledge utilization comes from economy, our discussion so far implies that its ability to broaden the possibility of organizations, both corporate and non- combining different items of knowledge corporate, function as the main arena for accumulated in different organizations accumulation dynamics. Organizations are across the organizational boundaries. the places where accumulation occurs. For Entrepreneurs are not constrained by utilization dynamics, however, the main organizational boundaries and they are arena is the market. The market is where also free from hierarchical control. When utilization occurs. Obviously, the person they detect an innovation opportunity, they who uses accumulated knowledge for the can obtain accumulated knowledge from purpose of innovation is the entrepreneur and

Hiroyuki Itami 77 the corporate organization which he or she hierarchical authority and coordination. In leads. That utilization, however, occurs in the the market place, the market mechanism of context of the market. In short, “organizations competition and price regulates the demand- accumulate and markets utilize”, or a little supply relationship and allocates resources more precisely, the market allows a firm to among the market participants. Both utilize the organizations’ accumulation. mechanisms can vary from time to time and Certainly in the tale of three innovators from one country to another in their actual and in many other cases, the market details and the basic patterns of behavior of mechanism makes it possible for the the participating actors. entrepreneurs to use knowledge accumulated If we compare the US and Japan in terms somewhere in the economy. However, it of the mixture of the organization and the is important to note that there must be market in an economy, much research someone who accumulates knowledge and the stylized facts seem to indicate that in the first place. There is no utilization Japan is a more organization-oriented of knowledge unless it is accumulated market economy than the US, while the US beforehand. is more market oriented. For example, in To summarize, knowledge accumulation the Japanese intermediate goods market, is done through learning by a team of buyers and sellers tend to maintain long- people who share a common goal and a term transaction relationships and often common knowledge base. An organization cooperate long term in innovation. The is good at this. Knowledge utilization for relationship in automobile-parts transactions innovation is done by experimenting with in the Japanese automobile industry, often a new combination of knowledge across referred to as the Keiretsu relationship, is organizational boundaries and providing this a typical example, whereas in the US auto combination with the right resources at the parts market, shorter-term, arm’s length right time. Entrepreneurs with outstanding relationships are the norm. I once termed ideas are the ones who use this knowledge. the pattern of market mechanism with these The market is the place for this kind of close relationships the ‘organizational’ experiment to happen. market (a kind of market mechanism with certain features of the organizational 5. The US experiments and Japan develops mechanism), compared with the freer Although there are corporate competitive markets in the US. organizations and a market in any market If so, it then follows that Japan is better economy, the ways they actually work and at knowledge-accumulation dynamics and their relative share of importance in the the US is better at knowledge-utilization total economy vary from country to country. dynamics. Certainly this seems to be the case Any market economy is a mixture of the and one example is the different nature of organizational (hierarchical) resource- innovation activities in the two countries. The allocation mechanism and the market US is the country of industrial experiment and mechanism. Japan is the country of industrial nurturing or Within a corporate organization, resources development. are allocated to the organizational members The US is well suited for experimental through the organizational mechanism of activity aimed at starting up and trying out

78 new businesses or new business models in accumulation come from for the American many industries., Both the capital market and knowledge-utilization dynamics? Perhaps the labor market in the US have the mobility not so much from the American corporate to supply resources for such experiments, organizations’ accumulation as before. For and there is ample venture capital as well example, the famous Bell Lab disappeared as a large public-offering market for new after ATT was broken up and at the IBM companies. Attracted by these markets, Watson Research Center, the glory of its both capital and labor flow into the US from former days is said to be fading. all over the world—for example into Silicon There are at least two sources of Valley. knowledge accumulation still available to Over the course of history, there have American firms and American entrepreneurs. been many times when the US played a One is the open knowledge base accumulated very dominant role in the early stages of in American universities. The other source commercialization of innovation. Even if is knowledge accumulation done in other we limit our scope to the last forty years, countries, both in corporate organizations when Japan came to approach the US in and non-corporate organizations. The US can industrial strength, the US led the world tap and attract those accumulation sources in semiconductors, liquid crystal display, outside its national border. information technology and biotechnology, among others. 6. The US as the market arena for the world Japan was not too far behind when it came A particular strength of the American to the development of an industry after the economic system lies in the very openness seed was planted. Both in semiconductors of this system. One of the clear ways and liquid crystal displays, Japan has led for American firms to capitalize on this the world at various stages of industrial openness is to broaden the scope of the open development after the initial experimental knowledge base they can tap. American firms stage was over and the pace of technological have been much more active in international innovation was accelerating. Another sourcing of their knowledge base, either historical example is automobiles. Japan has in the form of foreign R&D activities or been overtaking the US as the main player of inviting foreign university personnel to in this industry after the US established it so different American organizations, universities many years ago. In this process, the Japanese or firms. This is in a sense an effort to Keiretsu system of inter-firm cooperation, broaden the open-knowledge base for a kind of ‘organizational market’, played an American firms. indispensable role. Another example of broadening the open- How can the US maintain its position? The knowledge base is to have marketplaces American knowledge-utilization dynamics of venture activities for innovation, such as seems to be as strong as ever, even now— Silicon Valley, in the US. These marketplaces Google being one of the latest examples. attract many people from all over the world, As I noted before, any knowledge utilization who bring their accumulated knowledge with presupposes knowledge accumulation. them. People from many corners of the world Without accumulation, there is nothing to flock to America in order to capitalize on be utilized. Then, where does knowledge the knowledge accumulation in the market

Hiroyuki Itami 79 arena that the US provides. In a sense, the utilizing the knowledge accumulated in the US is tapping the large open-knowledge Soviet Union university system. The rest of base throughout the world by providing the the story is now history. market arena for knowledge holders outside These three conditions—i.e. language, America. currency and ethnic origin, are something As we already mentioned, this is made that no other country can currently emulate. possible partly because of the existence of a Only the US enjoys this special position very mobile labor market and a very active resulting from its historic and ethnic venture-capital market in the US. There are, circumstances. That is why it is able to however, three more basic conditions that maintain its knowledge utilization dynamics. enable the US to function as the market arena for the world. 7. Fair Emphasis on Organizational The first condition is that the native Knowledge Accumulation language of the US, English, is the lingua In a sense, the US is unique: an exception franca of the world. People from other parts rather than a rule. If other countries were to of the world can come to the US without try to repeat the glamour of American-style fearing language problems, as long as they knowledge-utilization dynamics, by trying, can speak at least broken English. English for instance, to develop a Silicon Valley of has become the lingua franca thanks to the their own without making a substantial British Empire. The second condition is that effort to accumulate knowledge within their the American dollar is the international key own national borders, they would likely fail. currency. People who earn money using Knowledge utilization does not work without the American market system have not had knowledge accumulation in the first place. to worry too much about the international Behind the knowledge utilization value of what they earn, at least until the dynamics in the US lies the very active Lehman shock. The third condition is that market mechanism. Economists tend to the US is a country of immigrants not only overemphasize the merits of the market in its origin but also in terms of the current mechanism. But after the fall of communism immigration policy. The US is thus a melting and the planned economy in the 1990s, the pot of many people with different ethnic American ideology seems to have swept the origins where anybody can come from world. different parts of the world. Those who come It is one thing to use the market to the US do not have to worry too much mechanism to allocate resources in a stable about their origin. economy where the knowledge or technology In a sense, Google is a good example bases do not change very much. The basic of the US attracting knowledge originally theory of a market economy almost always accumulated elsewhere in the world. Sergey assumes a given set of technology. It is Brin came to the US at the age of six from another thing, however, to have too much the then Soviet Union, where his father was faith in the market mechanism when we have a mathematics professor at one of the major to consider how to broaden our knowledge universities. Sergey followed the family base in society by accumulating new tradition and was educated by his father to knowledge, as in the case of innovation. Who become another mathematician, in a sense would want to accumulate knowledge if too

80 many economic actors were busy trying to References use what they already know? Ch e s b r o u g h , H. (2003), Open Innovation: The New Imperative for Moreover, when utilization dynamics Creating and Profiting from Technology, Harvard Business School Press. become bigger, accumulation dynamics Cr i n g e l y , R. (1992), Accidental Empire: How the Boys of Silicon Valley Make Their Millions, Battle Foreign Competition, and Still Can’t Get a may get smaller. The utilization dynamics Date, Addison-Wesley. Im a i , K., and H. It a m i (1984), “Interpenetration of Market and would become more active (i.e., get bigger) Organization”, International Journal of Industrial Organization, if there were sources of knowledge that December 1984. It a m i , H., and T. Ro e h l (1987), Mobilizing Invisible Assets, Harvard corporations could depend on for utilization. University Press. It a m i , H. (1994), “The “Human-Capitalism” of the Japanese Firm It is often the open knowledge base outside as an Integrated System” in Imai and Komiya (eds.), Business Enterprise in Japan, The MIT Press. the corporate organizations upon which they It a m i , H., K. Ku s u n o k i , T. Nu m a g a m i , et al. (eds.) (2010), Dynamics of become dependent. Such an increase in Knowledge, Corporate Systems and Innovation, Springer. Wi l l i a m s o n , O. (1975), Markets and Hierarchies: Analysis and Antitrust external dependence could have a negative Implications, Free Press. impact on the corporate organization’s efforts to accumulate internal knowledge, because people in the corporate organization might consider it more profitable to use external knowledge rather than invest in obtaining internal knowledge accumulation. Since corporations play an important part in knowledge accumulation through their internal R&D efforts, an increase in their external dependence would mean that the accumulation dynamics in society as a whole would shrink. Innovation is essential for economic growth, be it a national or a regional economy. We have to be deeply concerned about the mechanism to make innovation more active in the economy as a whole. As I have been emphasizing, an organization accumulates and the market utilizes. There are currently tendencies to emphasize the importance of the market mechanism to such an extent that the importance of the organizational mechanism is neglected. We have to pay attention to the organizational knowledge-accumulation mechanism in both corporate and non-corporate organizations. Too much market orientation may be detrimental to sustainable innovation, to the economy and to society as a whole.

Hiroyuki Itami 81

Innovation Inside and Outside the Company: How Markets for Technology Encourage Open Innovation

Alfonso Gambardella 1. INTRODUCTION While both spillovers and open source Università Bocconi, Milan In recent years considerable attention (or open science) are important sources of has been devoted to the phenomenon of open innovation, this chapter focuses on “open innovation” (Chesbrough, 2003). In the acquisition or distribution of knowledge a nutshell, the sources for innovation are that depends on a standard economic no longer largely internal in a firm, but mechanism—that is, market-mediated have spread to many loci in the outside forces. While spillovers or open source imply environment. There are different sources exchange of knowledge based on forces of open innovation. A classical one is or norms other than markets, in this case knowledge spillovers, which arise when knowledge is exchanged at a price. This firms can capture knowledge or information price may take several forms—e.g., licensing “in the air”, as Marshall put it. Recently, royalties, profit sharing, co-development or there has been an upsurge in the so-called supply of resources for innovation. But what “open source” phenomenon whereby distinguishes this source from the others is knowledge and information are distributed that knowledge is traded. As we shall see, openly by their producers, in a context this trade is more complicated than that of where the production and distribution of standard commodities, and has far more knowledge are governed by well-defined limitations. However, not only is it possible, norms (e.g., Lerner and Tirole, 2002). An but it has become more and more significant “old” form of open source is open science, in recent years. which is again based on clear norms of We shall discuss the notion of technology production and diffusion of knowledge trade in a broad sense. While the classical (Dasgupta and David, 1994). Open science, example is licensing agreements, whereby and particularly the proximity of firms to one firm sells technology to another firm universities or other scientific institutions, in exchange for money, we include more have themselves been considered sources elaborate forms of technology transaction, of knowledge spillovers (e.g., Alcacer and in particular alliances or other collaborative Chung, 2007). arrangements for the development of

Alfonso Gambardella 85 innovation. We remain deliberately vague limits of technology markets. The following on this definition to let the reader interpret section discusses the implications of the technology trade in the way he or she prefers. absence of markets for assets, highlighting The reason why we focus on these what we can expect to observe when such market-mediated forces is twofold. First, markets exist. We then deal with three main as noted, they have grown in recent years. limitations to the formation of technology For example, from 1980 to 2003 in the G8 markets: a cognitive limitation, i.e., in countries, technology royalty payments and trading knowledge it may be hard to identify receipts increased annually by an average the object of exchange; a transaction cost of 10.7% and reached an annual volume of limitation, i.e., one needs proper institutions approximately US$190 billion in 2003 (OECD, for these markets to function; a degree 2006). Arora et al. (2001), as well as Arora of market limitation—i.e., knowledge has and Gambardella (2010a and 2010b), provide special properties which imply that only additional systematic evidence of these under certain conditions does a given piece trends. Second, markets are in general an of knowledge have a market large enough to important institution for economic growth. justify its trade. We conclude by discussing I am sure that a good deal of knowledge is some implications for industry structure and diffused today via spillovers, open source, company strategy. or open science, and in this chapter I do This chapter draws on my research on this not want to discuss or claim any superiority topic with Ashish Arora and Andrea Fosfuri. of the market mechanism with respect to Here I summarize some of the main issues these other forces. However, the formation and implications of our work. While they are of markets for knowledge, or markets for of course not responsible for any drawbacks technology are crucial for many aspects of or limitations in this chapter, I encourage the growth of knowledge, its diffusion, or the interested reader to look at Arora et al. the ability of firms to use knowledge as a (2001a), or Arora and Gambardella (2010a and resource more effectively. Moreover, they 2010b), where we discuss at greater length create new strategic options for firms, as some of the issues dealt with in these pages. firms can decide whether to buy, make or sell technology. Without such markets the 2. BACKGROUND only strategic option for product innovators The exchange of technology between is to produce their own technology, and independent parties is not a novel for the technology makers to invest in the phenomenon. In a series of articles, downstream assets to sell the product that Lamoreaux and Sokoloff (e.g., 1996 and 1999) embodies the technology. discuss the existence of an active market The goal of this chapter is to discuss the for patents in the US in the 19th century. factors that make the rise of technology Typically, inventors used to develop their own markets possible, along with the limits to technologies which were then sold to firms their development. I then examine a number that developed them and manufactured and of implications for industry structure and commercialized the products, or employed company strategy. Specifically, the chapter them as process innovation. Interestingly, is organized as follows. The next section Lamoreaux and Sokoloff also document provides a general overview of the nature and the existence of services and institutions

86 required expensive equipment that the Even in the mid-20th century individual inventors, or their small firms, “ could not afford. A related reason was that many large corporations relied knowledge itself became more complex and interdisciplinary, requiring the contributions on outside sources of ideas, of specialists in many fields. As a result, inventors were gradually employed by larger especially at the upstream end firms, which at the same time started to become large enough to bear the growing of the knowledge spectrum. costs and risks of innovation. To be sure, even in the mid-20th century For example, Mueller (1962) many large corporations relied on outside sources of ideas, especially at the upstream documents that quite a few of end of the knowledge spectrum. For example, Mueller (1962) documents that quite a few of Du Pont’s major inventions in Du Pont’s major inventions in the first half of the 20th century came from ideas that it had the first half of the 20th century acquired from external inventors or smaller firms. Arrow (1983) theorizes on this point. came from ideas that it had He notes that large and small firms have comparative advantages in different types acquired from external inventors of innovations or at different stages of the innovation activity. In large firms there is a or smaller firms greater organizational distance between the ” inventor and the manager who is responsible for financing the innovation. This implies that firms finance only projects in which in support of the technology trade, as we the asymmetric information between the typically observe when markets exist. Thus, managers and the inventors is not excessive. for example, patent lawyers supported both But limited asymmetric information is typical inventors and companies in their trade, of projects for which there is substantial special magazines or trade press provided knowledge and information, i.e., that are information about the technologies to be less risky and innovative. When projects sold, and the patent office itself was a crucial are particularly innovative it is most likely institution in this trade as it provided the that the inventor has more information than certification of the property rights and of the the manager, and in general the manager novelty of the invention. (or the external financier) takes a greater As Lamoreaux and Sokoloff themselves risk in financing them. Smaller firms, or noted, the US market for patents shrank even firms founded by the inventor, have a in the 1920s. One important reason is that shorter organizational distance, which makes the development of technologies became the problem of asymmetric information too risky and complex to be governed less severe. At the same time, larger firms by individual inventors. For example, it have more internal resources to finance

Alfonso Gambardella 87 larger-scale projects and inventions. This is typical of the downstream development of Small firms specialize in the initial innovations or ideas, or of more basic “ research projects that demand significant development of riskier projects investment in large scale equipment or resources. As a result, small firms specialize that demand fewer resources, in the development of riskier projects that demand fewer resources, while larger while larger firms specialize in firms specialize in larger-scale projects, whether upstream or downstream. Given the larger-scale projects, whether complementarities between these two types of projects Arrow concludes that a “market upstream or downstream for firms”, whereby larger firms buy the ” smaller concerns that produce new ideas, can make our economies more efficient by giving rise to a division of labor in innovation Teece (1988) concludes that these based on comparative advantages. reasons explain why the creation, Teece (1988) analyzes the reasons why a development, and commercialization market for Research & Development (R&D) of new products and processes have services encounters serious limitations. traditionally been integrated within firms. He argues that the interdependencies This is consistent with the classical view among tasks in the innovation process, and of Grossman and Hart (1986) and Hart the natural uncertainty associated with and Moore (1990) who argue that vertical development and commercialization of integration, and the authority it confers, innovations, create at least three sources help to solve the problems of opportunistic of transaction costs. First, it is hard to behavior that arise when contracts are provide detailed specifications of the task incomplete. In the case of innovation, this requirements at the outset of the innovation means that a firm can specify and organize process. These specifications can be the actions of the various agents involved defined more precisely while undertaking in the innovation process while the process processes needing contracts that are largely is taking place. In a similar vein, Arrow incomplete and which potentially leave either (1975) develops a model showing that one party open to opportunistic behavior by the of the determinants of vertical integration other. Second, if a company develops close is asymmetric information about the quality interactions with one technology supplier, the of the supply. In addition, being part of interplay of relationships may generate sunk the same organization helps the various costs, which can give rise to switching costs specialists to acquire a better understanding and “lock-in” problems. Finally, releasing of each other’s problems and needs, to pre-contract information to bidders may share common objectives and beliefs, and require the companies to share valuable to adopt a common language (Arrow, 1974). proprietary information, and increases the This facilitates collaboration and information risk that competitors will discover its R&D exchange, and increases the productivity of plans. the innovation process.

88 Teece (1988) also points out that the problem is more severe in the case of In order to better understand more complex technologies, such as “ systemic technologies that require profound the implications of markets for interdependencies between many activities, as compared to “stand-alone” innovations. He technology, it is useful to begin therefore acknowledges that the advantages of integrating the innovation tasks within with a more general discussion the same organization can differ across industries and technologies. However, he of the implications of high also provides numerous examples showing how the lack of proper integration of R&D transaction costs in the markets with manufacturing and commercialization leads to poor innovation performance. In for corporate assets short, the Teece (1988) perspective provides ” the natural theoretical support for the discussion found for instance in Chandler (1990) who argues that historically the by resources for which well-functioning advantages of larger integrated firms has markets do not or cannot exist, or they been their ability to make systematic “three- will have high transaction costs. So, the pronged” investments in R&D, production and firm builds a sustainable competitive marketing. advantage by having access to assets that its competitors cannot access. Barney (1986) 3. THE EFFECTS OF HIGH TRANSACTION COSTS IN notes that the possession of such assets THE MARKETS FOR CORPORATE ASSETS must be rooted in imperfections in the factor In order to better understand the market, i.e., the market where the factors implications of markets for technology, used to create such assets are traded, and it is useful to begin with a more general these imperfections ultimately arise from discussion of the implications of high differences in the expectations that firms transaction costs in the markets for hold about the future value of the assets corporate assets. Broadly speaking, these (Barney, 1991). Dierickx and Cool (1989) assets include technology, production argue that not all the assets required to expertise and facilities, a strong brand-name sustain competitive advantage can be bought reputation, human assets, supplier networks and sold. Instead, such assets must be and established marketing channels. accumulated internally through a number of The resource-based theory of the firm mechanisms over a period of time. Similarly, suggests that to be a source of sustained much of the thinking on technology strategy above-average performance, resources has approached the problem by implicitly or must meet three criteria: they must be explicitly assuming that technological assets valuable, rare and imperfectly mobile cannot be directly bought and sold and the (Barney, 1991; Peteraf, 1993; Markides services of such assets cannot be “rented”. and Williamson, 1996). In other words, a In the context of our analysis in this chapter, competitive advantage must be underpinned it is interesting to ask what happens when

Alfonso Gambardella 89 some assets that were not tradable become tradable. The immediate consequence The immediate consequence of an absent “ or highly imperfect market for technology of an absent or highly imperfect is that the innovator has to mainly find the sources of the technology in-house. That market for technology is that the is, in order to extract the value from the technology, it (or rather its services) must be innovator has to mainly find the embodied in goods and services that are then sold. Such goods and services must have sources of the technology in- lower costs or command higher prices in order to deliver returns that are greater than house the competitive rate of returns: so that firms ” can earn “quasi-rents”. Consider a case where a firm has developed a new cost-reducing technology puts it, firms have to invest in creating co- for the production of certain goods. In order specialized assets to maximize their returns to extract value from the technology, the firm from developing new technology. In short, must use it to produce the goods. Not only in the absence of a market for technology, does this require the firm to have access to a firm must often acquire other assets in the complementary assets (such as land and order to extract profits from the technology. physical equipment, marketing channels and Insofar as these other assets are themselves so on), but the returns also depend on the expensive and illiquid, well capitalized, large, volume of output that the firm can produce integrated firms that possess such assets and sell. If the complementary assets are have greater incentives to invest in developing themselves not traded in a competitive new technologies (Nelson, 1959). Conversely, market, or if firms differ in their access smaller firms face major hurdles in to them, then firms that have superior developing and commercializing technology. access to these complementary assets will The situation is quite different when the be able to derive greater value from the asset can be sold or rented. Complementary technology. Similarly, firms that can exploit assets need not be owned or even directly the technology on a larger scale will be able accessed by the technology developer. The to derive greater value from it (Cohen and relative importance of complementary Klepper, 1996; Klepper, 1996). assets within the boundaries of the individual Continuing with this logic, larger firms or firms diminishes relative to the existence of firms with superior access to complementary such complementary assets at the level of assets will have a greater incentive to invest industries or markets as a whole. Clearly, in the technology in the first instance. Taking transaction costs or factors may increase this one step further, firms investing in the cost of acquiring the complementary technology would be well advised to also assets externally relative to owning them invest in the complementary assets that in-house, even when such markets exist. cannot be easily and efficiently acquired on However, as these imperfections become less the market. In other words, as Teece (1986) important, then, to use Teece’s terminology,

90 the appropriate strategy in the presence of Consider a case where a technology markets depends on the efficiency “ of markets for other types of assets, firm has developed a new cost- including finance. Moreover, in thinking about how a market reducing technology for the for technology conditions strategies, there is one other industry level force that must be production of certain goods. In considered. Markets, particularly efficient markets, are great levelers. As we shall order to extract value from the discuss in section 5 below, a technology market lowers entry barriers and increases technology, the firm must use it competition in the product market, which often implies a rethink of existing strategies. to produce the goods In turn, this implies that when a well- ” functioning market for an asset exists, such an asset cannot be a source of sustainable competitive advantage and firms have to the existence of complementary assets at the look somewhere else for gaining an edge level of markets or industries may offset the over competitors. This is an important lack of such assets at the level of the firm. consequence of technology markets. When Ultimately, a market for the asset provides they exist, technology cannot be retained in the innovator—a firm that has developed exclusive ways. By contrast, one area that the new technology—with more options. retains its exclusive nature is likely to be Instead of embodying a newly-developed the knowledge of customers and markets, technology in goods and services, a firm and the assets that link these markets and may choose to sell or license it to others, or clients to a specific firm vs. its competitors. may choose to buy it from external providers This knowledge, and the underlying assets rather than develop it in-house. This does depend on sizable investments and a good not mean that companies would only acquire deal of experience with such markets and technologies from external sources. Leading clients. To the extent that the markets for companies would probably choose the right these assets remain less perfect than the balance between external acquisition and technology markets, commercialization in-house development of technologies, even capabilities, market information, and other though for companies with lower in-house downstream assets, may become better technological capabilities the existence of sources of differential advantages vis-à-vis external technology sources might be critical the competitors. to enhance their ability to produce and sell more innovative goods. Similarly, a market 4. LIMITS AND OPPORTUNITIES IN THE GROWTH OF for technology assets does not mean that TECHNOLOGY MARKETS innovating firms will become pure licensing 4.1. Uncertainty and cognitive limitations companies, although several small (and An important limit in the growth of not so small) firms have been successful as technology markets is that the key objective specialized technology suppliers. Rather, of exchange, knowledge or technology, is

Alfonso Gambardella 91 characterized by significant uncertainties. This is especially true when technology Codified technology is is not codified, is embedded in people or “ machines, and is largely based on experience easier to patent. Conversely, rather than general principles. For example, improvements in a production process or in a an increasing appreciation service may be hard to define and codify with precision. In these cases, the object of the of intellectual property rights transaction is ill-defined to begin with, and this ambiguity makes it harder to trade in the encourages codification of improved process. Arora and Gambardella (1994) argue innovations that the increase in the extent to which ” industrial technologies are based in science (including engineering sciences), and the use of advanced instruments and computers, raises the search costs of both buyers and are reducing the fraction of “inarticulable” suppliers and leads to considerations of technology. Thanks to advances in option values rather than actual values, and computer technology, including software, renders potential transactions subject to a many technical problems (e.g., in design, variety of biases to which human beings are semiconductors, biotechnology, and many prone when faced with uncertainty. The net other industries) can be defined in logical result is that technology transactions are terms (e.g., mathematical language) and more imperfect and harder to accomplish. captured in software. Interestingly, there are useful synergies with patents in facilitating 4.2. Patents as a solution to the contractual technology transactions. Codified technology limitations in technology trade? is easier to patent. Conversely, an increasing Teece’s (1988) limitation discussed earlier appreciation of intellectual property rights is fundamentally a limitation in our ability encourages codification of innovations. to write contracts involving an ill-defined The difficulties, however, are not only object like knowledge or technology. Arrow’s contractual. Discovering who has relevant (1962) solution to the classical problem technology and the price at which they may of information exchange is to appeal for make it available (if at all) is also difficult. intellectual property protection. If protected, Understanding what they have and how to the seller could disclose the details to use it amplifies the problem. Conversely potential buyers, mitigating the problem. for a seller, identifying potential buyers This close relationship between patenting, can be problematic, and once a prospective the technology market, and specialization in partner has been identified, settling on the invention is reflected in trends in patenting price can be no less challenging. Moreover, and measures of the technology market. new technologies are often surrounded Lamoreaux and Sokoloff note that patenting by commercial uncertainty (Rosenberg, per capita in America rose during the 19th 1996). Simply put, it is difficult to know what century, peaked in the early 20th century, and applications the technology can have. This then declined thereafter, closely mirroring

92 has an incentive to withhold payment, Many trades in technology claiming that inadequate know-how was “ provided. actually come with the provision The model shows that these problems can be solved by staggering the payment of complementary services—like to the licensor over time and by relying on the property rights of the technology. The the provision of know-how and buyer’s value depends on the technology and the know-how. While the know-how technical services—along with that is transferred cannot be withdrawn, by withdrawing the rights to use the technology, a blueprint technology, like a the licensor does have a hostage because the know-how without a license to the patent licensed patent is of diminished value. In some cases, the ” bundling with other complementary inputs, such as specialized machinery can provide a similar role (e.g., Arora, 1996). trends in individual inventor activities and The empirical literature provides mixed in trade in patents. After the mid 1980s, evidence on the relationship between patenting per unit of R&D investment in the patent protection and technology licensing US changed course and began to rise, very contracts. Using a sample of 118 MIT close in time to the resurgence in technology inventions, Gans, Hsu and Stern (2002) find markets as well (see Arora and Gambardella, that the presence of patents increases the 2010a). likelihood that an inventor will license to an From a theoretical point of view, Arora incumbent rather than enter the product (1995) provides a model that clarifies market by commercializing the invention some important conditions under which (see also, Decheneaux et al., 2008). Anand technology trading can occur, and the role and Khanna (2000) find that in the chemicals of patents in this process. Many trades sector, where patents are believed to be more in technology actually come with the effective, there are more technology deals, provision of complementary services—like a larger fraction of these are arm’s length, the provision of know-how and technical involving exclusive licenses, and a larger services—along with a blueprint technology, fraction of licensing is for future technologies like a licensed patent (Taylor and Silberston, rather than existing ones. In contrast, 1973, Contractor, 1981). Arora models the Cassiman and Veugelers (2002) do not case where, along with the technology, the find that more effective patents encourage licensor also has to transfer know-how. Belgian firms to enter into collaborative R&D Given the difficulty in objectively verifying that arrangements. Evidence from cross-national the know-how is provided, the licensor has data is similarly mixed (see Arora and an incentive to skimp, since providing such Gambardella, 2010a) know-how services is costly. Conversely, Arora and Ceccagnoli (2006) provide a insofar as some payments are conditional on potential resolution of this mixed evidence. the provision of the know-how, the licensee They argue that when licensing is attractive,

Alfonso Gambardella 93 then patent protection facilitates licensing. However, for firms with the ability to A specialization advantage commercialize technology themselves, “ patent protection also increases the arises only if a supplier which payoffs to commercialization. Analyzing data from a comprehensive survey of R&D- incurs fixed costs can serve a performing firms in the U.S., they find that patent protection increases licensing, but number of different producers only for firms that lack complementary manufacturing capabilities. Hall and Ziedonis at only a small additional cost. (2001) provide similar evidence from the semiconductor industry: all else being equal, This requires the technology small design specialists are more likely to patent, and case- study evidence suggests or the knowledge base of that they do so to license their technologies. the supplier not to be totally 4.3. General-purpose technologies and the size of technology markets idiosyncratic to specific contexts Much of the discussion thus far has focused on the factors that affect the cost or environments and efficiency of technology transactions. ” Hence Adam Smith’s well known observation that “the division of labor is limited by the extent of the market”. Thus, even if one could relative to the firm that produces and sells successfully solve the contractual problems, the goods, because the market size of the a fully-fledged division of labor in the technology would not be much larger than production and utilization of knowledge and that of the goods to which it is applied. technologies would depend on the size of the Moreover, the comparative advantages of market for their applications. the supplier would not increase, if the size of To understand this issue one has to the market (for those goods, and hence for better define what is meant by size of the that application) were to increase. In other market in the case of technology. Suppose words, if a specialized supplier is restricted that a certain body of knowledge or a certain to a single buyer, there is no advantage to technology is specific to a given application specialization that can offset the inevitable by a particular firm. The context-specific costs of transaction and others involved. nature of the knowledge and technology A specialization advantage arises only if a would then imply that it is difficult to “re- supplier which incurs fixed costs can serve a use” it for other applications. In these cases, number of different producers at only a small the R&D cost can only be spread over the additional cost. This requires the technology volume of production of the goods associated or the knowledge base of the supplier not to with the given application. But this implies be totally idiosyncratic to specific contexts that the potential supplier would not have or environments. In other words, while any economic advantage in the R&D activity the technology may have to be adapted to

94 increase in the size of the individual user or Dedicated technologies are application. “ Bresnahan and Gambardella (1998) customized and co-specialized develop a model in which they argue that the size of the market has two components: N, for a given application, but which is the number of diverse applications of a given technology, and S, the average they cannot be used for other size of each application. They show that as N increases, a vertical division of applications labor becomes more likely: technology- ” specialist firms produce GPTs supplied to the downstream producers that operate in different segments of the final market. As various applications or users, at least parts S increases, downstream firms are more of the technology and knowledge bases can likely to integrate backward to produce be re-used at zero or very low incremental dedicated technologies for their business. costs. Under these conditions, specialized Dedicated technologies are customized and suppliers would have an advantage over any co-specialized for a given application, but individual user because although the user they cannot be used for other applications. could also re-use the knowledge, he or she GPTs can be employed for many applications, would do so much less frequently than would but they are less effective than a dedicated a specialized supplier serving a number of technology in any of them. users. The intuition is that with high N, a In short, what we suggest here is specialized technology supplier can gain that technology markets and specialized economies of scale at the level of the technology suppliers are more likely to industry. To do so, however, the supplier has arise in the case of general-purpose to produce a general technology to be offered technologies (Bresnahan and Trajtenberg, to the different downstream segments of the 1995; Rosenberg, 1976), or when the final market. By contrast, with high S the technology relies on “general and abstract final market of a specific application is large knowledge bases” (Arora and Gambardella, enough to justify a fixed cost investment in 1994). General-purpose technologies, or a technology dedicated to it. Thus, a large GPTs, are technologies that encompass N encourages the production of GPTs, and several applications. Since the fixed cost of through them the exploitation of economies developing a GPT can be spread over many of scale at the industry level associated potential applications, the efficiency of with the breadth of the final market. A large specialized GPT suppliers increases as the S encourages instead the production of number of applications to which the GPT dedicated technologies and the exploitation of is applied increases. Thus, specialization economies of scale at the level of the firm (or advantages arise with increases in the application) associated with the depth of the size of the market, insofar as the increase final market. is due to an increase in the number of Bresnahan and Gambardella discuss potential users of the GPT rather than an the example of the Japanese machine tool

Alfonso Gambardella 95 sector that developed compact general- Today, there are growing examples of GPTs purpose machines for the differentiated and a rise in related technology markets. needs of small final producers in many Gambardella and McGahan (2010) discuss manufacturing industries. By contrast, in several of them, and the business models the US, machine tools were technologies of the technology specialists. For example, largely dedicated to the need of the large Maine and Garsney (2006) discuss the automobile industry. The argument is not stories of two nanotechnology companies— country-specific, because as they also point Hyperion Catalysis and Cambridge Display out, the roles are reversed in the case of Technology (CDT). Hyperion Catalysis has software. In the 1980s, the large PC market developed special applications of fullerenes, in the US, which catered to many different carbon allotropes discovered in 1985 that types of users, led to the production of represent a general technology with many general-purpose packaged software created potential applications based on basic by specialist vendors. In Japan there were nanotechnology materials research. Initially fewer PCs, and computers were largely Hyperion struggled to find applications for mainframes owned by large users for its new materials, and ultimately explored specialized applications. As a result, Japan applications via alliances with manufacturers, had many large providers of custom software automotive, aerospace and power generation but few independent software package companies. This has proved a successful producers. Moreover, users often developed strategy, as Hyperion has commercialized their own software. more than 40 products in these four distinct Arora et al. (2009) test the predictions markets. CDT has developed polymers that in Bresnahan and Gambardella using data emit light, another general technology with from the chemical plant engineering sector. potential applications in semiconductors, In their model, large chemical firms (those consumer electronics and toys. Again, investing in more than one plant) choose licensing and alliances with several whether to design the plant internally or manufacturers have provided the company engage an external supplier of design with paths towards downstream markets. and engineering services—the specialized engineering firms, or SEF. Small firms either 5. IMPLICATIONS OF MARKET-MEDIATED OPEN use an SEF or do not enter the market. INNOVATION PROCESSES They generalize the model by allowing the 5.1. Efficiency gains from a division of labor in number of SEFs operating in a market to innovation, and a higher rate of innovation depend on the demand for their services, There are many implications of market- and therefore on the decisions of potential mediated open innovation processes. In buyers, i.e., the chemical firms. Consistent this concluding section, we discuss three of with the theoretical predictions in Bresnahan them: at the level of economies as a whole and Gambardella (1998), they find that the (this subsection); at the level of industries number of SEFs increases when the market (the next subsection); and at the level of the expands through an increase in the number individual firms and their strategies. of potential buyers but not when market A technology market creates advantages expansion is due to an increase in the related to the possibility of creating average size of buyers. specialization and division of labor based on

96 equipped to develop or market it. Engaging In high-tech industries like in marketing may even retard innovation, “ by diverting attention and changing the software, semiconductors, or nature of the organization. Licensing to another firm with a comparative advantage in biotechnology, it is common for manufacturing and marketing will yield gains to both parties. The third source of gains new or smaller firms to be set up is more obvious. For instance, a firm may develop a technology that it does not wish to to explore one innovation. If the use but which is applicable elsewhere, and it can gainfully license (or sell) it. innovation fails, the firms can Finally, a division of labor encourages more firms to invest in innovation. To the exit the market at small cost, or extent that revenue from innovation is earned only if firms also invest in costly sell their competencies downstream assets, smaller firms, without ” such capabilities, will on many occasions give up. This is also related to the risks of the innovation process. Low- cost exploration for comparative advantages. The argument is innovations may entail a small loss in case of the one suggested by Arrow (1983), which failure. The loss will be far more serious if the we discussed earlier. Different types of firms firm has to invest in marketing capabilities or agents can specialize in the activities as well. By contrast, firms can try out many where they are relatively more efficient—e.g., innovations if they know that they can sell smaller firms in upstream riskier, innovative, their intermediate technological outcomes projects, and larger firms in downstream or to established firms that already own these large-scale research projects. The exchange assets. In high-tech industries like software, between them creates gains from trade semiconductors, or biotechnology, it is that enhance the overall efficiency of the common for new or smaller firms to be set innovation process. up to explore one innovation. If the innovation The gains from trade in technology have fails, the firms can exit the market at small three sources. First and foremost, there cost, or sell their competencies. are advantages related to cost savings for not reinventing the wheel. This aspect 5.2. Implications for entry, competition and is particularly salient in international industry structure technology licensing (a country does not have By definition, open innovation makes to reinvent what has been invented in another technology available more broadly to a country), and in the discussion of GPTs (an larger set of firms. A technology market is industry may not have to reinvent what has an effective mechanism for this process. been invented in another industry and can be This reduces entry barriers, increasing reused in it). The second source of gains from competition in product markets. In a trade is comparative advantage. Sometimes world in which the firms have to produce the inventor of a technology is not the best the technology that they use, any ability

Alfonso Gambardella 97 associated with a faster decline of product Technology markets are then price, once again suggesting that patenting by “ outsiders encouraged entry into the product the mechanisms that link the market. Arora et al. (2001b) provide more direct growth of first-world markets evidence in their study of investments in chemical plants in the developing countries to the growth of developing- during the 1980s. They find that a higher number of SEFs that provide engineering country markets, where the services in product markets is associated with a larger volume of investments in latter is prompted by the higher chemical plants by developing-country firms. However, the number of SEFs does not investment in plants induced by affect investments in developing countries by large multinationals. These multinationals the larger number of SEFs are well-established firms with strong ” technological capabilities, and thus it is not surprising that they are not affected by the presence of SEFs. By contrast, the domestic or specialization downstream can be chemical firms in the developing countries undermined by a firm’s weakness in are technically less advanced but may have an developing the technology. By contrast, advantage in producing locally. This illustrates with technology markets, these firms can the point that technology suppliers—the SEFs use technologies that are developed more in this case—differentially benefit technically efficiently by others, and thus focus on their less-advanced firms. comparative advantages in the product This suggests that the division of labor markets. This raises competition because created by the technology markets can be these firms will be more efficient competitors seen as a pecuniary form of externality or if they don’t have to develop the technology spillovers. Spillovers are widely regarded in-house. In some cases, this encourages the as important in the process of industrial entry of firms that would not be able to enter development and economic growth. Yet, much the product markets if they had to develop the of the research on spillovers focuses on non- technology internally. pecuniary spillovers, or even more narrowly, The impact of licensing on entry is evident on the involuntary (and uncompensated) in the chemical industry, which has a long transfer of knowledge. The SEF story history of licensing of chemical processes suggests that a market-mediated division (Arora and Gambardella, 1998). Lieberman of innovative labor can be an important (1989) finds that licensing was less common mechanism of knowledge transfer as well. in concentrated chemical products, and that Thus, for example, the growth of the product when licensing was restricted, there was markets in the developed countries induces less entry. In a related study of twenty-four the rise of SEFs, which serve the chemical chemical-product markets, Lieberman (1987) firms in the developing countries. Technology reports that patenting by outsiders was markets are then the mechanisms that

98 link the growth of first-world markets to the growth of developing-country markets, The commonality in the where the latter is prompted by the higher “ investment in plants induced by the larger learning process across the number of SEFs. Importantly, these spillovers can also industries, or what Rosenberg occur across sectors, as our discussion of GPTs suggests. In his study of the US called “technological machine tool sector in the 19th century, Rosenberg (1976) noted that the various convergence”, was critical for downstream industries using machine tools started up at different times. For instance, the transmission of growth, but firearm manufacturing emerged earlier than sewing machines, typewriters or required the intermediation of an bicycles. The growth of the firearm industry spurred the development of metal-cutting upstream sector and shaping machines. Bicycle production ” required metal-cutting operations that were very similar to those of the firearm industry (e.g. boring, drilling, milling, planing, for some types of production and distribution grinding, polishing, etc.—see Rosenberg, assets, and firms can leverage them to obtain 1976), and thus the bicycle industry could rely a competitive advantage over their rivals. upon the suppliers of metal-cutting machines For example, Arora and Gambardella (2005) that were already serving the larger firearm argue that while innovation in software has industry. What the suppliers had learned in grown considerably in emerging economies producing metal-cutting machines for the like India, software innovation in advanced firearm producers did not have to be learned economies continues to derive an important again to supply bicycles producers. The advantage from proximity to lead users. commonality in the learning process across Software innovation depends crucially on the industries, or what Rosenberg called close interaction with lead users. These “technological convergence”, was critical for users—e.g., advanced telecom, computer, the transmission of growth, but required the manufacturing or service firms—are still intermediation of an upstream sector. more unequally distributed worldwide More generally, an important implication than the capability of producing software of MFT is that they shift the value of an innovations. industry chain downstream. As Dierickx and Cool (1989) suggest, the formation 5.3. Implications for company strategy of a market for an asset means that the Technology markets increase the strategic asset—technology in our case—is no longer options of firms. Without them, firms can strategic to the firm in the sense that it can only make their technologies and use be used to outcompete others. Markets them internally. Now they can buy or make do not currently exist for assets such as technology, and on the supply side they knowledge of markets and customers and can profit from their technologies either by

Alfonso Gambardella 99 using them or by selling them, or both. In Arora and Gambardella (2010a) we discuss Product market competition at some length how technology markets “ affect the strategic behavior of companies enhances licensing because as technology buyers. Here we focus on their strategic options as technology suppliers. rent dissipation falls faster than Arora and Fosfuri (2003) develop a framework to understand the decision of licensing rents as product market firms to sell technology, and how product- market and technology-market competition competition increases. Indeed, condition this decision. In their model, multiple technology holders compete, both as is well known, a monopolist in the technology market and in the product market. Technologies are not perfect will not license substitutes for each other, and neither are ” the goods produced from the technology. In deciding whether to license or not, the technology holder has to balance the revenue concentrated chemical products, and the from licensing and the rent-dissipation effect limited licensing that did take place was by produced because licensing will increase outsiders (non producers and foreign firms). product market competition. As a result, Arora and Fosfuri also point out that factors that enhance licensing revenue or licensing is more likely when products are that reduce rent-dissipation will encourage homogeneous rather than differentiated. licensing. If products are differentiated, a licensee is This tradeoff depends upon competition in closer in the product space to the licensor the product market. If the licensee operates than to other producers, so that the rent in a “distant” market, rent-dissipation is dissipation felt by the licensor is greater small compared to when the licensee is than if the product is homogenous. Put “nearby”. For example, the licensee may differently, by licensing, a technology holder operate in a geographical market in which imposes a greater negative (pecuniary) the licensor finds it costly to operate, externality on other producers when the e.g., because the licensor does not have product is homogenous. Consistent with this, the complementary downstream assets. Fosfuri (2006) finds that licensing is lower in Similarly, the technology could be used for markets where technology-specific product a different type of product that the licensor differentiation is high. may not produce. Arora and Fosfuri note The Arora-Fosfuri framework also implies that product market competition enhances that smaller firms are more likely to license, licensing because rent dissipation falls because they suffer less from the rent- faster than licensing rents as product dissipation from additional competitors. The market competition increases. Indeed, as is logic is apparent in the extreme case in which well known, a monopolist will not license. the licensor has no stakes in the downstream Consistent with this, Lieberman (1989) markets, and thus has no product market finds that licensing was less common in rents to worry about. This is also consistent

100 with the observation that in many high- The role of technology markets is best tech industries (e.g., biotechnology, appreciated by looking at what happens semiconductors, software) suppliers often do when they exhibit high transaction costs. not produce in the product markets for which The most significant implication is that they supply technology, and with the evidence any user of technology has to possess the provided by other studies in the literature, as resources and capabilities to produce it, and discussed in Arora and Gambardella (2010a). any producer of technology has to have the Gambardella and Giarratana (2010) resources and capabilities to embody it in generalize the Arora and Fosfuri framework final products to be commercialized. This by emphasizing the interplay between has natural constraints in that it foregoes the the generality of the technology and the advantages of specialization and division of fragmentation of the product markets. labor according to comparative advantages, The generality of the technology makes it with implied market-level inefficiencies. In attractive to “distant” user firms, which addition, the rate of innovation is reduced implies that rents from licensing can be because any inventor or technology-specialist earned from firms in product markets firm can invest in innovation only if they also different from that of the technology holder. make the far more costly investments in the Because the markets are distant in product assets or the capabilities that enable them to space, the rent-dissipation is small, which enjoy revenue from the commercialization of raises the incentives to license. the final products. Gambardella and Giarratana (2010) jointly When technology markets function consider both the licensing decision and the well, and make innovation open, entry and decision on the range of product markets competition increase because technology that the technology holder will enter. The is no longer the highly-guarded secret of key assumption is that technology can be some master firm or R&D lab. An important deployed in more product markets than is implication is that technology becomes profitable for the technology holder to serve less strategic as a source of competitive directly, suggesting that technology can have advantage of firms. Firms have to focus on broader economies of scope than marketing other strategic assets, which are less open and manufacturing assets, which creates and more unique to each of them. Among opportunities for licensing. In particular, others, one of such assets is the ability of the GPTs can be so broadly applicable that few firm to secure customers and final markets firms are likely to exploit all the applications. through investments in downstream assets. This also suggests why many technology 6. CONCLUSIONS specialist firms make little or no revenue There are several conduits to open (e.g., the biotech firms—see Pisano, 2006) innovation: knowledge spillovers, open and a good deal of the revenue in the vertical science, and more recently open source structure of an industry accrues downstream. technologies. This chapter focused on a From a strategic point of view, technology market-mediated mechanism. It shows that a markets give firms more options. Apart good deal of the open innovation process can from buying rather than making technology, take place through this standard economic they can sell their own technologies. This channel. is a strategic choice that hinges on the

Alfonso Gambardella 101 comparison of the rents from licensing REFERENCES and the dissipation of rents caused by the Al c a c e r , J., and W. Ch u n g (2007), “Location Strategies and nurturing of a potential competitor. As Knowledge Spillovers”, Management Science 53, pp. 760-776. An a n d , B., and T. Kh a n n a (2000), “The Structure of Licensing technologies become broader, and they Contracts”, Journal of Industrial Economics 48(1), pp.103-135. Ar o r a , A. (1995), “Licensing Tacit Knowledge: Intellectual Property have a larger span of applications than the Rights and the Market for Know-how”, Economics of Innovation and New Technology 4, pp. 41-59. ability of a firm to exploit all of them, this can Ar o r a , A. (1996), “Contracting for Tacit Knowledge: The Provision of become an increasingly feasible strategy. Technical Services in Technology Licensing Contracts”, Journal of Development Economics 50(2), pp. 233-256. This chapter neglects several important Ar o r a , A., and M. Ce c c a g n o l i (2006), “Patent Protection, Complementary Assets, and Firms: Incentives for Technology issues. For example, the demand for Licensing”, Management Science 52, pp. 293-308. Ar o r a , A., and A. Fo s f u r i (2003), “Licensing the Market for technology or uncertainty plays an important Technology”, Journal of Economic Behavior & Organization 52(2), pp. role in these markets and in the ensuing 277-295. Ar o r a , A., A. Fo s f u r i and A. Ga m b a r d e l l a (2001a), Markets for openness of the innovation process. Some Technology: The Economics of Innovation and Corporate Strategy, Cambridge MA: The MIT Press. of them are discussed in Arora et al. (2001a) Ar o r a , A., A. Fo s f u r i and A. Ga m b a r d e l l a (2001b), “Specialized Technology Suppliers, International Spillovers and Investments: and more recently in Arora and Gambardella Evidence from the Chemical Industry”, Journal of Development (2010a and 2010b). The interested reader is Economics 65(1), pp. 31-54. Ar o r a , A., and A. Ga m b a r d e l l a (1994), “The Changing Technology welcome to consult these sources, and the of Technical Change: General and Abstract Knowledge and the Division of Innovative Labour”, Research Policy 23, pp. 523-532. many references therein, for further insights. Ar o r a , A., and A. Ga m b a r d e l l a (1998), “Evolution of Industry Structure in the Chemical Industry”, in A. Arora, R. Landau and N. Rosenberg (eds.), Chemicals and Long-Term Economic Growth, New York: John Wiley & Sons. Ar o r a , A., and A. Ga m b a r d e l l a (2005) ,“The Globalization of the Software Industry: Perspectives and Opportunities for Developed and Developing Countries”, in A. Jaffe, J. Lerner and S. Stern (eds.), Innovation Policy and the Economy 5, Cambridge MA: The MIT Press. Ar o r a , A., and A. Ga m b a r d e l l a (2010a), “Markets for Technology”, in B. Hall and N. Rosenberg (eds), Handbook of Economics of Innovation, Amsterdam: Elsevier. Ar o r a , A., and A. Ga m b a r d e l l a (2010b), “Ideas for Rent: An Overview of Markets for Technology”, Industrial and Corporate Change 19, pp. 775-803. Ar o r a , A., W. Vo g t and J. Yo o n (2009), “Is the Division of Labor Limited by the Extent of the Market? Evidence from the Chemical Industry”, Industrial and Corporate Change 18(5), pp. 785-806. Ar r o w , K. (1962), “Economic Welfare and the Allocation of Resources for Invention”, in The Rate and Direction of Inventive Activity, Princeton NJ: Princeton University Press, pp. 609-625. Ar r o w , K. (1974), The Limits of Organization, New York, NY: W.W. Nortong. Ar r o w , K. (1975), “Vertical Integration and Communication”, Bell Journal of Economics 6, pp. 173-183. Ar r o w , K. (1983), “Innovation in Large and Small Firms”, in J. Ronen (ed.), Entrepreneurship, Lexington MA: Lexington Books, pp.15-28. Ba r n e y , J. (1986), “Strategic Factor Markets: Expectations, Luck and Business Strategy”, Management Science 32(10), pp. 1231-1241. Ba r n e y , J. (1991), “Firms’ Resources and Sustained Competitive Advantage”, Journal of Management 17, pp. 99-120. Br e s n a h a n , T., and A. Ga m b a r d e l l a (1998), “The Division of Inventive Labor and the Extent of the Market”, in E. Helpman (ed.) General Purpose Technologies and Economic Growth, Cambridge, MA: The MIT Press, Br e s n a h a n , T., and M. Tr a j t e n b e r g (1995), “General Purpose Technologies: ‘Engines of Growth’?”, Journal of Econometrics 65(1), pp. 83-108. Ca s s i m a n , B., and R. Ve u g e l e r s (2002), “R&D Cooperation and Spillovers: Some Empirical Evidence from Belgium”, American Economic Review 92(4), pp. 1169-1184. Ch a n d l e r , A. (1990), Scale and Scope: The Dynamics of Industrial Capitalism, Part I: “Introduction: Scale and Scope”, Cambridge MA: The Belknap Press of Harvard University Press, pp. 1-46.

102 Ch e s b r o u g h , H. (2003), Open innovation: The New Imperative for Pi s a n o , G. (2006), “Can Science Be a Business: Lessons from Creating and Profiting from Technology, Boston, MA: Harvard Biotech”, Harvard Business Review, October, pp. 114-125. Business School Press. Ro s e n b e r g , N. (1976), “Technological Change in the Machine Tool Co h e n , W., and S. Kl e p p e r (1996), “Firm Size and the Nature of Industry” in N. Rosenberg, (ed.) Perspectives on Technology, Innovation within Industries: The Case of Process and Product Cambridge MA: Cambridge University Press, pp. 11-31. R&D”, Review of Economics and Statistics 78(2), pp. 232-243. Ro s e n b e r g , N. (1996), “Uncertainty and Technological Change” in Co n t r a c t o r , F. (1981), “International Technology Licensing”, R. Landau T. Taylor and G. Wright (eds.), The Mosaic of Economic Lexington, MA: DC Heath and Company. Growth, Stanford, CA: Stanford University Press. Da s g u p t a , P., and P. Da v i d (1994), “Towards a New Economics of Ta y l o r , C., and A. Si l b e r s t o n (1973),“The Economic Impact of the Science”, Research Policy 23, pp. 487-521. Patent System: A Study of the British Experience”, Cambridge, De c h e n a u x , E., M. Th u r s b y and J. Th u r s b y (2009), “Shirking, Sharing MA: University of Cambridge, D.A.E. monograph 23, Cambridge Risk and Shelving: The Role of University License Contracts”, University Press. International Journal of Industrial Organization 27(1), pp. 80-91. Te e c e , D. (1986), “Profiting from Technological Innovation”, Research Dierickx, I., and K. Co o l (1989) “Asset Stock Accumulation and Policy 15, pp. 285-305. Sustainability of Competitive Advantage”, Management Science Te e c e , D. (1988), “Technological Change and the Nature of the Firm”, 35(12), pp, 1504-1513. in G. Dosi et al. (eds.) Technological Change and Economic Theory, Fo s f u r i , A. (2006), “The Licensing Dilemma: Understanding the London: Printer Publishers, pp. 257-281. Determinants of the Rate of Technology Licensing”, Strategic Management Journal 27, pp. 1141-1158. Ga m b a r d e l l a , A., and M. Gi a r r ata n a (2010), “General Technological Capabilities, Product Market Fragmentation, and the Market for Technology: Evidence from the Software Security Industry”, draft, Milan: Bocconi University. Ga m b a r d e l l a , A., and A. McGa h a n (2010), “Business-Model Innovation, General Purpose Technologies, Specialization and Industry Change”, Long Range Planning 43, pp. 262-271. Ga n s , J., D. Hs u and S. St e r n (2002), “When Does Start- Up Innovation Raise the Gale of Creative Destruction”, Rand Journal of Economics 33 (4), pp. 571-586. Gr o s s m a n , S., and O. Ha r t (1986), “The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration”, Journal of Political Economy 94, pp. 691-719. Ha l l , B., and R. Ziedonis (2001), “The Patent Paradox Revisited: Determinants of Patenting in the US Semiconductor Industry, 1980-1994”, Rand Journal of Economics 32(1), pp. 101-128. Ha r t , O., and J. Mo o r e (1990) “Property Rights and the Nature of the Firm”, Journal of Political Economy 98, pp. 1119-1158. Kl e p p e r , S. (1996), “Entry, Exit, Growth, and Innovation over the Product Life Cycle”, American Economic Review 86(3), pp. 562-583. La m o r e a u x , N., and K. So k o lo ff (1996), “Long-Term Change in the Organization of Inventive Activity”, Proceedings of the National Academy of Sciences of the United States of America 93(23), pp. 12686-12692. La m o r e a u x , N., and K. So k o lo ff (1999), “Inventors, Firms, and the Market for Technology in the late Nineteenth and Early Twentieth Centuries”, in N. Lamoreaux, D. Raff and P. Temin (eds.), Learning by Doing in Markets, Firms, and Countries, Chicago, IL: University of Chicago Press. Le r n e r , J., and J. Ti r o l e (2002), “Some Simple Economics of Open Source”, Journal of Industrial Economics L(2), pp. 197-234. Li e b e r m a n , M. (1987), “Patents, Learning by Doing, and Market Structure in the Chemical Processing Industries”, International Journal of Industrial Organization 5(3), pp. 257-276. Li e b e r m a n , M. (1989),“The Learning Curve, Technological Barriers to Entry, and Competitive Survival in the Chemical-Processing Industries”, Strategic Management Journal 10(5), pp. 431-447. Ma i n e , E., and E. Ga r s n e y (2006), “Commercializing Generic Technology: The Case of Advanced Materials Ventures”, Research Policy 35(3), pp. 375-393. Ma r k i d e s , C., and P. Wi l l i a m s o n (1996) “Corporate Diversification and Organization Structure: A Resource-Based View”, Academy of Management Journal 39, pp. 340-367. Mu e l l e r , W. (1962), “The Origins of the Basic Inventions Underlying Du Pont’s Major Product and Process Innovations, 1920 to 1950”, in The Rate and Direction of Inventive Activity, Princeton NJ: Princeton University Press, pp. 323-346. Ne l s o n , R. (1959), “The Simple Economics of Basic Scientific Research”, Journal of Political Economy 67(2), pp. 297-306. OECD (2006), OECD Technology Indicators,Technology Balance of Payment—Payments/Receipts, Paris: OECD. Pe t e r a f , M. (1993) “The Cornerstones of Competitive Advantage: A Resource-Based View”, Strategic Management Journal 14(3), pp. 179-191.

Alfonso Gambardella 103

Technology shapes culture, values resist Culture, values and the long waves of capitalist development

Francisco Louçã ‘Time present and time past have been called the long or Kondratiev ISEG (Technical University of Lisbon), UECE Are both perhaps present in time future waves. And time future contained in time past’ There are two sound reasons for choosing T. S. Eliot, Four Quartets this approach and framework. The first is the crashing evidence of facts: between 1. Introduction: how the histories of 2007 and 2009 the developed economies economies, technologies and cultures suffered the deepest general recession intermingle since 1929, proving the impact of the Juglar, The standard literature has recognized, but this happened after decades of mild not without theoretical misapprehension, the expansion with many recessions, with low imposing recurrence of the short ‘Juglar’ or rates of accumulation and deep financial and business cycles, but instead has generally structural mismatches, evoking the impact avoided the longer grasp of history in of the longer processes of economic and economic analysis. This chapter argues that social rearrangements, described by the long understanding the larger processes of social, waves. The second reason is also relevant economic, technological and even cultural for the purpose of this collective book, and innovation in modern economies requires it is the evidence of the impact of historical establishing the framework of cultural processes such as the technological values, of social relations in production revolution in course. As Chris Freeman has and trade, and of the establishment of consistently argued, the crux of the matter in 1 This section and the last one are largely based upon the institutions and learning processes, and that economic development is either the match or book As Time Goes By—From the Industrial Revolutions to these require the interpretation of recurrent the mismatch between the techno-economic the Information Revolution, long waves of capitalist development. and the socio-institutional systems, and co-authored with the late Chris Freeman some years Furthermore, it argues that an understanding these long phases of adjustment or crisis ago (Oxford University Press, of the formation of cultures and values mark each age of modern economic growth, 2002). Freeman, who died in the 1 summer 2010, was certainly can benefit from analysis of the historic or capitalist development. The question for one of the leading researchers framework of the successive modes of many is therefore, why is it that the ongoing on innovation and evolutionary economics. development of modern economies -- what deep technological revolution is so slow to

Francisco Louçã 107 change the general economic conditions? phenomena were the successive structural Or, for the purpose of this chapter, how is transformations of the economic system it that the changes in the general economic brought about by successive waves of conditions contain or shape the evolution of technical change and the accompanying values and cultures? organizational and managerial changes. In the following paper I will argue that this Gerhard Mensch used the expression change is on its way, and that it is deeper ‘metamorphoses’ to characterize these than commonly suspected. In particular, transformations and this is a good way to the interest is concentrated here on the describe what has taken place -- a process mutations in the landscape of culture, both Schumpeter had emphasised. in the strictest sense of the production From this standpoint it was unfortunate of cultural artefacts generating sense that many of those investigating and and reference, and in the widest sense developing the long-wave concept followed on the changes in values spreading over Kondratiev in attempting to substantiate communities and societies under the impact their ideas with purely statistical evidence of challenging radical innovation. of aggregate movements in production and In order to present this short contribution, prices, rather than evidence of structural I will summarise the common characteristics transformation and waves of technical and of each of the four long waves, also present economic change.2 This made it possible for in the emergence of the probable fifth wave. those who believed that the test of a theory According to this view, the reason for the long was exclusively in terms of econometric contradictory process of structural adjustment procedures on data and on aggregate trends and successive crises with low profitability to mount a plausible attack on the very idea and accumulation—and strong tendencies of long waves. to concentrate capital on short‑term Instead, in our book we challenged our adventurous financial applications—is that colleagues to consider that, during a period there is a mismatch between the already of turbulent structural change, some new available technological capabilities and industries and activities grow very rapidly but the economic restructuring of the major others decline, stagnate or grow more slowly. economies. This was the reason for previous The combined outcome of these contradictory long periods of slow expansion and general tendencies will vary in different countries at crises, and it may be the case nowadays, as different times, depending on wider political described by previous long waves of economic and institutional factors, as well as on more development. Furthermore, this mismatch narrowly defined economic and technological generates social and cultural tensions. trends. Typically, a structural crisis of Whereas, however, many of the adjustment will tend to be a period when earlier long-wave theories relied mainly the expansionary impetus from emerging or exclusively on statistical evidence of constellations of new products, processes 2 In spite of this, I follow the standard procedure introduced fluctuations in rates of growth of GDP, and organizational innovations will not yet by Schumpeter to call these industrial production or prices, Freeman be widespread enough to overcome the long phases and movements ‘Kondratiev waves’, since this and I argued in As Time Goes By that such depressive constraining effects of the slow- author was the introducer aggregates conceal as much as they reveal down or contraction in the older established of the modern debate on the historical trends in capitalist and that the really important long-wave industries. development.

108 crises. This is apparently the case today, Typically, a structural crisis with the lasting Solow paradox of general “ computerization but scarce effects on of adjustment will tend to be a productivity. Qualitative historical narrative, as well period when the expansionary as disaggregated sectoral data, are more important than aggregate quantitative data in impetus from emerging analysing successive industrial revolutions. As Keynes pointed out in his debate with constellations of new products, Tinbergen, one of the main dangers in the standard statistical procedures is that they processes and organizational may obscure or altogether ignore processes of qualitative change. innovations will not yet be However, to justify the use of the concept of ‘waves’ or ‘cycles’, rather than simply widespread enough to overcome ‘stages’ or ‘periods’ of historical evolution, it is necessary to distinguish recurrent the depressive constraining phenomena in each period as well as the unique features of each technological effects of the slow-down revolution. Moreover, it is essential to place these recurrent features of the changes or contraction in the older in technology and the economy in a wider institutional and social context, a context in established industries which political and cultural changes may ” sometimes predominate in determining the course of events. In any case, a theoretical framework However, this may not always be the for the history of economic growth should case. The expansionary impetus from the satisfy three main requirements. First, new developments may be so great that it should provide a plausible explanation it imparts an upward thrust to aggregate and illumination of the stylized facts that industrial production and/or GDP despite summarize the main features of the growth a structural crisis of adaptation and high of the world economy. This is essential to levels of structural unemployment. This was pave the way for generalizations, which apparently the case in Britain in the 1830s should of course be constantly tested against and 1840s and in the United States in the new historical evidence, as well as newly 1880s and 1920s. On the other hand, the unfolding events. Secondly, it should do tempestuous growth of the automobile and this for the three main categories identified oil industries in the 1920s was not sufficient by Abramovitz: forging ahead, catching up to overcome the depressive trends in the and falling behind, in order to discuss the US and the world economy in the 1930s, uneven development of different economies. exacerbated as they were by severe political Finally, it should provide a framework for crises, international conflicts and monetary analyzing and reconciling the research data,

Francisco Louçã 109 case studies and generalizations emerging overview of the major changes in cultural from the various sub-disciplines of history: history for the last decades, relating such the history of science and of technology, processes to the major social, economic and economic history, political history and technological innovations. cultural history. This chapter will refer to these five As a step in an inevitably ambitious sub-divisions for conceptual and analytical and hazardous undertaking, the following purposes, whilst accepting of course that definitions were used in previous work: people make only one history and recognizing 1. The history of science is the history of that in real life the five streams intermingle. those institutions and sub-systems of society However, the use of sub-divisions is not which are primarily concerned with the simply a matter of convenience in handling advancement of knowledge about the natural an extremely complicated topic, nor is it world and the ideas of those individuals just a question of following the academic (whether working in specialized institutions departmentalization and specializations or not) whose activity is directed towards this which have emerged in the twentieth objective. century and that were even accentuated in 2. The history of technology is the history of this century. Moreover, the establishment artefacts and techniques and of the activities of separate sub-disciplines reflects the of those individuals, groups, institutions and sense of dissatisfaction felt especially by sub-systems of society which are primarily scientists, technologists and economists concerned with their design, development that their special interests were being and improvement, and with the recording neglected within the wider rubric in which and dissemination of the knowledge used for they were contained. Some protested against these activities. the neglect of technology in this approach, 3. Economic history is the history of those and I will add that other factors are also institutions and sub-systems of society which relevant, such as a wider range of cultural are primarily concerned with the production, phenomena, in order to understand the distribution and consumption of goods reluctance to accept new technologies, the and services and of those individuals and social imbalances these create, and the deep institutions concerned with the organization changes created by such innovation, including of these activities. in the formation of novel values. 4. Political history is the history of those These five sub-divisions are proposed for individuals, institutions and sub-systems of fundamental reasons. In the first place, they society which are primarily concerned with are proposed because each one has been the governance (legal and political regulation shown to have some independent influence by central, local or international authorities) on the process of economic growth, varying of society, including its military affairs. in different periods and different parts of the 5. Cultural history is the history of those world, but at least sometimes extending over ideas, values, artistic creations, traditions, long periods. Finally, and most important of religions and customs which influence the all, it is precisely the relative autonomy of behavioural norms of society and of those each of these five processes which can give individuals and institutions which promote rise to problems of lack of synchronicity and them. The next section will present an harmony or, alternatively, of harmonious

110 integration and virtuous circle effects on of the regulatory regimes. Together, they economic growth. It is thus essential to study account for the existence of long waves as both the relatively independent development recurrent phenomena in modern economic of each stream of history and their development. interdependencies, their loss of integration and their reintegration, for the understanding 2.1. The recurrence of exceptional super-profits of the long waves in the history of of innovative entrepreneurship in successive capitalism depends on these movements of long waves synchronicity and mismatch.3 Both some of the sternest critics of The next section summarises how these capitalism (for example, Karl Marx) and some movements proceed, presenting some of its most ardent admirers (for example, conclusions on the recurrence of economic Friedrich von Hayek) have argued that one of and technological processes that account the foremost characteristics of capitalism has for the long waves, while the following one been its capacity to generate and to diffuse a 3 This deals with developments addresses the impact of systemic changes torrent of technical innovations. Everything within industrial capitalist economies, and does not on culture. Finally, some conclusions on that is solid melts into air, claimed Marx in address other issues. Indeed, the contemporary problems of economic order to descry the hurricane of innovation in there are other types of theories of long cycles which development are presented. modern times. have a far wider scope, even The exceptionally favourable confluence going back to the Ancient World. Instead, the currently 2. The long waves as the result of five of cultural, political, economic, geographical, summarized theoretical recurring processes in economic history sketch has a relatively limited scientific and social circumstances in domain of application: it An historical approach to economic growth eighteenth century Britain gave rise to that relates to the evolution of capitalist economies from is unlikely to be acceptable, unless it not only upsurge of technical and organizational the late eighteenth to the tells a story using this type of theoretical innovations known ever since as the early twenty-first centuries and it postulates for this framework, but is capable of identifying and ‘Industrial Revolution’. It is also understood period the predominance explaining recurrent phenomena, as well as that other capitalist economies, and within the leading economies of recognizably capitalist special cases. As Werner Sombart (1929) especially that of the United States, were institutions and in particular of put it, ‘all history and particularly economic not only able to achieve similar results but, private ownership and private wealth accumulation through history has to deal not only or mainly with the as time went by, were also able to outstrip profits. To criticize this theory as special case, but with events and situations Britain with new constellations of innovations, ‘technological determinism’ which recur, and, recurring, exhibit some namely within the framework of the second is therefore wide of the mark. It is the very existence of similarity of feature—instances which can be technological revolution and of the age of certain social institutions grouped together, given a collective label and electricity and the automobile. which made possible the technological revolutions which treated as a whole’ (Sombart, 1929: 18). Capitalist economies have been able to have been shortly described. For this purpose, five recurrent achieve these remarkable results, ‘surpassing Moreover, these successive new technologies discussed processes involving the shaping of economic the wonders of the Ancient World’, as Marx here were not ‘manna from heaven’; they were the outcome development were identified in our previous and Engels again put it, by a combination of human social activities and work: the creation of super profits of of incentives and pressures ultimately institutions. Within this general framework, giving emphasis innovative entrepreneurship, the pervasive affecting numerous firms and individuals: to the changes in technology constellations of technological innovations, in short, they were able to do so through as a dynamic element in the whole system is simply a way to the organizational and management changes a culture of innovation and organization of stress crucial changes moving as the result of such impulses, the general structural change. First of all, of course, a the whole economic and social process. crises of structural adjustment and those well-functioning capitalist economy offers

Francisco Louçã 111 the possibility, but by no means the certainty, The statistics are very difficult to assemble, of profit from successful innovation, and especially for the nineteenth century but, such sometimes very large profit. This profit may as they are, they do provide some support for be accompanied by other rewards: status, this interpretation (e.g. Entor and Poletayev, privilege, political advancement and fame. 1985). The plausibility of these models cannot Some of the most successful entrepreneurs be denied, but since the concern of this in each technological revolution did indeed chapter is mainly on structural change, it is achieve extraordinarily large profits, although more accurate to stress here the exceptionally they did not necessarily seek the other large ‘super-profits’ which may be realized advantages often sought by very wealthy through the exploitation of major radical individuals. Fame itself they could hardly innovations. These profits appear all the more avoid and indeed this was a very important remarkable if they are made during a period social mechanism for the dissemination of of general decline in the rate of profit in the their innovations and for efforts to surpass ‘downswing’ phase of the long wave. Although them. Arkwright, Wedgwood, Hudson, Brunel, he disagrees with Mandel and other long- the Vanderbilts, Carnegie, Krupp, Rockefeller, wave theorists on the aggregate rate of profit, Rathenau, Siemens, Diesel, Ford, Gates and Tylecote (1992) also points to the extraordinary Murdoch are all examples which we have importance of the demonstration effect for key cited of entrepreneurs and inventors, who innovations in each long wave. achieved both fame and fortune through their This demonstration effect is not only one innovations, whether technical, organizational of clear-cut technical efficiency but also one or both. Schumpeter emphasised this trend of of great profitability and great potential for entrepreneurship, moved by ‘social deviants’ widespread application. This effect was so breaking the routine. In short, capitalism is powerful in the case of Arkwright’s water- adaptive since it rejects equilibrium. frame that it led some of his rivals and A number of long-wave theorists (Mandel, competitors to try to destroy his equipment. 1980; Goodwin, 1985; Poletayev, 1987) have Despite this hostility, the successful and constructed models of the behaviour of the highly profitable operations of Cromford mill economic system based mainly on long-term and his other factories stimulated numerous fluctuations in the aggregate rate of profit. imitators to invest in cotton mills, especially They have argued quite plausibly that a fall in after the expiry of his disputed patents. Some the rate of profit tends to occur after a long of the early canal investments, such as the period of prosperity and expansion, partly Worsley-Manchester Canal, made very good because of the Schumpeterian processes profits. On a far greater scale, the Rainhill of erosion of innovators’ profits during Trials of various steam locomotives, followed dissemination and partly on account of wider by the successful and profitable operation of pressures from rising costs of inputs. These the Liverpool-Manchester Railway, led to an tendencies for the rate of profit to fall at the enormous boom in railway investment and peak of a long boom are among the main indeed to a huge financial bubble based on reasons explaining the upper turning point in the excitement caused by often exaggerated the long wave and the onset of a prolonged estimates of the potential profits to be made. downswing in which generally lower rates of Railway promoters, such as George profit prevail. Hudson in Britain and the Vanderbilts in

112 the United States, made huge profits from but in all cases there were interdependent speculation and financial manipulation, developments, both technically and rather than technical innovation, even economically. The dramatic demonstration though Hudson lost his fortune in the end. effects did not just make a fortune for Otherwise, the profits of Carnegie, Krupp individual entrepreneurs, but served to and Ford provided examples of the vast propel an entire technological system and to amounts that could be accumulated by accelerate its dissemination world-wide. The successful innovative entrepreneurship. The first recurrent characteristic of long-wave profits of IBM were not so much the result behaviour is therefore directly connected to of individual entrepreneurship as of company the second: the potential for very widespread performance; they were nevertheless hugely application. impressive and IBM was in some measure the most profitable firm in the world before 2.2. The recurrence of pervasive constellations it suffered setbacks in the 1980s, and its of technical and organizational innovations place as the most profitable player in ICT Each wave is characterized not just by one was usurped by Microsoft and, currently, by a or two big innovations, nor even by a cluster number of challenging firms investing in the of quite discrete individual innovations, interface between mobile communications but by a constellation of interdependent and internet. and mutually supportive technical and The first distinguishing recurrent organizational innovations. As argued characteristic of the long waves, therefore, by Carlota Perez (1983), each of these is that in each case, although the individual constellations or paradigms has certain innovations were unique and very different, characteristics, which are common to them a cluster of innovations emerged which all. They all have identifiable and obvious offered a clear-cut potential for immense core inputs, which have falling prices relative profits, based on proven technical superiority to other commodities during the critical over previous modes of production. Minor transition period between one paradigm and incremental improvements were, of course, the next. The principal producers and users occurring all the time, but the innovations of these inputs became the leading sectors which were at the heart of each wave offered (motive and carrier branches) in the upsurge quite dramatic changes in productivity and of the economy. The demonstration effects profitability. However, these highly profitable occur relatively early in the diffusion of each innovations were not isolated events but part new technological revolution and, whether of a constellation of inter-related product, they occur most conspicuously in firms process and organizational innovations. making core inputs, in other leading sectors, Numerous other firms jumped on the band- or in associated infrastructures, they help to wagon, as Schumpeter had suggested, propel the diffusion of the whole constellation including many small new firms. Sometimes and not only a part of it. it was a new process, which generated the It is not just the excitement generated by main super-profits, sometimes it was an the first demonstration effects, important array of new products, sometimes it was though these undoubtedly are, but the long- mainly organizational changes, as in the term potential which has become visible case of Ford’s assembly line or the internet, and which reverberates throughout the

Francisco Louçã 113 system as more and more applications of the new paradigm appear on the horizon. A The very success of the second recurrent feature of the long waves “ is therefore that each one is characterized by leading firms is sufficient in the emergence and experimental testing of a new combination of inter-related innovations, itself to stimulate imitative which demonstrate remarkable gains in productivity and profitability at first in a few efforts in relation to their new applications, but with the clear potential for very pervasive diffusion. management style but, of Ultimately, this full potential is realized in a period of prolonged prosperity but only course, the technical innovations after a structural crisis of adjustment, which can last. Examples of the pervasiveness of which they introduce are often new technology systems in each new wave are the applications of steel and of electricity, also directly conducive to of iron and steam power, of oil and internal combustion and, currently, of computers organizational changes in those and new technologies of information and communication. The chip and the devices firms which adopt them for communication are the key factors of ” the emerging long wave. As the following pages will indicate, these new devices are fundamental for creating new forms of conducive to organizational changes in those economic production but also for generating firms which adopt them. new modes of cultural production. The use of computers and mobile communications are two obvious 2.3. The recurrence of waves of organizational contemporary examples, but some and management changes in firms organizational styles are not so directly A third recurrent feature of each revolution dependent on technical innovations and is that organizational and managerial have a momentum of their own. The sheer changes introduced in the new leading growth in the size of leading firms was itself sectors are widely imitated elsewhere. A new an important factor in organizational and management style becomes fashionable and managerial changes in the nineteenth in the later waves in the twentieth century is and twentieth centuries. The trends in disseminated by management consultants organizational change are more complex as well as through the media and social than the narrowly technical changes but communication, propelled by example. The there is an identifiable recurrence of a new very success of the leading firms is sufficient management style in each Kondratiev wave in itself to stimulate imitative efforts in which influences many firms, although in relation to their new management style diverse ways, throughout the economy. but, of course, the technical innovations This does not mean of course that every which they introduce are often also directly firm in every industry adopts a similar

114 management style or organizational but also affects other parts of the economy structure. The idea of a representative firm very unevenly, requiring different types of characterising all firms is one which has machinery, of materials and components, been widely influential in economic theory, of distribution and of supporting services. but it is not embraced here: on the contrary, Some entirely new branches of the economy evidence shows that with each technological make their appearance while other branches revolution, the effects are very varied. With experience only marginal changes. Moreover, the mass production style, for example, sometimes they affect particular occupations firms in some industries were capable of within industries and services which are introducing standardized products and otherwise little affected. The process of using an assembly line resembling the dissemination is therefore unpredictable Fordist line in the automobile industry. and extremely uneven as new applications Many others continued to produce unique are explored, tested, expanded, modified or customized or small-batch products. Still rejected. Nevertheless, a clearly observable others modified some features of the Fordist and recurrent characteristic of each new management style so that there were technological revolution is its pervasive actually many varieties of Fordism, even effect on the structure of the economic within the automobile industry itself (Boyer, system. Although the induced branches of 1988). Only a minority of firms became the economy are different, they are very recognizably ‘Fordist’. Nevertheless, in significant in every case, and so too are the industries as diverse as tourism, fast food, induced changes in skill requirements and retail distribution and clothing, the influence hence in the education and training systems. of Fordist management philosophy and The fourth recurrent characteristic of each organizational change is clearly evident. long wave is therefore a crisis of structural Similarly with electrification, this led on adjustment as the skills and distribution of the one hand to the growth of some giant the labour force and of firms adapt to the electrical firms with specialized departmental new paradigm, while the social conventions, management structures. On the other hand, it contracts, laws and generally accepted facilitated the de-centralized success of many procedures tend to change slowly and small firms taking advantage of the new sometimes after periods of conflict. flexibility permitted by electric machinery, Recurrent high levels of structural and the management of information- unemployment are an important intensive processes allows for new forms of manifestation of these adjustment crises decentralization and delocalization. in each long wave. The statistics for the nineteenth century are very poor, but 2.4. Recurrent crises of structural adjustment there is strong evidence of very serious These examples show that there is some unemployment in the 1830s and 1840s in danger of making too schematic a model Britain, while David Wells (1890) commented of the successive technological revolutions, on the widespread unemployment in which would do violence to their individual most industrial countries in the 1880s variety. This is especially the case because and especially in those which were most each one of them not only embodies a unique advanced in the use of machinery. There is, combination of products and processes of course, abundant statistical evidence of

Francisco Louçã 115 the heavy structural unemployment in the which have led with each successive crisis 1920s and 1930s and again in the 1980s and of structural adjustment to a variety of 1990s. Even in the 1920s boom in the United movements for education reform. It is also States, as Fearon (1987) and the NBER obvious that each major new technology pointed out, there were sectors experiencing entails new requirements for safety and severe adjustment problems, such as coal, protection, whether of operatives in industry, railways and ship-building. In Germany consumers or people in certain exposed and Britain, heavy industry generally, but areas. However, the recurrent changes in especially the steel industry and the ship- the regulatory regime go well beyond these building industry experienced prolonged immediate and obvious induced effects. problems of structural adjustment. In the Even at this elementary level regulatory 1980s, the automobile industry, the oil requirements can raise some fundamental industry, the synthetic materials industry political issues such as ‘self-regulation’ of and again the steel industry were among the industries versus state regulation, national many industries which experienced severe versus international regulation or local adjustment problems. versus national. They also raise questions Nowadays, the crisis of structural of standards which tend also to become an adjustment expresses itself in a large army of area of conflict and dispute, both between permanently unemployed as a consequence competing groups seeking to promote their of the mismatch of qualifications and own version of the new technology, and employment between those sectors between nations seeking to protect their and branches with high profitability and own interests. Especially in the case of new competitiveness but few jobs, and those infrastructural investment, questions of which have a large number of jobs but ownership and control also arise. If private diminishing competitiveness. Without the ownership is the solution which is adopted in reorganization of a virtuous match between any particular case, this again immediately the technological capacities and the social gives rise to questions of monopoly, and institutional framework, the recovery will competition and price regulation. Equally be slow and interrupted by deep crises, such problematic are the questions of trade as those triggered by the financial crashes of and protection, whether of new or of older 1987 and 2007. industries. Typically, the leaders in a new wave of 2.5. Recurrent changes in the regulatory technology, such as Britain in the nineteenth regime century or the United States in the twentieth Finally, a recurrent feature of the century, will tend to advocate the opening up qualitative changes engendered by the of world markets to the new products and long wave is a periodic re-configuration of services in which they excel, while catching- the regime of regulation of technology and up countries will often deploy ‘infant industry’ of the economy more generally. It is quite arguments to justify various forms of obvious that such extensive changes as protection. The leading economies will seek mechanization, electrification, motorization, to advocate and, if they have the strength, and computerization raise entirely new to impose an international regulatory requirements for education and training, regime with institutions which promote

116 the interests of their leading industries. to the impact of innovation on the creation Thus, what is at stake in each structural of cultural traits. Let me take the extreme crisis is a re-constitution of the entire example of art. It is extreme since art is institutional and social framework because posited and defines itself as autonomous there is a mismatch between the regulatory from other social relations, and as a peculiar framework developed and consolidated by a expression of creation of new culture or previous generation for older technologies communication. The production of works and industries, and the needs of the newly of art as part of cultural production is that emerging constellation and the interests of province where the autonomy in relation the new technological leaders. to social processes and, in particular, to Once a new technological and regulatory economic determination, is more radically regime has become dominant and firmly affirmed. Yet, art is an interesting case of established, the phenomenon of ‘lock in’ to the interaction of individuality and society, of the new regime becomes widely apparent. technology conditioning invention. This is the case not only with lock in to Indeed, art has logic and a time of its dominant designs, technical standards, own; quite often, it anticipates the future components and so forth, but also to all kinds or constructs alternative worlds. That is a of social standards and institutions, variable reason for proceeding in this section from the though these may be between different production of art to the general production of countries, in response to the changing cultural artefacts, images and sounds or, in balance of social and political forces in each general, to references, as part of the cultural country and on the international stage. changes in a changing society. The instability of the current international In spite of the vindication of the autonomy economic structure is revealed not by the of art, the producers live in concrete societies challenge by emerging economies of the and their horizon is largely defined by the dominant role of the previous leaders, but potentialities of their epoch. In the same instead by the fact that there is not a stable sense, the creation of a specific culture, international order to make their trade in the general sense of the coherence of coherent and to settle their disputes. forms of communication in fashion, food, One of the aspects of this deep ongoing literature, architecture, dance, or music, just change, which is of interest for what follows, as the evolution of languages or other social is the impact of economic and technological artefacts is largely bound by its particular innovation on culture, altering previous epoch. The technological framework, the modes of production of sense and images, social structure and the historical process of distorting others, suggesting new ones, and the formation of knowledge define the setting creating universal references as part of a for the work of art as for the construction of unified global market. social cultures. This section explores this connection, 3. The impact of economic and technological in order to present an overview of large innovation on the production of culture processes of the social production of cultural In order to exemplify this analysis of some products. This topic was not previously historical trends, and to define their impact discussed in the literature, and it is only on the creation of values, I will turn now sketched here as a suggestion for further

Francisco Louçã 117 investigation. In this sense, I argue that there are specific tides in cultural production that The argument is, first, can be better understood in the framework “ of the societal and historical vision indicated that major changes in the previously, and that this specific nexus is crucial for the understanding of the forms of economy are causally related organised social communication prevailing in modern societies. to dramatic alterations in the I certainly do not suggest that technological means determine the social structure, including in production of cultural values as such; that would mean an underrating of the influence the forms of work and power, of social and individual traits in the creation of cultural artefacts and communication. as well as the dominant modes But evidence shows how the landscape of technological opportunities shaped different of communication, and, second, forms of cultural production, amplifying and selecting new means and inducing new that the trends in cultural trajectories such as the cinema, the video, the clip, and the continuous production of production are unintelligible images and messages. In a nutshell, the argument is, first, that outside the context of these major changes in the economy are causally related to dramatic alterations in the social changes structure, including in the forms of work and ” power, as well as the dominant modes of communication, and, second, that the trends in cultural production are unintelligible machines—indeed they were worshipped outside the context of these changes. by the futurists and other modernists, who The next table takes up this argument. praised the automobile as the archetype of Each epoch is defined by the industrial the progress of humankind—but against the revolution originating the maelstrom impersonal relations of the market and the that changed the way of life and shaped general reification under capitalism. Finally, each specific experience of modernity. the triumph of the market over its radical Consequently, three main categories are opposition was marked by its extension into indicated: while the original industrial what was, until then, the partially separated revolution set the tone for the process of world of art production: this period has been modernization, following on from the slow called postmodernism. As Jameson puts development after the Enlightenment and it, “modernism [was] the experience and the sixteenth century, modernism was the the result of incomplete modernization, (…) emerging language for the conflict against [and] the postmodern begins to make its the enlargement and dominance of the appearance whenever the modernization modern market. Not against technology or process no longer has archaic features and

118 obstacles to overcome and has triumphantly turned toward the past. Where we perceive a implanted its own autonomous logic” chain of events, he sees one single catastrophe (Jameson, 1991: 366). which keeps piling wreckage and hurls it in That said, Modernism yesterday was front of his feet. The angel would like to stay, not, and Postmodernism today is not either awaken the dead, and make whole what has culturally dominant or even absolutely been smashed. But a storm is blowing from hegemonic: as indicated in the table, they can Paradise: it has got caught in his wings with be considered as emerging traits in cultural such violence that the angel can no longer production, representative of the ongoing close them. This storm irresistibly propels conflict. But Modernism and Postmodernism him into the future to which his back is turned, are the trends most closely associated with while the pile of debris before him grows the fractures of history in their own time. skyward. This storm is what we call progress. They were indeed seen by contemporaries (Benjamin, 1973: 259-260) as earthquakes—a celebrated example is This wave of progress invaded daily life that of the much quoted and tragic images of and transformed the modes of production, Angelus Novus by Paul Klee, a representation distribution and communication at the end of the transformation imposed by the second of the nineteenth century. The culture of the industrial revolution and the motif for Walter new century was part of this catastrophe: Benjamin’s much quoted reminiscences: “Il faut être absolument moderne”, An angel looking as though he is about said Rimbaud. The next industrial and to move away from something he is fixedly technological revolution imposed a new contemplating. His eyes are staring, his mouth version of the dictum: we cannot but be is open, his wings are spread. This is how postmodern. The structure of this evolution is one pictures the angel of history. His face is the theme for the table below:

Table 1. The production of culture in a long-term perspective

Period Industrial Emerging Examples Modes of Centres of revolution cultural traits communication cultural production Long Wave II Machine Realism Conversation London 1848-1890s production of Books steam-driven Transition Paris engines 1890s Long Wave III Machine Modernism Expressionism, Printed word Paris, Berlin, 1890s-1940s production Cubism, (books, Vienna, St. of electric Futurism newspapers) Petersburg and internal- Transition Rock’n Roll Radio, Film New York combustion 1940s-50s engines Long Wave IV Machine Post Pop, Punk, Film, TV New York Los 1940s-… production Modernism Fashion, Angeles of electrical Advertisement Bollywood and electronic Transition MTV, Youtube, TV, Electronically machines ? Facebook, Twitter transmitted bits, clips

Francisco Louçã 119 As the table indicates, there are discourse and were relegated to the domain considerable lags between causally of the separate and slightly esoteric artistic connected events and trends; moreover, production. there is a large margin of autonomy A new epoch was then opened when between technological transformations, Fordist production spread to the whole allowing for new methods of dissemination social fabric and extended to the mechanical and permitting new experiences of the reproduction of works of art. Radio and process of modernization, and their cultural film—the first distinctively mediatic art counterparts. Yet the creation of new form, since opera had only performed that technological means sets the pace for the function in restricted areas of Europe, such transformation. as Italy, as had been the case with theatre in The undisputed but not unique example Britain—then became the dominant modes of is the creation of the ‘Gutenberg Galaxy’ communication. in the fifteenth century: it allowed for Finally, and we come to our own time, the development ‘of a system essentially a ‘new alphabetic order’, a new digital dominated by the typographic mind and meta-language is being imposed as the the phonetic alphabet order’ (Castells, cultural infrastructure: ‘A technological 1996, I: 331). As the alphabet was the transformation of similar historical dominant ‘conceptual technology’ since dimensions [as the creation of the alphabet] 700 BC Greece, it established itself as the is taking place 2700 years later, namely privileged infrastructure for the codification the integration of various modes of of cumulative knowledge. But it became a communication into an interactive network’ dominant mode of communication just when (Castells, ibid.: 328). These epoch-making the industrial capacity established the printed transformations are the theme for the next word as the direct form of expression and table. the book as the cultural tool of the elite. As previously indicated, the epochs Consequently, for the whole period sounds depicted in Tables 1 and 2 were or are not and images were outside the scope of written periods of uniformity, and their cultural

Table 2. Modes of cultural production

Period Dominant Construction of Technique of Socially Emerging trend in character-istic meanings cultural production constructed cultural production attitude LW I and II Liberal Hierarchical Discontinuous and Reverence Promethaic capitalism dissemination of scarce production Admiration modernization knowledge, auratic of individual works works LW III Fordism Mechanical Discontinuous Contemplation Apollonian reproduction of artefacts and Concentration modernism the works of art, dense production distantiation effect LW IV, Late capitalism Anti-auratic, populist Continuous flow, Distraction Dyonisian emerging V culture, global networks postmodernism reification effect

120 production was a fortiori a turbulent But modernism was rooted in high landscape of diversity and contradiction. culture, and the headquarters of resistance Their emerging cultural traits were not were established in the authenticity, necessarily dominant or hegemonic originality and uniqueness of the work throughout the period, although they of art: its discourse was that of creativity marked a peculiar vision of the storm of (Lash and Urry, 1987: 286) and the defence modernization, and eventually constituted of the aura of artistic artefacts. In that the more distinguishable features of its sense, art in society vindicated a radical inheritance. separation of cultural forms from the social Realism represented the first framework—and this was the reason for interpretation of the changing world, and its intense appeal as well as for its failure. this new world reserved a specific role for In a matter of decades, the expansion of the entertainment business: popular novels, the market conquered this last bastion of theatre, and popular opera were, for some cultural critique and transformed it into an countries, the forerunners of the cultural industry, and in particular into an industry of industry of the second half of the century. production in continuous flows. Although this business was still separated In fact, the crucial alteration introduced from the production of high culture, the in the post-war period was the widespread dissemination of the market in this direction diffusion of commercial TV. Consequently, anticipated the aestheticization of daily the film industry, the epicentre of cultural life—but even this would still require another production since the beginning of the major technological change. century, was transmuted from a production Modernism was the response to these of episodic and unique pieces, seen by first moves: breaking with the aesthetics large audiences in unique settings, into a of representation in art and the theoretical production of flows of images and sounds to discourse based on the insulated worlds be seen simultaneously in all private settings. of culture and social life (Lash and Urry, The simultaneous collective experience 1987: 13), the modernist revolution was built was transmuted into a simultaneous on challenges of the capitalist process of individualised experience. Furthermore, the modernization. It led to non-representational modifications went deeper than the setting and expressionist painting, to new lyric of the experience of the cultural product: poetry, to existentialism in philosophy, to they imposed a change in the product itself, the films d’auteur. Attacking the market since the continuous flow abolished the and not technology, the modernists were effort of memory and imposed the loss of fascists with Marinetti and communists with historicity, mixing news, films, soaps and Maiakovsky: they praised cars, speed and contests at the same level of discourse. All movement, neat colours and strong feelings. sounds and images were reduced to bits of Picabia, Duchamp, Fernand Léger, Diego infotainment. The great consequence was Rivera painted machines and the possibility the fully used potential for the construction of reconstruction of social life in a new of ‘fictive temporalities’ and therefore the technological world; Frank Lloyd Wright, Le ‘technological appropriation of subjectivity’, Corbusier and Mies applied the new vision to generating a specific and novel type of media architecture and rebuilt urban life. populism that was to become the basis for

Francisco Louçã 121 the entertainment industry (Jameson, 1991: 74). Advertising is the dominant The social consequences of this “ dramatic change in culture are still to be form of production of signs fully understood. In any case, they were the result of the transformation of culture in postmodern culture: by the market. The growing importance of advertising, the consumption of the discourse postmodernism is that specific of consumption and the narrative of desire inscribed in publicity constitute the image as mode of production in which the final form of reification of the commodity: the product is identified with its brand or advertisement is the new logo. Advertising is the dominant form of production of signs in postmodern culture: technology of communication, a postmodernism is that specific mode of production in which advertisement is the new ‘conceptual technology’ or new technology of communication, a new ‘conceptual technology’ or ‘alphabetic order’ ‘alphabetic order’ of our days. of our days. As a consequence, culture has a function for the market. As a consequence, culture has a Fashion and fast food, B-films and remakes, Warhol’s pop art, parodies and function for the market kitsch, science fiction, music and video ” reduced to clips, these images populate this universe of pastiche, to use Thomas Mann’s concept. Categories of space have replaced Net and the Self, so that ‘in this condition categories of time, historical depth has of structural schizophrenia between been lost to ephemerity and concentration function and meaning, patterns of social has been replaced by superficial trivia: communication become increasingly under commodification of culture is a devastating stress’ (Castells, 1996, I: 3). process. How did machines then produce machines As this process is our contemporary, and information produce information to the its implications are still largely unknown, extent that we are transported from a culture although there are two that follow from the of virtual reality to a culture of real virtuality pattern of communication imposed by this in this period of transition? This is the cultural revolution. First, ‘a crucial effect of question for Castells, in his magnificent The the electronic media and spatio-temporal Information Age: Economy, Society and Culture. changes in our disorganizing capitalist The answer resides in the technological societies has been the decentring of identities changes associated with the information and the loosening or destructuration of group and communication revolution emerging and grid’ (Lash and Urry, 1987: 299). But, through the fourth long wave, and in the second, this iconography of modernity also concrete process of social selection that has imposes a bipolar opposition between the determined the shape of the new techno-

122 economic paradigm challenging the still bits and clips of our social communication, prevailing mode of development in our times and this aesthetic of distraction is universal. of mismatch and transition. The answer is the It marks the triumph of a new conceptual network of cultural products and facilities of technology on the map of culture. communication in a market economy. Yet, this technology does not by itself In this framework, we follow Jameson’s impose a social order; on the contrary, its suggestion to reconsider the concept of ‘late prevalence depends on the social mutations capitalism’ as it was used by the Frankfurt here described as the long waves of capitalist school, namely by Adorno and Horkheimer, development. and lately by Ernest Mandel. Late capitalism describes the galaxy of economic structures, 4. Conclusion: social and cultural changes methods of production and cultural in the long waves substrata derived from the expansion of The preliminary presentation of recurrent commodification towards Nature and the changes characteristic of each long wave Self or the Unconscious. This is a process of has already gone beyond purely economic reification of all social relations, i.e. one purer and technological phenomena, and the form of capitalism. Late capitalism is thus the previous section discussed the production name for the technological transformations of cultural references, which is largely diffused since the 1950s and for the cultural autonomous although influenced by the alterations emerging from the 1960s until social movement as a whole. As the crisis the present. As a cultural constellation, it of structural adjustment and the periodic had a long period of maturation: it was even changes in the regulatory regime raise anticipated in the early decades of the century fundamental questions of the relationship by Dada and Surrealism, which invented between technical change, political change these postmodernist tones, although they and cultural change, this is shortly evoked as rooted their activity in a mood of denunciation follows: of the market economy as the adversary to First, consider changes in the regulatory art. Yet it was when the technology became regime, whether at a national or international available for the production of continuous level, since they can lead to the most flows of infotainment that postmodernism fundamental political and ideological won the day. conflicts within and between nations. Contrary to MacLuhan and so many other Lloyd-Jones and Lewis (1998) have made commentators, this victory did not represent a particularly valuable study of the conflict the imposition of a complete universal over the Corn Laws in the 1830s and 1840s culture: we do not live in a global village, but in Britain and the later conflict on Tariff in ‘customized cottages globally produced Reform in Britain in the late nineteenth and and locally distributed’ (Castells, 1996-I: early twentieth centuries. Both of these 341). Each cultural artefact is locally bounded conflicts split the ruling Tory Party from top and the production of icons is still mediated to bottom and led to major re-alignments by national and regional frontiers: their in British politics and each was associated understanding is largely local. The global with a long-wave structural crisis. In the world is a world of diversity. But icons are same sense, the problems of tariff protection industrially produced and are the constitutive also had profound effects in the United

Francisco Louçã 123 States, Germany and Japan as they were adjustment. There are also bound to be industrialising and catching up in technology. conflicts within the expanding industries and However, the political dimensions of free technologies over pay, status and working trade and tariff reform clearly go far beyond conditions for various groups of managers just the question of regulating some new and workers. Modern conflicts raise a products and services, or protecting older wider range of problems, with deep cultural industries, even though these problems may implications, such as concerns about the trigger the conflicts. Fundamental national ecological sustainability of industrial or urban interests, as well as those of particular policies, and the effects on climate change, industries, are often felt to be at stake and international relations and poverty issues. friction over trade issues can be a major The third domain of interest here is the source of friction in international relations technical changes, which are relatively more generally, as illustrated in the Anglo- unrelated to other changes previously German naval armaments race before 1914. described. This is only superficially known, The World War between 1939-1945, marking since it is widely accepted that the evolution, the turning point after the depressive long for instance, of the ship, of the hammer, wave of the first decades of the century and of flints for tools and weapons, of the opening an epoch of growth and prosperity, is harnessing of the horse, and of the steam another illustration of this concatenation of engine or the plough emphasize alike the political and military solutions for long-term relative autonomy of the improvements disputes over markets and resources. which were made over the centuries to these Second, consider the depth of the social artefacts, so essential for human civilization. clashes which may be exacerbated during The selection environment, which interests, a structural crisis, which is illustrated no inspires and constrains engineers, designers, less clearly by the labour conflicts that are inventors and mechanics and many historians engendered. History registers the widespread of technology, is primarily the technical social unrest as well as the outbreaks of environment, the criteria of technical ‘Luddism’ associated with the destruction efficiency and reliability and of compatibility of old crafts and occupations, such as those with existing or future conceivable technology of the hand-loom weavers. Some historians systems. have argued that Luddism, especially in The reciprocal influence of science the hosiery industry in Nottinghamshire and technology upon each other has been was inspired mainly by the desire to protect demonstrated in numerous studies and is British quality standards in foreign trade. indeed obvious in such fields as computer The workers supposedly feared more technology and biotechnology today, as for the loss of jobs through the erosion well as in earlier developments such as of British sales in foreign markets than thermodynamics and the steam engine. simply from mechanization. Whatever the Technology has to take account of the laws of interpretation may be, it is fairly obvious that nature and hence of science. Nevertheless, the destruction of the livelihood of hundreds Derek Price (1984), Rosenberg (1969, of thousands of people is bound to be a cause 1982), Pavitt (1995) and many others have of acute social unrest and this has indeed produced cogent arguments for recognizing been the case in every crisis of structural the special features of each sub-system

124 of technological trajectories, both specific The reciprocal influence to particular products or industries and “ general trajectories such as electrification of science and technology or mechanization affecting a vast number of processes and industries, including compur. upon each other has been They rightly identified the combination of such trajectories with scaling-up in demonstrated in numerous production and markets as one of the most powerful influences on economic growth. studies and is indeed obvious These ideas were further developed by Dosi (1982) in his work on technological in such fields as computer trajectories and technological paradigms, in which he pointed to the relative autonomy of technology and biotechnology some patterns of technological development by analogy with Kuhn’s paradigms in science. today, as well as in earlier Despite the obvious close interdependence between technology and the economy or developments such as technology and science, it is essential to take into account these relatively autonomous thermodynamics and the steam features in the history of technology. A satisfactory theory of economic growth engine and development must certainly take ” account of these processes, but it should also recognize that the relative autonomy of evolutionary developments in science precisely in order to understand the nature and technology justifies some independent of their interaction. Nor does this refer only consideration. An essentially similar to recent history, as the massive contribution argument applies to economic change. No- of Needham (1954) to the history of Chinese one can seriously doubt the importance of science and technology clearly illustrate. capital accumulation, profits, changes in Historians of technology, such as company organization and the behaviour Gille (1978) and Hughes (1982), have of firms and of banks for the evolution amply demonstrated the systemic of industrial societies over the past two nature of technologies and analyzed the centuries. Economic institutions too have interdependencies between different some relative autonomy in the cycles of their elements in technology systems. Both they development. In any case, explanations of and Rosenberg have also shown that the economic growth must pay especially close technological imperatives derived from attention to the interdependencies between these systemic features may serve as economic history and technological history. focusing devices for new inventive efforts. It is precisely the need to understand the Finally, in their seminal paper ‘In Search changing nature of this interdependency of Useful Theory of Innovation’ Nelson and which leads to the proposal of a theory of Winter (1977) drew attention to the role recurrent phenomena and ‘out of sync’

Francisco Louçã 125 phases of development, when, for example, since they mimic natural evolution so well, changes in technology may outstrip the with the creation of variety (i.e. innovation) institutional forms of the production and and the selection of change (i.e. stable market system that may be slow to change environment). or impervious to change for relatively But this process of adaptation and long periods. The reverse may also occur, creation of stability is also responsible providing impetus to new technological for some conservatism against radical developments, as with the assembly line or implications of social innovation flowing from factory production. radical innovation in the techno-economic Finally, cultural change is generally system, where they tend to originate. The accepted as an important influence socio-institutional system and its cultural on economic growth. In the previous standards tend to generate the mismatch section I explored the opposite sense of or desynchronicity previously indicated as influence: that from the economic mode of the engine of the long waves of capitalist development and availability of technologies development. to the production of culture, the former In any case, a general view of the cultural creating opportunities and incentives for determinations of social relations should new developments of the latter. It is in order emphasize all these contributions to the to emphasise now the impact of culture, formation of social mentalities and modes as part of the creation of social values, of reasoning, including the motivation for on the dynamics of growth, since these accepting change and routine. Indeed, values tend to concentrate the resistance social, political and cultural changes interact or suspicion about characteristics of the in modern societies under the impact of institutional change imposed by the diffusion technical and organizational changes, of the clusters of radical innovations. Social either to react or to resist. If retardation or values are shaped by institutions and acceleration phenomena are to be explained, recognise contracts, laws, routines, types the dominant cultures of an epoch reveal of communication, hierarchies, the forms and register the combined effects of its of each social pact ruling each society, and histories of present and past. Institutions, tend therefore to be adverse to radical and which are the result of such cultures and unknown change. Although some societies— social relations, are the decisive structures some cultures—are more inclined to accept for economic evolution and the condition for the challenge of innovation and rupture in growing or perishing. the previous trajectory, it is understandable The long waves, this modern curse of that a flexible answer to the hurricane of Heraclitus, encapsulate the social and change is to impose rules that are previously economic processes of evolution and change, known to the society. Indeed, any new of adaptation and of creation of variety, or economy or new technology is appropriated innovation. But innovation alters structures according to the previously established and culture, institutions and routines, which knowledge. This is why modern developed are locked in established trajectories. This is societies are so stable: they change but tend why the epoch-making radical innovations, to adapt to change. Evolutionary economics clustering in industrial and technological is certainly familiar with these processes, revolutions, can create new upsurges in

126 economic development but tend to confront Bibliography large institutional resistance. Be n j a m i n , W. (1973), Illuminations, London: Fontana. This is the case today. The early years Be r m a n , M. (1983), All That is Solid Melts into Air – the Experience of Modernity, London: Verso. st of the 21 century were marked both by Bo y e r , R. (1988), “Technical Change and the Theory of Regulation”, in G. Dosi, C. Freeman, R. Nelson, G. Silverberg and L. Soete the magnificent extension of a cluster of (eds.), Technical Change and Economic Theory, London: Pinter, pp. 67-94. innovations applicable to a wide range Ca s t e l l s , M. (1996), The Information Age: Economy, Society and of productive processes and service Culture I, The Rise of the Network Society, Oxford: Blackwell. Do s i , G. (1982), “Technological Paradigms and Technological economy, and simultaneously by the Trajectories”, Research Policy, 11(3), pp. 147-62. Fe a r o n , P. (1987), War, Prosperity and Depression: The American disarrangement of the financial markets, Economy 1917-1945, Deddington: Phillip Alan. Fr e e m a n , C., F. Lo u ç ã (2002), As Time Goes By – From the Industrial with speculation destroying wealth and Revolutions to the Information Revolution, Oxford: Oxford University savings, and accumulation undermining the Press. Gi l l e , B. (1978), Histoire des Techniques, Paris: Gallimard. creation of value. This is explainable by the Go o d w i n , R. (1985), ‘A Personal Perspective Economics’, Banca Nazionale del Lavoro Quarterly Review, pp. 152, 3-13. asynchronous movements in the depressive Ha r v e y , D. (1992), A Condição Pós-Moderna, São Paulo: Loyola. Hu g h e s , T. (1982), Networks of Power Electrification in Western phase of the long wave and by the emergence Society, 1800-1930, Baltimore: Johns Hopkins University Press. of new profitable branches, stimulating Ja m e s o n , F. (1991), Postmodernism or the Cultural Logic of Late Capitalism, London: Verso. speculation and over-accumulation. As in La s h , S., and J. Ur r y , (1987), The End of Organized Capitalism, Madison: University of Wisconsin Press. previous long waves, the crucial question Ll o y d -Jo n e s , R., and M. Le w i s (1998), British Industrial Capitalism is not why the technological push does not since the Industrial Revolution, London: UCL Press. Ma n d e l , E. (1980), Long Waves of Capitalist Development, Cambridge: translate into macroeconomic performance, CUP. Ne l s o n , R., and S. Wi n t e r (1977), “In Search of a Useful Theory of but instead, how should the social networks Innovation”, Research Policy, 6(1), pp. 36-76. Pav i t t , K. (1995), “Academic Research and Technical Change”, in be reassembled and economic institutions MacLeod, R. (ed.), Technology and the Human Prospect, London: created that are able to regulate a new Pinter, pp. 31-54. Po l e tay e v , A. (1987), “Profits and Long Waves”, working paper, system, creating jobs, qualifications, welfare Montpellier Conference on Long Waves. Pr i c e , D. (1984), “The Science-Technology Relationship”, Research and further innovation. Some will say this is Policy, 13(1), pp. 3-20. Ro s e n b e r g , N. (1969), “Directions of Technological Change: finally an issue of changing culture. Inducement Mechanisms and Focusing Devices”, Economic Development and Cultural Change 18, pp. 1-24. Ro s e n b e r g , N. (1982), Inside the Black Box: Technology and Economics, Cambridge: CUP. So m b a r t , W. (1929), “Economic Theory and Economic History”, Economic History Review 2: p. 18. Ty l e c o t e , A. (1992), The Long Waves in the World Economy: the Present Crisis in Historical Perspective, London: Routledge. We l l s , D. (1890), Recent Economic Changes, London: Longman.

Francisco Louçã 127

Technological change and the evolution of the U.S. “National Innovation System”, 1880‑1990

David C. Mowery Introduction States to overtake the global economic leader Haas School of Business, University of California, Technological change has played a of the time, Great Britain. Beginning in the Berkeley & NBER central role in US economic growth since late 19th century, however, the United States the 19th century. The pioneering work of embarked on a prolonged transition from Solow (1957) and Abramovitz (1956) both resource-led to knowledge-led economic suggested that expansion in labor and capital growth. accounted for no more than 15% of total Institutional innovation was an growth in US output per head between the indispensable complement to technological middle of the 19th century and the 1950s. innovation during and after this period in US The remaining 85%, labeled the “residual,” economic development. Public and private is widely interpreted as a measure of the investments in new organizational structures economic effects of technological change, for the support of knowledge creation, although Abramovitz famously referred to innovation and education were essential it as a “measure of our ignorance”. This to the changing trajectory of US economic essay explores the changing characteristics growth in the 19th and 20th centuries. State of innovation and the relationship between and federal government investments innovation and US economic growth during supported the creation of a higher education this lengthy period. infrastructure that eventually proved to The transition from the 19th to the 20th be an important source of scientific and centuries was accompanied by a shift in engineering knowledge and personnel the sources of US economic growth from (Goldin and Katz, 2009). Industrial investment exploitation of a rich domestic endowment in the development of new technologies also of natural resources to the exploitation of made important contributions during the 20th “created” resources based on knowledge and century. And the 1945-89 period, dominated trained scientists and engineers. Advances by geopolitical tensions that sparked massive in technology and knowledge aided the investment of public funds in defense and exploitation of the US resource endowment related missions by the federal government, during the 19th century, enabling the United witnessed a further transformation of this

David C. Mowery 129 technology development, the training of The pioneers in this scientists and engineers, and technology “ adoption. Institutional elements, such as organizational innovation were national systems of higher education and corporate finance and governance, represent the large German chemicals other important components of national innovation systems. The structure of a firms of the last quarter of nation’s innovation system is the result of complex historical processes of institutional the 19th century, whose growth development that are affected by public policy and other influences. Moreover, the was based on innovations in performance of these systems depends in part on the actions and decisions of private dyestuffs enterprises that can reinforce or offset the ” effects of government policies.

Overview of US economic “catch-up,” complex mix of public and private institutions 1800–1910 devoted to supporting innovation. US economic growth during the This essay surveys the development of 19th century has been characterized by the US “national innovation system” from Abramovitz and David (2000), David and the late 19th to the late 20th centuries. The Wright (1997), and Wright (2007) as more “national innovation system” framework capital- and natural resource-intensive than for analyzing innovative performance and Western European growth during the same policy is the subject of a substantial body period. The capital-intensive trajectory of of scholarship that has flourished since the US economic growth during the 19th century first articulation of the concept in Freeman reflected the high rates of investment and (1987; see also Lundvall, 1992 and Nelson, significant innovation in the transportation 1993). “National” innovation systems typically and communications infrastructure (canals, include the institutions, policies, actors, railways, the telegraph and telephone) that and processes that affect the creation of contributed to the development of another knowledge, the innovation processes that major factor in 19th-century US economic translate research into applications (either growth—the large, unified domestic market for commercial sale or deployment in such that manufacturers in particular exploited “nonmarket” contexts as national defense), in the wake of the Civil War. Through much and the processes that influence the adoption of the 19th century, this domestic market of innovations. was characterized by relatively low levels Accordingly, the US national innovation of income inequality, by comparison with system includes not just the institutions Great Britain and other European economies, performing R&D and the level and sources resulting in a large, homogeneous profile of funding for such R&D, but policies—such of consumer demand. Reliable all-weather as antitrust policy, intellectual property inland transportation also facilitated the rights, and regulatory policy—that affect export of the produce of the abundant and

130 relatively fertile expanse of farmland within US “research university” (Johns Hopkins the United States. University, founded in 1876), which was based During the last two decades of the on the German research university structure 19th century, the US economy began a that had proven to be effective in supporting prolonged transition from the extensive scientific research and collaboration with growth trajectory that relied on expanding industry. Although decades (and billions in capital, resource, and labor inputs to a more public funding) were required to bring US knowledge-intensive growth trajectory that universities to positions of global scientific was associated with higher rates of total leadership, even before their attainment factor productivity growth (Abramovitz and of research excellence these institutions David, 2002). One of the most dramatic played a crucial role in training generations illustrations of this gradual shift was of scientists, engineers, and managers, the increased exploitation of scientific and developed networks of collaboration in and technical knowledge in US resource scientific and technical research with US extraction industries that began in the late industry that contributed to US economic 19th century (David and Wright, 1997). As growth in the late 19th and 20th centuries. David and Wright pointed out, the United Much of the technological innovation that States pioneered in the development of drove US economic development during the new institutions for research and education 19th century was “pre-scientific,” relying as in mining engineering, geology and much on trial-and-error experimentation related fields that supported expansion by skilled practitioners as on activities that in US output of minerals and related raw might be described as “R&D”. The reliance materials during this period. Based in part of 19th century innovation on “tinkering” on a growing endowment of economically declined in the final decades of the century, relevant natural resources, US firms had with the growth of new areas of industrial moved to the technological frontier in mass- production and innovation that relied on production manufacturing, particularly in more complex technologies that were metalworking and machinery industries, by linked to the frontiers of scientific and the late 19th century (Nelson and Wright, engineering knowledge. Their reliance on 1994: 135).1 more formalized knowledge meant that the Many of the first academic institutions growth of the “new industries” of the Second specializing in these fields of research and Industrial Revolution, particularly chemicals education were publicly funded, illustrating and electrical machinery, was associated another important characteristic of the with investments in R&D within the firm, post-1870 period of economic catch-up. The an activity with little precedent in most US 1 “These new turn-of-the- century achievements may be 1862 Morrill Act established a foundation firms. thought of as the confluence of two technological streams: the for publicly funded higher education, and The pioneers in this organizational ongoing advance of mechanical (along with the 1887 Hatch Act) expanded innovation were the large German chemicals and metalworking skills and th performance, focused on the federal and state government funding firms of the last quarter of the 19 century, high-volume production of for research and extension activities in whose growth was based on innovations standardized commodities; th and the process of exploring, agriculture. The development of mass higher in dyestuffs. But by the early 20 century, developing, and utilizing the education in the United States occurred a number of large US firms had also mineral resource base of the national economy. in parallel with the emergence of the first established in-house R&D organizations.

David C. Mowery 131 The growth of these laboratories almost and commercialized them (Mueller, 1962; certainly could not have occurred without Hounshell and Smith, 1988; Hounshell, complementary changes in institutions 1995).2 In-house R&D in US firms developed external to the firm, ranging from the in parallel with independent R&D laboratories 2 The research facilities of development of US universities to the growth that performed research on a contract basis AT&T were instrumental in the procurement of the “triode” of new mechanisms for industrial finance. (see also Mowery, 1983a). But over the course from independent inventor Nonetheless, the rise of the industrial R&D of the 20th century, contract-research firms’ Lee de Forest, and advised senior corporate management laboratory represented a fundamental shift share of industrial research employment on their decision to obtain in the structure of the US national innovation declined. loading-coil technology from Pupin (Reich, 1985). General system. The evolution of industrial research in Electric’s research operations the United States was influenced by another monitored foreign technological advances in lamp filaments The Growth of US Industrial Research in the factor that was absent in Germany during and the inventive activities of outside firms or individuals, “Second Industrial Revolution,” 1890-1945 th th the late 19 and early 20 centuries -- and pursued patent rights By the first decade of the 20th century, competition policy. By the late 19th century, to innovations developed all over the world (Reich, a number of large US manufacturing judicial interpretations of the Sherman 1985: 61). The Standard Oil firms had established in-house industrial Antitrust Act had made agreements among Company of New Jersey established its Development research laboratories as part of a broader firms for the control of prices and output Department precisely to restructuring that transformed their scale, targets of civil prosecution. The 1895-1904 carry out development of technologies obtained from management structures, product lines, merger wave in the United States, particularly other sources, rather than for and global reach. Many of the earliest US the surge in mergers after 1898, was one original research (Gibb and Knowlton, 1956: 525). Alcoa’s corporate investors in industrial R&D, such response to this new legal environment. R&D operations also closely monitored and frequently as General Electric and Alcoa, were founded Since informal and formal price-fixing and purchased process innovations on product or process innovations that drew market-sharing agreements had been from external sources (Graham and Pruitt, 1990: 145-147). on advances in physics and chemistry. The declared illegal in a growing number of 3 See Stigler (1968). The corporate R&D laboratory brought more of cases, firms resorted to horizontal mergers Supreme Court ruled in the the process of developing and improving to control prices and markets.3 Trans Missouri Association case in 1898 and the Addyston Pipe industrial technology into the boundaries The Sherman Act’s encouragement of case in 1899 that the Sherman of US manufacturing firms, reducing the horizontal mergers ended with the Supreme Act outlawed all agreements among firms on prices or technological and economic importance of Court’s 1904 Northern Securities decision, market sharing. Data in Thorelli (1954) and Lamoreaux (1985) the independent inventor (Schmookler, 1957). but many large US firms responded to the indicate an increase in merger But the in-house research facilities new antitrust environment by pursuing activity between the 1895- 1898 and 1899-1902 periods. of large US firms were not concerned strategies of diversification that relied on in- Lamoreaux (1985) argues that exclusively with the creation of new house R&D to support the commercialization other factors, including the increasing capital-intensity of technologies. Like the laboratories of the of new technologies that were developed production technologies and German dyestuff firms, these US industrial internally or purchased from external the resulting rise in fixed costs, were more important influences laboratories also monitored technological sources. George Eastman saw industrial on the US merger wave, but her account (p. 109) also developments outside the firm and advised research as a means of supporting the acknowledges the importance corporate managers on the acquisition of diversification and growth of Eastman Kodak of the Sherman Act in the peak of the merger wave. Lamoreaux externally developed technologies. Many (Sturchio, 1988, p. 8). The Du Pont Company also emphasizes the incentives of Du Pont’s major product and process used industrial research to diversify out of created by tighter Sherman Act enforcement after 1904 for innovations during this period, for example, the black and smokeless powder businesses firms to pursue alternatives were obtained from sources external to even before the 1913 antitrust decision that to merger or cartelization as strategies for attaining or the firm, and Du Pont further developed forced the divestiture of much of the firm’s preserving market power.

132 black powder and dynamite businesses of external technological developments that (Hounshell and Smith, 1988: 57). supported the purchase by their parent firms Although it discouraged horizontal of important innovations from independent mergers among large firms in the same inventors and other firms. lines of business, US antitrust policy Another area in which the pre-1940 era through much of the pre-1940 period had in the development of industrial research little effect on efforts by these firms to resembles that of the past two decades acquire new technologies from external is the evidence of collaborative linkages sources. The development of industrial between industrial and academic research. research, as well as the creation of a market Furman and MacGarvie (2005) show that for the acquisition and sale of industrial pharmaceuticals industry R&D facilities technologies, also benefited from reforms founded during 1927– 46 in the United States in US patent policy between 1890 and 1910 tended to locate near leading research that strengthened patent-holder rights universities, and provide other evidence (See Mowery, 1995).4 Judicial tolerance for of university-industry collaboration in restrictive patent licensing policies further pharmaceuticals during this period. Other increased the value of patents in corporate scholars (Mowery et al., 2004; Rosenberg, 4 These technology-acquisition research strategies. Although the search 1998) have emphasized the importance of strategies built on a domestic market for intellectual property for new patents provided an incentive to university-industry collaboration during this that grew substantially pursue industrial research, the impending period, not least in the development of such during the 1880-1920 period. According to Lamoreaux expiration of these patents created another important fields of university research as and Sokoloff (1999), the development of a national important impetus for the establishment chemical engineering. market for intellectual property of industrial research laboratories. Both Training by public universities of scientists enabled independent inventors to specialize and thereby American Telephone and Telegraph and and engineers for employment in industrial enhanced their productivity General Electric, for example, established research also linked US universities and and the overall innovative performance of the US or expanded their in-house laboratories industry during the first decades of the economy during this period. By in response to the intensified competitive 20th century. The Ph.D.s trained in public the early 20th century, however, the increased costs of inventive pressure that resulted from the expiration universities were important participants activity and greater demand for formal scientific and of key patents (Reich, 1985; Millard, 1990: in the expansion of industrial research engineering training led to the 156). Intensive efforts to improve and employment during this period (Thackray, supplanting of independent by 5 corporate inventors (Lamoreaux protect corporate technological assets 1982: 211). The size of this trained and Sokoloff, 2005). complemented the acquisition of patents in manpower pool was as important as its 5 Hounshell and Smith (1988: related technologies from other firms and quality; although the situation was improving 298) report that 46 of the 176 Ph.D.s overseen by Carl Marvel, independent inventors. in the decade before 1940, Cohen (1976) longtime professor in the Many of the elements of the “Open noted that virtually all “serious” US scientists University of Illinois chemistry department, went to work for Innovation” model, defined by its leading completed their studies at European one firm, Du Pont. According to Thackray (1982: 221), 65% proponent as a new model for managing universities. Thackray et al. (1985) argue of the 184 Ph.D.s overseen by corporate innovation in which “firms can that American chemistry research during Professor Roger Adams of the University of Illinois during and should use external ideas as well as this period attracted attention (in the form of 1918-58 went directly into internal ideas” (Chesbrough, 2003), were citations in other scientific papers) as much industrial employment. In 1940, 30 of the 46 Ph.D.s produced present in the early development of US for its quantity as its quality. by the University of Illinois industrial R&D. The in-house R&D facilities Federal expenditure for R&D throughout chemistry department were first employed in industry. of leading industrial firms served as monitors the 1930s constituted 12-20% of total US

David C. Mowery 133 R&D expenditure, and industry accounted for A central characteristic of the institutional about two-thirds of the total. The remainder transformation of the US national innovation came from universities, state governments, system during this period was increased private foundations, and research institutes. federal support for R&D, most of which One estimate suggests that state funds was defense-related. Defense-related R&D may have accounted for as much as 14% of spending accounted for more than 80% of university research funding during 1935-36 total federal R&D spending for much of the (National Resources Planning Board, 1942: 1950s, and rarely has dropped below 50% of 178). Moreover, the contribution of state federal R&D expenditure during the entire governments to non-agricultural university 1949-2005 period (figure 1; data from US research appears from these data to have Office of Management and Budget, 2005). exceeded the federal contribution, in sharp Since federal R&D spending accounted contrast to the postwar period. The modest for more than 50% of total national R&D role of the federal government in financing spending during 1953-78 (data for overall US R&D during the 1930s changed radically national R&D investment are available as a result of the political events of the next only after 1952), and only dropped below 20 years. 40% in 1991 (its postwar low point of 25% appeared in 2000, as Figure 2 shows; data The transformation of the US innovation from National Science Board, 2006), the system, 1945-1989 significance of the federal government’s The global conflict of 1939‑1945 defense-related R&D investment is obvious— transformed the structure of R&D throughout in some years during the postwar period the industrial economies. In few if any (e.g., the late 1950s and early 1960s), public other industrial economies, however, was defense-related R&D investment accounted this transformation as dramatic as in the for nearly one-half of total national R&D United States. The structure of the pre-1940 spending. US R&D system resembled those of other Defense-related R&D programs affected leading industrial economies of the era, innovation throughout the postwar US such as the United Kingdom, Germany, and economy. Much of the “R&D infrastructure” France: industry was a significant funder and of the postwar economy, including large performer of R&D, and central government research facilities in industry, government, funding of R&D was modest. But the postwar or academia, was built with funding from US R&D system differed from those of defense-related R&D programs. In addition, other industrial economies in at least three defense-related funding for academic aspects: 1. US antitrust policy during the research in fields ranging from computer postwar period was unusually stringent; 2. science to oceanography supported the 6 Chandler and Hikino (1997) small, new firms played an important role in training of thousands of scientists and argue that established the commercialization of new technologies, engineers. A second important channel of firms dominated the 6 commercialization of new especially in information technology; influence was associated with technological technologies in most sectors and 3. defense-related R&D funding and “spinoffs” -- technological advances of the postwar US economy, with the significant exception of procurement exercised a pervasive influence developed for defense-related applications “…electronic data-processing in the high-technology sectors of the US that found large markets in the civilian technologies, based on the transistor and integrated economy. economy. Such spinoffs proved to be circuit…” (p. 33).

134 Figure 1. Federal and Nonfederally funded R&D, 1953-2002

0.8

0.7

0.6

0.5

0.4 percentaje

0.3

0.2

Federal R&D share

Nonfederal R&D sh are 0.1

0 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

Figure 2. Defense & Nondefense share of total federal gov’t R&D outlays, 1949-2005

90.0

80.0

70.0

60.0

50.0 percentaje

40.0

30.0

20.0

10.0 Defense

Nondefense 0.0 1949 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 198319811985 1987 1989 1991 1993 1995 1997 1999 200320012005

David C. Mowery 135 particularly significant in aerospace and defense-related demand for applications of information technology. novel technologies had detrimental effects on A third important channel through the commercial fortunes of US machine tool which defense-related spending on new firms (Mazzoleni, 1999; Stowsky, 1992). And technologies advanced civilian technological the light-water nuclear reactor technologies applications, aiding the exploitation of that were first developed for military technological “spinoffs”, was procurement. applications proved to be poorly adapted to Postwar defense-related R&D programs the civilian sector (Cowan, 1990). typically were complemented by substantial The “spinoff” and “procurement” channels purchases of new technologies. The US of interaction were most significant when military services, whose procurement defense and civilian requirements for new requirements typically emphasized technologies overlapped significantly and/ performance above all other characteristics or when defense-related demand accounted (including cost), played a particularly for a large share of total demand for a important role during the post-1945 period new technology. In both aerospace and as a “lead purchaser,” placing large orders information technology, the economic and for early versions of new technologies. These technological significance of military-civilian procurement orders enabled suppliers of spinoffs appear to have declined as a result products such as transistors or integrated of growing divergence in the technological circuits to reduce the prices of their products requirements of military and civilian and improve their reliability and functionality.7 products, as well as the growth of civilian Government procurement allowed innovators markets for these products. Moreover, in to benefit from production-related learning some cases, such as information technology, and cost reductions by expanding output the influence of defense applications on the of early versions of a new technology. overall direction of technical development Reductions in production costs led to lower not only declined by the 1990s; defense prices for the technologies, by opening up technologies in some areas lagged behind civilian markets, which typically are more those in the civilian sector, reflecting the price-sensitive. reduced influence of defense-related demand Examples of technological “spinoffs” and R&D investment on the innovative from defense-related R&D spending in the activities of private firms. postwar United States include the jet engine Although defense-related R&D programs and swept-wing airframe that transformed typically are dominated by spending on the postwar US commercial aircraft industry. “development,” rather than “research, the 7 New technologies undergo Major advances in computer networking sheer size of the overall investment of public a prolonged period of “debugging”, performance and computer memory technologies, which funds meant that government defense- and reliability improvement, cost reduction, and learning found rapid applications in civilian as well as related R&D supported academic research in on the part of users and military programs, also trace their origins to a diverse array of disciplines in the physical producers about applications and maintenance (Mowery defense-supported R&D programs. Defense- sciences and engineering. But federal R&D and Rosenberg, 1999). The related procurement was particularly funding in the bio-medical sciences, which pace and pattern of such progressive improvement affect important in the postwar US information was allocated largely to research, also grew the rate of adoption, and the technology industry. In other areas, however, substantially during the post-1945 period. rate of adoption in turn affects the development of these such as numerically controlled machine tools, Although the primary federal funder of innovations.

136 in this sector.9 The NIH now supports half of Major advances in computer all federal non-defense R&D and over 60% “ of federally funded research in American networking and computer universities.10 NIH support of academic research memory technologies, which contributed to the scientific advances in molecular biology and related fields that gave found rapid applications in rise to the biotechnology industry during the 1970s and 1980s. Scientific advances at such civilian as well as military universities as Columbia, Stanford, and the University of California at San Francisco held programs, also trace their origins out considerable potential for applications in pharmaceuticals and related industries. to defense-supported R&D All three of these universities, as well as others, became important “incubators” programs for new firms, and increasingly patented ” faculty discoveries. Even before the passage of the Bayh-Dole Act of 1980, important patents had been filed on behalf of these biomedical research, the National Institute three universities, and university licensing of Health (NIH), was established in 1930, in biomedical fields grew rapidly during the its extramural research program received 1980s and 1990s (See Mowery et al., 2004). significant support only after the founding In contrast to federal investments in IT, in 1937 of the National Cancer Institute, the federal R&D policy in the biomedical sector first of 28 research institutes within the NIH did not combine federal procurement-related 8 A substantial majority (80%) (Swain, 1962) and during the late 1940s, NIH’s “demand-pull” with its large investments of the annual research budget of the NIH supports research extramural research programs began to in research. But the dominance of third- conducted in laboratories grow more rapidly.8 By 1970, NIH funding of party payment (from both public and private at universities, generally in medical schools. academic research amounted to $2 billion (in sources) for the majority of US healthcare 9 The US Pharmaceutical 2000 dollars), which had grown to more than meant that patients and doctors alike were Manufacturers Association estimated that foreign and $13 billion by 2009. more responsive to performance than to US pharmaceuticals firms Rapid growth in the NIH budget, along with price. As a result, new technologies tended invested more than $26 billion in R&D in the United States in slower growth in defense-related R&D after to command a higher price premium in the 2002, substantially above the 1970, shifted the disciplinary composition United States biomedical market than in $16 billion R&D investment by the National Institute of of federally funded research away from the other industrial economies, where public Health in the same year (See physical sciences and engineering and toward insurance systems often limited prices and Pharmaceutical Manufacturers Association, 2003, for both biomedical research. Growth in federally margins. These incentives to adopt and estimates). funded biomedical R&D has been more apply new technologies quickly may well 10 National Science Foundation/ Division of Science Resources than matched by growth in privately funded have influenced the commercial exploitation Statistics, Survey of Research R&D investment in the US pharmaceuticals by US pharmaceutical, medical device, and Development Expenditures st at Universities and Colleges, industry since 1990. By the early 21 century, and biotechnology firms of the knowledge FY 2006. http://www.nsf. federally funded R&D spending accounted and techniques produced by NIH R&D gov/statistics/nsf08300/pdf/ nsf08300.pdf for less than 40% of overall R&D spending investments.

David C. Mowery 137 As I noted earlier, an internationally technologies that historically had been unique characteristic of the US national essential to the competitive success, eroding innovation system that dates back to the the quality and consistency of decision- late 19th century has been the unusually making on technology-related issues.12 stringent character of US antitrust policy, Another novel characteristic of the US which exerted great influence on the early national innovation system during the 1945- R&D strategies of many leading US industrial 90 period -- one that contrasted with the firms. Antitrust policy continued to affect the pre-1940 period --was the prominence of new development of industrial R&D during the firms in commercializing new technologies. In postwar period. US antitrust policy during the industries that effectively did not exist before 1950s and 1960s made it more difficult for 1940, such as computers, semiconductors, large US firms to acquire firms in “related” and biotechnology, new firms played technologies or industries, and increased important roles in the commercialization of their reliance on intra-firm sources for innovations. These postwar US industries 11 Hounshell and Smith (1988) and Mueller (1962) both argue new technologies (see Fligstein, 1990). In differed from their counterparts in Japan and that discovery and development the case of Du Pont, the use of the central most Western European economies, where of nylon, one of Du Pont’s most commercially successful laboratory and Development Department established electronics and pharmaceuticals innovations, was in fact atypical to seek technologies from external sources firms retained dominant roles in the of the firm’s pre-1940 R&D strategy, which bore more was ruled out by senior management as a commercialization of these technologies. than a passing resemblance result of perceived antitrust restrictions on Several factors contributed to the to “open innovation.” Rather than being developed to the acquisitions in related industries. As a result, importance of new firms in the postwar point of commercialization following its acquisition by Du internal discovery (rather than development) US innovation system. The large basic Pont, nylon was based on the of new products became paramount research establishments in universities, basic research of Carothers within Du Pont’s central (Hounshell and Smith, 1988 emphasize the government, and a number of private firms corporate research facilities. firm’s postwar expansion in R&D and its served as “incubators” for the development The successful development of nylon from basic research 11 search for “new nylons” ), in contrast to of innovations that “walked out the door” through to commercialization the firm’s R&D strategy before World War with individuals who established firms to nevertheless exerted a strong influence on Du Pont’s postwar II. The inward focus of Du Pont research commercialize them. Although Klepper R&D strategy, not least because of the fact that many senior appears to have impaired the firm’s postwar (2009) argues that a similar pattern of Du Pont executives had direct innovative performance, even as its central entrepreneurial exit and establishment experience with the nylon project. Hounshell (1992) corporate research laboratory gained a of new firms within the same geographic argues that Du Pont had far sterling reputation within the global scientific region also characterized the US automobile less success in employing the “lessons of nylon” to manage th community. industry in the early 20 century, the such costly postwar synthetic In other US firms, senior managers sought evolution of the postwar US biotechnology, fiber innovations as Delrin. 12 to maintain growth through the acquisition microelectronics and computer industries Graham’s discussion (1986) of the failure of RCA to of firms in unrelated lines of business, was heavily affected by such new-firm commercialize its videodisk technology in the face of the creating conglomerate firms with few if any “spinoffs” from established firms. Indeed, firm’s extensive diversification technological links among products and high levels of labor mobility within regional into such unrelated industries as automobile rental agencies processes. Chandler (1990) and others (e.g., agglomerations of high-technology firms and frozen food is an illustrative Ravenscraft and Scherer, 1987; Fligstein, served as an important channel for analysis of the failures of technology management 1990) argue that diversification weakened technology diffusion and as a magnet for that accompanied the senior management understanding of and other firms in related industries to locate in conglomerate-diversification strategies of many US firms in commitment to the development of the these areas. Such labor mobility also aided the 1960s and 1970s.

138 in the transfer of knowledge and know-how the economic influence of post-1945 federal within many of these nascent high-technology R&D spending, for example, flowed from the industries.13 The importance of new firms in effects of public policy on both support for commercializing postwar innovations in these the development of new technologies and new industries in the postwar US economy support for their rapid adoption. Moreover, also relied on the extension to much smaller in fields such as information technology, firms of the equity-based system of industrial the widespread adoption by US users of finance that distinguished the US economy such innovations as desktop computers and from those of Germany and Japan. computer networking created a vast domestic platform that supported user-led innovation. Conclusion For this “general purpose technology” in Along with other industrial economies, the particular, innovation and adoption interacted United States shifted from an economy whose and accelerated one another. Public policies

13 Discussing the development performance was based on the exploitation to address future technological challenges of laser technology, of domestic natural resources, including such as global climate change or public Bromberg (1991) highlights the importance of linkages agricultural resources, to a “knowledge- health must take into account the importance among research funders and based economy” during the 20th century. of consistency and support for both performers within the United States during the 1950s This transition took decades, but it also was technological innovation and adoption. and 1960s that in turn were characterized by a number of phenomena based on researcher mobility: st “Academic scientists were widely cited as hallmarks of 21 -century linked to industrial scientists through the consultancies that innovation. “Open innovation,” for example, university professors held in in which large corporations utilize intra-firm large and small firms, through the industrial sponsorship capabilities to scan the technological horizon of university fellowships, for potential acquisitions of new technologies, and through the placement of university graduates accurately describes the strategies of many and postdoctoral fellows in of the large US corporate pioneers of in- industry. They were linked th by joint projects, of which a house R&D during the early 20 century. major example here is the Their acquisitions of technologies from Townes-Schawlow paper of [sic] optical masers, and through external sources also relied on the operation sabbaticals that academics took in industry and industrial of a market for intellectual property that was scientists took in universities. widespread during the early decades of the Academic scientists were linked th with the Department of Defense 20 century, although its importance was R&D groups, and with other subsequently supplanted by the in-house government agencies through tours of duty in research technology development activities of large organizations such as the firms. Institute for Defense Analyses, through work at DoD-funded This brief survey also highlights the close laboratories such as the Columbia Radiation Laboratory interaction among technological, policy, and or the MIT Research laboratory institutional influences within the evolution for Electronics, and through government study groups and of the US national innovation system. The consultancies. They were also discussion underscores the linkages between linked by the fact that so much of their research was supported the processes of technological innovation by the Department of Defense and adoption that are essential to economic and NASA.” (Bromberg, 1991: 224). growth in all industrial economies. Much of

David C. Mowery 139 References Ga l l m a n , R. E. (2000), “Economic Growth and Structural Change in the Long Nineteenth Century”, in S. L. Engerman and R. E. Ab r a m ov i t z , M. (1956), “Resource and Output Trends in the United Gallman (eds.), The Cambridge Economic History of the United States since 1870”, American Economic Review 46, pp. 5-23. States, vol. II, New York: Cambridge University Press. Ab r a m ov i t z , M., and P. A. Da v i d (2000), “American Macroeconomic Ge r s c h e n k r o n , A. (1962), Economic Backwardness in Historical Growth in the Era of Knowledge-Based Progress”, in S. L. Perspective Cambridge, MA: Harvard University Press. Engerman and R. E. Gallman (eds.), The Cambridge Economic Gi b b , G.S., and E. H. Kn o w l t o n (1956), The Resurgent Years: History of History of the United States, vol. III., New York: Cambridge Standard Oil Company (New Jersey), 1911-1927, New York: Harper University Press. & Row. American Association for the Advancement of Science (2005), Go l d i n , and Ka t z (2009), The Race Between Education and Technology, Research and Development in the FY2006 Budget, Washington, D.C.: Cambridge, MA: Harvard University Press. American Association for the Advancement of Science. Gr a h a m , M. B. W. (1986), RCA and the Videodisc: The Business of Bo k , D. (1982), Beyond the Ivory Tower, Cambridge, MA: Harvard Research, New York: Cambridge University PressGraham, M. B. University Press. W., and H. G. Pruitt (1990), R&D for Industry: A Century of Technical Br a u n , E., and S. Ma c Do n a l d (1978), Revolution in Miniature, New Innovation at Alcoa, New York: Cambridge University Press. York: Cambridge University Press. Ha i n e s , M. R. (2000), “The Population of the United States, Br o m b e r g , L. (1991), The Laser in America, 1950-1970, Cambridge, 1790‑1920” in S. L. Engerman and R. E. Gallman (eds.), The MA: The MIT Press. Cambridge Economic History of the United States, vol. II, New York: Bu s h , V. (1945), Science: The Endless Frontier, Washington, D.C.: U.S. Cambridge University Press. Government Printing Office. Ho u n s h e l l , D. A. (1995), “Du Pont and the Management of Large- Ch a n d l e r , A. D., Jr. (1977), The Visible Hand, Cambridge, MA: Harvard Scale Research and Development”, in P. Gallison and B. Hevly, University Press. Big Science: The Growth of Large-Scale Research, Stanford, CA: Ch a n d l e r , A. D., Jr. (1990), Scale and Scope, Cambridge: MA: Harvard Stanford University Press. University Press. Ho u n s h e l l , D. A. (2000), “The Medium is the Message, or How Ch a n d l e r , A. D., Jr. (2001), Inventing the Electronic Century, New York: Context Matters: The RAND Corporation Builds an Economics Free Press. of Innovation, 1946-62”, in T. P. Hughes and A. Hughes (eds.), Ch a n d l e r , A. D., Jr., and T. Hikino (1997), “The large industrial Systems, Experts, and Computers, Cambridge, MA: MIT Press. enterprise and the dynamics of modern economic growth”, in A. D. Ho u n s h e l l , D. A., and J. K. Sm i t h (1998), Science and Corporate Chandler, Jr., F. Amatori and T. Hikino (eds.), Big Business and the Strategy: Du Pont R&D, 1902‑1980, New York: Cambridge University Wealth of Nations, Cambridge, UK: Cambridge University Press. Press. Ch e s b r o u g h , H. (2003), Open Innovation: The New Imperative for Kl e p p e r , S. (2009), “Silicon Valley—A Chip off the old Detroit Bloc” in Creating and Profiting from Technology, Boston, MA: Harvard Z. Acs, B. Audretsch and R. Strom (eds.), Entrepreneurship, Growth, Business School Press. and Public Policy, New York: Cambridge University Press. Ch e s b r o u g h , H. (2006), “Open Innovation: A New Paradigm for La m o r e a u x , N. R., and K. L. So k o lo ff (1999), ìInventors, Firms, Understanding Industrial Innovation” in H. Chesbrough, W. and the Market for Technology in the Late Nineteenth and Early Vanhaverbeke and J. West (eds.), Open Innovation: Researching a Twentieth Centuriesî, in N. R. Lamoreaux, D. M. G. Raff and P. New Paradigm, New York: Oxford University Press. Temin (eds.), Learning by Doing in Markets, Firms, and Countries, Co h e n , I. B. (1976), “Science and the Growth of the American Chicago: University of Chicago Press. Republic”, Review of Politics, 38, pp. 359-398. La m o r e a u x , N. R., and K. L. So k o lo ff (2005), “The Decline of the Co h e n , W., R. Fl o r i d a and R. Go e (1994), “University‑Industry Independent Inventor: A Schumpeterian Story”, National Bureau Research Centers in the United States”, Technical Report, Center of Economic Research Working Paper #11654. for Economic Development, Carnegie-Mellon University. La n g lo i s , R. (2003), “The Vanishing Hand: The Changing Dynamics Co h e n , W., R. Fl o r i d a , L. Ra n d a z z e s e and J. Wa l s h (1998), “Industry of Industrial Capitalism”, Industrial and Corporate Change, pp. 12, and the Academy: Uneasy Partners in the Cause of Technological 351-385. Advance”, in R. Noll, ed., Challenges to the Research University, La n g lo i s , R. N., and D. C. Mo w e r y (1996), “The Federal Government Washington, D.C.: Brookings Institution. Role in the Development of the U.S. Software Industry” in D. C. Co w a n , R. (1990), “Nuclear Power Reactors: A Study in Technological Mowery (ed.), The International Computer Software Industry: A Lock-In”, Journal of Economic History 50, pp. 541-567. Comparative Study of Industry Evolution and Structure, New York: Da v i d , P. A., and G. Wr i g h t (1997), “Increasing Returns and the Oxford University Press. Genesis of American Resource Abundance”, Industrial and Le s l i e , S. W. (1993), The Cold War and American Science, New York: Corporate Change, 6, pp. 203-245. Columbia University Press. Da v i s , L. A., and R. J. Cu l l (2000), “International Capital Movements, Le v i n , Richard C. (1982), “The Semiconductor Industry”, in R. R. Domestic Capital Markets, and American Economic Growth, 1820- Nelson ed., Government and Technical Progress: A Cross-Industry 1914”, in S. L. Engerman and R. E. Gallman (eds.), The Cambridge Analysis, New York: Pergamon Press. Economic History of the United States, vol. II, New York: Cambridge Lu n d v a l l , B. -Å. (1992), National Systems of Innovation: Towards a University Press. Theory of Innovation and Interactive Learning, London: Pinter. Ed q u i s t , C. (2004), “Systems of Innovation: Perspectives and Ma d d i s o n , A. (1994), “Explaining the Economic Performance of Challenges”, in J. Fagerberg, D. C. Mowery and R. R. Nelson Nations, 1820-1989”, in W. J. Baumol, R. R. Nelson and E. N. Wolff (eds.), Oxford Handbook of Innovation and Policy, Oxford, UK: Oxford (eds.), Convergence of Productivity, New York: Oxford University University Press. Press. Fligstein, N. (1990), The Transformation of Corporate Control, Ma r r , W.L., and D. G. Pa t e r s o n (1980), Canada: An Economic History, Cambridge, MA: Harvard University Press. Toronto: Macmillan. Fr e e m a n , C. (1987), Technology Policy and Economic Performance: Ma z z o l e n i , R. (1999), “Innovation in the Machine Tool Industry: Lessons from Japan, London: Pinter. A Historical Perspective on the Dynamics of Comparative Fr e e m a n , C. (1995), “The ‘National System of Innovation’ in Historical Advantage”, in D. C. Mowery and R. R. Nelson (eds.), The Sources Perspective”, Cambridge Journal of Economics, 19, pp. 5-24. of Industrial Leadership, New York: Cambridge University Press. Fu r m a n , J., and M. Ma c Ga r v i e (2005), “Early Academic Science McMi l l a n , G. S., F. Na r i n and D. S. De e d s (2000), “An Analysis of and the Birth of Industrial Research Laboratories in the U.S. the Critical Role of Public Science in Innovation: The Case of Pharmaceutical Industry”, National Bureau of Economic Research Biotechnology”, Research Policy 29, pp.1-8. working paper #11470. Mi l l a r d , A. (1990), Edison and the Business of Invention, Baltimore, Ga l a m b o s , L., and J. L. St u r c h i o (1998), “Pharmaceutical firms and MD: Johns Hopkins University Press. the Transition to Biotechnology: A Study in Strategic Innovation”, Mo w e r y , D. C.(1983a), “Industrial Research, Firm Size, Growth, and Business History Review 72, pp. 250-278. Survival, 1921‑1946”, Journal of Economic History, 43, pp. 953‑980.

140 Mo w e r y , D. C. (1983b), “The Relationship between the Contractual Sc h u m p e t e r , J. A. (1943), Capitalism, Socialism, and Democracy, New and In-House Forms of Industrial Research in American York: Harper & Row. Manufacturing, 1900-1940”, Explorations in Economic History, 20, So l o w , R. M. (1957), “Technical Change and the Aggregate pp. 351-374. Production Function”, Review of Economics and Statistics, 39, pp. Mo w e r y , D. C. (1995), “The Boundaries of the U.S. Firm in R&D”, 312-320. in N. R. Lamoreaux and D. M. G. Raff (eds.), Coordination St i g l e r , G. J. (1968), “Monopoly and Oligopoly by Merger”, in G. J. and Information: Historical Perspectives on the Organization of Stigler (ed.), The Organization of Industry, Homewood, IL, Irwin. Enterprise, Chicago: University of Chicago Press for NBER. St o w s k y , J. (1992), “From Spin-off to Spin-on: Redefining the Mo w e r y , D. C. (2005), “National Security and National Innovation Military’s Role in American Technology Development”, in W. Systems”, presented at the PRIME/PREST workshop on Sandholtz, M. Borrus, J. Zysman, K. Conca, J. Stowsky, S. Vogel, “Reevaluating the Role of Defence and Security R&D in the and S. Weber, The Highest Stakes, New York: Oxford University Innovation System”, University of Manchester, September 19‑21. Press. Mo w e r y , D. C., R. R. Ne l s o n , B. Sa m p a t and A. Ziedonis (2004), Ivory St u r c h i o , J. L. (1988), “Experimenting with Research: Kenneth Mees, Tower and Industrial Innovation, Stanford, CA: Stanford University Eastman Kodak, and the Challenges of Diversification”, presented Press. at “The R&D Pioneers”, Hagley Museum and Library, October 7. Mo w e r y , D. C., and N. Ro s e n b e r g (1999), Paths of Innovation, New Sw a n n , J. P. (1988), Academic Scientists and the Pharmaceutical York: Cambridge University Press. Industry, Baltimore, MD, Johns Hopkins University Press. Mo w e r y , D. C., and B. N. Sa m p a t ( 2004), “The Bayh-Dole Act of 1980 Th a c k r ay , A. (1982), “University-Industry Connections and Chemical and University-Industry Technology Transfer: A Model for Other Research: An Historical Perspective”, in University-Industry OECD Governments?” Journal of Technology Transfer, 30, pp. 115- Research Relationships, Washington, D.C., National Science Board. 127. Th a c k r ay , A., J. L. Sturchio, P.T. Carroll and R. Bud (1985), Chemistry Mo w e r y , D. C., and T. Si m c o e (2002), “The History and Evolution of the in America, 1876‑1976: Historical Indicators, Dordrecht: Reidel. Internet” in B. Steil, R. Nelson and D. Victor (eds.), Technological Th o r e l l i , H.B. (1954), Federal Antitrust Policy, Baltimore, MD: Johns Innovation and Economic Performance, Princeton, NJ: Princeton Hopkins University Press. University Press. Tr o w , M. (1979), “Aspects of Diversity in American Higher Mo w e r y , D. C., and A. Ziedonis (2002), “Academic Patent Quality and Education”, in H. Gans, On the Making of Americans, Philadelphia: Quantity Before and After the Bayh-Dole Act in the United States”, University of Pennsylvania Press. Research Policy, 31, pp. 399-418. Tr o w , M. (1991), “American Higher Education: ‘Exceptional’ or Just Mu e l l e r , W. F. (1962), “The Origins of the Basic Inventions Different?” in B. E. Shafer (ed.), Is America Different? A New Look at Underlying DuPont’s Major Product and Process Innovations, 1920 American Exceptionalism, New York: Oxford University Press. to 1950” in The Rate and Direction of Inventive Activity, Princeton: U.S. Office of Management and Budget (2005), Budget of the U.S. Princeton University Press. Government, Fiscal Year 2006: Historical Tables, Washington, D.C.: Na t i o n a l Re s e a r c h Co u n c i l (1999), Funding a Revolution: Government U.S. Government Printing Office. Support for Computing Research, National Academies Press. Wi l d e s , K.L., and N. A. Li n d g r e n (1985), A Century of Electrical Na t i o n a l Re s e a r c h Co u n c i l (2004), A Patent System for the 21st Engineering and Computer Science at MIT, 1882‑1982 Cambridge, Century, Washington, D.C.: National Academies Press. MA: MIT Press. Na t i o n a l Re s o u r c e s Pl a n n i n g Bo a r d , Research—A National Resource, Wr i g h t , G. (2007), “Historical Origins of the New American Washington, D.C.: U.S. Government Printing Office. Economy”, unpublished MS, Stanford University. Na t i o n a l Sc i e n c e Bo a r d (2006), Science and Engineering Indicators: 2006, Washington, D.C.: U.S. Government Printing Office. Na t i o n a l Sc i e n c e Fo u n d at i o n , Di r e c t o r at e f o r So c i a l , Be h a v i o r a l , a n d Ec o n o m i c Sc i e n c e s (1995a), “1993 Spending Falls for U.S. Industrial R&D, Nonmanufacturing Share Increases”, http://www. nsf.gov/statistics/databrf/sdb95325.pdf. Na t i o n a l Sc i e n c e Fo u n d at i o n , Sc i e n c e Re s o u r c e s Division (1995b), “Research and Development in Industry, 1992”, http://www.nsf. gov/statistics/nsf96333/appa.pdf. Na t i o n a l Sc i e n c e Fo u n d at i o n , Sc i e n c e Re s o u r c e s Division (2005), Academic Research and Development Expenditures: Fiscal Year 2003, Washington D.C.: National Science Foundation. Ne a l , A. D., and D. G. Go y d e r (1980), The Antitrust Laws of the United States, Cambridge, UK: Cambridge University Press. Ne l s o n , R. R. (ed.) (1993), National Innovation Systems: A Comparative Analysis, New York: Oxford University Press. Ne l s o n , R. R., and G. Wr i g h t (1992), “The Rise and Fall of American Technological Leadership”, Journal of Economic Literature 30(4), December, pp. 1931‑1964. Pa t i t , J. M., S. P. Ra j , and D. Wi l e m o n (2006), “Integrating Internal and External R&D: What Can We Learn from the History of Industrial R&D?”, presented at the meetings of the Academy of Management, Atlanta, GA, August 4‑6. Pharmaceutical Manufacturers Association (2003), Industry Profile 2003, http://www.phrma.org/publications/profile02. Ra v e n s c r a f t , D., and F. M. Sc h e r e r (1987), Mergers, Sell-Offs, and Economic Efficiency, Washington, D.C.: Brookings Institution. Re i c h , L. S. (1985), The Making of American Industrial Research, New York: Cambridge University Press. Ro s e n b e r g , N. (1998), “Technological Change in Chemicals: The Role of University-Industry Relations” in A. Arora, R. Landau, and N. Rosenberg, eds., Chemicals and Long-Term Economic Growth, New York: John Wiley. Sc h m o o k l e r , J. (1957), “Inventors Past and Present”, Review of Economics and Statistics, 39, pp. 321-333.

David C. Mowery 141

Mapping Creativity in the European Union: The role of labour market structure and systems of education and training1

Edward Lorenz 1. Introduction Although there has been some work on Université de Nice Sophia Antipolis Creativity has attracted the attention the cultural or systemic basis of creativity Bengt-Åake Lundvall of researchers in a variety of disciplines (Csikszentmihalyi, 1988; Lubart, 1999), prior Aalborg Universitet including behavioural psychology and to Richard Florida’s publication of The Rise management. Within the field of psychology of the Creative Class (2002), relatively little the focus has been primarily on the attention has been given to analysing the relationship between creativity and such basis for and the impact of creativity at the individual attributes as intelligence, levels of regions and nations. By putting knowledge and personality (Barron and forward creativity as the driving force of Harrington, 1981; Helson, 1996; Sternberg, economic growth, and by presenting the 1988; Sternberg and Lubart, 1991; Weisberg, rise of creativity as a general account of 1993).2 In the management literature the the current transformation of the economy focus has been more on how creativity comparable to the knowledge-based emerges from the interaction between the economy hypothesis, Florida’s research has individual employee and various aspects of done more than any of the more specialised management style and work organisation. research to bring creativity to the forefront Woodman, Sawyer, and Griffin (1993), of debate in the social sciences. Further, for example, see creativity as resulting in a series of empirical studies focusing from the interaction of individual, group on the relationship between investments 1 This chapter draws on the analysis in an article that and organizational variables. Amabile in human capital, creativity and regional we originally published in et al. (1996) similarly focus on social economic performance, Florida and his co- the Cambridge Journal of Economics, 2010. and organizational factors, arguing authors have argued that the creative class

2 See R. J. Sternberg (ed.), in particular that creativity at work is provides a new and alternative standard 1999, for an overview of the supported by organizational and supervisory to the level of educational attainment literature. encouragement as well as by a diversity of for measuring human capital in studies ideas within the work group (Bharadwag and focusing on regional development (Florida, Menon, 2000; Drazin, Glynn and Kazanjian, Mellander and Stolarick, 2008; Mellander 1999; and Ford, 1996). and Florida, 2006).

Edward Lorenz and Bengt-Aake Lundvall 143 Drawing inspiration from Florida’s creative work activity across nations after research as well as from the more adjusting for differences in occupation and specialised research on creativity in the fields industrial structure. Section 4 examines the of behavioural psychology and management, relationship between creativity and measures this paper sets out firstly to provide what we of national labour market structures and believe to be the first mapping of creativity systems of education and training. Section 5 at work for the 27 member nations of concludes and briefly alludes to implications the European Union. We show that there for EU policy. are significant national differences in the likelihood of employees being involved in 2. Measuring the creative workforce creative work activity even after adjusting A major theme in the behavioural for national differences in occupational and psychology literature on creativity is that industrial structure. of ‘eminence’ or being ‘unique in the Referring to recent research that extends whole world’, and there are a number of the perspective on national systems of empirical studies of creativity focusing on innovation to include the organisation of the lives of truly exceptional musicians, work, labour market characteristics and artists or scientists. In contrast to this focus education systems (Hall and Soskice 2001; on eminence, there is a body of research Lam and Lundvall, 2006; Lorenz and Lundvall focusing on ‘everyday’ or ‘local’ creativity of 2006; Lundvall, 2002; Whitley 2006), we then the sort that a large percent of the working explore by means of aggregate correlations population engage in during their daily work at the national level the relationship between activity (Reilly, 2008; Craft, 2005; Richards creativity at work and characteristics of 1996). national labour markets and systems of Florida’s notion of the creative class education and training. Among the key corresponds to this latter, more broadly findings presented in this paper is that the distributed, form of creativity. In Florida level of creative work activity tends to be (2002), he states that the distinguishing higher in nations with broad competence- characteristic of the creative class is that its based systems of education and training members “engage in work whose function is that place value on equality of access to to create meaningful new forms” (p. 68). The life-long learning opportunities and the highest level of creative work, characteristic continuing acquisition of job-related skills. of what Florida refers to as the ‘super- The level of creativity also tends to be higher creative core’, involves “producing new forms in nations characterised by the combination or designs that are readily transferable and of high levels of labour market mobility and widely useful...” (p. 69). This group includes well-developed systems of unemployment such occupations as scientists, university protection (flexible security) and with active professors, poets and architects. Beyond labour market policies. this core, Florida includes within the creative The chapter is structured as follows. class a diverse group of professionals who, Section 2 develops the mapping of the “engage in creative problem-solving, drawing importance of creative workers for the EU- on complex bodies of knowledge to solve 27. Section 3 demonstrates that there are specific problems.” He observes, “What significant differences in the frequency of they (creative professionals) are required to

144 do regularly is think on their own.” (p. 69). to the shop floor, and highly creative firms Further, he notes that many technicians are typically seek to mobilise the knowledge and included in the creative class as they, “apply skills of the entire workforce. The blanket complex bodies of knowledge to working with characterisation of the work of operators, physical materials” and in a number of fields, sales and service staff and craft workers as “are taking on increased responsibility to non-creative is at odds with a vast literature interpret their work and make decisions...” on ‘learning organisations’ that emphasize (pp. 69-70). the collective and multi-level nature of As the above references show, Florida’s learning and creativity at the workplace. notion of the creative class is an economic Second, there is a well-established one based on the kinds of work activities or internationally comparative literature which jobs that different occupational categories identifies important national effects on the typically undertake. Consistent with this, and organisation of work. In particular, detailed in order to measure the size of the creative international comparisons show that the jobs class and its growth over time for the US and work activity of the same occupational economy, he draws on the occupational categories can display significant national classifications and figures compiled by variations, requiring more or less learning the US Bureau of Labor Statistics. Based and problem-solving activity and differences on standard characterisations of skill in responsibility and autonomy (Dore, 1973; 3 Florida’s measure of the requirements for different jobs, occupations Gallie, 1978; Lane, 1989; Lorenz and Valeyre, creative class is based on the 1998 Standard Occupational are grouped into the creative, service or 2005; Maurice et al., 1982). The findings of Classification (SOC) system working classes. The creative class is defined these detailed international comparisons of which, in common with the International Standard to include most management occupations, enterprise organisation are consistent with Classification of Occupations professionals and selected categories of the work on national systems of innovation (ISCO), groups jobs together 3 in occupations and more technicians and assistant professionals. that links the micro-dynamics of learning and aggregate groups mainly on Florida (2002: 75, 330) estimates that the knowledge creation to differences in national the basis of the similarity of skills required to fulfil the tasks creative class increased from 3 million labour markets and education and training and duties of the jobs. For the workers or 10% of the workforce in 1900 systems. list of occupational categories included in the creative class to 38.3 million or 30% in 1999. In 1999, the Third, work on sectoral systems of see Florida (2002: 328-329). In terms of the ISCO used by working and service classes are estimated innovation (Malerba, 2002) points to the European Union, Florida’s at 26.1 and 43.4 % of the work force important differences in the technological creative class is composed of Management Occupations respectively, with agriculture making up the dynamism of different sectors of the economy (ISCO 12-13), Professionals remaining 0.5%. and thus it can be anticipated that the work (ISCO 21-24) and some of the occupations classified as While this way of measuring the size of of the same occupational categories will Technicians and Associate the creative workforce is appropriate for display marked differences in terms of Professionals (ISCO 31-34). The service class is composed capturing broad changes in the importance problem-solving activity and creativeness of Clerks (ISCO 41-42), Service Workers (ISCO 51-52) and of creativity within an economy over time, according to the sector. This implies a need Sales and Service Elementary it has a number of limitations that make it to take into account differences in industrial Occupations (ISCO 91). The working class is composed unsuitable for an internationally comparative structure across nations in any statistical of Craft and Related Trade analysis. Firstly, as Florida’s discussion of analysis of the determinants of creativity at Workers (ISCO 71-74), Plant and Machine Operators (ISCO the creative factory emphasises (Florida, the workplace. 81-83) and Labourers in Mining, 2002: 52), creativity can extend down from the In order to develop a measure of the Construction, Manufacturing and Transport (ISCO 93). firm’s management and technical services creative workforce that is suitable for

Edward Lorenz and Bengt-Aake Lundvall 145 a comparative analysis of the EU-27, These six work activity variables do not, we draw on the results of the 4th EWCS however, provide a basis for discriminating conducted by the European Foundation for between the creative workforce as a whole the Improvement of Living and Working and the ‘super creative core’ which Florida Conditions in 2005. The survey questionnaire defines in terms of the outcome of producing was directed to approximately 1000 active transferrable and widely-used new forms or persons in each country with the exception designs. of Cyprus, Estonia, Luxembourg, Malta Table 2 shows the composition of the three and Slovenia, which had approximately groups resulting from the hierarchical cluster 600 respondents. The total population analysis. The first group, which accounts surveyed was 29,679 occupied persons.4 for 51% of the population, is distinctive for The analysis presented here is restricted high levels of problem-solving, learning to the 9,198 salaried employees working in and task complexity. The persons grouped 4 The sample of the EWCS establishments with at least 10 employees in this cluster use their own ideas and is representative of persons in both industry and services, but excluding exercise considerable autonomy in carrying in employment (employees and self-employed). The agriculture and fishing, public administration out their jobs. We refer to them as ‘creative sampling design had the and social security, education, health and workers’. The second group is characterised following stages: stratification of primary sampling units social work, and private domestic employees. by nearly as high levels of problem- solving (PSUs) according to region and In order to develop a measure of the creative and learning and comparable levels of task urbanisation level; random selection of starting addresses workforce that is consistent with Florida’s complexity. However, there is little use of within each PSU; and a ‘random walk’ procedure for the (2002) characterisation of the creative one’s own ideas, and levels of autonomy selection of the household. The class, we use factor analysis to identify the or discretion at work are low. This cluster response rate was 0.48 and was calculated as the proportion underlying associations that exist among six groups employees who, while regularly of completed interviews to the binary variables that capture key features solving technical or other problems at work, total number of eligible cases. Three types of weighting were 5 of creative work activity (see Table 1). We do so in highly supervised settings offering applied to the data in order to then use hierarchical clustering in order to little scope for developing original or creative enhance the representativeness of the results: a selection group the population into three basic types solutions based on their own ideas. We refer probability weighting; a non- of workers: creative workers, constrained to them as ‘constrained problem solvers’. The response (or post-stratification) weighting; and a cross-national problems solvers and workers with Taylorist third group is composed largely of persons weighting in order to be able to 6 do cross-national estimations. jobs. doing deskilled work. Levels of learning, For the quality report on the Table 1 shows the percentage of the problem-solving and task complexity are 4th EWCS (see Petrakos Agilis, M., 2007). population characterised by the six work- low. There is little use of one’s own ideas 5 For the exact wording of activity variables that are used in order to and there is limited scope for exercising the questions upon which the classify a worker as creative. Thus, as Florida discretion in how work is carried out. We measures are based, see the Annex; Table A1. observes, creative workers typically engage in refer to this group as ‘Taylorised workers’. 6 The factor method used complex problem-solving activities. Further, Table 3 shows that there are variations is multiple correspondence analysis. In order to group the workers who use their own ideas in settings in the importance of creative learners individuals, Ward’s method where they exercise considerable discretion according to industrial sector. In particular, of hierarchical clustering is used on the basis of the factor over their work methods or task order creative learners are over-represented in scores, or the coordinates of correspond to the distinguishing creative business services and in community, social the observations, of the first two factors which account for feature of being able to, “think on their own” and personal services, while they are under- 59% of the total variance of the and to take on, “increased responsibility to represented in manufacturing, construction data set. See the Annex for a graphical presentation of the interpret their work and make decisions”. and retail and other services. factor analysis.

146 Table 1. Creative work variables

Percentage of occupied persons affected Problem solving activities in work 79

Learning new things at work 68

Undertaking complex tasks 62

Using one’s own ideas at work 50

Able to choose or change one’s work methods 60 Source: Fourth Working Conditions Survey, 2005, Able to choose or change the order of one’s tasks 56 European Foundation for the Improvement of Living and N 9,240 Working Conditions

Table 2. Cluster analysis of types of workers

Percentage of occupied persons by type of learner reporting each variable Creative Constrained Taylorised Average Variable workers problem-solvers workers Problem solving activities at work 96 87 37 79 Learning new things at work 87 84 16 68 Undertaking complex tasks 80 81 8 62 Using one’s own ideas at work 77 24 19 50 Able to choose or change one’s work methods 94 21 29 60 Source: Fourth Working Conditions Survey, 2005, Able to choose or change the order of one’s 92 14 25 56 European Foundation for the tasks Improvement of Living and Total share of occupied persons 51 24 25 100 Working Conditions

Table 3. Type of Worker by Sector of Activity

Percentage of occupied persons by sector of activity and type of learner Creative workers Constrained Taylorised workers Total problem solvers Manufacturing, construction and utilities 46 27 27 100 Retail and other services 49 23 29 100 Source: Fourth Working Business and financial services 67 19 13 100 Conditions Survey. European Foundation for the Community, social and personal services 59 18 22 100 Improvement of Living and Average 51 24 25 100 Working Conditions

Edward Lorenz and Bengt-Aake Lundvall 147 Table 4. Type of Worker by Occupational Category

Percentage of occupied persons by occupational category and type of worker Creative workers Constrained problem Taylorised workers Total solvers Senior managers 82 10 7 100 Professionals and technicians 74 18 8 100 Clerks and service workers 53 23 24 100 Source: Fourth Working Skilled workers and machine operators 38 30 32 100 Conditions Survey, Unskilled workers 33 24 43 100 European Foundation for the Improvement of Living and Average 51 24 25 100 Working Conditions

Table 5. National differences in Types of Learners: EU27 (percentage of occupied persons by country and type of learner)

Creative workers Constrained problem Taylorised workers Total solvers Belgium 60 21 19 100 Czech Republic 40 30 30 100 Denmark 70 15 14 100 Germany 52 23 26 100 Estonia 58 22 20 100 Greece 39 33 28 100 Spain 35 30 36 100 France 63 18 19 100 Ireland 58 18 24 100 Italy 37 29 34 100 Cyprus 42 26 32 100 Latvia 53 19 27 100 Lithuania 35 27 38 100 Luxembourg 60 20 20 100 Hungary 44 31 25 100 Malta 70 14 16 100 Netherlands 67 16 16 100 Austria 50 28 23 100 Poland 43 34 23 100 Portugal 46 24 29 100 Slovenia 50 25 25 100 Slovakia 33 32 35 100 Finland 66 21 13 100 Sweden 82 10 8 100 United Kingdom 51 22 27 100 Source: Fourth Working Bulgaria 39 30 31 100 Conditions Survey, 2005 Romania 35 38 27 100 European Foundation for the Improvement of Living and EU-27 51 24 25 100 Working Conditions

148 Table 4 points to the considerable diversity Cyprus, the Czech Republic, Hungary, that exists in the importance of creative Lithuania, Slovakia, and Bulgaria. The work across broadly defined occupational frequency of constrained problem solvers is categories. Although the large majority relatively high in Greece, in the new member of senior managers, professionals and nations with the exception of Latvia, and technicians, which make up the bulk of Slovenia and to a lesser extent Lithuania. Florida’s creative class, are highly over- Table 3 shows that the frequency of represented in the creative workers cluster, creative work activity varies across broadly roughly half of the occupations making up defined sectors of activity, and some of the clerks and sales and service category, the national differences in the importance who form Florida’s service class, engage in of creativity shown in Table 5 may be creative work activity. Moreover, a significant attributable to cross-national differences in minority of the manual occupations making industrial structure. It is also possible that up Florida’s working class engage in work international differences in occupational requiring creative learning, problem-solving structure may explain some of the differences and the use of one’s own ideas. The results in the frequency of creative work across shown in Table 4 point, for the EU at any the member nations of the EU. In order to rate, to the limitations of using standard control for the effects of these structural occupational categories as the basis for variables, we have undertaken a logistic identifying the group of workers who are regression analysis explaining the likelihood creative at work. Significant proportions of that an employee is engaged in creative service and manual workers may work in work in terms of nation, industrial sector settings where they are called upon to make and occupation. The results are presented in creative use of their own ideas. Table 6. The results presented in the first column 3. national effects of Table 6 show national effects on the Table 5 identifies important differences in likelihood of creative work without structural the size of the creative workforce across the controls and the second column shows the EU-27. Creative workers are most present results with these controls. Germany, which in the Scandinavian countries, Finland, the has a profile of types of learners close to the Netherlands and Malta and least present EU-27 average, is used as the reference case. in Spain, Greece, Italy, Cyprus, the Czech The results thus show whether or not creative Republic, Hungary, Lithuania, Poland, work activity is significantly more likely in a Slovakia, Bulgaria and Romania. There are nation relative to the German case. intermediate levels of creative work activity The first column results (without in the continental European nations, the structural controls) show that creative work UK and Ireland, Portugal and amongst the is significantly more likely in the Nordic new member nations in Estonia, Latvia, countries, Netherlands, Malta and France. and Slovenia. The frequency of Taylorised Expressed in odds ratios an employee workers tends to show the reverse trend to working in Sweden is 4.4 times as likely that of creative workers, being lowest in the as an employee in Germany to be engaged Scandinavian countries, the Netherlands and in creative work activity. The likelihood of Malta, and highest in the southern nations, creative work is not significantly different in

Edward Lorenz and Bengt-Aake Lundvall 149 Table 6. Logit estimates of national effects on creative work activity

Logit estimates without Logit estimates with structural structural controls controls Belgium .33 .43* Czech Republic -.45** -.17 Denmark .81** .89** Germany Reference Estonia .26 .45* Greece -.52** -.47* Spain -.70** -.48* France .48** .51** Ireland .24 .06 Italy -.60** -.47* Cyprus -.40* -.31 Latvia .07 .24 Lithuania -.67** -.36* Luxembourg .34 .21 Hungary -.29 -.08 Malta .81** 1.04** Netherlands .66** .60** Austria -.08 .06 Poland -.33* -.03 Portugal -.21 .27 Slovenia -.06 .10 Slovakia -.77** -.61** Finland .62** .68** Sweden 1.47** 1.64** United Kingdom -.01 -.20 Bulgaria -.54** -.41* Romania -.69** -.32 Manufacturing, construction and utilities Reference Retail and other services -.16 Business and financial services .09 Community, social and personal services .36* Senior managers 2.29** Professionals and technicians 1.62** Clerks and service workers .68** Crafts and related trades Reference * significant at 5% level; Operators and assemblers -.20 ** significant at 1% level.

150 the continental nations with the exception 4. Creativity, labour market structure and of France, and the likelihood is significantly systems of education and training lower in the southern nations with the The analysis above has shown that there exception of Portugal for which the difference are significant differences in the importance is not significant. Creative work activity is of creative work activity across the member less likely in a number of the new member nations of the European Union. Relatively nations including Lithuania, Poland, Slovakia, little attention has been given in the the Czech Republic, Bulgaria and Romania. literature to how national-level institutional Expressed in odds ratios, the likelihood of arrangements may impact on creativity at the creative work is only .46 times as likely in workplace. Although creativity at work might Slovakia as it is in Germany. be influenced by a wide range of institutional The second column results report national conditions, in this exploratory analysis we effects after taking into account the effects focus on a set of complementary institutional of cross-national differences in the structure arrangements that have received attention in of sectors, occupational categories and recent work on national innovation systems: establishment size. Most of the national the role of broad competence-based systems effects reported in column one remain the of education and training; and the role of same in terms of the direction of the sign and labour market systems characterised by the statistical significance. The exceptions are combination of high levels of labour market Belgium and Estonia for which the positive mobility and well developed systems of coefficients are now significant at the 5% unemployment protection. (Hall and Soskice, level, and Cyprus, Poland and Romania 2001; Lam and Lundvall, 2006; Lorenz and for which the negative coefficients are no Lundvall, 2006). longer significant at the 5% level or better. Considering the control variables, we can see 4.1. National labour market structure that relative to manufacturing and mining Hall and Soskice (2001) have argued creative work is more likely in community, that fluid labour markets characterised by social and personal services, while for few restrictions on hiring and firing may business and financial services and retail impact positively on innovative performance and other services there are no significant because they allow firms to rapidly bring differences. As expected, creative work in new knowledge from the outside and to activity is more likely for senior managers and reconfigure their knowledge bases. New professionals relative to skilled workers and knowledge can support creative outcomes, machine operators, and it is also more likely such as developing new products or services, for clerks and sales workers relative to skilled because it provides a foundation for exploring workers and machine operators. Expressed novel solutions and for learning that extends in terms of odds ratios, senior managers are beyond the firm’s existing areas of expertise. nearly six times as likely to be engaged in In order to explore this hypothesis, we creative work activity and professional and developed a measure of labour market technicians are about four times as likely. mobility (LABMOB) based on data from the Sales staff and clerks are about twice as Labour Force Survey on the share of persons likely as skilled workers and operators to be by country whose job had started within the engaged in creative work activity. last three months. LABMOB is defined as the

Edward Lorenz and Bengt-Aake Lundvall 151 average of this share over three quarters: themselves to what would otherwise be the 2nd quarter of 2005 and the 1st and 2nd considered unacceptably risky career quarters of 2006.7 paths that are punctuated by transitions While fluid labour markets can contribute between employment and unemployment to a rapid reconfiguration of a firm’s or part-time employment. Furthermore, knowledge base, as Lam and Lundvall (2006) unemployment protection combined with have observed, labour market mobility is a active labour market polices can help assure two-edged sword for the creative firm. Highly that extended periods of unemployment will creative firms draw their capability from the not lead individuals to accept downgrading diverse know-how and practical problem- or accept job offers that do not make use of solving skills embodied in individual experts. and build on the experience and knowledge Formal professional knowledge may play they have gained through previous only a limited role and the expert’s problem- employment. solving capabilities have more to do with For these reasons, it can be argued that experience and tacit knowledge generated labour market mobility is more likely to through interaction, trial-and-error and be skill-enhancing in nations with well- experimentation. Because these tacit skills developed systems of unemployment cannot be easily codified, the creative firm protection combined with active labour 7 faces a problem of reproducing what has market policies. In order to capture the The figures are taken from, Statistics in Focus, ‘Population been learnt into an organizational memory development of such systems of flexicurity and Social Conditions’, 6/2006, Eurostat. and it is highly vulnerable when it comes to (FLXSCR), we use a simple indicator 8 The labour market individuals leaving the organisation. constructed by multiplying LABMOB, the expenditure figures are These problems of accumulating measure of labour market mobility, by LMP, taken from Eurostat’s Labour Market Policy data base. Total and transferring experience-based tacit total expenditures on active and passive expenditures are defined knowledge take a different form when labour market policies as a percentage of as the sum of active and passive expenditure targeted 8 firms are organised into localised networks GDP. at one of the following: the and industry clusters. Mobility across Figures1 and 2 below present aggregate unemployed, the employed at risk of becoming unemployed organisational borders within industrial correlations at the national level showing and inactive persons who would like to enter the labour clusters contributes to professional and the relationship between the frequency of market but are disadvantaged social relationships which provide the ‘social creative work activity and the measures in some way. Active measures 9 include expenditure on training, capital’ and ‘information signals’ needed of labour market mobility and flexicurity. job rotation and job sharing, to ensure the efficient accumulation and The results support the view that labour employment incentives, direct job creation and start-up transfer of tacit knowledge in an inter-firm market mobility is more likely to foster skill incentives. Passive measures career framework (Saxenian, 1996). We enhancement and creativity at the workplace include expenditure on out of work income maintenance and would argue that such professional and when it is combined with well-developed early retirement. social networks are more likely to arise in systems of unemployment protection 9 We are well aware that simple correlations are institutional settings where high levels of combined with active labour market policies. primitive when it comes to labour market mobility are complemented Figure 1 shows a weak and non-statistically sorting out causalities. In the paper in the Cambridge by well-developed systems of unemployment significant positive relationship between the Journal of Economics (Lorenz protection and active labour market policies frequency of creative work and the measure and Lundvall, 2010) we pursue a more sophisticated designed to increase the employability of of national labour market mobility, while analysis based upon multilevel the unemployed. Unemployment protection Figure 2 shows a stronger and statistically regression techniques. The results obtained there coincide can encourage individuals to commit significant positive relationship between the with those presented below.

152 frequency of creative work and the measure In order to develop measures of the of flexible security. Denmark, and to a lesser characteristics of national systems of extent Sweden and Finland, stand out for education and training, we used the their relatively high levels of flexible security. aggregate data available on Eurostat’s electronic database. We used two measures 4.2 National systems of education and training of the level of a nation’s investments in Lam and Lundvall (2006) have argued formal academic knowledge and skills: the that national systems of education and percentage of the population with third- training can be distinguished by the extent to level education (THRDED); and the number which they promote an even distribution of of science and engineering graduates as competence across occupational categories a percentage of the 20-29 aged cohort in as opposed to generating wide disparities 2005 (S&EGRD). In order to capture the in skill levels and learning opportunities. breadth of the education and training Broad competence-based systems are system and the extent to which value is characterised by their concern to balance placed on developing practical job-related investment in formal academic education skills, we used the results of the 2003 and the production of third-level degrees, Labour Force Survey module on life-long with investment in continuous vocational learning.10 As an indicator of the overall training and with creating possibilities for level of development of further education further training open to all. Such systems and training opportunities, we used the are more conducive to decentralised modes figures on the proportion of the labour force of work organisation and favour the forms involved in any form of education or training of interactive learning and the transmission during the four weeks prior to the survey. and mobilisation of tacit knowledge that can Equality of access to such further education 10 The figures are available on Eurostat’s electronic data contribute to creativity at the workplace. and training is defined as the ratio of the base. The Labour Force Survey lifelong learning module distinguishes between formal, non-formal and informal or self-learning. Formal life- long learning is defined as Figure 1. % Creative workers by % labour mobility Figure 2. % Creative worker by degree of flexible security that provided by the degree- conferring institutions of the SE SE formal educational system. 80 80 Non-formal education and training refers to all forms of taught learning, including 70 MT DK 70 MT DK that provided by employers, NL NL FI FI that occurs outside the formal FR FR degree-conferring educational 60 LUBE 60 LU BE system. Informal learning EE IE EE IE refers to self-taught learning LV DE LV DE including the use of printed UK UK 50 SI AT 50 SI AT materials and on-line computer % Creative workers % Creative workers based learning. For the PT PT HU HU PL PL Eurostat quality report on the CY CY 40 CZ 40 CZ lifelong learning module of the GR BG GR BG IT IT LFS, see: http://circa.europa. ROLT ES LTRO ES eu/irc/dsis/employment/ SK SK info/data/eu_lfs/LFS_MAIN/ 30 30 Adhoc_modules/2003/ 246810 0102030 ExplanatoryNotes/ % Labour mobility Degree of flexible security Final_Report_Ahm2003_EN.pdf R-squared = .10 R-squared = .26

Edward Lorenz and Bengt-Aake Lundvall 153 percentage of skilled trades involved in any the importance of third-level science and form of education or training activity to the engineering degrees. percentage of managers, professionals and Figures 5 and 6 show the relationship technicians (EQLLL). Higher ratios would between creative work activity and our two indicate a more even distribution of further measures of broad competence-based education and training across occupational systems of education and training. The categories.11 The value attached in a nation results show a positive and statistically to developing practical job-related skills highly significant relationship between the and expertise is measured by the proportion frequency of creative work and the measure of the labour force receiving job-related of equality of access to life-long learning, and education or training from providers an even stronger and statistically significant other than the formal degree-conferring positive relationship between the frequency educational system during the four weeks of creative work and a nation’s commitment prior to the survey (CVT). This includes to developing practical job-related skills and continuous vocational training provided by expertise. employers. Overall, while the aggregate correlations Figures 3 and 4 show the relationship suggest that an increase in the resources between the frequency of creative work committed to third-level education in general activity and the two measures of investment can promote creativity at work there is little in formal academic knowledge. The results evidence to suggest that insufficient numbers are mixed. While there is a positive and of science and engineering graduates statically significant relationship between constitute an obstacle to achieving higher creativity and the importance of third- levels of creativity at work. Moreover, the level education, there is little discernible results strongly suggest that for many of the relation between creativity at work and new member nations or southern European

11 Figure 3. % Creative workers by % third level education Figure 4. % Creative workers by % science and engineering We focus on life-long- graduates learning in this analysis rather than on initial vocational training because the further SE SE 80 80 education and training opportunities provided through systems of life-long- learning potentially concern 70 MT DK 70 MT DK NL NL all occupational categories. FI FI Apprenticeships or other FR FR forms of non-enterprise-based 60 LU BE 60 LU BE IE EE EE IE initial vocational training tend to be specific to particular LV DE DELV UK UK occupations and hence the level 50 AT SI 50 ATSI of development of these forms % Creative workers % Creative workers PT PT of training are less relevant for HU PL HU PL CY CY measuring the overall breadth 40 CZ 40 CZ GRBG BG GR of the educational and training IT IT RO LT ES RO ES LT system in a nation and the SK SK extent to which value is placed 30 30 on the acquisition of job-related 10 15 20 25 30 35 015 10 52025 skills for employees regardless % Third level education % Science and engineering graduates of their occupational category R-squared = .24 R-squared = .03 or level of education.

154 Figure 5. % Creative workers by degree of equality life long Figure 6. % Creative workers by % continuous vocational learning training

SE SE 80 80

70 DKMT 70 MT DK NL NL FI FI FR FR 60 BE LU 60 LU BE EE IE IE EE

LV LV DE DE UK UK 50 SI AT 50 ATSI % Creative workers % Creative workers PT PT HU HU PL PL CY CY 40 CZ 40 CZ BG GR BG GR IT IT RO LT ES RO ESLT SK SK 30 30

010220 030 010420 30 050 Degree of equality of access to life long learning % Continuous vocational training R-squared = .33 R-squared = .40

nations with very low levels of creative work higher chance of being assigned creative activity the more important bottleneck is their tasks in the Scandinavian nations than in the low levels of investment in further education Eastern or Southern nations. and training. Such national differences may have different causes and in this paper we link 5. Conclusion them to institutional differences among the One of the starting points for this paper European economies that are related to was the analysis of ‘the creative class’ as the further education and training system developed by Richard Florida. With reference and to labour market structure. We find to his work we used employee-level survey that broad competence-based education data from European countries to classify systems characterised by more equal access workers as more or less involved in creative to further training for enhancing vocational work activity. A first result is that while the skills as compared to academic knowledge occupational categories used by Florida to are associated with higher levels of creative define the creative class provide a useful work. We also find that labour markets that means for measuring the rise in the creative combine high mobility with ambitious labour class over time within a single nation, they market policy in terms of passive and active are misleading for purposes of international measures tend to be associated with higher comparisons. National location matters levels of creative work. and we find important ‘national effects’ on Creativity is arguably an essential the likelihood of creative work activity after factor in a nation’s capacity for knowledge adjusting for the effects of an employee’s development and innovation and our analysis occupation and sector of activity. A semi or has implications for public policy in Europe. unskilled operator or service worker has a Using a somewhat different classification

Edward Lorenz and Bengt-Aake Lundvall 155 of work categories, Arundel et al. (2007) demonstrate that a high frequency of participatory forms of work organisation go hand in hand with more radical innovation within a specific national system. The tendency to operate with narrow perspectives on innovation and innovation systems, where the focus is upon science-driven innovation and neglects experience-based learning and the organisation of work, is misleading (Jensen et al., 2007). The Spring 2010 European Council emphasised the importance of structural reforms for assuring a strong and sustainable recovery from the current economic crisis and for preserving the sustainability of Europe’s social models. Our results provide important guidance for the direction these should take. The analysis shows that ‘the creative class’ is an elastic category that can be widened to include many ordinary workers. On the basis of our results we would argue that there is a need for institutional reform in Europe in order to create broad- based and egalitarian further education and training systems that are integrated into policies for flexicurity. Such a political mix would serve to spread and deepen creative activities so that they are no longer the privilege of a specific social class. They may also be seen as a way to strengthen the EMU-economies most exposed to global competition and currently under attack from global finance. It would also represent a major step towards aligning the two classical objectives for the Lisbon agenda: competitiveness and social cohesion.

156 Annex set, is defined by the presence of problem- The figure presents graphically the solving, learning and complexity combined first two axes or factors of the multiple with the absence of autonomy and the use of correspondence analysis (MCA). The first one’s own ideas at work. factor, accounting for 42% of the variance The projection of the centre of gravity of in the data set or the chi-squared statistic, the three worker clusters coming out of the distinguishes between creative workers and hierarchical classification analysis (see Table Taylorised workers. On one side of the axis 2) onto the graphic representation of the first we find the variables measuring the presence two factors of the MCA shows that the three of autonomy, learning, problem-solving, clusters correspond to quite different types of complexity and the use of one’s own ideas, work activity. The creative cluster is located to and on the other side we find the variables the west of the graph, the Taylorised cluster measuring their absence. The second factor, to the east, and the constrained problem- accounting for 17% of the variance in the data solving cluster to the south.

Figure A1. Graphical Representation of first two factors of MCA - 6 Organisational Variables. orF the six creative work activity variables, + signifies the presence of the feature and – signifies its absence. PBSOLV: problem-solving at work. LEARN: learning new things at work. IDEAS: use of one’s own idea at work. COMPLX: undertaking complex tasks. AUTMET: choose or change one’s work methods. AUTORD: choose or change one’s task order.

FACTOR 2 e CONSTRAINED

–1.50

R AUTMET – R AUTORD – R COMPLX + R LEARN + R IDEAS – R PBSOLV + 0

R IDEAS + e CREATIVO R AUTMET + R AUTORD + R PBSOLV –

R COMPLX – R LEARN – e TALORIZED –0,75

–1.50

–1.0 –0.5 0 0.5 1.0 1.5 FACTOR 1

Edward Lorenz and Bengt-Aake Lundvall 157 Table A1. Survey questions used for the construction of the binary work activity variables

Variable Survey questions Learning new things (LEARN) Generally, does your main paid job involve, or not, learning new things? Employee problem-solving (PBSOLV) Generally, does your main paid job involve, or not, solving unforeseen problems on your own? Task Complexity (COMPLX) Generally, does your main paid job involve, or not, complex tasks? Using one’s own ideas in work Are you almost always or often able to apply your own ideas in your work? (IDEAS) Discretion in fixing work methods Are you able, or not, to choose or change your methods of work? (AUTOMET) Discretion in fixing the order of one’s Are you able, or not, to choose or change your order of tasks? Source: Agnès Parent-Thirion, tasks (AUTORD) et al. 2007, pp. 109-134.

Table A3. Aggregate Indicators: EU-27

LABMOB LMP EQLLL CVT THRDED S&EGRD Belgium 3.0 2.8 50.5 21.3 31.8 10.9 Czech Republic 2.5 .4 38.5 13.1 13.5 8.2 Denmark 6.9 4.2 79.6 45.2 34.7 14.7 Germany 3.8 3.2 59.0 14.4 23.8 9.7 Estonia 4.8 .2 32.5 15.3 33.3 12.1 Greece 2.2 .5 24.0 4.3 21.5 10.1 Spain 7.6 2.0 34.0 8.2 29.9 11.8 France 5.8 2.3 60.7 23.1 25.5 22.5 Ireland 5.9 1.3 67.1 13.1 30.8 24.5 Italy 3.3 1.3 55.8 6.0 12.9 9.7 Cyprus 4.4 0.7 28.9 19.1 30.5 3.6 Latvia 5.3 0.5 52.6 13.8 21.1 9.8 Lithuania 3.7 0.3 24.3 9.0 26.8 18.9 Luxembourg 2.7 1.1 76.3 15.6 24 1.8 Hungary 3.1 0.6 26.4 5.2 17.7 5.1 Malta 2.6 0.1 81.5 11.9 12 3.4 Netherlands 1.3 2.6 44.5 11.3 29.5 8.6 Austria 4.9 2.0 88.6 23.1 17.6 9.8 Poland 4.3 1.2 31.7 13.0 17.9 11.1 Portugal 2.9 1.8 48.5 8.8 13.5 12 Slovenia 4.2 0.6 81.2 24.8 21.4 9.8 Slovakia 3.4 0.4 73.5 25.7 14.5 10.2 Finland 8.8 2.6 78 .7 43.0 35.1 17.7 Sweden 8.2 2.2 65.6 45.2 30.5 14.4 UK 4 0.2 46.9 32.8 30.7 18.4 Bulgaria 6.4 0.6 16.8 1.5 21.9 8.6 Romania 3.4 0.5 17.6 0.7 11.7 10.3

158 References Lu b a r t , T. (1999), “Creativity across cultures”, in R. J. Sternberg (ed.), Handbook of Creativity, Cambridge: Cambridge University Am a b i l e , T. (1988), “A model of creativity and innovation in Press. organizations”, in B. M, Staw and L. L. Cummings (eds.), Research Ma l e r b a , F. (2002), “Sectoral Systems of Innovation and Production”’ in Organisational Behaviour, Greenwich, CT: JAI Press, vol. 10, Research Policy 31, pp. 247–264 pp.123-167. Ma u r i c e , M., F. Se l l i e r , J.-J. Si lv e s t r e (1986), The Social Foundations Am a b i l e , T., R. Co n t i , H. Co o n , J. La z e n b y and M. He r r o n (1996), of Industrial Power, Cambridge, MA: The MIT Press. “Assessing the Work Environment for Creativity”, Academy of Me l l a n d e r , C. and R. Fl o r i d a (2006), “The Creative Class or Human Management Journal 39(5), pp. 1154-1184. Capital? - Explaining Regional Development in Sweden”, Working Ar u n d e l , A., E. Lo r e n z , B.-Å. Lu n d v a l l , and A. Va l e y r e (2007), “How Paper Series in Economics and Institutions of Innovation 79, Royal Europe’s Economies Learn: a Comparison of Work Organization Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Mode for the EU-15”, Industrial and Corporate and Innovation Studies. Change, 16(6), pp. 1175-1210. Pa r e n t -Thirion, A., E. Fe r n á n d e z Ma c í a s , J. Hu r l e y and G. Ve r m e y l e n Ba r r o n and Ha r r i n g t o n (1981), “Creativity, Intelligence, and (2007), Fourth European Working Conditions Survey, European Personality”, Annual Review of Psychology, vol. 32, pp. 439-476. Foundation for the Improvement of Living and Working Conditions, Bh a r a d w a j , S., and A. Me n o n (2000), “Making Innovation Happen in Dublin. Organizations: Individual Creativity Mechanisms, Organizational Pa y n e (1990), “The Effectiveness of Research Issues: A review”, Creativity Mechanisms or Both?” Journal of Product Innovation in M. West and J. Farr (eds.), Innovation and creativity at work, Management 17(6), pp. 424 -434. Chichester, UK: Wiley. pp. 101-122. th Cr a f t , A. (2005), Creativity in Schools: Tensions and Dilemmas, Oxford: Pe t r a k o s Agilis, M. (2007), “Quality Report of the 4 European Routledge Press. Working Conditions Survey”, European Foundation for the Cs i k szentmihalyi , M. (1988), “Society, culture, and person: A systems Improvement of Living and Working Conditions, Dublin. http:// view of creativity” in R. Sternberg (ed.), The Nature of Creativity: www.eurofound.europa.eu/publications/htmlfiles/ef0708.htm. Contemporary Psychological Perspectives, Cambridge: Cambridge Re i l l y , R. (2008), “Is Expertise a Necessary Precondition for University Press. Creativity? A Case of Four Novice Learning group Facilitators”, Do r e , R. (1973), British Factory, Japanese Factory: The Origins of Thinking Skills and Creativity 3, pp. 59-76. National Diversity in Industrial Relations, Berkeley: University of Ri c h a r d s , R. (1996), “Beyond Piaget: Accepting Divergent, Chaotic, California Press. and Creative Thought”, New Direction for Child Development, 72, Dr a z i n , G. and Ka z a n j i a n (1999), ”Multilevel Theorizing About pp. 67-78. Creativity in Organizations: A Sense-making Perspective”, The Ro ff e , I. (1999), “Innovation and Creativity in Organisations: a Review Academy of Management Review, 1999, 24(2), pp. 286-307. of the Implications for Training and Development”, Journal of Fl o r i d a , R. (2002), The Rise of the Creative Class, New York: Basic European Industrial Training 23, pp. 224-241. Books. Sa x e n i a n , A. (1996), Beyond Boundaries: Open Labor Markets and Fl o r i d a , R., C. Me l l a n d e r and K. St o l a r i c k (2008), “Inside the black Learning in Silicon Valley, Oxford: Oxford University Press. box of regional development—human capital, the creative class St e r n b e r g , R. (ed.) (1988), The Nature of Creativity: Contemporary and tolerance”, Journal of Economic Geography 8, pp. 615–649. Psychological Perspectives, Cambridge: Cambridge University Fo r d , C. (1996), “A Theory of Individual Creative Action in Multiple Press. Social Domains”, The Academy of Management Review 21(4), St e r n b e r g , R. J. (ed.) (1999), Handbook of Creativity, Cambridge: pp. 1112-1142. Cambridge University Press. Ga l l i e , D., In Search of the New Working Class, Cambridge, St e r n b e r g , R., and T. Lubart (1991), “An Investment Theory of Cambridge University Press. Creativity and its Development”’, Human Development 34(1), pp. Ha l l , P., and D. So s k i c e (2001), Varieties of Capitalism, Oxford: Oxford 1-31. University Press. We i s b e r g , R. (1993), Creativity: Beyond the Myth of Genius, New York: He n s o n , R. (1996),“In Search of the Creative Personality”, Creativity W.H. Freeman. Research Journal 9, pp. 295-306. Wh i t l e y , R. (2006), “Innovation Systems and Institutional Regimes: Je n s e n , M. B., B. Jo h n s o n , E. Lo r e n z , and B.-Å. Lu n d v a l l (2007), the Construction of Different Types of National, Sectoral and “Forms of Knowledge and Modes of Innovation”, Research Transnational Innovation systems”’ in E. Lorenz and B.-Å. Lundvall Policy 36(5), June 2007, pp. 680-693. (eds.), How Europe’s Economies Learn: Coordinating Competing La m , A., and B.-Å. Lu n d v a l l (2006), “The Learning Organisation and Models, Oxford: Oxford University Press. National Systems of Competence Building and Innovation” in E. Wo o d m a n , R. W., J. E. Sa w y e r and R. W. Gr i ff i n (1993), “Toward a Lorenz and B.-Å. Lundvall (eds.), How Europe’s Economies Learn: Theory of Organizational Creativity”, Academy of Management Coordinating Competing Models, Oxford: Oxford University Press. Review 18(2), pp. 293-321. La n e , C. (1989), Management and Labour in Europe, Aldershot: Edward Elgar. Lo r e n z , E. and B.-Å. Lu n d v a l l (eds.) (2006), How Europe’s Economies Learn: Coordinating Competing Models, Oxford: Oxford University Press. Lo r e n z , E., and B.-Å. Lu n d v a l l (2010), “Accounting for Creativity in the European Union: A Multi-level Analysis of Individual Competence, Labour Market Structure, and Systems of Education and Training” (forthcoming), Cambridge Journal of Economics. Lo r e n z , E., and A. Va l e y r e (2005), “Organisational Innovation, HRM and Labour Market Structure: A Comparison of the EU-15”, Journal of Industrial Relations, pp. 424-442. Lu n d v a l l , B.-Å. (2002), Innovation, Growth and Social Cohesion: The Danish Model, Cheltenham: Edward Elgar. Lu n d v a l l , B.-Å., and E. Lo r e n z (2006), “Welfare and Learning in Europe—How to Revitalize the Lisbon Process and Break the Stalemate”, in E. Lorenz and B.-Å. Lundvall (eds.), How Europe’s Economies Learn: Coordinating Competing Models, Oxford: Oxford University Press.

Edward Lorenz and Bengt-Aake Lundvall 159

Innovative Organizations: Structure, Learning and Adaptation

Alice Lam 1. INTRODUCTION the link between structural forms and the School of Management Royal Holloway University of London Innovation is an important source of propensity of an organization to innovate growth and a key determinant of competitive (e.g. Burns and Stalker, 1961; Lawrence advantage for many organizations. Achieving and Lorsch, 1967; Mintzberg, 1979). The innovation requires the coordinated efforts unit of analysis is the organization and of many different actors and the integration the main research aim is to identify the of activities across specialist functions, structural characteristics of an innovative knowledge domains and contexts of organization, or to determine the effects application. Thus, organizational creation of organizational structural variables on is fundamental to the process of innovation product and process innovation. Theories of (Van de Ven et al 1999). The ability of an organizational cognition and learning (Glynn, organization to innovate is a pre-condition 1996; Bartel and Garud, 2009), by contrast, for the successful utilization of inventive emphasise the cognitive foundations of resources and new technologies. Conversely, organizational innovation which is seen to the introduction of new technology often relate to the learning and organizational presents complex opportunities and knowledge creation process (Agyris and challenges for organizations, leading to Schon, 1978; Nonaka and Takeuchi, 1995; changes in managerial practices and the Nonaka and von Krogh, 2009). This strand of emergence of new organizational forms. work provides a micro-lens for understanding Organizational and technological innovations the capacity of organizations to create are intertwined. Schumpeter (1950) saw and exploit new knowledge necessary organizational changes, alongside new for innovative activities. A third strand of products and processes, as well as new research concerns organizational change markets as factors of ‘creative destruction’. and adaptation, and the processes underlying Extant literature on organizational the creation of new organizational forms innovation is very diverse and can be broadly (Lewin and Volberda, 1999). Its main focus classified into three streams. Organizational is to understand whether organizations can design theories focus predominantly on adapt in the face of radical environmental

Alice Lam 163 shifts and technological change. In this to the demands of context. Contingency context, innovation is considered as a theory argues that the most ‘appropriate capacity to respond to changes in the external structure’ for an organization is the one environment, and to influence and shape it that best fits a given operating contingency, (Burgleman, 1991; 2002; Child, 1997; Teece, such as scale of operation (Blau, 1970), 2007). technology (Woodward, 1965; Perrow, 1970) This chapter examines the nature of or environment (Burns and Stalker, 1961; innovative organizations and the relationship Lawrence and Lorsch, 1967). This strand between organizing and innovating from of research and theory underpins our these three perspectives. Section two will understanding of the relationships between draw on organizational design theories and the nature of the task and technological work in the field of strategy to examine the environments, structure and performance. relationship between organizational structure Some of the studies deal specifically with and innovativeness. The third section looks the question of how structure is related to at the micro-level process of organizational innovation. learning and knowledge creation. It argues Burns and Stalker’s (1961) polar that organizations with different structural typologies of ‘mechanistic’ and ‘organic’ forms vary in their patterns of learning and organizations (see Box 1) demonstrate knowledge creation, engendering different how the differences in technological and types of innovative capabilities. This will be market environment, in terms of their rate of followed by an analysis of organizational change and complexity, affect organizational adaptation and the contemporary challenges structures and innovation management. facing firms in pursuing ‘organizational Their study found that firms could be grouped ambidexterity’ for sustaining innovation. The into one of the two main types: the former final section draws some general conclusions more rigid and hierarchical, suited to stable from the analysis and highlights the gaps in conditions; and the latter, a more fluid set the existing literature and areas for future of arrangements, adapting to conditions research. of rapid change and innovation. Neither type is inherently right or wrong, but the 2. oRGANIZATIONAL STRUCTURE AND INNOVATION firm’s environment is the contingency that 2.1. Structural archetypes and innovativeness prompts a structural response. Related is The classical theory of organizational the work of Lawrence and Lorsch (1967) on design was marked by a preoccupation principles of organizational differentiation with universal forms and the idea of ‘one and integration and how they adapt to best way to organise’. The work of Weber different environmental conditions, including (1947) on the bureaucracy and of Chandler the market -- technical-economic and the (1962) on the multidivisional form, was most scientific sub-environments, of different influential. The assumption of ‘one best industries. Whereas Burns and Stalker way’ was, however, challenged by research treat an organization as an undifferentiated carried out during the 1960s and 1970s whole that is either mechanistic or organic, under the rubric of contingency theory Lawrence and Lorsch recognize that which explains the diversity of organizational mechanistic and organic structures can forms and their variations with reference co-exist in different parts of the same

164 organization owing to the different demands organizations’—that are capable of coping of the functional sub-environments. The with both evolutionary and revolutionary work of these earlier authors had a profound technological changes (O’Reilly and Tushman, impact on organizational theory and provided 2004; 2008; Tushman et al., 2010; see useful design guidelines for innovation section 4). management. Burns and Stalker’s model Another important early contribution is remains highly relevant for our understanding the work of Mintzberg (1979) who synthesised of the contemporary challenges facing many much of the work on organizational structure organizations in their attempts to move and proposed a series of archetypes that away from the mechanistic towards the provide the basic structural configurations organic form of organizing, as innovation of firms operating in different environments. becomes more important and the pace of In line with contingency theory, he argues environmental change accelerates. Lawrence that the successful organization designs its and Lorsch’s suggestion that mechanistic structure to match its situation. Moreover, and organic structures can coexist is it develops a logical configuration of the reflected in the contemporary debate design parameters. In other words, effective about the importance of developing hybrid structuring requires consistency of design modes of organizations—‘ambidextrous parameters and contingency factors. The

Table 1. Burns and Stalker: Mechanistic and Organic Structures

Burns and Stalker set out to explore whether differences in the technological and market environments affect the structure and management processes in firms. They investigated twenty manufacturing firms in depth, and classified environments into ‘stable and predictable’ and ‘unstable and unpredictable’. They found that firms could be grouped into one of the two main types, mechanistic and organic forms, with management practices and structures that Burns and Stalker considered to be logical responses to environmental conditions. The Mechanistic Organization has a more rigid structure and is typically found where the environment is stable and predictable. Its characteristics are: a. tasks required by the organization are broken down into specialised, functionally differentiated duties and individual tasks are pursued in an abstract way, that is more or less distinct from the organization as a whole; b. the precise definition of rights, obligations and technical methods is attached to roles, and these are translated into the responsibilities of a functional position; there is also a hierarchical structure of control, authority and communication; c. knowledge of the whole organization is located exclusively at the top of the hierarchy, with greater importance and prestige being attached to internal and local knowledge, experience and skill rather than that which is general to the whole organization; d. there is a tendency for interactions between members of the organization to be vertical, i.e. between superior and subordinate. The Organic Organization has a much more fluid set of arrangements and is an appropriate form for changing environmental conditions which require emergent and innovative responses. Its characteristics are: a. individuals contribute to the common task of the organization and there is continual adjustment and re-definition of individual tasks through interaction with others; b. there is spread of commitment to the organization beyond any technical definition, a network structure of control authority and communication, and the direction of communication is lateral rather than vertical; c. knowledge may be located anywhere in the network, with this ad hoc location becoming the centre of authority and communication; d. importance and prestige attach to affiliations and expertise valid in industrial, technical and commercial milieus external to the firm. Mechanistic and organic forms are polar types at the opposite ends of a continuum and, in some organizations, a mixture of Source: Burns and Stalker both types can be found. (1961).

Alice Lam 165 ‘configurational hypothesis’ suggests that managerial strategic choice in response to firms are likely to be dominated by one of the market opportunities. Organizational forms five pure archetypes identified by Mintzberg, are constructed from the two variables each with different innovative potential: of ‘strategy’ and ‘structure’. The central simple structure, machine bureaucracy, argument is that certain organizational types professional bureaucracy, divisionalised form or attributes are more likely to yield superior and adhocracy. Two of these archetypes can innovative performance in a given environment be classified as organic organizations with a because they are more suited to reduce high capacity for innovation and adaptation: transaction costs and cope with potential the simple structure and the adhocracy. The capital market failures. The multi-divisional, former relies on direct supervision by one or M-form, for example, has emerged in person, as in the case of entrepreneurial response to increasing scale and complexity of start-ups, which continuously searches enterprises and is associated with a strategy high-risk environments. The latter is a highly of diversification into related product and flexible project-based organization relying on technological areas (Chandler, 1962). It can be the mutual adjustment of problem-solving an efficient innovator within certain specific teams. It is capable of radical innovation product markets, but may be limited in its in a volatile environment. The other three ability to develop new competencies. remaining archetypes, machine bureaucracy, Lazonick’s theory of ‘the innovative professional bureaucracy and the enterprise’ (Lazonick, 2005; 2010) is divisionalized form are more inhibited in their rooted in the Chandlerian framework, innovative capabilities and less able to cope inasmuch as it focuses on how strategy with novelty and change. The characteristic and structure determine the competitive features of the archetypes and their innovative advantage of the business enterprise. It implications are shown in Table 1. also builds on Lawrence and Lorsch’s (1967) Contingency theories account for the conceptualisation of organizational design diversity of organizational forms in different problems as differentiation and integration. technological and task environments. The theory distinguishes the ‘optimizing They assume that as technology and firm’ from the ‘innovative firm’. While the product markets become more complex former seeks to maximize profits within and uncertain, and task activities more given technological capabilities and market heterogeneous and unpredictable, constraints, the latter seeks to transform organizations will adopt more adaptive technological and markets constraints and flexible structures, and they will do through the development of distinctive so by moving away from bureaucratic to organizational capabilities which cannot be organic forms of organizing. The underlying easily imitated by competitors. Lazonick difficulties in achieving the ‘match’, however, identifies three social conditions that support are not addressed in this strand of research. the development of the innovative firm. The first condition is ‘strategic control’ which 2.2. Strategy, structure and the innovative firm refers to the set of relations that gives key The work of micro-economists in the decision-makers the power, knowledge and field of strategy considers organizational incentives to allocate the firm’s resources to structure as both cause and effect of confront market threats and opportunities.

166 Table 2. Mintzberg’s structural archetypes and their innovative potentials

Organization archetype Key features Innovative potential Simple structure An organic type centrally controlled by Entrepreneurial and often highly one person, which can respond quickly to innovative, continually searching for high- changes in the environment, e.g. small start- risk environments. Weaknesses are the ups in high-technology. vulnerability to individual misjudgement and resource limits on growth. Machine bureaucracy A mechanistic organization characterized by Designed for efficiency and stability. Good a high level of specialization, standardization at dealing with routine problems, but highly and centralized control. A continuous effort rigid and unable to cope with novelty and to routinize tasks through formalization of change. worker skills and experiences, e.g. mass production firms. Professional bureaucracy A decentralised mechanistic form which The individual experts may be highly accords a high degree of autonomy to innovative within a specialist domain, but the individual professionals. Characterized by difficulties of coordination across functions individual and functional specialization, with and disciplines impose severe limits on the a concentration of power and status in the innovative capability of the organization as a ‘authorized experts’. Universities, hospitals, whole. law and accounting firms are typical examples. Divisionalized form A decentralized organic form in which An ability to concentrate on developing quasi-autonomous entities are loosely competency in specific niches. Weaknesses coupled together by a central administrative include the ‘centrifugal pull’ away from structure. Typically associated with larger central R&D towards local efforts, and organizations designed to meet local competition between divisions which inhibit environmental challenges. knowledge sharing. Adhocracy A highly flexible project-based organization Capable of fast learning and unlearning; designed to deal with instability and highly adaptive and innovative. However, the complexity. Problem-solving teams can be unstable structure is prone to short life, and rapidly reconfigured in response to external may be driven over time toward bureaucracy changes and market demands. Typical (see also section 3.2). Sources: Mintzberg (1979); Tidd examples are professional partnerships and et al. (1997: 313-314); Lam software engineering firms. (2000).

The second condition is ‘organizational innovation is also stressed by several other integration’ -- that is the horizontal and authors (Lam, 2000; Lam and Lundvall, 2006). vertical integration of skills and knowledge to Because the conditions that underpin support cumulative learning over time. And the innovative firm are social, the type of the third condition is ‘financial commitment’ organisational integrative capability and the to ensure that sufficient funds are allocated nature of the innovative firm tend to vary for competence development to sustain the across institutional contexts and over time cumulative innovation process. The essence (Whitley, 2000; Lazonick, 2005). Drawing on of the innovative enterprise, according to comparative historical evidence, Lazonick Lazonick (2005: 34), “is the organizational (2005) has illustrated the rise and fall of integration of a skill base that can engage different national models of innovative in collective and cumulative learning”. The firms characterised by different types of critical importance of skills and knowledge organizational capabilities. For example, integration as the social foundations of the growth of the US industrial corporation

Alice Lam 167 during the first half of the twentieth century structural features. Some organizational was energised by a powerful managerial researchers regard innovation as a process organization for deploying new technology of bringing new, problem-solving, ideas into and using unskilled and semi-skilled use (Amabile, 1988; Kanter, 1983). Mexias workers in mass production. The US and Glynn (1993: 78) define innovation as managerial corporation was confronted by “non-routine, significant, and discontinuous the Japanese model of the innovative firm organizational change that embodies a new in the 1970s which outperformed the US in idea that is not consistent with the current many industrial sectors such as consumer concept of the organization’s business”. This electronics, machine tools and automobiles. approach defines an innovative organization Japanese firms have been able to gain a as one that is intelligent and creative (Glynn, competitive advantage in these industries 1996; Woodman et al., 1993), capable of because of their superior organizational learning effectively (Argote, 1999; Senge, capacity for integrating shop-floor skills 1990; Agyris and Schon, 1978) and creating and enterprise networks, enabling them to new knowledge (Nonaka, 1994; Nonaka plan and coordinate specialised divisions of and Takeuchi, 1995; Nonaka and von labour and innovative investment strategies. Krogh, 2009). Cohen and Levinthal (1990) The late 1990s saw the resurgence of the argue that innovative outputs depend on US high-technology sectors spearheaded the prior accumulation of knowledge that by what Lazonick (2005; 2010) refers to as enables innovators to assimilate and exploit ‘new economy companies’ in Silicon Valley new knowledge. From this perspective, which drew their innovative capabilities from understanding the role of organizational the dynamic integration of technical and learning in fostering or inhibiting innovation entrepreneurial skills within highly flexible, becomes crucially important. open network organizations. Central to theories of organizational The theory of the innovative firm learning and knowledge creation is the propounded by Lazonick, alongside other question of how organizations translate researchers in the field of strategy (e.g. individual insights and knowledge into Teece et al., 1997; Teece, 2007) stresses collective knowledge and organizational the importance of organizational and capability. While some researchers argue managerial processes—integrating, learning that learning is essentially an individual and reconfiguration—as core elements that activity (Simon, 1991; Grant, 1996), most underpin firms’ innovative performance. theories of organizational learning stress However, this strand of work devotes little the importance of collective knowledge as a attention to the micro-dynamics of learning source of organizational capability. Collective within organizations. knowledge is the accumulated knowledge of the organization stored in its rules, 3. THE COGNITIVE FOUNDATIONS OF procedures, routines and shared norms ORGANIZATIONAL INNOVATION which guide the problem-solving activities 3.1. Organizational learning and knowledge and patterns of interaction among its creation members. Collective knowledge resembles The structural perspectives discussed the ‘memory’ or ‘collective mind’ of the above treat innovation as an output of certain organization (Walsh and Ungson, 1991). It

168 can either be a ‘stock’ of knowledge stored as provides a shared social and mental space for hard data, or represent knowledge in a state the interpretation of information, interaction of ‘flow’ emerging from interaction. Collective and emerging relationships that serves knowledge exists between rather than within as a foundation for knowledge creation. individuals. It can be more, or less, than the Participating in a ‘ba’ means transcending sum of the individuals’ knowledge, depending one’s limited cognitive perspective or social on the mechanisms that translate individual boundary to engage in a dynamic process of into collective knowledge (Glynn, 1996). Both knowledge sharing and creation. In a similar individuals and organizations are learning vein, the notion of ‘community of practice’ entities. All learning activities, however, take (Lave and Wenger, 1991; Wenger, 1998; place in a social context, and it is the nature Brown and Duguid, 1991; 1998) suggests and boundaries of the context that make a that organizational members construct their difference to learning outcomes. shared identities and perspectives through Much of the literature on organizational ‘practice’, that is shared work experiences. learning points to the importance of social Practice provides a social activity in which interaction, context and shared cognitive shared perspectives and cognitive repertoires schemes for learning and knowledge develop to facilitate knowledge sharing and creation (Agyris and Schon, 1978; Lave and transfer. Hence, the work group provides Wenger, 1991; Brown and Duguid, 1991, an important site where intense learning 1998; Bartel and Garud, 2009). This builds and knowledge creation may develop. on Polanyi’s (1966) idea that a large part of The group, placed at the intersection of human knowledge is subjective and tacit, horizontal and vertical flows of knowledge and cannot be easily codified and transmitted within the organization, serves as a bridge independently of the knowing subject. Hence between the individual and organization in its transfer requires social interaction and the the knowledge creation process. Much of the development of shared understanding and recent literature on new and innovative forms common interpretive schemes. of organization also focuses on the use of Nonaka’s theory of organizational decentralised, group-based structure as a knowledge creation is rooted in the idea key organizing principle. that shared cognition and collective learning Many organizational and management constitute the foundation of organizational researchers regard the firm as a critical knowledge creation (Nonaka, 1994; Nonaka social context where collective learning and and Takeuchi, 1995; Nonaka and von Krogh, knowledge creation take place. Nonaka and 2009). At the heart of the theory is the idea Takeuchi (1995) talk about the ‘knowledge- that tacit knowing constitutes the origin of creating company’. Argyris and Schon all human knowledge, and organizational (1978) suggest that an organization is, at knowledge creation is a process of mobilising its root, a cognitive enterprise that learns individual tacit knowledge and fostering its and develops knowledge. ‘Organizational interaction with the explicit knowledge base knowledge’ essentially refers to the shared of the firm. Nonaka argues that knowledge cognitive schemes and distributed common needs a context to be created. He uses the understanding within the firm that facilitate Japanese word ‘ba’, which literally means knowledge sharing and transfer. It is similar ‘place’, to describe such a context. ‘Ba’ to Nelson and Winter’s (1982) concept of

Alice Lam 169 ‘organizational routines’: a kind of collective Whereas knowledge creation is often a knowledge rooted in shared norms and product of an organization’s capability beliefs that aids joint-problem solving and to recombine existing knowledge and is capable of supporting complex patterns generate new applications from its existing of action in the absence of written rules. knowledge base, radically new learning The notion of ‘core competence’ (Prahalad tends to arise from contacts with those and Hamel, 1990) implies that the learning outside the organization who are in a better and knowledge creation activities of firms position to challenge existing perspectives tend to be cumulative and path-dependent. and paradigms. Empirical research has Firms tend to persist in what they do because suggested that sources of innovation often learning and knowledge are embedded in lie outside an organization (von Hippel, 1988; social relationships, shared cognition and Lundvall, 1992). External business alliances existing ways of doing things (Kogut and and network relationships, as well as using Zander, 1992). Several authors have analysed new personnel to graft new knowledge onto how collective learning in technology depends the existing learning systems, are important on firms’ cumulative competences and mechanisms for organizational learning evolves along specific trajectories (Dosi, 1988; and knowledge renewal in an environment Pavitt, 1991). Thus, the shared context and characterised by rapid technological social identity associated with strong group- development and disruptive changes (Powell, level learning and knowledge accumulation 1998; Lam, 2007). The ‘dynamic capability’ processes may constrain the evolution of perspective argues that the long-term collective knowledge. Firms may find it competitive performance of the firm lies in difficult to unlearn past practices and explore its ability to build and develop firm-specific alternative ways of doing things. Levinthal capability and, simultaneously, to renew and and March (1993) argue that organizations re-configure its competences in response often suffer from ‘learning myopia’, and have to an environment marked by ‘creative a tendency to sustain their current focus and destruction’ (Teece et al., 1997; Teece accentuate their distinctive competence: what 2007). Thus, a fundamental organizational they call falling into a ‘competency trap’. challenge in innovation is not simply the The empirical research by Leonardo-Barton maintenance of a static balance between (1992) illustrates how firms’ ‘core capabilities’ exploitation and exploration, or stability and can turn into ‘core rigidities’ in new product change, but a continuous need to balance and development. coordinate the two dynamically throughout An inherent difficulty in organizational the organization. learning is the need to maintain an external boundary and identity while at the same time 3.2. Two alternative models of learning keeping the boundary sufficiently open to organizations: ‘J-form’ vs. ‘Adhocracy’ allow the flow of new knowledge and ideas All organizations can learn and create from outside. March (1991) points out that knowledge, but their learning patterns and a fundamental tension in organizational innovative capabilities vary (Lam, 2000; 2002). learning is balancing the competing goals During the past two decades, an extensive of ‘the exploitation of old certainties’ and literature has examined new organizational the ‘exploration of new possibilities’. models and concepts designed to support

170 organizational learning and innovation. These learning. Mintzberg’s term is used here to models include ‘high performance work capture the dynamic, entrepreneurial and systems’ or ‘lean production’ (Womack et adaptive character of the kind of organization al., 1990), pioneered by Japanese firms in typified by Silicon- Valley-type companies the automobile industry; and the ‘N-form (Bahrami and Evans, 2000). Both the ‘J-form’ corporation’ (Hedlund, 1994) and ‘hypertext and ‘adhocracy’ are learning organizations organization’ (Nonaka and Takeuchi 1995). with strong innovative capabilities, but More recently, concepts such as ‘cellular they differ markedly in their knowledge forms’ (Miles et al., 1997); ‘modular forms’ configurations, patterns of learning and the (Galunic and Eisenhardt, 2001); ‘project- type of innovative competences generated. based networks’ (DeFillippi, 2002) and ‘new These two polar organizational types economy firms’ (Lazonick, 2005) reflect are facilitated by different institutional the growth of flexible and adaptive forms characteristics of labour markets and of organization with a strategic focus on systems of competence building (Lam, 2000; entrepreneurship and radical innovation in Lam and Lundvall, 2006). knowledge-intensive sectors of the economy. The J-form organization relies on These studies highlight the different ways knowledge that is embedded in its operating in which firms seek to create learning routines, team relationships and shared organizations capable of continuous problem culture. It is facilitated by a relatively stable, solving and innovation. long-term employment relationship and, A closer examination of the literature on a broad-based education and training new forms suggests that the various models system for the majority of the workforce. of learning organizations can be broadly Learning- and knowledge-creation within the classified into two polar ideal types, namely, J-form takes place within an ‘organizational the ‘J-form’ and ‘adhocracy’ (Lam, 2000; community’ that incorporates shopfloor 2002). The former refers to an organization skills in problem solving, and intensive which is good at exploitative learning and interaction and knowledge sharing across derives its innovative capabilities from different functional units. The existence the development of organization-specific of stable organizational careers rooted collective competences and problem-solving in an internal labour market provide an routines. The term J-form is used because incentive for organizational members to its archetypal features are best illustrated commit to organizational goals and to by the ‘Japanese type’ of organizations, such develop firm-specific problem-solving as Aoki’s (1988) model of the ‘J-firm’, and knowledge for continuous product and Nonaka and Takeuchi’s (1995) ‘knowledge process improvement. New knowledge is creating companies’. Adhocracy (Mintzberg, generated through the fusion, synthesis 1979), by contrast, tends to rely more upon and combination of the existing knowledge individual specialist expertise organized in base. The J-form tends to develop a strong flexible market-based project teams capable orientation towards pursuing an incremental of speedy responses to changes in knowledge innovation strategy and do well in relatively and skills, and integrating new kinds of mature technological fields characterised expertise to generate radical new products by rich possibilities of combinations and and processes. It is skilled at explorative incremental improvements of existing

Alice Lam 171 components and products (e.g. machine- a very adaptive form of organization capable based industries, electronics components of dynamic learning and radical innovation. and automobiles). But the J-form’s focus on However, the fluid structure and speed of nurturing organizationally-embedded, tacit change may create problems in knowledge knowledge and its emphasis on continuous accumulation, since the organization’s improvement in such knowledge can competence is embodied in its members’ inhibit learning radically new knowledge professional expertise and market-based from external sources. The disappointing know-how which are potentially transferable. performance of Japanese firms in such The adhocracy is subject to knowledge loss fields as software and biotechnology in when individuals leave the organization. The the 1990s may constitute evidence of the long-term survival of this loose, permeable difficulties faced by ‘J-form firms’ in entering organizational form requires the support of a and innovating in rapidly developing new stable social infrastructure rooted in a wider technological fields (Whitely, 2003). occupational community or localised firm An adhocracy is an organic and adaptive networks form of organization that is able to fuse Although firms in the high-technology professional experts with varied skills and sectors are under intense pressure to knowledge into adhoc project teams for learn faster and organize more flexibly, solving complex and often highly uncertain evidence thus far suggests that complete problems. Learning and knowledge creation adhocracies remain rare. Adhocracies are in an adhocracy occurs within professional usually confined to organizational subunits teams that often are composed of employees engaged in creative work (e.g. ‘skunk work’ from different organizations. Careers are adhocracies) (Quinn, 1992), or knowledge- usually structured around a series of discrete intensive professional service fields (e.g. projects rather than advancing within an intra- law, management consultancies, software firm hierarchy. The resulting project-based engineering design) where the size of the career system is rooted in a relatively fluid firm is generally relatively small, enabling occupational labour market which permits the whole organization to function as an the rapid reconfiguration of human resources interdependent network of project teams to align with shifting market requirements (DeFillippi, 2002). Attempts by large and technological changes. The adhocracy corporations to adopt the adhocracy mode has a much more permeable organizational have proved difficult to sustain in the long-run boundary that allows the insertion of new (Foss, 2003). Elsewhere, the most successful ideas and knowledge from outside. This examples of adhocracies are found in occurs through the recruitment of new regionally based industrial communities, as staff, and the open professional networks in the case of Silicon Valley, and other high- of the organizational members that span technology clusters (Saxenian, 1996; Angels, organizational boundaries. The adhocracy 2000). There, the agglomeration of firms derives its competitive strength from its ability creates a stable social context and shared to reconfigure the knowledge base rapidly to cognitive framework to sustain collective deal with high levels of technical uncertainty, learning and reduce uncertainty associated and to create new knowledge to produce novel with swift formation of project teams and innovations in emerging new industries. It is organizational change.

172 4. oRGANIZATIONAL CHANGE AND ADAPTATION: possibilities for future action. As such, the TOWARDS ‘ORGANIZATIONAL AMBIDEXTERITY’ strategic choice perspective projects the Can organizations change and survive possibility of creativity and innovative change in the face of major environmental shifts? within the organization. If so, how do they adapt? There are two Many strategic adaptation theorists broad perspectives in the research on view organizational change as a continuous organizational change. Organizational process encompassing the paradoxical ecology and institutional theorists forces of continuity and change. (Hannan and Freeman, 1984; Barnett and Continuity maintains a sense of identity Caroll, 1995; DiMaggio and Powell, 1983; for organizational learning (Weick, 1996), Greenwood and Hinings, 1996) emphasize provides political legitimacy, and increases the powerful forces of organizational inertia the acceptability of change among those and argue that individual organizations who have to live with it (Child and Smith, seldom succeed in making radical change 1987). Burgleman’s (1991, 2002) study of Intel in strategy and structure in the face of corporation illustrates how the company environmental turbulence. This strand of successfully evolved from a memory to a research focuses on the way environments microprocessor company by combining the select organizations, and how this selection twin elements of continuity and change for process creates change in organizational strategic renewal. Burgleman argues that forms as new entrants within an industry consistently successful organizations use a display the established organizations that combination of ‘induced’ and ‘autonomous’ cannot adapt fast enough. One possible processes in strategy-making to bring about way for organizations to adapt, according organizational renewal. The induced process to the selectionist perspective, is to spin develops initiatives that are within the scope out new business ventures (Barnett and of the organization’s current strategy and Freeman, 2001; Christensen, 1997). By build on existing organizational learning contrast, theories of strategic organizational (i.e. continuity). In contrast, the autonomous adaptation and change focus on the role of process concerns initiatives that emerge managerial action and strategic choice in outside the organization and provide the shaping organizational change (Child, 1997; opportunities for new organizational learning Burgleman, 2002; Teece, 2007). They view (i.e. change). These twin processes are organizational change as a product of an considered vital for successful organizational actor’s decisions and learning, rather than transformation. In a similar vein, Brown the outcome of a passive environmental and Eisenhardt (1997) note that continuous selection process. According to Child (1997), organizational change for rapid product organizational action is bounded by the innovation is becoming a crucial capability cognitive, material and relational structures for firms operating in high-velocity industries internal and external to the organization, with short product cycles. Based on case but at the same time it impacts upon those studies of multi-product innovations in the structures. Organizational actors, through computer industry, the authors conclude that their actions and ‘enactment’ (Weick, 1979), continuous change and product innovations are capable of redefining and modifying are supported by organizational structures structures in ways that will open up new that can be described as ‘semi-structures’,

Alice Lam 173 a combination of ‘mechanistic’ and ‘organic’ efficiency by emphasizing stability and features, that balance order and chaos. control, and for long-term innovation by The dual search for stability and change taking risks. Organizations that operate constitutes a central paradox in all forms in this way develop multiple, internally of organizing and poses a major challenge inconsistent architectures, competences for firms operating in today’s business and cultures, with built-in capabilities for environment (Farjoun, 2010). In the past, efficiency, consistency and reliability needed many organizational theorists maintained for exploiting current business on the one that the structures, processes and practices hand, and experimentation and improvisation that support stability and reliability were for exploring new opportunities on the other. largely incompatible with those needed From a strategic perspective, organizational for change and flexibility. The tension ambidexterity is seen as a dynamic capability between ‘exploitation’ and ‘exploration’ in enabling organizations “to maintain organizational learning and innovation is a ecological fitness and, when necessary, familiar example (March, 1991). Exploitation to reconfigure existing assets and develop builds on existing knowledge and thrives the new skills needed to address emerging on the kind of organizational cohesiveness threats and opportunities” (O’Reilly and found in the ‘J-form’ whereas exploration Tushman, 2008: 189). requires the creation of new knowledge and The concept of organizational novel ideas nurtured in an entrepreneurial ambidexterity is an attractive one. However, mode of organizing such as the adhocracy the conditions under which it leads to long- (Lam, 2000). The contrasting organizing term success and its impact on innovative logics underlying the two activities make performance have yet to be verified. The their effective combination extremely challenge associated with managing the difficult, if not impossible. However, in apparent paradox of stability and change recent years there have been growing remains a formidable task for many pressures on organizations to develop dual organizations. structures and processes for sustaining performance in a fast changing and 5. CONCLUSION complex environment. The notion of an Innovation is a process of learning, and ‘ambidextrous organization’ (O’Reilly and learning is a collective process that occurs Tushman, 2004, 2008; Tushman et al., 2010) within an organized setting. This chapter suggests that the key to the long-term has examined the nature and development success of firms lies in their ability to exploit of innovative organizations from three existing competences while simultaneously different but interdependent perspectives: exploring new possibilities to compete in 1. the relationship between organizational both mature and emerging markets. The structural forms and innovativeness; term ‘ambidexterity’ means doing both. 2. innovation as a process of organizational According to O’Reilly and Tushman (2004; learning and knowledge creation; and 2008), ambidextrous organizations are 3. organizational capacity for change and ones that can sustain their competitive adaptation. The analysis suggests that advantage by operating in multiple modes building innovative organizations entails simultaneously—managing for short-term not only matching structural forms with

174 technological and market opportunities, but has tended to focus on how technology and also embedding the capacity for learning and market forces shape organizational outcomes knowledge creation within team processes and treat organizations primarily as a vehicle and social relationships. There are different or facilitator of innovation, rather than types of learning and innovative organizations focussing on the process of organizational and their dominant features tend to vary innovation itself. For example, we tend over time and across institutional contexts. to assume that technological innovation However, a fundamental characteristic of triggers organizational change because innovation is that it always consists of a new it shifts the competitive environment and combination of ideas, knowledge, capabilities forces organizations to adapt to the new and resources. Thus, maintaining the set of demands. This deterministic view openness of an organization for absorbing neglects the possibility that differences new knowledge and ideas from a variety in organizational interpretations of, and of sources increases the scope for new responses to, external stimuli can affect combinations and enhances the possibility the outcomes of organizational change. for producing more sophisticated innovations. Treating the organization as an interpretation An enduring challenge facing all innovative and learning system (e.g. Daft and Weick, organizations is the encapsulation of dual 1994; Greve and Taylor, 2000) directs our structures, processes and capabilities that attention to the important role of internal reconcile stability and exploitation with organizational dynamics, actor cognition change and exploration to ensure current and behaviour in shaping the external viability and long-term adaptability. The environment and outcomes of organizational notion of an ‘ambidextrous organization’ change. A promising direction for future has become a popular expression to denote research would be to take greater account the paradox of managing innovation in the of endogenous organizational forces such as contemporary business environment. capacity for learning, values, interests and Organizational innovation is a multifaceted culture in shaping organizational change and phenomenon. The extensive literature innovation. in organization studies has advanced our understanding of the effects of organizational structure on the ability of organizations to learn, create knowledge and generate technological innovation. We know relatively less, however, about how internal organizational dynamics and actor learning interact with technological and environmental forces to shape organizational evolution. It remains unclear how and under what conditions organizations shift from one structural archetype to another, and the role of technological innovation in driving the process of organizational change is also obscure. The bulk of the existing research

Alice Lam 175 REFERENCES Employment Principle for a New Organizational Era, New York: Oxford University Press, pp. 116-131. Am a b i l e , T. M. (1988), “A model of creativity and innovation in DiMa g g i o , P. J. and W. W. Po w e l l (1983), “The Iron Cage organizations”, in N. M. Staw and L. L. Cummings (eds.), Research Revisited: Institutional Isomorphism and Collective Rationality in Organizational Behaviour, Greenwich, CT: JAI Press, 10, pp. in Organizational Fields,” American Sociological Review 48, 123-167. pp. 147‑160. An g e l s , D. P. (2000), “High-technology agglomeration and the labour Do s i , G. (1988), “Sources, Procedures, and Microeconomic Effects of market: the case of Silicon Valley”, in K. Martin (ed.) Understanding Innovation”, Journal of Economic Literature 26, pp. 1120-1171. Silicon Valley: the Anatomy of an Entrepreneurial Region, Stanford: Fa r j o u n , M. (2010), “Beyond Dualism: Stability and Change as a Stanford University Press, pp. 125-189. Duality”, Academy of Management Review 35, pp. 202-225. Ao k i , M. (1988), Information, Incentives and Bargaining in the Japanese Fo s s , N. J. (2003) , “Selective Intervention and Internal Hybrids: Economy, Cambridge: Cambridge University Press. Interpreting and Learning from the Rise and Decline of the Oticon Ar g o t e , L. (1999), Organizational Learning: Creating, Retaining Spaghetti Organization”, Organization Science 14, pp. 331-349. and Transferring Knowledge, Norwell, MA: Kluwer Academic Ga l u n i c , D. C., and K. M. Ei s e n h a r d t (2001), “Architectural Innovation Publishers. and Modular Corporate forms”, Academy of Management Ar g y r i s , C., and D. Sc h o n (1978), Organizational Learning: a Theory of Journal 44, pp. 1229-1249. Action Perspective, Reading, MA: Addison-Wesley. Gl y n n , M. A. (1996), “Innovative Genius: a Framework for Relating Ba h r a m i , H. and S. Ev a n s (2000), “Flexible Recycling and High- Individual and Organizational Intelligence to Innovation”, Academy Technology Entrepreneurship”, in K. Martin (ed.), Understanding of Management Review 21, pp.1081-1111. Silicon Valley: the Anatomy of an Entrepreneurial Region, Stanford: Gr a n t , R. M. (1996), “Toward a Knowledge-Based Theory of the Stanford University Press, pp. 166-189. Firm”, Strategic Management Journal 17, pp. 109-122. Ba r t e l , C. A., and R. Ga r u d (2009), “The Role of Narratives in Gr e e n w o o d , R., and C. R. Hi n i n g s (1996), “Understanding Sustaining Organizational Innovation”, Organization Science 20, Radical Organizational Change: Bringing Together the Old and pp.107-117. New Institutionalism”, Academy of Management Review 21, Ba r n e t t , W. P. and G. R. Ca r o l l (1995), “Modelling Internal pp. 1022‑1054. Organizational Change”, Annual Review of Sociology 21, Gr e v e , H. R. and A. Ta y l o r (2000), “Innovations as Catalysts for pp. 217‑236. Organizational Change: Shifts in Organizational Cognition and Ba r n e t t , W. P., and J. Fr e e m a n (2001), “Too Much of a Good thing? Change,” Administrative Science Quarterly 45, pp. 54-80. Product Proliferation and Organizational Failure”, Organization Ha n n a n , M. T. and J. H. Fr e e m a n (1984), “Structural Inertia and Science 12, pp. 539-558. Organizational Change”, American Sociological Review 49: pp. Bl a u , P. M. (1970), “A Formal Theory of Differentiation in 149-164. Organizations”, American Sociological Review 35, pp. 201-218. He d l u n d , G. (1994), “A Model of Knowledge Management and the Br o w n , J. S., and P. Du g u i d (1991), “Organizational Learning and n-Form Corporation”, Strategic Management Journal 15: pp. 73-90. Communities of Practice: Towards a Unified view of Working, Ka n t e r , R. M. (1983), The Change Masters, New York: Simon & Learning and Innovation,” Organization Science 2, pp. 40-57. Schuster. Br o w n , J. S. and P. Du g u i d (1998), “Organizing Knowledge”, California Ko g u t , B., and U. Za n d e r (1992), “Knowledge of the Firm, Management Review 40, pp. 90-111. Combinative Capabilities, and the Replication of Technology”, Br o w n , S. L. and K. M. Ei s e n h a r d t (1997), “The Art of Continuous Organization Science 3, pp. 383-397. Change: Complexity Theory and Time-Paced Evolution in La m , A. (2000), “Tacit knowledge, Organizational Learning, Societal Relentlessly Shifting Organizations”, Administrative Science Institutions: an Integrated Framework”, Organization Studies 21, Quarterly 42, pp. 1-34. pp. 487-513. Bu r g l e m a n , R. A. (1991), “Intra-Organizational Ecology of Strategy- La m , A. (2002), “Alternative Societal Models of Learning and Making and Organizational Adaptation: Theory and Research”, Innovation in the Knowledge Economy”, International Social Organization Science 2, pp. 239-262. Science Journal 17, pp. 67-82. Bu r g l e m a n , R. A. (2002), “Strategy as Vector and the Inertia of La m , A. (2007), “Knowledge Networks and Careers: Academic Co-evolutionary Lock-in”, Administrative Science Quarterly 47, Scientists in Industry-University Links”, Journal of Management pp. 25‑357. Studies 44, pp. 993-1016. Bu r n s ,T., and G. M. St a l k e r (1961), The Management of Innovation, La m , A. and B-Å. Lu n d v a l l (2006), “The Learning Organization and London: Tavistock. National Systems of Competence Building and Innovation” in E. Ch a n d l e r , A. D. (1962), “Strategy and Structure: Chapters in the Lorenz and B- Å. Lundvall (eds.), How Europe’s Economies Learn: History of the American Industrial Enterprise”, Cambridge, MA: Coordinating Competing Models, Oxford: Oxford University Press, The MIT Press. pp. 109-139. Ch i l d , J. (1972), “Organizational Structure, Environment and La v e , J., and E. We n g e r (1991), Situated Learning: Legitimate Performance—the Role of Strategic Choice,” Sociology, 6, pp. 1-22. Peripheral Participation, New York: Cambridge University Press. Ch i l d , J. (1997), Retrospect and Prospect”, Organization Studies 18, La w r e n c e , P. R., and J. W. Lo r s c h (1967), “Differentiation and pp. 43-76. Integration in Complex Organizations”, Administrative Science Ch i l d , J., and C. Sm i t h (1987), “The Context and Process of Quarterly 12, pp. 1-47. Organizational Transformation—Cadbury Limited in its Sector”, La z o n i c k , W. (2004), “The Innovative Firm,” in J. Fagerberg, D. Journal of Management Studies 24, pp. 565-593. Mowery and R. Nelson (eds.), The Oxford Handbook of Innovation, Ch r i s t e n s e n , C. M. (1997), The Innovator’s Dilemma: When New Oxford: Oxford University Press, pp. 29-55. Technologies Cause Great Firms to Fail, Boston, MA: Harvard La z o n i c k , W. (2010), “The Chandlerian Corporation and the Theory Business School Press. of Innovative Enterprise”, Industrial and Corporate Change 1, Co h e n , W. M., and D. A. Le v i n t h a l (1990), “Absorptive Capacity: a new pp. 317‑349. Perspective on Learning and Innovation”, Administrative Science Le o n a r d -Ba r t o n , D. (1992), “Core Capabilities and Core Rigidities: Quarterly 35, pp.123-138. a Paradox in Managing New Product Development”, Strategic Da f t , R. L., and K. E. We i c k (1984), “Toward a Model of Organizations Management Journal 13, pp. 111-125. as Interpretation Systems”, The Academy of Management Review 9, Le v i n t h a l , D. A., and J. G. Ma r c h (1993), “The Myopia of Learning”, pp. 284-295. Strategic Management Journal 14, pp. 95-112. DeFi l l i p p i , R. (2002), “Organization Models for Collaboration in the Le w i n , A. Y., and H. W. Vo l b e r d a (1999), “Prolegomena on Co- New Economy”, Human Resource Planning 25, pp. 7-19. evolution: a Framework for Research on Strategy and New DeFi l l i p p i , R. J. and M. B. Ar t h u r (1996), “Boundaryless Contexts Organizational Forms”, Organization Science 10, pp. 519-534. and Careers: a Competency-Based Perspective” in M. B. Arthur Lu n d v a l l , B.-Å. (ed.) (1992), National Systems of Innovation: Towards a and D. M. Rousseau (eds.), The Boundaryless Career: A New Theory of Innovation and Interactive Learning, London: Pinter.

176 Ma r c h , J. G. (1991), “Exploration and Exploitation in Organizational We i c k , K. E. (1996), “The Role of Renewal in Organizational Learning”, Organization Science 2, pp.71-87. Learning”, International Journal of Technology Management 11, Me z i a s , S. J., and M. A. Gl y n n (1993), “The Three Faces of Corporate pp. 738-746. Renewal: Institution, Revolution, and Evolution”, Strategic We n g e r , E. (1998), Communities of Practice: Learning, Meaning, and Management Journal 14: pp. 77-101. Identity. New York, Cambridge University Press. Mi l e s , R. E., C. C. Sn o w , J. A. Ma t h e w s , G. Mi l e s and H. J. Co l e m a n Wh i t l e y , R. (2000), “The Institutional Structuring of Innovation Jr. (1997), “Organizing in the Knowledge Age: Anticipating the Strategies: Business Systems, Firm Types and Patterns of Cellular form”, Academy of Management Executive 11(4), pp. 7-20. Technical Change in Different Market Economies”, Organization Mi n t z b e r g , H. (1979), The Structuring of Organization, Englewood Studies 21, pp. 855-886. Cliffs, NJ: Prentice Hall. Wh i t l e y , R. (2003), “The Institutional Structuring of Organizational Ne l s o n , R. R., and S.G. Winter (1982), An Evolutionary Theory of Capabilities: the Role of Authority Sharing and Organizational Economic Change, Cambridge, MA: The Belknap Press of Harvard Careers”, Organization Studies 24, pp. 667-695. University Press. Wo m a c k , J. P., D. T. Jo n e s and D. Ro o s (1990), The Machine that No n a k a ., I., and H. Ta k e u c h i (1995), The Knowledge Creating Company, Changed the World. New York: Rawson Associates. New York: Oxford University Press. Wo o d m a n , R. W., J. E. Sa w y e r and R. W. Gr i ff i n (1993), “Toward a No n a k a , I. (1994), “A dynamic theory of organizational knowledge Theory of Organizational Creativity”, Academy of Management creation”, Organization Science 5, pp. 14-37. Review 18, pp. 293-321. No n a k a , I., and G. v o n Kr o g h (2009), “Perspective—Tacit Knowledge Wo o d w a r d , J. (1965), Industrial Organization, Theory and Practice, and Knowledge Conversion: Controversy and Advancement London: Oxford University Press. in Organizational Knowledge Creation Theory”, Organization Science 20, pp. 635-652. O’Re i l l y , C. A., and M. L. Tu s h m a n (2004), “The Ambidextrous Organization”, Harvard Business Review, April, pp. 74-81. O’Re i l l y , C. A. and M. L. Tu s h m a n (2008), “Ambidexterity as a Dynamic Capability: Resolving the Innovator’s Dilemmas”, Research in Organizational Behaviour 28, pp. 185-206. Pav i t t , K. (1991), “Key Characteristics of the Large Innovating Firm”, British Journal of Management 2, pp. 41-50. Pe r r o w , C. 1970, Organizational Analysis, London: Tavistock. Po l a n y i , M. (1966), The Tacit Dimension, New York: Anchor Day Books. Po w e l l , W. W. (1998), “Learning from Collaboration: Knowledge and Networks in the Biotechnology and Pharmaceutical Industries”, California Management Review 40, pp. 228-240. Pr a h a l a d , C. K. and G. Ha m e l (1990), “The Core Competence of the Corporation”, Harvard Business Review, May/June: pp.79-91. Qu i n n , J. B. (1992), Intelligent Enterprise: a Knowledge and Service Based Paradigm for Industry, New York: The Free Press. Sa x e n i a n , A. (1996), “Beyond Boundaries: Open Labour Markets and Learning in the Silicon Valley” in M. B. Arthur and D. M. Rousseau (eds.), The Boundaryless Career: a New Employment Principle for a New Organizational Era, New York: Oxford University Press, pp. 23-39. Sc h u m p e t e r , J. (1950), “The Process of Creative Destruction,” in J. Schumpeter (ed.) Capitalism, Socialism and Democracy, 3rd ed., London: Allen and Unwin. Se n g e , P. (1990), The Fifth Discipline: the Art and Practice of the Learning Organization New York: Doubleday. Si m o n , H. A. (1991), “Bounded Rationality and Organizational Learning”, Organization Science 2, pp.125-134. Te e c e , D. J., G. Pi s a n o and A. Sh u e n (1997), “Dynamic Capabilities and Strategic Management”, Strategic Management Journal 18, pp. 509‑533. Te e c e , D. (2007), “Explicating Dynamic Capabilities: the Nature and Microfoundations of (Sustainable) Enterprise Performance”, Strategic Management Journal 28, pp. 1319-1350. Ti d d , J., J. Bessant and K. Pavitt (1997), Managing Innovation, Chichester: John Wiley &Sons. Tu s h a m n , M. L., W. K. Sm i t h and R. C. Wo o d et al. (2010), “Organizational Designs and Innovation Streams”, Industrial and Corporate Change, doi: 10.1093/icc/dtq040. Va n d e Ve n , A., D. Po l l e y , S. Ga r u d and S. Ve n k ata r a m a n (1999), The Innovation Journey, New York: Oxford University Press. Vo n Hi p p e l , E. (1988), The Sources of Innovation, New York: Oxford University Press. Wa l s h , J. P., and G. R. Un g s o n (1991), “Organizational Memory”, Academy of Management Review 16, 57-91. We b e r , M. (1947), The Theory of Social and Economic Organization, Glencoe, IL: The Free Press. We i c k , K. E. (1979), The Social Psychology of Organizing, 2nd ed., Reading, MA: Addison-Wesley. We i c k , K. E. (1995), Sense-making in Organizations, Thousand Oaks, CA: Sage.

Alice Lam 177

Innovation by Users

Eric von Hippel Ever since Joseph A. Schumpeter Sometimes, user-developed innovations Massachusetts Institute of Technology (MIT) (1934) promulgated his theory of economic result from a number of users working development, economists, policymakers and together collaboratively. business managers have assumed that the User innovation is an institution that dominant mode of innovation is a “producers’ competes with and, I will argue, can displace model.” That is, it has been assumed producer innovation in many parts of the that most important innovations would economy. A growing body of empirical originate from producers and be supplied to work clearly shows that users are the consumers via goods that were for sale. first to develop many and perhaps most This view seemed reasonable on the face new industrial and consumer products. In of it—producers generally serve many users addition, the importance of product and and so can profit from multiple copies of a service development by users is increasing single innovative design. Individual users, over time. This shift is being driven by two in contrast, depend upon benefits from related technical trends: 1. the steadily in-house use of an innovation to recoup improving design capabilities (innovation their investments. Presumably, therefore, a toolkits) that advances in computer hardware producer that serves many customers can and software make possible for users; 2. the afford to invest more in innovation than any steadily improving ability of individual users single user. From this it follows logically that to combine and coordinate their innovation- producer-developed designs should dominate related efforts via new communication media user-developed designs in most parts of the such as the Internet. economy. The ongoing shift of innovation to users However, the producers’ model is only one has some very attractive qualities. It is mode of innovation. A second, increasingly becoming progressively easier for many important model is user innovation. Under users to get precisely what they want by this second model, economically important designing it for themselves. Innovation innovations are developed by individual by users also provides a very necessary users (consumers) and also by user firms. complement to, and feedstock for, producer

Eric von Hippel 181 In this paper, I offer a review of some The ongoing shift of innovation collective learning on this important topic to “ date. to users has some very attractive Importance of innovation by users qualities. It is becoming Users, as I use the term, are firms or individual consumers that expect to benefit progressively easier for many from using a product or a service. In contrast, producers expect to benefit from selling a users to get precisely what product or a service. A firm or an individual can have different relationships to different they want by designing it for products or innovations. For example, Boeing is a producer of airplanes, but it is also a themselves. Innovation by users user of machine tools. If one were examining innovations developed by Boeing for the also provides a very necessary airplanes it sells, Boeing would be a producer-innovator in those cases. But if complement to, and feedstock one were considering innovations in metal- forming machinery developed by Boeing for for, producer innovation in-house use in building airplanes, those ” would be categorized as user-developed innovations and Boeing would be a user- innovator in those cases. innovation. And innovation by users appears Innovation user and innovation producer to increase social welfare. At the same time, are the two general “functional” relationships the ongoing shift of product-development between innovator and innovation. Users activities from producers to users is painful are unique in that they alone benefit directly and difficult for many producers. User from innovations. All others (here lumped innovation is “attacking” a major structure of under the term “producers”) must sell the social division of labor. Many firms and innovation-related products or services industries must make fundamental changes to users, indirectly or directly, in order to to long-held business models in order to profit from innovations. Thus, in order adapt. Further, governmental policy and to profit, inventors must sell or license legislation sometimes preferentially supports knowledge related to innovations, and innovation by producers. Considerations of producers must sell products or services social welfare suggest that this must change. incorporating innovations. Similarly, The workings of the intellectual property suppliers of innovation-related materials system are of special concern. But despite or services—unless they have direct use for the difficulties, a user-centered system of the innovations—must sell the materials innovation appears well worth striving for. or services in order to profit from the Today a number of innovation process innovations. researchers are working to develop our The user and producer categorization understanding of user innovation processes. of relationships between innovator and

182 thoughts towards finding out easier and Today a number of innovation readier methods of performing it”. Rosenberg “ (1976) explored the matter in terms of process researchers are working innovation by user firms rather than individual workers. He studied the history of the US to develop our understanding of machine tool industry, finding that important and basic machine types like lathes and user innovation processes milling machines were first developed and ” built by user firms having a strong need for them. Textile manufacturing firms, gun producers and sewing machine producers innovation can be extended to specific were important early user-developers of function, attributes, or features of products machine tools. and services. When this is done, it may turn Quantitative studies of user innovation out that different parties are associated with document that many of the most important different attributes of a particular product and novel products and processes in a range or service. For example, householders are of fields have been developed by user firms the users of the switching attribute of a and by individual users. Thus, Enos (1962) household electric light switch—they use it to reported that nearly all the most important turn lights on and off. However, switches also innovations in oil refining were developed by have other attributes, such as “easy wiring” user firms. Freeman (1968) found that the qualities, that may be used only by the most widely licensed chemical production electricians who install them. Therefore, if an processes were developed by user firms. electrician were to develop an improvement Von Hippel (1988) found that users were to the installation attributes of a switch, the developers of about 80% of the most it would be considered a user-developed important scientific instrument innovations, innovation. and also the developers of most of the major Both qualitative observations and innovations in semiconductor processing. quantitative research in a number of fields Pavitt (1984) found that a considerable clearly document the important role users fraction of invention by British firms was for play as first developers of products and in-house use. Shah (2000) found that the services later sold by manufacturing firms. most commercially important equipment Adam Smith (1776) was an early observer of innovations in four sporting fields tended to the phenomenon, pointing out the importance be developed by individual users. of “the invention of a great number of Empirical studies also show that many machines which facilitate and abridge labor, users—from 10% to nearly 40%—engage in and enable one man to do the work of many”. developing or modifying products. This has Smith went on to note that “a great part of the been documented in the case of specific machines made use of in those manufactures types of industrial products and consumer in which labor is most subdivided, were products, and in large, multi-industry studies originally the invention of common workmen, of process innovation in Canada and the who, being each of them employed in some Netherlands as well (table 1). When taken very simple operation, naturally turned their together, the findings make it very clear that

Eric von Hippel 183 users are doing a lot of product development to gain relatively high benefits from a solution and product modification in many fields. of the needs they have encountered there. Studies of innovating users (both The correlations found between innovation individuals and firms) show them to have the by users and lead user status are highly characteristics of “lead users” (Urban and significant, and the effects are considerable von Hippel, 1988, Herstatt and von Hippel, (Franke and Shah, 2003, Lüthje et al., 2002 1992, Olson and Bakke, 2001, Lilien et al., and Morrison et al., 2000). 2002). That is, they are ahead of the majority Since lead users are at the leading edge of of users in their populations with respect to the market with respect to important market an important market trend, and they expect trends, one can guess that many of the novel

Table 1. Studies of user innovation frequency

Innovation Area Number and type of users sampled % developing and building product for own use Industrial products 1. Printed Circuit CAD Software (a) 136 user firm attendees at a PC-CAD 24.3% conference 2. Pipe Hanger Hardware (b) Employees in 74 pipe hanger installation firms 36% 3. Library Information Systems (c) Employees in 102 Australian libraries using 26% computerized OPAC library information systems 4. Medical Surgery Equipment (d) 261 surgeons working in university clinics in 22% Germany 5. Apache OS server software security 131 technically sophisticated Apache users 19.1% features (e) (webmasters) Consumer products 6. Outdoor consumer products (f) 153 recipients of mail order catalogs for 9.8% outdoor activity products for consumers 7. “Extreme” sporting equipment (g) 197 members of 4 specialized sporting clubs in 37.8% 4 “extreme” sports 8. Mountain biking equipment (h) 291 mountain bikers in a geographic region 19.2% known to be an “innovation hot spot.” Multi-industry process innovation surveys 26. ‘Advanced Manufacturing Canadian manufacturing plants in 9 28% developed Technologies’ (i) Manufacturing Sectors (less food processing) 26% modified in Canada, 1998 (population estimates based upon a sample of 4,200) Data Sources: a. Urban and von 39. ‘Advanced Manufacturing 16,590 Canadian manufacturing 22% developed Hippel, 1988; b. Herstatt and von Hippel,1992; c. Morrison Technologies’ (j) establishments that met the criteria of having 21% modified et al., 2000; d. Lüthje, 2003; at least $250,000 in revenues, and at least 20 e. Franke and von Hippel, 2003; employees. f. Lüthje, 2004; g. Franke and Any type of process innovation or process Representative, cross-industry sample of 498 41% developed only Shah, 2003; h. Lüthje et al., modification (k) “high tech” Netherlands SMEs 34% modified only 2002; i. Arundel and Sonntag, 54% developed and/or 1999; j. Gault and von Hippel, 2009; k. de Jong and von Hippel, modified 2009.

184 products they develop for their own use attractiveness as one moves from left to will appeal to other users too and so might right indicates that innovations developed provide the basis for products producers by lead users tend to be more commercially would wish to commercialize. This turns out attractive. (Innovation attractiveness is the to be the case. A number of studies have sum of the novelty of the innovation and shown that many of the innovations reported the expected future generality of market by lead users are judged to be commercially demand.) attractive and/or have actually been commercialized by producers. WHY ManY USERS WanT CUSToM PRoDUCTS Research provides a fi rm grounding for Why do so many users develop or modify these empirical fi ndings. The two defi ning products for their own use? Users may characteristics of lead users and the innovate if and as they want something that is likelihood that they will develop new or not available on the market and are able and modifi ed products have been found to be willing to pay for its development. It is likely highly correlated (Morrison et al., 2004). In that many users do not fi nd what they want addition, it has been found that the higher on the market. Meta-analysis of market- the intensity of lead user characteristics segmentation studies suggests that users’ displayed by an innovator, the greater the needs for products are highly heterogeneous commercial attractiveness of the innovation in many fi elds (Franke and Reisinger, 2003). that that lead user develops (Franke and Mass producers tend to follow a strategy von Hippel, 2003a). In fi gure 1, the increased of developing products that are designed to concentration of innovations toward the right meet the needs of a large market segment indicates that the likelihood of innovating well enough to induce purchase from and is higher for users having higher lead user capture signifi cant profi ts from a large index values. The rise in average innovation number of customers. When users’ needs

Figure 1. User-innovators with stronger “lead user” characteristics develop innovations having higher appeal in the general market place

Innovation

Estimated OLS function: Y = 2.06 + 0.57x

With 10 Y = attractiveness of innovation [2;14] x = lead user-ness of respondent in sample [2;14]

Adj. R² = .281; p = 0.002; n = 30 Estimated OLS curve

5 Attractiveness of Innovations Attractiveness

0 Data Source: Franke and von 98765432 10 11 12 13 14 Hippel, 2003 “Lead User-ness” of Users

ERIC von HIPPEL 185 are heterogeneous, this strategy of “a few sizes fit all” will leave many users somewhat Mass producers tend to follow dissatisfied with the commercial products “ on offer and probably will leave some users a strategy of developing products seriously dissatisfied. In a study of a sample of users of the security features of Apache that are designed to meet the web server software, Franke and von Hippel (2003b) found that users had a very high needs of a large market segment heterogeneity of need, and that many had a high willingness to pay to get precisely well enough to induce purchase what they wanted. 19% of the users sampled actually innovated to tailor Apache more from and capture significant closely to their needs. Those who did were found to be significantly more satisfied. profits from a large number of

Users’ Innovate-or-Buy Decisions customers Even if many users want “exactly-right ” products” and are willing and able to pay for their development, we must understand why users often do this for themselves rather of the principal and the agent are not the than hire a custom producer to develop a same, there will be agency costs. In general special just-right product for them. After all, terms, agency costs are 1. costs incurred to custom producers specialize in developing monitor the agent to ensure that it (or he or products for one or a few users. Since these she) follows the interests of the principal, firms are specialists, it is possible that they 2. the cost incurred by the agent to commit could design and build custom products itself not to act against the principal’s interest for individual users or user firms faster, (the “bonding cost”), and 3. costs associated better, or cheaper than users could do this with an outcome that does not fully serve for themselves. Despite this possibility, the interests of the principal (Jensen and several factors can drive users to innovate Meckling, 1976). In the specific instance of rather than buy. Both in the case of user product and service development, a major firms and that of individual user-innovators, divergence of interests between user and agency costs play a major role. In the case of custom producer does exist: the user wants individual user-innovators, enjoyment of the to get precisely what it needs, to the extent innovation process can also be important. that it can afford to do so. In contrast, With respect to agency costs, consider the custom producer wants to lower its that when a user develops its own custom development costs by incorporating solution product that user can be trusted to act in elements it already has or that it predicts its own best interests. When a user hires others will want in the future—even if by a producer to develop a custom product, doing so it does not serve its present client’s the situation is more complex. The user is needs as well as it could. then a principal that has hired the custom A user wants to preserve its need producer to act as its agent. If the interests specification because that specification is

186 A model of the innovate-or-buy decision The custom producer wants to (von Hippel, 2005) shows in a quantitative “ way that user firms with unique needs (in lower its development costs by other words, a market of one) will always be better off developing new products for incorporating solution elements themselves. It also shows that development by producers can be the most economical it already has or that it predicts option when n or more user firms want the same thing. However, when the number of others will want in the future— user firms wanting the same thing is between 1 and n, producers may not find it profitable even if by doing so it does not to develop a new product for just a few users. In that case, more than one user may invest serve its present client’s needs in developing the same thing independently, owing to market failure. This results in a as well as it could waste of resources from the point of view of ” social welfare. The problem can be addressed by new institutional forms, such as the user innovation communities that will be chosen to make that user’s overall solution mentioned later. quality as high as possible at the desired It is important to note that an additional price. For example, an individual user may incentive can drive individual user- specify a mountain-climbing boot that will innovators to innovate rather than buy: they precisely fit his unique climbing technique may value the process of innovating because and allow him to climb Everest more easily. of the enjoyment or learning that it brings Any deviations in boot design will require them. It might seem strange that user- compensating modifications in the climber’s innovators can enjoy product development carefully practiced and deeply ingrained enough to want to do it themselves—after climbing technique—a much more costly all, producers pay their product developers solution from the user’s point of view. A to do such work! On the other hand, it is custom boot producer, in contrast, will also clear that enjoyment of problem solving have a strong incentive to incorporate the is a motivator for many individual problem materials and processes it has in stock solvers in at least some fields. Consider for and expects to use in future even if this example the millions of crossword-puzzle produces a boot that is not precisely right aficionados. Clearly, for these individuals for the present customer. For example, the enjoyment of the problem-solving process producer will not want to learn a new way to rather than the solution is the goal. One bond boot components together even if that can easily test this by attempting to offer would produce the best custom result for a puzzle solver a completed puzzle—the one client. The net result is that when one very output he or she is working so hard or a few users want something special they to create. One will very likely be rejected will often get the best result by innovating for with the rebuke that one should not spoil themselves. the fun. Pleasure as a motivator can

Eric von Hippel 187 apply to the development of commercially useful innovations as well. Studies of the Product developers need two motivations of volunteer contributors of code “ to widely used software products have shown types of information in order that these individuals too are often strongly motivated to innovate by the joy and learning to succeed at their work: need they find in this work (Hertel et al., 2003; Lakhani and Wolf, 2005). and context-of-use information

Users’ Low-Cost Innovation Niches (generated by users) and generic An exploration of the basic processes of product and service development shows solution information (often that users and producers tend to develop different types of innovations. This is due initially generated by producers in part to information asymmetries: users and producers tend to know different specializing in a particular type things. Product developers need two types of information in order to succeed at their of solution) work: need and context-of-use information ” (generated by users) and generic solution information (often initially generated by producers specializing in a particular type the information at little or no cost” (1962: of solution). Bringing these two types of 614‑615). information together is not easy. Both need When information is sticky, innovators information and solution information are tend to rely largely on information they often very “sticky”—that is, costly to move already have in stock. One consequence of from the site where the information was the resulting typical asymmetry between generated to other sites (von Hippel, 1994). users and producers is that users tend to It should be noted that the observation that develop innovations that are functionally information is often sticky contravenes a novel, requiring a great deal of user-need central tendency in economic theorizing. information and use-context information for Much of the research on the special their development. In contrast, producers character of markets for information, and tend to develop innovations that are the difficulty of appropriating benefit from improvements on well-known needs and invention and innovation, has been based on that require a rich understanding of solution the idea that information can be transferred information for their development. Similarly, at very low cost. (Thus, Arrow observes that users tend to have better information “the cost of transmitting a given body of regarding ways to improve use-related information is frequently very low. . . In the activities such as maintenance than do absence of special legal protection, the owner producers: they “learn by using” (Rosenberg, cannot, however, simply sell information on 1982). the open market. Any one purchaser can This sticky information effect is destroy the monopoly, since he can reproduce quantitatively visible in studies of innovation.

188 Riggs and von Hippel (1994) studied the types If we extend the information-asymmetry of innovations made by users and producers argument one step further, we see that that improved the functioning of two major information stickiness implies that types of scientific instruments. They found information on hand will also differ among that users are significantly more likely than individual users and producers. The producers to develop innovations that enabled information assets of some particular user the instruments to do qualitatively new (or some particular producer) will be closest types of things for the first time. In contrast, to what is required to develop a particular producers tended to develop innovations that innovation, and so the cost of developing enabled users to do the same things they had that innovation will be relatively low for that been doing, but to do them more conveniently user or producer. The net result is that user or reliably (table 2). For example, users were innovation activities will be distributed across the first to modify the instruments to enable many users according to their information them to image and analyze magnetic domains endowments. With respect to innovation, one at sub-microscopic dimensions. In contrast, user is by no means a perfect substitute for producers were the first to computerize another. instrument adjustments to improve ease of operation. Sensitivity, resolution, and Why Users Often Freely Reveal Their accuracy improvements fall somewhere in Innovations the middle, as the data show. These types The social efficiency of a system in of improvements can be driven by users which individual innovations are developed seeking to do specific new things, or by by individual users is increased if users producers applying their technical expertise somehow pass on what they have developed to improve the products along known general to others. Producer-innovators partially dimensions of merit, such as accuracy. achieve this when they sell a product or The sticky information effect is a service on the open market (partially independent of Stigler’s (1951) argument that because they disseminate the product the division of labor is limited by the extent incorporating the innovation, but often not of the market. When profit expectations are all the information that others would need controlled, the impact of sticky information to fully understand and replicate it). If user- on the locus of innovation is still strongly innovators do not somehow also pass on evident (Ogawa, 1998). what they have done, multiple users with

Table 2. Source of innovations by nature of improvement effected

Type of improvement provided by innovation Innovation developed by: %User User Producer Total 1. New functional capability 82% 14 3 17 2. Sensitivity, resolution or accuracy 48% 11 12 23 improvement 3. Convenience or reliability improvement 13% 3 21 24 Source: Riggs and von Hippel, Total 64 1994.

Eric von Hippel 189 firms—and sometimes producers—often Hiding an innovation as a freely reveal detailed information about their “ innovations. trade secret is unlikely to be The practices visible in “open source” software development were important successful for long: too many in bringing this phenomenon to general awareness. In these projects it was clear generally know similar things, policy that project contributors would routinely and systematically freely reveal and some holders of the “secret” code they had developed at private expense (Raymond, 1999). However, free revealing information stand to lose little or of product innovations has a history that began long before the advent of open nothing by freely revealing what source software. Allen, in his 1983 study of the eighteenth-century iron industry, they know was probably the first to consider the ” phenomenon systematically. Later, Nuvolari (2004) discussed free revealing in the early history of mine pumping engines. very similar needs will have to independently Contemporary free revealing by users develop very similar innovations—a poor use has been documented by von Hippel and of resources from the viewpoint of social Finkelstein (1979) for medical equipment, welfare. Empirical research shows that users by Lim (2000) for semiconductor process often do achieve widespread diffusion by an equipment, by Morrison, Roberts, and von unexpected means: they often “freely reveal” Hippel (2000) for library information systems, what they have developed. When we say that and by Franke and Shah (2003) for sporting an innovator freely reveals information about equipment. Henkel (2003) has documented a product or service it has developed, we free revealing among producers in the case of mean that all intellectual property rights to embedded Linux software. that information are voluntarily given up by Innovators often freely reveal because it the innovator, and all interested parties are is often the best or the only practical option given access to it—the information becomes available to them. Hiding an innovation as a public good (Harhoff et al., 2003). a trade secret is unlikely to be successful The empirical finding that users often for long: too many generally know similar freely reveal their innovations has been a things, and some holders of the “secret” major surprise to innovation researchers. information stand to lose little or nothing by On the face of it, if a user-innovator’s freely revealing what they know. Studies find proprietary information has value to others, that innovators in many fields view patents one would think that the user would strive as having only limited value (Harhoff et al., to prevent free diffusion rather than help 2003). Copyright protection and copyright others to a free ride on what it has developed licensing are applicable only to “writings,” at private cost. Nonetheless, it is now such as books, graphic images, and computer very clear that individual users and user software.

190 Active efforts by innovators to freely also common, with users joining together reveal—as opposed to sullen acceptance— in networks and communities that provide are explicable because free revealing can useful structures and tools for their provide innovators with significant private interactions and for the distribution of benefits as well as losses or risks of loss. innovations. Innovation communities can Users who freely reveal what they have increase the speed and effectiveness with done often find that others then improve or which users and also producers can develop, suggest improvements to the innovation, test and diffuse their innovations. They also to their mutual benefit (Raymond, 1999). can greatly increase the ease with which Freely- revealing users also may benefit from innovators can build larger systems from enhancement of reputation, from positive interlinkable modules created by community network effects due to increased diffusion participants. of their innovation, and from other factors. Free and open source software projects Being the first to freely reveal a particular are a relatively well-developed and very innovation can also enhance the benefits successful form of an Internet-based received, and so there can actually be a rush innovation community. However, innovation to reveal, much as scientists rush to publish communities are by no means restricted to in order to gain the benefits associated with software or even to information products, and being the first to have made a particular they can play a major role in the development advance. of physical products. Franke and Shah (2003) have documented the value that user- Innovation Communities innovation communities can provide to user- Innovation by users tends to be widely innovators developing physical products in distributed rather than concentrated among the field of sporting equipment. The analogy just a very few very innovative users (table 3). to open source innovation communities is As a result, it is important for user-innovators clear. to find ways to combine and leverage their The collective or community effort to efforts. Users achieve this by engaging in provide a public good—which is what freely many forms of cooperation. Direct, informal revealed innovations are—has traditionally user-to-user cooperation (assisting others been explored in the literature on “collective to innovate, answering questions, and so action”. However, behaviors seen in extant on) is common. Organized cooperation is innovation communities fail to correspond to

Table Source: von Hippel, 2005, table 7-1.

Data Sources: * von Hippel, 1988, Appendix: Table 3. User innovation is widely distributed: Few users developed more than one major commercialized innovation GC, TEM, NMR Innovations ** Riggs and von Hippel, Esca User samples Number of innovations each user developed: and AES 1 2 3 6 na sample (n) *** von Hippel, 1988, Appendix: Semiconductor and pultrusion Scientific Instrument users* 28 0 1 0 1 32 process equipment innovations. Scientific Instrument users** 20 1 0 1 0 28 **** Shah, 2000, Appendix A: skateboarding, snowboarding Process equipment users*** 19 1 0 0 8 29 and windsurfing innovations Sports equipment users**** 7 0 0 0 0 7 developed by users.

Eric von Hippel 191 that literature at major points. In essence, innovation communities appear to be This finding implies that more robust with respect to recruiting and “ rewarding members than the literature would policy making should support predict. The reason for this appears to be that innovation contributors obtain some private user innovation, or at least rewards that are not shared equally by free riders (those who take without contributing). should ensure that legislation For example, a product that a user-innovator develops and freely reveals might be perfectly and regulations do not favor suited to that user-innovator’s requirements but less well suited to the requirements of producers at the expense of user- free riders. Innovation communities thus illustrate a “private-collective” model of innovators innovation incentive (von Hippel and von ” Krogh, 2003).

Adapting Policy to User Innovation investment. Instead, it now appears that there Is innovation by users a “good thing”? are economies of scope in both patenting Welfare economists answer such a question and copyright that allow firms to use these by studying how a phenomenon or a change forms of intellectual property law in ways that affects social welfare. Henkel and von Hippel are directly opposed to the intent of policy (2005) explored the social welfare implications makers and to the public welfare (Foray, of user innovation. They found that, relative 2004). Major firms can invest to develop to a world in which only producers innovate, large portfolios of patents. They can then social welfare is very probably increased by use these to create “patent thickets”—dense the presence of innovations freely revealed by networks of patent claims that give them users. This finding implies that policy making plausible grounds for threatening to sue should support user innovation, or at least across a wide range of intellectual property. should ensure that legislation and regulations They may do this to prevent others from do not favor producers at the expense of user- introducing a superior innovation and/or to innovators. demand licenses from weaker competitors The transitions required of policy making on favorable terms (Shapiro, 2001; Bessen, to achieve neutrality with respect to user 2003). Movie, publishing, and software firms innovation vs. producer innovation are can use large collections of copyrighted work significant. Consider the impact on open for a similar purpose (Benkler, 2002). In view and distributed innovation of past and of the distributed nature of innovation by current policy decisions. Research done users, with each tending to create a relatively in the past 30 years has convinced many small amount of intellectual property, academics that intellectual property law is users are likely to be disadvantaged by such sometimes or often not having its intended strategies. effect. Intellectual property law was intended It is also important to note that users to increase the amount of innovation (and producers) tend to build prototypes of

192 their innovations economically by modifying from both Canada and the Netherlands products already available on the market show that about 25% of such user-developed to serve a new purpose. Laws such as innovations get voluntarily transferred to the (US) Digital Millennium Copyright Act, producers. A significant fraction—about intended to prevent consumers from illegally half—is transferred both unprotected by copying protected works, also can have intellectual property and without charge the unintended side effect of preventing (Gault and von Hippel, 2009, de Jong and von users from modifying products that they Hippel, 2009). purchase (Varian, 2002). Both fairness Policy making that levels the playing and social welfare considerations suggest field between users and producers will that innovation-related policies should be force more rapid change onto producers but made neutral with respect to the sources of will by no means destroy them. Experience innovation. in fields where open and distributed It may be that current impediments to innovation processes are far advanced show user innovation will be solved by legislation how producers can and do adapt. Some, or by policy making. However, beneficiaries for example, learn to supply proprietary of existing law and policy will predictably platform products that offer user-innovators resist change. Fortunately, a way to get a framework upon which to develop and use around some of these problems is in the their improvements (Jeppesen, 2004). hands of innovators themselves. Suppose many innovators in a particular field decide Diffusion of user-developed innovations to freely reveal what they have developed, Products, services, and processes as they often have reason to do. In that case, developed by users become more valuable users can collectively create an information to society if they are somehow diffused to commons (a collection of information freely others that can also benefit from them. If available to all) containing substitutes for user innovations are not diffused, multiple some or a great deal of information now held users with very similar needs will have to as private intellectual property. Then user- invest to (re)develop very similar innovations innovators can work around the strictures which, as was noted earlier, would be a poor of intellectual property law by simply using use of resources from the social-welfare these freely revealed substitutes (Lessig, point of view. In the case of information 2001). products, users have the possibility of largely This pattern is occurring in the field of or completely doing without the services of software—and very visibly so. For many producers. Open-source software projects are problems, user-innovators in that field now object lessons that teach us that users can have a choice between proprietary, closed create, produce, diffuse and provide user field software provided by Microsoft and other support, update, and use complex products firms and open-source software that they by and for themselves in the context of user can legally download from the Internet and innovation communities. In physical product legally modify as they wish, to serve their own fields, the situation is different. Users can specific needs. It is also happening, although develop products. However, the economies less visibly, in the case of process equipment of scale associated with manufacturing and developed by users for in-house use. Data distributing physical products give producers

Eric von Hippel 193 a firm’s product line they typically arrive To systematically find user- with a lag and by an unconventional and “ unsystematic route. For example, a producer developed innovations, producers may “discover” a lead user innovation only when the innovating user firm contacts the must redesign their product producer with a proposal to produce its design in volume to supply its own in-house development processes needs. Or sales or service people employed ” by a producer may spot a promising prototype during a visit to a customer’s site. Modification of firms’ innovation processes an advantage over “do-it-yourself” users in to systematically search for and further those activities. develop innovations created by lead users can How can or should user innovations of provide producers with a better interface to general interest be transferred to producers the innovation process as it actually works, for large-scale diffusion? We propose three and so provide better performance. A natural general methods for accomplishing this. experiment conducted at 3M illustrates this First, producers can actively seek innovations possibility. Annual sales of lead user product developed by lead users that can form the ideas generated by the average lead user basis for a profitable commercial product. project at 3M were conservatively forecast Second, producers can draw innovating users by management to be more than 8 times the into joint design interactions by providing sales forecast for new products developed them with “toolkits for user innovation.” in the traditional manner—$146 million Third, users can become producers in order versus $18 million per year. In addition, lead to widely diffuse their innovations. We discuss user projects were found to generate ideas each of these possibilities in turn. for new product lines, whereas traditional To systematically find user-developed market-research methods were only found to innovations, producers must redesign their produce ideas for incremental improvements product development processes. Currently, to existing product lines. As a consequence, almost all producers think that their job 3M divisions funding lead user project ideas is to find a need and fill it rather than to experienced their highest rate of major sometimes find and commercialize an product line generation in the past 50 years innovation that lead users have already (Lilien et al., 2002). developed. Accordingly, producers have set Toolkits for user innovation custom design up market-research departments to explore involve partitioning product-development the needs of users in the target market, and service-development projects into product-development groups to think up solution-information-intensive subtasks and suitable products to address those needs, and need-information-intensive subtasks. Need- so forth. In this type of product development intensive subtasks are then assigned to users system, the needs and prototype solutions along with a kit of tools that enable them of lead users—if encountered at all—are to effectively execute the tasks assigned to typically rejected as outliers of no interest. them. In the case of physical products, the Indeed, when lead users’ innovations do enter designs that users create using a toolkit are

194 designed using this approach (Thomke and Users’ ability to innovate is von Hippel, 2002). “ Innovations developed by users sometimes improving radically and rapidly achieve widespread dissemination when those users become producers—setting up as a result of the steadily a firm to produce their innovative product(s) for sale. Shah (2000) showed this pattern in improving quality of computer sporting goods fields. In the medical field, Lettl and Gemunden (2005) have shown a software and hardware, improved pattern in which innovating users take on many of the entrepreneurial functions needed access to easy-to-use tools and to commercialize the new medical products they have developed, but do not themselves components for innovation, abandon their user roles. New work in this field is exploring the conditions under which and access to a steadily-richer users will become entrepreneurs rather than transfer their innovations to established firms innovation commons” (Hienerth, 2004; Shah and Tripsas, 2004). I summarize this overview article by saying again that users’ ability to innovate is then transferred to producers for production improving radically and rapidly as a result of (von Hippel and Katz, 2002). Toolkits make the steadily improving quality of computer innovation cheaper for users and also lead software and hardware, improved access to higher customer value. Thus, Franke to easy-to-use tools and components for and Piller (2004) in a study of consumer innovation, and access to a steadily-richer wrist watches, found the willingness to pay innovation commons. Today, user firms and for a self-designed product was 200% of even individual hobbyists have access to the willingness to pay for the best-selling sophisticated programming tools for software commercial product of the same technical and sophisticated CAD design tools for quality. This increased willingness to pay hardware and electronics. These information- was due both to the increased value provided based tools can be run on a personal by the self-developed product and the value computer, and they are rapidly coming down of the toolkit process for consumers engaging in price. As a consequence, innovation by in it. (Schreier and Franke, 2004). users will continue to grow even if the degree Producers that offer toolkits to their of heterogeneity of need and willingness to customers can attract innovating users into a invest in obtaining a precisely-right product relationship with their firms and so obtain an remains constant. advantage with respect to producing what the Equivalents of the innovation resources users develop. The custom semiconductor described above have long been available to industry was an early adopter of toolkits. a few within corporations. Senior designers In 2003, more than $15 billion worth of at firms have long been supplied with semiconductors were produced that had been engineers and designers under their direct

Eric von Hippel 195 control, and with the resources needed to References quickly construct and test prototype designs. Al l e n , R. C. (1983), “Collective Invention”, Journal of Economic The same is true in other fields, including Behavior and Organization 4(1), pp. 1-24. Ar r o w , Kenneth J. (1962), “Economic Welfare and the Allocation of automotive design and clothing design: just Resources of Invention”, The Rate and Direction of Inventive Activity: Economic and Social Factors, A Report of the National Bureau of think of the staffs of engineers and model Economic Research, 609-625, Princeton, NJ: Princeton University Press. makers supplied so that top auto designers Ar u n d e l , A., and V. So n n ta g (1999), “Patterns of Advanced can quickly realize and test their designs. Manufacturing Technology (AMT) Use in Canadian Manufacturing: 1998 AMT Survey Results”, Research Paper no. 12, Ottawa: But if, as we have seen, the information Science, Innovation and Electronic Information Division, Statistics Canada. needed to innovate in important ways is Be n k l e r , Y. (2002), “Intellectual Property and the Organization of Information Production”, International Review of Law and widely distributed, the traditional pattern of Economics 22(1), pp. 81-107. concentrating innovation-support resources Be s s e n , J. (2003), “Patent Thickets: Strategic Patenting of Complex Technologies”, Research on Innovation, Boston University School on a few individuals is hugely inefficient. of Law, Working Paper. d e Jo n g , Jeroen P. J., and Eric v o n Hi p p e l (2009), “Measuring High-cost resources for innovation support User Innovation in Dutch High Tech SMEs: Frequency, Nature and Transfer to Producers”, MIT Sloan School of Management cannot efficiently be allocated to “the right Research Paper No. 4724-09 (March), Research Policy, forthcoming people with the right information”: it is very http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1352496 Fo r a y , D. (2004), Economics of Knowledge, Cambridge, MA: The MIT difficult to know who these people may be Press. Fr a n k e , N., and F. Pi l l e r (2004), “Value Creation by Toolkits for User before they develop an innovation that turns Innovation and Design: The Case of the Watch Market, Journal of out to have general value. When the cost Product Innovation Management 21(6), pp. 401-415. Fr a n k e , N. and H. Re i s i n g e r (2003), “Remaining Within Cluster of high-quality resources for design and Variance: A Meta Analysis of the ‘Dark’ Side of Cluster Analysis”, Vienna Business University, Working Paper. prototyping becomes very low (the trend Fr a n k e , N., and S. Sh a h (2003), “How Communities Support Innovative Activities: An Exploration of Assistance and Sharing we have described), these resources can Among End-Users”, Research Policy 32(1), pp. 157-178. be diffused very widely, and the allocation Fr a n k e , N., and E. v o n Hi p p e l (2003a), “Finding Commercially- Attractive User Innovations”, MIT Sloan School of Management problem diminishes in significance. The net Working Paper No. 4402-03. Fr a n k e , N., and E. v o n Hi p p e l (2003b), “Satisfying Heterogeneous result is a pattern in which development User Needs via Innovation Toolkits: The Case of Apache Security Software”, Research Policy 32(7), pp. 1199-1215. of product and service innovations is Ga u l t , Fred, and Eric v o n Hi p p e l (2009), “The Prevalence of User increasingly shifting to users—a pattern that Innovation and Free Innovation Transfers: Implications for Statistical Indicators and Innovation Policy”, MIT Sloan School of will involve significant changes for both users Management Working Paper #4722-09 (January). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1337232 and producers. Ha r h o ff , D., J. He n k e l and E. v o n Hi p p e l (2003), “Profiting from Voluntary Information Spillovers: How Users Benefit by Freely Revealing their Innovations”, Research Policy 32(10), pp. 1753- 1769. He n k e l , J. (2003), “Software Development in Embedded Linux – Informal Collaboration of Competing Firms”, in W. Uhr, W. Esswein and E. Schoop (eds.), Proceedings der 6. Internationalen Tagung Wirtschaftsinformatik 2003 2, Heidelberg, pp. 1-99. He n k e l , J. and E. v o n Hi p p e l (2005), “Welfare Implications of User Innovation”, Journal of Technology Transfer, forthcoming. He r s t a t t , C. and E. v o n Hi p p e l (1992), “From Experience: Developing New Product Concepts via the Lead User Method: A Case Study in a “Low Tech” Field”, Journal of Product Innovation Management 9(3), pp. 213-222. He r t e l , G., S. Ni e d n e r and S. He r r m a n n (2003), “Motivation of Software Developers in Open Source Projects: an Internet-Based Survey of Contributors to the Linux Kernel”, Research Policy 32(7), pp. 1159-1177. Hi e n e r t h , Christoph (2004) “The commercialization of user innovations: Sixteen cases in an extreme sporting industry”, Vienna University of Economics and Business Administration Working Paper. Je n s e n , M. C., and W. H. Me c k l i n g (1976), “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure”, Journal of Financial Economics 3(4), pp.305-360.

196 Je p p e s e n , L. B. (2004), “Profiting from Innovative User Communities: Stern (eds.), Innovation Policy and the Economy 1, pp. 119-150, How Firms Organize the Production of User Modifications in the Cambridge, MA: The MIT Press. Computer Games Industry”, Department of Industrial Economics St i g l e r , George J. (1951), “The Division of Labor is Determined by and Strategy, Copenhagen Business School, Copenhagen, Denmark, the Extent of the Market”, Journal of Political Economy 59(3) (June), Working paper WP-04. pp. 185-193. La k h a n i , K. R. and B. Wo l f (2005), “Why Hackers Do What They Th o m k e , S. H., and E. v o n Hi p p e l (2002), “Customers as Innovators: Do: Understanding Motivation and Effort in Free/Open Source A New Way to Create Value”, Harvard Business Review 80(4), pp. Software Projects”, J. Feller, B. Fitzgerald, S. Hissam, and K. R. 74-81. Lakhani (eds.), Perspectives on Free and Open Source Software, Ur b a n , G. L. and E. v o n Hi p p e l (1988), “Lead User Analyses for the Cambridge, MA: The MIT Press. Development of New Industrial Products”, Management Science Le s s i g , L. (2001), The Future of Ideas: The Fate of the Commons in a 34(5), pp. 569-82. Connected World, New York: Random House. Va r i a n , H. R. (2002), “New Chips Can Keep a Tight Rein on Le t t l , C., C. He r s t a t t and H. Ge m ü n d e n (2005), “The entrepreneurial Consumers”, New York Times, July 4. role of innovative users”, Journal of Business and Industrial v o n Hi p p e l , E., and S. N. Fi n k e l s t e i n (1979), “Analysis of Innovation in Marketing 20(7), pp. 339-346. Automated Clinical Chemistry Analyzers”, Science & Public Policy Lilien, Gary L., Pamela D. Mo r r i s o n , Kathleen Se a r l s , Mary 6(1), pp. 24-37. So n n a c k , Eric v o n Hi p p e l (2002), “Performance Assessment of the v o n Hi p p e l , E. (1994), “Sticky Information and the Locus of Problem Lead User Idea Generation Process”, Management Science 48(8) Solving: Implications for Innovation”, Management Science 40(4), (August), pp. 1042-1059. pp. 429-439. Lim, K. (2000), “The Many Faces of Absorptive Capacity: Spillovers of v o n Hi p p e l , E., and G. v o n Kr o g h (2003, “Open Source Software and Copper Interconnect Technology for Semiconductor Chips”, MIT the ‘Private-Collective’ Innovation Model: Issues for Organization Sloan School of Management, Working paper # 4110. Science”, Organization Science 14(2), pp. 209–223. Lü t h j e , C. (2003), “Customers as Co-Inventors: An Empirical v o n Hi p p e l , Eric (2005), Democratizing Innovation, Cambridge MA: The Analysis of the Antecedents of Customer-Driven Innovations in MIT Press. the Field of Medical Equipment”, Proceedings from the 32th EMAC v o n Hi p p e l , E., and R. Ka t z (2002), “Shifting Innovation to Users via Conference 2003, Glasgow. Toolkits”, Management Science 48(7), pp. 821-833. Lü t h j e , C. (2004), “Characteristics of Innovating Users in a Consumer Goods Field: An Empirical Study of Sport-Related Product Consumers”, Technovation, forthcoming. Lü t h j e , C., C. He r s t a t t and E. v o n Hi p p e l (2002), “The Dominant Role of Local Information in User Innovation: The Case of Mountain Biking”, MIT Sloan School, Working Paper #4377-02. Mo r r i s o n , P. D., J. H. Ro b e r t s and D. F. Mi d g l e y (2004), “The Nature of Lead Users and Measurement of Leading Edge Status”, Research Policy 33(2), pp. 351-362. Mo r r i s o n , P. D., J. H. Ro b e r t s and E. v o n Hi p p e l (2000), Determinants of User Innovation and Innovation Sharing in a Local Market”, Management Science 46(12), pp. 1513-1527. Nu v o l a r i , A. (2004), “Collective Invention during the British Industrial Revolution: The Case of the Cornish Pumping Engine”, Cambridge Journal of Economics 28(3), pp. 347-363. Og a w a , S. (1998), “Does Sticky Information Affect the Locus of Innovation? Evidence from the Japanese Convenience-Store Industry”, Research Policy 26(7-8), pp. 777-790. Ol s o n , Erik L., and Geir Ba kk e (2001), “Implementing the Lead User Method in a High Technology Firm: A Longitudinal Study of Intentions versus Actions”, Journal of Product Innovation Management 18(2), (November), pp. 388-395. Pav i t t , K. (1984), “Sectoral Patterns of Technical Change: Towards a Taxonomy and a Theory”, Research Policy 13(6), pp. 343-373. Ra y m o n d , E. (1999), The Cathedral and the Bazaar: Musings on Linux and Open Source by an Accidental Revolutionary”, Sebastopol, CA: O’Reilly. Ri g g s , William, and Eric v o n Hi p p e l (1994), “The Impact of Scientific and Commercial Values on the Sources of Scientific Instrument Innovation”, Research Policy 23 (July), pp. 459-469. Ro s e n b e r g , N. (1976), Perspectives on Technology, New York: Cambridge University Press. Ro s e n b e r g , N. (1982), Inside the Black Box: Technology and Economics, New York: Cambridge University Press. Sc h r e i e r , M. and N. Fr a n k e (2004), “Tom Sawyer’s Great Law in Action: Why Users are Willing to Pay to Design their own Products via Toolkits for User Innovation and Design”, Working Paper, Vienna University of Economics and Business Administration. Sc h u m p e t e r , Joseph A., The Theory of Economic Development, New York: Oxford University Press, 1934. Sh a h , S. (2000), “Sources and Patterns of Innovation in a Consumer Products Field: Innovations in Sporting Equipment”, MIT Sloan School of Management, Working paper # 4105. Sh a h , S., and M. Tr i p s a s (2004), When Do User-Innovators Start Firms? Towards A Theory of User Entrepreneurship, University of Illinois, Working Paper #04-0106. Sh a p i r o , C. (2001), “Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting”, A. Jaffe, J. Lerner, and S.

Eric von Hippel 197

The Power of Creative Freedom: Lessons from the MIT Media Lab

Frank Moss Over its 25-year history, the MIT Media I believe that all organizations, both for- MIT Media Lab Lab has refined a unique research style that profit and non-profit, can learn from the Lab’s has resulted in some of the most original unique ethos as long they are willing to take thinking of the digital revolution. The secret the risk of doing things a bit differently. formula for this success–and­ for the Lab’s continued ability to “invent the future”–is a Seeding Invention renegade research environment ­that not only Drawing on the Media Lab’s example, allows, but encourages, researchers to ask if you were to ask me where you might the questions that no one else has thought to strengthen an organization’s innovation ask. process, I’d say to begin by rethinking We are an organization that is how you define innovation. Too often, the constantly reinventing itself with the most early seeds of creativity are undervalued. unconventional pairings of disciplines and It is commonly accepted that innovation is people. The idea is to bring together the the successful implementation of creative brightest people we can find–from a large ideas. But, as we at the Media Lab have number of disparate disciplines–to figure out demonstrated, true innovation isn’t about to how to change the world. Most important, finding new ways to put existing ideas into we are simply not afraid of being on the new practices. The process needs to start “lunatic fringe” or hitting a dead end. That’s much earlier, and be far more radical. It because real innovation comes from fostering needs to begin as “pre-innovation”–with a research culture where it is not only okay crazy, revolutionary ideas that become the to fail, but where failure is fully expected–and fodder for society-changing technologies and accepted–as part of the creative process. products. Great ideas don’t come from playing safe. Today, too many companies are weak on They don’t come from thinking incrementally. the front end of the innovation cycle because Rather, they come from thinking about things they are not investing in the seed corn— in a way that no else has. And this is the those hundreds of inventions that result lesson that the Lab offers to the world. from a free-formed, undirected process.

Frank Moss 199 Think of the kind of innovation that, in the creativity, shares a lab with the Smart past, came from Bell Labs, IBM, or Xerox Cities group, which is focused on designing PARC. These companies made a conscious tomorrow’s sustainable cities. The Tangible decision to invest heavily in seeding new Media group, which focuses on tactile ideas; some would lead to products, but connections between the physical and digital many more would not. However, the entire worlds, works alongside researchers in Viral organization was dedicated to pioneering Communications who are exploring radical new ways of thinking about technology. Now, new concepts for networked systems. we’re seeing more and more organizations Research disciplines at the Lab delegating “innovation” to smaller, elite range from robotics, to neurobiology, to teams of creative thinkers who reside in a epistemology. And it is not unusual for company’s “innovation lab.” This is a model any single research project to draw from that does not take advantage of the power ongoing work in several seemingly unrelated of creative freedom. Innovation should be disciplines: the challenge is to find the ubiquitous throughout an organization. Ideas connections. Each research group is led by should organically sprout from all different a faculty member or research scientist who departments in such a way that there is no directs a team of graduate and undergraduate “wrong way” to think about a problem, or students. (The undergraduates work at the “right way” to solve one. Lab through MIT’s Undergraduate Research Opportunities Program.) All researchers also Follow Your Passion work within one of the Lab’s consortia, which At the Media Lab, our mantra is “follow are organized around broad research themes your passion.” We’re not here to answer rather than traditional disciplines. For specific questions for our sponsors or outside example, Things That Think, the Lab’s largest funding agencies, but rather to discover consortium, joins computer scientists with the new questions that need to be asked–to product designers, biomedical engineers, focus on how digital technology can help to and even architects to focus on inventing the transform our most basic notions of human future of digitally augmented objects and capabilities. Most important, we are here to environments. foster a unique culture of learning by doing. To The Lab’s 25 research groups focus on do this, we have gathered some 25 research more specific areas, and address a broad groups working “atelier style” to create scope of projects that range from creating the the things that conventional wisdom says next generation barcode (Camera Culture), can’t–or shouldn’t–be done. There are no to developing communications systems with boundaries, only possibilities. an understanding of their content (Object- Based Media), to creating interfaces that Reaching Across Traditional Disciplines allow people to “grasp” and “manipulate” bits Central to the Media Lab culture is by coupling them with everyday objects and our disregard for working within the architectural surfaces (Tangible Media). straightjacket of traditional academic One key feature of this approach involves disciplines. Here, for example, the Opera shunning the standard academic model of of the Future research group, which is directed research. The Lab’s funding model expanding the boundaries of music and gives all corporate sponsors access to all

200 of the Lab’s intellectual property during detector built at the Lab and demonstrated their term of sponsorship, license-fee free it to customers within the same year. Soon and royalty free. This further promotes the afterward NEC announced the Passenger intellectual openness and sharing that is Sensing System. Armed with this technology, essential to the way the Lab functions. Each the car’s seat could distinguish between faculty member or student has total freedom a rear-facing or forward-facing baby, and to stray from conventional research paths and could signal an auto’s airbag when–and more collaborate with others in entirely different importantly when not–to deploy, making it areas. This way, the Lab becomes an open- a potentially life-saving device for a baby ended think tank, with access to cutting-edge traveling in the front seat of an automobile. research on a wide variety of topics in many Another example of how an open, creative different fields. environment can bring about surprising results involves the Lab’s work in affective Serendipity by Design computing. The initial focus of this work was When you create the right research on developing computers with “emotional culture, some of the best innovation happens intelligence” to detect user frustration in through the most serendipitous paths– human-machine interaction. Over time, it “accidentally on purpose.” For example: in has grown into two very important, yet totally the 1990s, the Lab’s Physics and Media group different research areas: devices used to began exploring the interaction between detect and respond to a customer’s level of the human body and electrical fields while satisfaction, and tools to help detect and treat developing new sensors for a collaboration autism. with world-renowned cellist Yo-Yo Ma. This The potential for using affective computing led to smart furniture that could “see” in for customer service is significant. Currently, 3D, and to the subsequent discovery of a there is no existing system to capture and way to send data through the human body, analyze facial expressions in real-time which was incorporated into a Spirit Chair customer-service interactions and relate for magicians Penn and Teller (who were these to business outcomes. But consider appointed as visiting scholars at the Lab). The how important it is to a customer-service device literally channeled a field through a oriented business, such as banking, to have performer’s body to control music. real-time techniques to assess the outward One day, while watching Penn and Teller appearance of customer interest, confusion, demonstrate the Spirit Chair, a visiting and other cognitive-affective states. This executive from Lab sponsor NEC got the idea capability could lead to fundamental new that this same technology could be used for understanding of how to improve customer a car-seat sensing device. Once its potential experience in face-to-face interactions, at use was identified, the Media Lab was ATMs, or through online banking services. instrumental in quickly demonstrating the This technology can also be used for more product’s technical viability, and in helping accurate results from test marketing, where to understand the physics of the problem, participants are often less than honest when as well as in helping with the project’s filling out surveys or being interviewed. It can engineering design and rapid prototyping. also help take voice emotion out of consumer The executive had a prototype car-seat phone interactions, helping to diffuse

Frank Moss 201 difficult interactions with a customer-service would have happened if we had depended representative. on typewriter companies to come up with But this same technology also promises to word processing? Or if we didn’t look beyond have an impact in helping people with autism. landlines for the next breakthrough in Specialized tools, including novel, wearable telephony? physiological sensors and corresponding Health care offers another good example. software, can help individuals on the autism At the Media Lab, engineers, scientists, and spectrum communicate cognitive and designers, unencumbered by current industry emotional states, as well as help others–­ and academic biases, are exploring a myriad including scientists, therapists, teachers, and of health-related issues. With “out-of-the- caregivers–to better understand those states. box” thinking, Lab researchers have already made major strides in developing new Rethinking Traditional Research Boundaries “smart” prostheses for amputees, memory Linus Pauling once said, “The best way aids, and even an ingenious new technology to have a good idea is to have a lot of ideas.” for analyzing and precisely controlling any To my mind, no one demonstrated this more neural circuit, including those in the brain. than the late William J. Mitchell, former dean This new work in neuroengineering offers the of MIT’s School of Architecture + Planning possibility of controlling the firing of specific and head of the Media Lab’s Smart Cities neurons in the brain to within a millisecond, research group. Bill, who sadly passed away very precisely targeting cells so that a few months ago, was an inspirational neighboring healthy cells remain untouched. thinker and prolific writer who challenged This work has implications for developing conventional concepts about sustainable radically new medical technologies to cities, design, and urban transportation by treat brain disorders such as Parkinson’s bringing together the most unlikely team of disease, or even blindness, and for changing researchers. His Smart Cities research group mental and emotional states, such as severe continues to design the CityCar, a light- depression. weight, electric, shared vehicle that folds Lab researchers are also focusing on a and stacks like a supermarket shopping cart new area we call New Media Medicine, where and would be placed at convenient locations we seek to shift the health-care paradigm. throughout urban areas. The CityCar project We believe that to have a truly meaningful totally rethinks the design of an automobile, impact on society, health must be approached as it has all essential mechanical systems in a far broader context—a context in which housed in the car’s wheels. The car itself an individual’s physical, mental, and social is amazing. But even more amazing is the well-being are so closely integrated that they fact that the CityCar team does not include cannot be distinguished. Toward this end, one researcher who had a background in the Media Lab is designing new platforms automobile design. and applications that will become intimate In addition to crossing traditional yet unobtrusive parts of a person’s everyday disciplinary lines, innovation also involves life. These range from next-generation smart breaking out of conventional thinking phones and personal sensing networks to about what kind of researchers should be help their users become more self-aware and approaching a particular problem. What understand how to adapt better behaviors

202 The Media Lab encourages all its The Media Lab encourages all researchers never to abandon their child- “ like fascination with the universe or their its researchers never to abandon thrill of discovery. Not only do we stress the importance of learning by doing, but also the their child-like fascination with importance of having fun during the process. In fact, one of the Media Lab’s research the universe or their thrill of groups is called Lifelong Kindergarten. A great name, but an even greater approach. discovery. Not only do we stress Here, researchers develop new technologies that, in the spirit of the blocks and finger- the importance of learning by paint of kindergarten, expand the range of what people design, create, and invent–and doing, but also the importance of what they learn in the process. Their ultimate goal is a world full of playfully creative people having fun during the process who are constantly inventing new possibilities ” for themselves and their communities. One recent innovation that has come out of the group is Scratch, a programming language for healthier lifestyles, to technologies for and online community that makes it easy to “personal collective intelligence,” where create interactive stories, games, animations, people can contribute to, and learn from, the and simulations­–and share these creations collective knowledge and experience of their online. Scratch is designed to enhance the peers. We are also developing digital tools for technological fluency of young people (ages helping patients become equal partners with eight and up), helping them learn to express their physicians­–allowing them to share and themselves creatively with new technologies. interpret their health information to positively As they create and share Scratch projects, change their lives for the better. young people learn to think creatively, reason systematically, and work collaboratively. Hard Fun Available at no cost through the Internet, Many years ago, the Lab adopted its Scratch has reached a broad, worldwide now iconic motto of “demo or die.” Another audience with more than 500,000 users expression we use to describe our unique who have uploaded more than one million culture is “imagine and realize.” Our students projects. are constantly challenged to build, and build again, and then to demonstrate their work A Unique Physical Environment at scale. We are a Lab of tinkerers. It would In March 2010, the Media Lab expanded not be unusual for a visitor to see a sewing into a spectacular new building designed by machine or a soldering iron sitting next to Fumihiko Maki, who like I. M. Pei (designer a state-of-the-art digital display. One day of the original 1985 Media Lab building), is a student is busily cutting out a cardboard a Pritzker Prize-winning architect. This new model; the next day that same student is space is a model for how physical space can writing complex code. be fully integrated with a research program

Frank Moss 203 and serve not just as a place to work, but also helps it stay connected with real-world as a catalyst for creativity. The entire complex needs. functions as an evolving research platform, It is important to note that the Lab does seamlessly connecting the real and virtual not focus on specific, technology-based worlds. projects for our sponsors, but rather looks The building offers new levels of to create an environment for companies to transparency, where all the researchers can improve their own innovation processes. If view each other from various vantage points, a sponsor is using the Lab correctly, it will supporting the unfettered exchange of ideas. come in looking for a single solution and walk The goal is a space that functions as a single, away with ideas that relate to five entirely massively interconnected unit, with seven different areas of product development. The labs facing one another across a central goal is to fuel the imagination–to encourage atrium in a staggered configuration. Through thinking outside the box; for companies a series of interactive information displays to become visionary about their research placed throughout the Media Lab complex, direction. the Lab expands collaboration beyond our This is not just academic theory; the Media walls to visitors, sponsors, colleagues, and Lab has lived this for 25 years. Today the the public at large. It delivers on our unique same Lab that predicted the convergence vision of how to conduct society-changing of multimedia and technology, and paved research—no boundaries, no walls—just a the way for the digital revolution in 1985, flow of interdisciplinary ideas, and plenty of continues to break new ground with society- open space to invent just about anything. changing advances. More than 80 spin-off companies have come out of the Lab, and Symbiosis Lab-based commercial products range from The Media Lab model offers enormous electronic ink (the basis of the Kindle), to freedom to pursue the most far-out research LEGO Mindstorms, to Guitar Hero. We have directions without concern for the accepted some 60 sponsors that include a number of conventional approach in either academia or the largest and most prestigious companies industry. At the same time, the Lab’s close in the world, including Audi-Volkswagen, connections to the corporate community AOL, BT, BBVA, Bank of America, (both through sponsor visits to the Lab Google, IBM, Intel, LEGO, Samsung, Sun and faculty and student visits to sponsors’ Microsystems, and Toshiba. research facilities), help keep research grounded in real-world concerns. Making a Difference The Lab and its sponsors have a For years, technologists digitized almost symbiotic relationship: the Lab’s open everything, but transformed almost nothing. research approach enables companies to Now we are moving away from merely ask questions they would not have otherwise building more sophisticated digital tools, and asked. The goal is for collaboration with the are looking to create technologies that will be Media Lab to help widen the front end of a truly intelligent and helpful participants in the company’s R&D pipeline and spur innovative world. thinking about entirely new directions. At the Like the Media Lab’s past work, today’s same time, the Lab’s interaction with industry research remains clearly focused on human

204 experience. But more than ever before, plastic device–which currently can be it emphasizes the strong link between produced for less than US$2–is easily business, society, and the individual. A few clipped onto a mobile phone screen. To examples of some current projects that are use it, one simply holds the device up to “making a difference” include: the eye, looks into it, and uses the phone’s • HealthMap’s Outbreaks Near Me iPhone keypad until two patterns overlap. This is and Android application, which provides repeated several times per eye, with the real-time disease outbreak information. patterns at different angles. The whole • Mobility on Demand (MoD) systems– process takes about two minutes, during lightweight, electric vehicles placed at which time software loaded onto the electrical charging­ stations strategically phone provides the data needed to create distributed throughout a city. MoD systems a prescription. provide mobility from transit stations to The Lab offers us all an outstanding and from a final destination. Three MoD model for how much an organization can vehicles have been developed: the CityCar, accomplish when it fosters an environment RoboScooter, and GreenWheel bicycle. where people can create at will, follow their • CollaboRhythm, a speech- and touch- passion, and think beyond the boundaries set controlled collaborative interface that by conventional thinking. The sky is the limit facilitates improved doctor-patient when no one tells you that “it can’t be done.” interaction. Patients can actively engage We can invent our own future. with their data, allowing for a more collaborative relationship with their doctors. • Konbit, a mobile phone-based system that helps communities rebuild themselves by soliciting skill sets of local residents. The system, which does not require participants to be literate, indexes the skills of all those who phone in, translates the responses to English, and makes them searchable by NGOs via natural language processing and visualization techniques. • Sourcemap, a volunteer-driven, social- networking Web application that presents easy-to-understand map visualizations of the environmental impact of consumer products—information that is almost never available to the public. • NETRA (Near-Eye Tool for Refractive Assessment), a quick, simple, and inexpensive way for people in the developing world to use mobile phones to give themselves eye exams. A small

Frank Moss 205 Noted Accomplishments from the MIT Media Lab

E-ink, opening up the possibility of a one-book library.

SixthSense, a gestural, pendant-like interface that projects digital information onto any surface, and allows the user to interact with that information using natural hand gestures. It seamlessly integrates information with the user’s physical surroundings, making the entire world a computer.

Scratch, an open-source programming language for kids that allows them to create their own interactive stories, games, music, and animations for the Web.

CityCar, a shared, foldable, electric, two-passenger vehicle for urban areas.

The world’s first powered ankle-foot prosthesis, an important advance for lower-limb amputees.­ The device propels users forward using tendon-like springs and an electric motor, reducing fatigue, improving balance, and providing a more fluid gait.

Nexi, a social robot that possesses a novel combination of mobility, moderate dexterity, and human-centric communication and interaction abilities.

The world’s first real-time, moving synthetic hologram.

Bokode, a next-generation barcode that uses a new optical solution for encoding information, allowing barcodes to be shrunk to fewer than 3mm, read by ordinary cameras, and offer different information from different angles.

Csound, a pioneering computer programming language for transmitting music over the web. It is one of the most widely used software sound systems.

The first Web-based, on-demand, personalized electronic newspaper.

The first “programmable brick” that led to the LEGO Mindstorms robotics kits, now used by millions of people around the world.

The XO machine, known worldwide as the “$100 Laptop,” which offers connectivity to children throughout the developing world.

Sensors that can detect a user’s actions by measuring a body’s influence on an electric field.

Audio Spotlight, that generates audible sound that can be directed to one specific location.

206 The MIT Media Lab’s Innovative Evolution

In 1985, MIT Professor Nicholas Negroponte and former MIT President Jerome Wiesner co-founded the Media Lab, which grew out of work of MIT’s Architecture Machine Group. Cross-disciplinary in nature, the Lab housed researchers in fields ranging from holography, to documentary film making, to epistemology and learning. Not only encouraged to think “at the lunatic fringe,” Lab researchers were also encouraged to build prototypes of their ideas. Rather than the standard academic theme of “publish or perish”, the Lab’s motto was “demo or die”.

The physical environment of the Lab supported this unconventional thinking. Housed in a building designed by Pritzker Prize-winning architect I.M. Pei, the Lab pioneered the concept of open computer gardens, with personal computing on every desk and an eclectic range of ongoing projects on display. Glass-fronted offices ringed the perimeter of each floor. One lab would be full of LEGOs, while another contained the most sophisticated equipment for holography. Lab visitors came not only to see what Lab researchers did, but also how they did it.

The Lab’s initial research focus was often represented as a Venn diagram representing publishing, cinema, and computers. From its first days, there was a focus on computing for people during a time when no one was thinking in terms of “user- friendly” machines or why our machines needed to be adapted to human ways.

During its second decade, the Lab’s research foci morphed into a revised Venn diagram showing the convergence of perceptual computing, learning and common sense, and information and entertainment. The overlapping segments were labeled interact, play, and express, and the Media Lab was shown in the center of this convergence.

For the first time, the idea of user-friendly was greatly expanded. The Lab extended its interests to focus more broadly on pervasive, ubiquitous computing. The Lab began looking at merging the virtual and physical worlds—initiating work to integrate emerging digital technologies into everyday objects. The Lab began to present such seemingly outlandish concepts as a refrigerator that could tell you when you were low on milk, or a car that could give you directions, or point out a good restaurant that you’d pass on your way home. During this time, the Lab also pioneered wearable computing–the idea that we could actually wear our bits on our clothing or carry them in our bags. It also conducted groundbreaking research in sociable and tangible media, further enhancing individual and community expression and social connection.

Now in our third decade, the Lab has added human augmentation as a major research theme. At some point in our lives, almost all of us will be marked by a fundamental disability, from dementia, to the loss of a limb, to a debilitating disease such as Parkinson’s. Indeed, serious physical and mental challenges are inherent to the human condition. But the Lab does not believe that we need to accept the current definition of disability. Instead we are asking, “What if, through the invention of novel technologies, we could profoundly improve the quality of life for those afflicted with physical, cognitive, or emotional disabilities, while significantly reducing health-care costs? What if natural ability was a baseline, and enhanced ability became the norm?”

Frank Moss 207

Creating Abundance through the application of a discipline of innovation

Curtis R. Carlson I. The Innovation Economy Of course, innovation has always been SRI International Innovation is the creation and delivery of the driving force for progress and improved new customer value into the marketplace. 1 productivity (Ridley, 2010). What is different It is the only path to growth, prosperity, today is the intensity of the innovative environmental sustainability, and security processes needed to sustain enterprises and (Carlson and Wilmot, 2006). Developed national competitiveness. Specifically, the countries can no longer compete on the innovation economy is characterized by three basis of low-cost labor or access to capital, main attributes (Carlson and Wilmot, 2006: which flows freely around the globe. They 26; parts of this article were abstracted from must provide an environment that promotes Carlson and Schaufeld, 2011). continuous and efficient innovation. This Abundance of Opportunities: This is a time is the only way for developed countries to of unprecedented opportunity. Almost every remain productive and competitive, with major field is undergoing increasingly rapid increasing personal incomes and high levels technological development. Progress is often of employment. at exponential rates, with improvements of Today, many companies are doing poorly 100% at the same cost every 12 to 48 months 1 A more comprehensive at innovation. To thrive, companies need new (Kurzweil, 2005). The Moore-Engelbart Law2 and inclusive definition is: “Innovation is the creation and innovation perspectives and skills. They must for computers is the most famous example delivery of new customer value embrace a broader, more comprehensive of this property. However, rapid, exponential in the marketplace. Innovations are sustainable only if they understanding of their opportunities for improvement is now seen in many other provide sufficient enterprise creating customer value. This broader fields too, as they become increasingly based value to allow for their continued production.” understanding emphasizes the importance of on ideas and bits, not just atoms and muscle. 2 J. Markoff (2005) tells how continuous value creation throughout all parts New ideas are the currency of the innovation Moore heard a talk by Douglas Englebart about why, because of the enterprise to remain competitive. With economy, and they are an abundant, of basic scaling principles, such skills, the future can be seen correctly unlimited resource. computers would improve at these rates. Moore then as a period of abundance (Carlson and These continuous, rapid improvements plotted the data and created Wilmot, 2006: 22). Without them, the future open up one major opportunity after another. the concept that now carries his name. may be seen correctly as a period of scarcity. Whether in finance, medicine, media,

Curtis R. Carlson 211 energy, consumer electronics, computing, working to remove conventional banks from or communications, there has never been transactional processes.4 a better time for creating major new At the same time, the opportunity to innovations. It is potentially a time of great create world-leading companies has never prosperity—but only if we seize and address been greater. Google was started little more the innovation challenge. than 10 years ago by two students with an Consider, for example, access to idea. At this point it is a $144B company that financial services. For most consumers, dominates its industry. AOL, Yahoo, eBay, and the knowledge needed to understand and Amazon all had similar origins. In fact, it can access the wide range of options available reasonably be said that the “old” industries of is daunting. But increasingly there will be media, banking, pharmaceuticals, education, computer “assistants” to help customers with energy, and many others, are all destined these options. There are primitive versions of to follow the well-known path of creative these computer assistants available now on destruction and then re-emerge as new, smart phones. But they will quickly become major industries. impressively more “intelligent” and allow for Intense Global Competition: The world is a host of convenient, instantaneous banking now deeply integrated, and competition is transactions. increasing at an unprecedented rate. Almost Creation and Destruction of Companies: every significant business must now think While rapid, exponential progress creates and act globally in our “flat world,” where great opportunities, it also creates great ideas and money travel at the speed of light challenges. A company that does not (Friedman, 2005). Countries like India and innovate at the speed of its market and China are rapidly moving past low-cost does not adapt to technological change labor alone as a competitive advantage, will decline. The decreasing life span of because they can leverage the entire world’s S&P 500 companies indicates that fewer of knowledge. They can bring proven business them are keeping pace with change (Foster ideas and technologies into their countries 3 Note: The velocity of and Kaplan, 2001). “Lifetime employment” and adapt them for regional markets. It technological improvement at rapid, exponential rates also has become a distant, quaint idea in many is possible to argue that China is now the implies the acceleration of parts of the world.3 If history is a guide, new leading innovation country in the world. technological improvement at rapid, exponential rates. This players will arise who understand these China is taking established businesses from is a sobering realization, the opportunities and move rapidly to displace the West, modifying them to fit the Chinese consequences of which for individuals, businesses, and today’s leaders. One example is what is ecosystem and, at the same time, developing nations are surely impossible to happening to bookstore retailers. Online new products, services, and models of fully appreciate. 4 retailers, such as Amazon.com and Kindle- production. In 2010 China passed Japan in Wikipedia, http://en.wikipedia. org/wiki/PayPal like digital readers, are replacing them. A GDP (Hosaka, 2010) and it is now the world’s 5 How China will Change the similar fate awaits video rental companies largest and fastest growing automotive Cars America Drives, Motor 5 Trend, April 25, 2010, http:// such as Blockbuster, which is now market. mt.kargo.com/v/News/HowChin contemplating bankruptcy, as their brick- Consider also that based on its population aWillChange/?KSID=3189d3546 687c862a6eebeb2eaf0ef7b and-mortar store advantage almost literally alone, China has the potential for more 6 See for population statistics 6 turns to dust before their eyes. Will this “honor students” than America has students. the CIA Fact Book at https:// happen to conventional banking too? There It is perhaps not surprising that China and www.cia.gov/library/ publications/the-world- are already many companies, such as PayPal, India together annually produce more than factbook/

212 10 times as many science and engineering countries, indigenous populations are graduates as the United States. Although declining by 25% to 50% in each successive the quality of America’s graduates still puts generation.8 This is also true in China the United States ahead, this advantage may because of their one-child policy. In the not last long (Wadhwa, 2005). In India and future, without effective immigration policies, China, a fervent desire for education along there may be many fewer workers in these with prodigious work ethics and cultures of countries to support the costly social services entrepreneurism create a strong basis for required for increasingly older populations. rapid progress. For all these reasons, to thrive we must At the same time, we should be significantly improve our success rate cautious about predicting China’s long- in all forms of innovation. It is the only term prospects, since we have neither full factor that significantly counteracts these access to information about their economy rapidly increasing costs and other complex 7 In addition, we are rapidly going from 1.5 billion Internet nor the ability to predict the future path challenges. For executives in companies, users today to a time, only of their political system (Friedman, 2009). the innovation economy forces management years from now, when a large percentage of the world’s India, with all its promise, must address to increasingly shift its focus from gradual population of seven billion daunting infrastructure, environmental, and improvement of current assets to the people will be connected. Individual connections are only governance issues (Kapor, 2010). But clearly, creation of new, high-value products and one important development, increased levels of global competition have services. The daunting rate of change of both however. Additional computer applications will be connected emerged. Imagine what global competition technologies and markets demands this shift via the Internet and run at many millions of times today’s would be like if the nearly four billion people in emphasis. computer speeds. Systems of now living in poverty across India, China, and all types — financial trading, consumer services, production the other developing countries fully join the II. The Opportunity to Improve Performance design systems, etc. — will world’s economy and add their ideas, energy, Considerable attention is being given be orders of magnitude more plentiful and complicated and innovative genius. to the topic of innovation. A Google search when compared to those Other Issues: The innovation economy query on “innovation” produces more than available today. No person or enterprise will be capable of has other special challenges. Environmental 100 million results. The concept has become understanding all of them. costs are increasing. Additionally, the cost a source of theory, research, scholarly Indeed, the behavior of these systems will be non-linear, of fighting terrorism is unabated, taking writing, and endless discussion in the press. and they will interact in ways that can neither be tested resources away from other activities. It is There is a litany of consultants, publications, nor anticipated. Given this impossible to anticipate what future terrorist and public conversation about the virtues complexity, the large number of computer hackers, and the events might do to open societies, from the of innovation as a strategy. In the U.S., the criminals supported by nation loss of personal freedoms to restrictions on government has established a new National states working to destroy or 9 extract value, we should expect business interactions. In 2010, the world is Council on Innovation and Entrepreneurship. that “Black Swans” will be even emerging from a period of financial chaos, But something is still missing. Michael more common (Taleb, 2007). but it is still not clear whether institutional Mandel, chief economist at Bloomberg 8 “Population Decline,” Wikipedia, http://en.wikipedia. changes made in response to the crisis will Business Week, wonders why, with our wide org/wiki/Population_decline help or hinder future growth.7 array of nanotechnology, biotechnology, 9 The author of this article, Curtis R. Carlson, is a member Finally, there are major demographic robotics, artificial intelligence, and other of this council. See http:// shifts occurring around the world whose technologies, we are not seeing more www.commerce.gov/news/ press-releases/2010/07/13/ consequences are not fully understood. For marketplace impact (Mandel, 2009). He locke-announces-national- example, in Germany, France, Italy, Japan, further asks why we don’t have better tools advisory-council-innovation- and-entrepreneur Korea, Singapore, and many other developed for quantifying progress. We have output

Curtis R. Carlson 213 measures, such as the number of initial other activity would this be seen as good public offerings (IPOs), stock price, corporate performance? growth, and market share. He argues that Example after example can be given for these measures fall short because they innovative failure. This quote is indicative do not measure either innovative capacity of the problem: “If you ask a CEO whether or efficiency. Measuring the number of the world is moving faster and whether they patents or publications has not proven to be need to innovate faster, they will say yes. particularly effective. But if you ask an employee in that company Marketplace output is the only true to describe their innovation system, you measure of innovative effectiveness. get blank looks. They have none” (Carlson However, innovative progress, capacity, and Wilmot, 2006). My organization, SRI and efficiency can be measured using the International, has worked with hundreds of “artifacts” of innovation, such as the core companies and organizations, and that is also concepts and processes to be described our observation. Most organizations do not shortly. Innovation will be faster and more have comprehensive innovation systems or successful once these core concepts are processes. If the professionals in a company widely understood and applied. cannot describe the company’s innovation Poor Innovative Performance: The lifetimes processes, there clearly are none. of the largest companies in America are University technology transfer programs decreasing rapidly. At the turn of the 20th are also often considered to be disappointing century, a large company would continue to in generating value from their intellectual be included in the S&P 500 index of large- property (Mitchell). Much of it lies fallow. cap American stocks for more than 75 years Universities are, of course, not designed to before it was bought or went away. Today, create innovations. Their mission is education the lifespan of this elite group of companies and the generation of new knowledge. is, on the average, down to less than 20 Nevertheless, universities have built into their years (Foster and Kaplan, 2001; Carlson and technology transfer programs an important Wilmot, 2006: 34). These companies, with flaw. If there is one thing we know about all their advantages, are not keeping pace. innovation, it is that “technology push” does They are like dinosaurs whose bulk, once not work. Rather, the goal should always an advantage, has become a disadvantage be “market pull.” University technology since it fatally slows down their ability to transfer initiatives are mostly technology adapt. Today, it takes different processes and push. If these programs are to be improved, corporate architectures to survive. they must reverse this approach and create Consider also the success rate of new incubators that focus on “value creation”— products in the retail grocery industry, that is, formally and systematically which is only 20 to 30% (Stone, 2008). Do connecting market needs with new solutions. they fail because of bad technology or from The amount of waste these failures lack of clever ideas? No. They fail because represent is enormous. Today’s low output customers do not want them. Even in Silicon of innovations is analogous to the low quality Valley, by far the world’s leading new venture and high cost of products in the 1950s. creation region, only one out of seven or ten Imagine if we performed just a few percent new companies has real success. In what better every year in our innovative ability.

214 Over time, the positive impact of these quality and cost seemed unreasonable. As a improvements on companies and national result, over the ensuing years many American economies would be enormous. companies and hundreds of thousands of jobs disappeared. Many books and articles III. value—Not Only Cost and Quality were written during this period about the end Given these dynamics of the innovation of the “American era” (Dowd, 2007; Vogel, economy, are companies and their 1979). After suffering substantial commercial workforces fully preparing to compete? and social pain, America eventually adopted Enterprises that do not strengthen and these profoundly more productive ways of broaden their innovation processes will fail. working, as did the rest of the world. Now, On the other hand, individuals who master every significant manufacturing company such skills will be uniquely valuable. To gain a uses some version of TQM continuous- perspective on the potential of the innovation improvement principles. economy for improvement, it is useful to look This approach has been so effective at an example from a previous economic that today, low cost and high quality are period that illustrates the enormous the entrance requirements for most new improvements possible when people work in products. Now companies must increasingly more productive ways. move to a broader definition of customer In the 1960s and 1970s, America lost value. The innovation economy demands high its lead as producer of quality products to quality and low cost, but it also requires that Japan. After World War II, a “Made in Japan” we deliver new products and services with label implied cheaply made goods. Japanese more convenience, features, personalization, companies were determined to eliminate design, and user control, among many that perception. They accomplished this by other ways to create additional customer embracing the Total Quality Management value. It also demands that we take the (TQM) movement, as pioneered by W. same approach to the other aspects of the Edwards Deming (1986) and Toyota’s Taiichi enterprise: manufacturing, distribution, Ohno (1988). These innovators proved that by marketing, human resources, financial working in a new, more productive way based systems, legal services, and information on fundamental improvement principles, technology. companies could dramatically increase quality and dramatically reduce costs. Using IV. The Way We Work Is the Most Important Ohno’s lean manufacturing innovations, Innovation11 Toyota became the world’s leader in Can we, like Deming and Ohno, achieve automotive quality and eventually the world’s dramatically better results by developing number one car company. 10 and using more productive ways of working? 10 “Toyota Motor Corporation,” At first, the US and other developed At SRI we strongly believe this is possible New York Times, July 15, 2010 http://topics.nytimes.com/top/ countries ignored Japan’s revolutionary through the comprehensive application of news/business/companies/ new way of working, believing that high the fundamentals of innovation, which are toyota_motor_corporation/ index.html quality came at a high cost. The idea that not widely known or applied today. Although

11 From C. R. Carlson, who the rigorous application of a small number interest in the topic of innovation is great, says about SRI’s innovation of fundamental, continuous-improvement the field of innovation concepts and best practices, “The way we work is our most important innovation.” concepts would dramatically improve both practices is still in its infancy. It is like the

Curtis R. Carlson 215 discipline of TQM before Deming and Ohno of transportation, but today’s automobiles codified and popularized the core ideas include a tremendous number of both small (Shewhart, 1931). and large innovations. It took many tens of To test the maturity of innovation thousands of small innovations to achieve understanding, ask seasoned executives the remarkable quality, durability, and for the definition of innovation. You will reliability of today’s automobiles. In addition, typically be told that it is about creativity, today’s automobiles can include many major teamwork, intellectual property, novel ideas, innovations, such as air conditioning, AM- 12 This definition is slightly different from the one given in or entrepreneurship. These definitions FM-satellite radio, airbags, seatbelts, GPS- Carlson and Wilmot, 2006: 6, are incomplete and lead to confusion and guided navigation systems, communication but the meaning is essentially the same. inefficiency. Every enterprise requires a systems,16 and pollution controls. And, unlike 13 See http://uh.edu/engines/ comprehensive “innovation playbook,” and the Model-T, which came only in black, the epi1163.htm few have one today. choices now include a rainbow of colors. 14 “Sufficient value” means that the producers can either recoup A complete definition for innovation is: Outputs, Not Just Inputs: It is important to their ongoing investments or “The creation and delivery of new customer focus efforts on outputs—innovations—and they can find a way to have the endeavor subsidized. value in the marketplace. Innovations are not confuse them with inputs. Concepts like The airline business is an sustainable only if they provide sufficient entrepreneurship, creativity, collaboration, industry that, cumulatively, has generated negative financial enterprise value to allow for their continued intellectual property, and business skills are returns over its history. It production.”12 A product or service may be all inputs that can lead to new innovations. survives only because of government subsidies and clever or creative, but unless customers in The goal is not entrepreneurship per se (the because individuals continue to invest in it. Wikipedia is another the marketplace use it, it is not an innovation. set of skills, attitudes, and behaviors that interesting case. Here, the As a dramatic example, consider that the US can help a person be more successful at subsidy comes from people’s time, which they provide Patent Office has so far issued more than innovation), it is innovation itself. to make a subject they are 4,000 patents for mousetraps (Hope, 1996). Using the wrong words to describe interested in available to the world. Open-source software Yet only about 20 of those thousands of innovation can cause confusion, limit is still another. There are many patents have ever made money.13 The others success, and discourage people from ways an innovation can be sustainable other than through may represent clever, creative ideas but they participating fully. For example, after I financial profit for a company. are not innovations. Unless an enterprise gave a talk on innovation to a large group Obviously, most innovations are transitory but some, like the obtains sufficient value for producing the of academics, a department head of wheel, can last a very long time. An innovation’s significance product or service, it rapidly disappears and mechanical engineering said to me, “That is clearly a function of its ceases to be an innovation.14 talk changed my life ” (Carlson, 2008). longevity, the number of people for whom it delivers value, Innovations can be small and transitory, When asked why, he said, “Because I have and the total financial value it like Motorola’s flat RAZR phone, or large been asked to teach entrepreneurship, and creates. That is why the wheel is often thought of as one of the and long-lasting, like Thomas Edison’s light I don’t feel like an entrepreneur—that is world’s greatest innovations, bulb, or the computer mouse with interactive not who I am; it is not my identity. Teaching along with language and cooking. In modern times, many computing developed by Douglas Engelbart entrepreneurship has always made me believe that the Internet is the 15 most important innovation. See (Nielson, 2006) or the Internet. Whatever feel uncomfortable. But I am passionate http://en.wikipedia.org/wiki/ the size of an innovation, individually or about innovation. That is why I obtained my Timeline_of_historic_inventions for an interesting list of the cumulatively, it is possible that over time Ph.D., became a professor, and agreed to world’s greatest innovations. the accumulation of innovations can create be a department head. It is also why I love 15 See also http://www.sri.com/ enormous new customer value. teaching students, so that they can become about/history/nielson_book. html Consider Ford’s Model-T compared to innovators and make positive contributions 16 Like OnStar by General today’s automobiles. Both are still means too. Now I realize that I can teach these Motors

216 often confused and inefficient. Clearly, A complete definition for these basic ideas are not widely taught or “ understood.18 innovation is: The creation and Fundamentals of Innovation: Many authors have contributed excellent ideas about how to delivery of new customer value think about and improve innovative success (Drucker, 1993; Christiansen, 1997; Moore, in the marketplace. Innovations 2002, and Porter, 1998). Important concepts include “crossing the chasm,” “open are sustainable only if they innovation”, “industrial clusters”, and many more. These concepts, however, are best provide sufficient enterprise applied after the fundamentals of innovation are in place. In the book, Innovation: The Five value to allow for their continued Disciplines for Creating What Customers Want, a family of fundamental “disciplines” are production described, which are used by SRI and many of ” its partners (Carlson and Wilmot, 2006: 20). SRI’s five disciplines are: 1. Important customer and market needs courses with enthusiasm using the new 2. Value creation understanding you gave us today.” This 3. Innovation champions attitude is very common among technical 4. Innovation teams professionals, whether in a university, a 5. Organizational alignment company, or government. Each of these disciplines describes a set

17 SRI International http://www. Innovative Understanding: Many thousands of concepts and best practices that increase sri.com of executives, technical managers, the probability of innovative success. These 18 The innovation economy academics, and government officials disciplines have proven to work through requires changes in the educational curriculum too, from around the world have come to SRI extensive application and experimentation such as a more comprehensive 19 understanding of innovation. International’s headquarters in Menlo Park, over many decades. They provide a focus on This includes fundamental California, to participate in a program called customers’ needs, both internal and external, business concepts and a 17 global perspective. Today’s the SRI Five Disciplines of Innovation™. and they offer a common language, concepts, graduates must be able to write The program begins by asking participants tools, and processes for rapidly amplifying clearly and give compelling presentations, which have to write answers to a series of questions, the process of value creation. SRI believes become even more important. including “What are the definitions of that these five disciplines are effectively Finally, they must have the human skills and values needed innovation, customer value, and a value multiplicative. If an enterprise rates a “zero” for productive, multidisciplinary proposition?” These are among the most in any one, the probability of success is also collaboration.

19 One of the most thoughtful basic concepts in any business. Remarkably, effectively zero. If several are implemented contributors to our only about 20% of the participants can poorly, then the enterprise’s innovative understanding of the process of knowledge creation is reasonably answer these questions when potential is significantly reduced. Douglas Engelbart, the inventor the program begins. By not having a Value Creation: It is not possible to of the computer mouse and the foundations of personal common, accurate language for the most describe all five disciplines here. Rather, computing at SRI in 1967. basic concepts of innovation, their strategic this section describes elements of “value (Carlson and Wilmot, 2006: 169, and http://dougengelbart.org/) decisions and day-to-day interactions are creation” to illustrate several basic

Curtis R. Carlson 217 principles. The section entitled “Case Study— Figure 1. Value creation is a process where new knowledge at SRI’s Journey” will briefly describe the other A and an important customer and market need at B converge to create an innovation, which generates enterprise profit from four disciplines and their application. B to C. At some point the product lifecycle is complete, the Developing a new innovation is not product is obsolete, and it is necessary to create a new, higher- value product or service. The role of R&D is to provide new an event; it is a process that requires the knowledge to address important customer and market needs. creation of new knowledge—value creation. It Innovation tools and processes help facilitate value creation, such as NABC Value Propositions and Value Creation Forums. is a process, as illustrated in Figure 1, where new knowledge at A is applied to address a C customer need at B to create a new product Obsolescence Profit or service. From B to C the enterprise generates profit, but eventually the product Important customer B

or service becomes obsolete and the value Value and market needs creation process must be repeated.

All innovations require connecting A to B. New NABC Value Propositions knowledge Value Creation Forums This process is very hard and it takes great P&D A skill, effort, and considerable time to develop Time a compelling, high-value solution. Often this process is called the “Valley of Death” because it is so difficult to understand and navigate (Taylor et al., 2008). At every step, the most efficient and effective practices 4. Why are those benefits per cost should be used. superior to the Competition and Because connecting A to B is common to alternatives? all innovations, any advance that makes the These four questions define what SRI process faster and more successful is itself calls an “NABC Value Proposition” (i.e., a major innovation—a meta-innovation. It Need, Approach, Benefits per costs, and is for this reason that we say, “The way we Competition, Carlson and Wilmot, 2006: 85). work is the most important innovation.” Below Every new innovation must answer at least are several examples of concepts, tools, and these four questions: they are the absolute processes that greatly increase innovative minimum for any proposed new innovation. efficiency and the likelihood of success. Focusing on these four questions, rather than Value Propositions: Developing a starting by trying to write a 300-page report, new innovation starts by answering four saves enormous amounts of time because fundamental questions, which define the in the beginning little is known about the proposed innovation’s value proposition: customer or the market; seldom have the 1. What is the important customer and best ideas and partners for the approach market Need, not one that is just been identified; and typically little is known interesting to you? about the competition and alternatives to 2. What is the unique, compelling new the new idea. Thus, there can be little to no Approach to address this need? understanding of the possible benefits per 20 Customer value is defined 3. What are the specific, quantitative costs. two ways: Financial Value = Benefits per cost (i.e., customer value20) Hypothesis-Driven Innovation: A value Benefits – Costs and Perceptual Value = Benefits/Costs. See of that approach? proposition is begun with an initial hypothesis. ibid, Carlson and Wilmot p. 79

218 This can be an observation about a market questions.23 Only after these four questions trend, or a paradigm shift in technology, or are answered can a more complete innovation any number of other insights. This is the plan be efficiently developed. proverbial “light bulb” switching on. But no “Big-A” presentations: If you hear many matter how clever a flash of insight, it must presentations, you are probably frustrated be expected that this first hypothesis will by how difficult it is to understand whether be wrong. Indeed, if it is a significant new they are describing anything of importance. innovation, the final product or service will be Mostly they are focused on their “approach” very different from what was imagined at the with little useful information about the beginning. market, customers, and competition. They SRI has found that none of its major proclaim that the market is huge, people innovations ended up where they started.21 will love the product, and that there are If it is a major new innovation, the reason for no competitors or alternatives—ever. But this, as has just been stated, is that so little there is always competition. We call these is known at the start. Rather, a hypothesis is “Big-A” presentations, as in nAbc. They are made, data is gathered and synthesized, all about the approach—i.e., the person’s a new hypothesis is developed, and then great new idea. To a potential funder or more data is gathered and synthesized partner, Big-A presentations have essentially 21 Conversation with Norman to create still another hypothesis. This no value. All four questions—NABC—must Winarsky, vice president of ventures and licensing for SRI iterative process continues until there are be compellingly, quantitatively answered International and his colleague Vince Endres at the Sarnoff solid answers for all elements of the value to have a meaningful conversation about Corporation (a wholly owned proposition. It takes unrelenting iteration to the potential value of a new idea. Big-A subsidiary of SRI), 2010 get to a reasonably good, quantitative value presentations create enormous confusion 22 There are many versions of this idea (Kelley, Littman and proposition. In essence, would-be innovators and inefficiency—waste. Peters, 2001). should, “fail fast and fail often to succeed Value Creation Forums: An important 23 These four questions are early.”22 New iterations should be daily or process for speeding up value creation and almost identical to those asked by the United States investment weekly at the start. avoiding Big-A presentations is to tap into the agency DARPA (Defense The NABC method focuses innovators on “genius of the team”. At SRI, these meetings Advanced Research Projects Agency) in their requests for the most fundamental questions first, which are called Value Creation Forums. 24 The proposals. are very hard to answer. It saves enormous objective is to rapidly improve innovative ideas 24 Carlson and Wilmot, 2006: 101, where Value Creation time and effort that, unfortunately, is often and to create compelling Value Propositions. Forums are called “Watering spent by untrained, would-be innovators Two guiding principles make the meetings Holes,” a colorful term that does not fully translate into on useless activities. Once the NABC Value most productive. First, everyone stands up some languages. Value Creation Proposition is developed, one can move and presents: no bench-sitters allowed. Each Forums are used across SRI International to develop new forward, and efficiently create a more detailed person gives an NABC Value Proposition innovations ranging from new innovation plan. The NABC approach applies about their important project.25 They present cancer drugs to new Web-based software companies. to all functions in an enterprise, whether in for five to ten minutes and, when time 25 A better format is an R&D, finance, HR, branding, or new product is up, they must stop. The presentations “Elevator Pitch,” which starts with a “Hook” to gain interest, development. That is because if you have are short so that the presenters focus on the NABC Value Proposition, customers, whether outside or inside the the fundamentals, which are very hard to and ends with a “Close” to end the presentation and ask for a enterprise, you can always create more value answer. Second, the presenter’s teammates specific action, such as a date for them. Even for the most basic research, then critique the presentation to reinforce for a full meeting (Carlson and Wilmot, 2006: 128). one should be able to answer these four basic what worked and suggest how it can be

Curtis R. Carlson 219 improved.26 The presenter listens carefully the competition does. In addition, there are without responding to the input: corrections broken plays and it is often necessary to can be made later to save the group’s improvise. But because they have practiced time.27 This approach has proven effective diligently over many years, players have a in corporate, academic, and governmental portfolio of possible “improvisations” that are settings because they all require that the understood by their teammates and that have fundamentals of an NABC Value Proposition a reasonable chance for success in different be addressed for every new initiative. situations. Experience shows that after three or Most people do not think about innovation four Value Creation Forums, with a partner this way, but having a playbook focuses helping in between Value Creation Forums, everyone’s efforts, keeps the team moving the improvements made are impressive. in the right direction, and coordinates the Note, however, that if the innovation is team’s efforts. Innovation is very much a significant, many dozens of meetings are “contact” team sport, where players must required before the answers needed are execute their roles professionally and obtained. Value Creation Forums allow for efficiently. And, yes, every new innovation’s the rapid sharing of ideas while allowing competition is on the move too, and an each participant to be a role model for their innovation team must continuously adapt and teammates. In addition, these meetings tap improvise. But if the team is prepared and into participant’s natural competitiveness, open to adaptation, it is much more likely that which incentivizes them to rapidly improve the changes needed to succeed will occur. each presentation. Very few organizations use a comprehensive

Why a Playbook? Innovation concepts playbook of innovation concepts and best 26 An additional option is to and best practices constitute a “playbook” practices, but the ones that do are often have each presenter share one new “innovation best practice” 28 29 for employees. Without a playbook it impressive. These practices represent a of value to the team, so that is almost impossible to systematically major source of competitive advantage for the team can learn additional concepts about innovation. succeed. Consider, as an analogy, football such companies. 27 It is best to have someone or soccer players and their playbooks. No An Innovation Laboratory: With its industry, taking notes for the presenter professional team can win without them. academic, and government partners, SRI as the feedback is given. 28 This concept also comes They describe a set of specific plays, what has been responsible for numerous world- from personal discussions each football player will do, and how each changing innovations, which have created with Pallab Chatterjee and the author. player will coordinate their efforts with their many tens of billions of dollars of new 29 For example, examples 30 teammates as the play unfolds. These plays economic value. SRI has been studying the include SRI International, are practiced over and over until everyone best innovators around the world, teaming Medtronics, IDEO, Toyota, and P&G. fully understands them and they can be with them on projects, and inventing new 30 SRI’s innovations with its precisely executed. Professional coaches innovation concepts and best practices. partners include the computer mouse and modern human- help the players understand the plays and SRI is unique in that it is both a major computer interface; electronic apply “best practices” to speed up learning. innovation practitioner and an “innovation banking; the United States high-definition TV standard; Of course the playbook will change depending best practices laboratory”, where the treatments for cancer and on the players available, the competition, concepts listed above have been developed infectious disease; minimally invasive robotic-assisted and the environmental conditions. Once and tested with thousands of colleagues, both surgery; computerized speech the game starts, the players must adapt inside and outside of SRI. SRI has discarded recognition; the world’s first virtual personal assistant (e.g., and modify their plays in response to what practices that are ineffective and kept those Siri Inc.); and much more.

220 by tenured faculty (Garrett and Davies, Very few organizations use 2010). Academic management is rightly “ acknowledged to be an extremely difficult, a comprehensive playbook of often frustrating task.32 The advantage of top-down management innovation concepts and best is that decisions can be made quickly. The advantage of bottom-up management is that practices, but the ones that do it allows for a multiplicity of new ideas. But neither is ideal. In the innovation economy all are often impressive top-down is increasingly uninformed and all ” bottom-up is increasingly irrelevant. Finding the “sweet spot”—the right balance between top- down and bottom-up—has always been that work. Most of the ideas tried were a difficult task (Brafman and Beckstrom, not effective because they were either too 2006). But, as a rule, the sweet spot for complex or not valuable to staff. They may management influence has been moving have sounded good in an academic setting, down in the organization because of the but when applied by professionals working rapidly changing dynamics of the innovation to solve real-world problems, they were economy.33 Only front-line employees are in not. Over and over, SRI has learned that it daily contact with customers, markets, and is the core, fundamental concepts that make technologies and are able to rapidly make the biggest difference in terms of sustained accurate decisions. By contrast, senior innovative success. SRI has also discovered, managers who have worked their way up the by working with dozens of leading companies corporate ladder are mostly familiar with around the world, that few enterprises even a previous time’s customer needs, market try to seriously apply them. The concepts dynamics, competitors, and technologies. seem easy to understand, but that does not Consider that only 20 years ago, the World mean they are; they are not. They can only be Wide Web was just beginning as was 2G understood through thoughtful, vigorous, and mobile communications. Over this 20-year steadfast application. period, computing power has improved by Changing Role of Management: The roughly ten thousand times at the same innovation economy requires that price. Applications like Google, Facebook, and management redefine elements of their Craigslist were almost unimaginable just a 31 See http://www. whatsbestnext.com/2010/02/ jobs. Consider first, as an extreme case, few short decades ago. an-example-of-bad- Henry Ford. His initial management In the innovation economy Henry Ford’s management/ approach was severely top-down. He style of management is increasingly archaic 32 Garrett and Davies, 2010: 70, “The management of creative wanted to make essentially all significant because one person cannot possibly learn professionals starts and ends with encouraging, supporting, decisions about his company. He even had enough, fast enough about customers, and incentivizing achievement”. detectives monitoring his managers; and if markets, competition, and technology. It is This quote was given to Garrett and Davies by C. R Carlson in any of them deviated from his orders, they not smart enough. 2010. were fired.31 Consider as another extreme Just as top-down alone is increasingly 33 This also makes it harder example, academic management, which is out of date, so is all bottom-up. There are for some more traditional managers, who want control. in many ways still all bottom-up, controlled exceptions, but many of the most important

Curtis R. Carlson 221 opportunities today require multidisciplinary productive collaboration with colleagues teams to create meaningful solutions. The and partners increases; and a conceptual apparent paradox for many managers is framework is created for more rapid learning how to create an enterprise where there is and continuous improvement. Having these sufficient freedom for invention, yet enough skills allows for greater career achievement structure to capture the ideas generated and professional growth, which means and turn them into valuable innovations. that enterprises supporting this kind of Letting staff go off in a hundred different environment are preferred by the best directions does not produce value; it employees. produces organizational chaos. Programs that emphasize “inspiration rooms”34 or V. Case Study—The SRI Journey “innovation centers,” or the trappings of The ideas described above have had creativity, such as pool tables, funny hats, a transformational effect on SRI, which play dough, and LEGO blocks, are often, by has had a storied history in Silicon Valley. themselves, misguided. Stanford University’s creation of SRI 65 At the other extreme, in the innovation years ago was one of the seminal events in economy, academia’s style of management the early formation of Silicon Valley, along is also increasingly archaic because it does with Hewlett-Packard. Most professionals not support collaboration within a disciplined probably use several SRI innovations every innovation structure. It is not smart enough day, whether it is the computer mouse, either. multiple computer windows, high-definition What is required is an organizational television, electronic banking, computerized architecture, like the one described below, for speech recognition (through Nuance the disciplined incubation of new high-value Communications), automated mail sorting, innovations. It requires new organizational and minimally invasive surgery (through structures that better exploit the best Intuitive Surgical). features of top-down and bottom-up. These SRI is an innovation enterprise: that’s new innovation structures complement the all it does. SRI has worked in nearly more traditional structures, such as TQM half the countries in the world and in and stage-gate management systems, all major technological areas. SRI has which remain effective for incremental pioneered management concepts now innovations.35 But TQM or stage-gate invoked widely, such as “SWOT” analysis structures alone are inadequate. and “open innovation”. Since its founding, Benefits for Employees: Innovation skills all of SRI’s major initiatives have been 34 See, for example, http:// are important to a company’s staff. People based on open innovation, because they www.theinspirationroom.com. with the ability to innovate are among the were all completed with great partners. au/who-is 35 Note, other innovation rarest people in the world: they are always In spite of these enormous achievements, management approaches are in demand. Experience shows that when by 2000 SRI had stopped growing. The often called “Stage-Gate” and “Funnels.” See Wikipedia, professionals gain these innovative skills, innovation concepts and best practices Stage-Gate, http://en.wikipedia. they become more successful while helping SRI had pioneered up to that point were no org/wiki/Stage-Gate_model. From SRI’s experience with their enterprises to be more successful. longer enough. With the emergence of the many international companies, The quality of their R&D and innovation innovation economy around that same year, these approaches often have limited to no success in initiatives improves; their ability for a more comprehensive innovative approach creating major new innovations.

222 was required. That was the year SRI began it is a waste of resources to spend money on to rigorously apply the Five Disciplines of technology. Innovation.36 SRI’s market-focused forums are each Since 2000, SRI has had a dramatic organized and facilitated by an expert in the turnaround with double-digit growth, a cadre specific market area. The forums are given of staff doing R&D to solve more important limited resources each year 38 to be spent problems, and a much more valuable venture on consultants, market studies and reports, and licensing pipeline. In 2010 alone, SRI customer and partner visits, and product had a major cancer drug approved by the designs and simulations. These forums come US Food and Drug Administration for T-cell and go depending on market conditions and lymphoma, a terrible cancer for which there SRI’s ability to contribute. SRI has two other was previously no good therapeutic. In ongoing Value Creation Forums, one for R&D addition, one of SRI’s spin-off companies, investments and one for commercialization Siri, was bought at a premium by Apple activities. These forums have much larger Computer,37 even though it was only 18 investment resources and there are senior months old at the time. Siri is the world’s managers who run the meetings, act as first practical computer assistant, a major mentors to new potential innovators, and advance in personal computing. In the future negotiate major transactions. it may be seen as rivaling in significance the SRI is a transparent enterprise where development of the computer mouse more anyone can talk to anyone else without than 40 years ago. permission. For example, Value Creation SRI’s Innovation Architecture: SRI applies Forums are posted on SRI’s internal website. the Five Disciplines of Innovation to all All staff can come to a forum, but it is aspects of its business: R&D, new product understood that these are value creation development, venture formation, and all meetings where everyone is expected to corporate functions. Use of a common contribute. Just sitting and watching is not language based on customer value has enough. With freedom comes responsibility. elevated cross-divisional communication Comprehensive Application: SRI uses its to a new level. It allows incremental common innovation language wherever innovations to be developed more efficiently, possible. For example, there is an “SRI Card,” and puts a more productive focus on larger, a wallet-sized plastic up card that describes multidisciplinary initiatives, which are the company’s mission, vision, values, and required to solve important problems. many of its innovation practices. SRI aspires SRI uses a family of Value Creation to be the “premier independent source of 36 C. R. Carlson became CEO of Forums to create new innovations. Across high-value innovations”. The Five Disciplines SRI in 1999. Previously he was a vice president of business SRI are market-focused forums, which of Innovation are described during the hiring development and ventures at SRI’s wholly owned subsidiary, match SRI’s strategic focus areas, such as process and they are on SRI’s website. New the Sarnoff Corporation. cyber security, infectious disease, intelligent employees are more formally introduced to 37 Interestingly, at the start of computer systems, education technology, and the disciplines of innovation at orientation. Apple Computer, Steve Jobs licensed the computer mouse clean energy. These Value Creation Forums SRI’s professional development focus is from SRI. are focused on generating compelling Value on how staff can use the Five Disciplines of 38 Value Creation Forums are Propositions; they do not fund new R&D. Innovation effectively, along with how they given tens of thousands of dollars annually. Until a good Value Proposition is developed, support SRI’s vision and business objectives.

Curtis R. Carlson 223 The CEO personally holds an innovation For example, the metrics for success from a workshop for all new employees to indicate new venture are dramatically different from the importance of these practices. He often those expected from R&D. If SRI is going has lunch with members of the staff and asks to start a new venture, it must be worth at them about issues needing improvement, least several hundred million dollars to be their work, and their Value Propositions. of interest. This is not an arbitrary objective. SRI promotes an “abundance” mentality, Among other reasons, this threshold is not one based on scarcity. But it makes it required in Silicon Valley because, if it is clear that it is only a world of abundance if not met, it is extremely hard to acquire staff have the required innovative skills and the best management team and venture are able to apply them effectively. Appropriate partners. Other activities have metrics that incentives are in place to focus outwardly are appropriate to the task, such as those for on customer and market needs—that is, on new R&D centers. These metrics allow staff value created. to decide more easily whether an initiative All business presentations at SRI use will have value for customers and SRI. It is the NABC format. They drive investments, surprisingly rare for management to have to speed up iteration, and minimize the need say no. Rather, a team proposing a new idea to compare “apples with oranges.” SRI soon realizes whether the threshold goal can works hard to keep presentations short: be met and, if it cannot, the idea often goes one-page proposals, 15-slide presentations, away. etc. SRI is focused on outcomes—real value Innovation Champions: Without a person to its customers. Because of its common who is passionately committed to making a language, concepts, and tools, staff members new innovation happen, it will fail. The first understand each other more quickly, input question SRI asks about any investment, is more consistent, and new insights can be proposal, or project is, “Does someone really incorporated more easily. There is much less want to do this?” Will someone commit to confusion about what staff and management success, no excuses, and agree to follow are agreeing to do and why. the Five Disciplines of Innovation? SRI has Important Market and Customer Needs: a saying, “No champion; no project; no In the innovation economy, we must aspire exception.” If the idea is a good one and SRI to work on important customer and market has no champion, they do not start serious needs, not just those that are interesting work until one is found. to us. Interesting problems are quickly This is SRI’s approach throughout the overrun by others in the innovation economy. organization, top to bottom. Champions Important customer and market needs allow are born with many of the traits needed for for the creation of significant customer value success, but they must also be nurtured and and they also motivate and attract the best cultivated. Training in innovation begins in staff. the technical divisions and progresses to As described, Value Creation Forums corporate venues. High-value innovation is at SRI are all run using the same basic about achievement. That is what motivates language, concepts and tools. Beyond the people and gets them to work day and night. basics, the expectations and presentations You can never force people to work this hard required for specific tasks are quite different. unless they are passionate about their work.

224 Every major innovative initiative must be built enterprise will be a market leader and that around that fundamental human need, which they will achieve this by delivering the highest champions possess. customer value in the minimum time and SRI focuses on its innovation playbook at the minimum cost. It means putting in to help staff achieve their goals. SRI is in place the structures, metrics, rewards, staff, the highly competitive Silicon Valley—if and support to satisfy the Five Disciplines of the playbook does not work, the staff will Innovation. It means removing obstacles to not use it. Even so, it takes a great deal of innovation. A common example is barriers to management effort and time before new staff. When they need to ask a vice president staff fully understand what SRI aspires to in a different division a question, they are achieve with its innovation concepts and best required to get permission from several practices, how to apply them, and why they levels of management. In addition to slowing will be valuable to their careers. down the process of value creation, that Innovation Teams: In the innovation sends exactly the wrong message to staff economy, an enterprise must team with the about the enterprise’s commitment to the best to maximize its chances for success. rapid creation of high-value innovations. Even large companies rarely have all the best Achieving the goal of becoming an resources. Although almost every company innovation enterprise must be at least a will claim that it abstains from the “not five-year initiative. Progress is relatively slow invented here” (NIH) syndrome, the truth is at first but then momentum builds: you will that almost all suffer badly from the disease. not go back. Build forward motion through Because they do not normally assemble early adapters; focus on achievement and the best teams, they are effectively hoping impact; demonstrate value; and create that their competition fails to do so as well. internal ambassadors. As the saying goes, Obviously, if their competition does assemble “Lead with the best to push the rest.”39 a crackerjack team, they may be defeated in Involve everyone at the strategic level; but the marketplace. deeply involving everyone is not possible. Forming teams is hard. It is a project that Make receipt of funding contingent on using must be actively managed. It takes training, the Five Disciplines of Innovation to the extent support, encouragement, and appropriate possible—this shows seriousness. The rewards to have staff create powerful, innovation agenda will not be taken seriously productive teams. To overcome the frictional if it is too marginal. Make Innovation concepts costs of team formation, major goals are and best practices a core business process required—e.g., important customer and in as many venues as possible. Focus on the market needs. The cost of putting together a fundamentals: the greater the market and high-powered team is otherwise not justified. customer attention and connection, the better An advantage of working on important the results. customer and market needs is that there is No organization can ever achieve an abundance of psychic rewards that can be perfection, but every organization can strive distributed throughout the team. to get better through a serious commitment 39 This is a common saying of Dennis Beatrice, who is vice Organizational Alignment: Organizational to continuous improvement. SRI strongly president of the Policy Division alignment starts with senior management believes in asking every enterprise activity to at SRI. He also contributed many ideas to this section. making a commitment to ensure that the improve some aspect of their function each

Curtis R. Carlson 225 year. SRI is not close to where it wants to be, beyond that. Having a deep understanding but each year it gets better. Success takes of innovation is beneficial to staff too. substantial time, but even modest progress Professionals today need new skills based creates significant returns. on a comprehensive understanding of the innovative processes that lead to success. VI. Conclusions Those who have these skills can prosper: We are in the innovation economy. There those without them will increasingly fail. has never been a better time for creating Enterprises that help their employees obtain major new innovations: it is potentially a time these skills have an advantage in attracting of abundance and unprecedented prosperity. and keeping the best talent. But it is also the most challenging time in The innovation economy gives us the the history of innovation, with technological opportunity to create abundance through the improvements in most fields occurring at application of a discipline of innovation. To rapid, exponential rates and with global thrive we must use innovation concepts and competition increasing equally dramatically. best practices throughout our enterprises This dynamism will not stop. These driving and more generally throughout industry, forces will accelerate as billions of people in academia, and government. The way we the developing world move from poverty and work is the most important innovation. Even low-cost manufacturing to prosperity and the small improvements in our collective ability creation of new, high-value innovations. to innovate would, over time, have a huge Our innovative performance today positive effect on the world’s prosperity, is, overall, poor. Few companies have environmental sustainability, and security. comprehensive innovation playbooks for staff with an organizational architecture that drives innovative success. Both are essential for survival today. Creating an innovative enterprise starts with commitment by senior management and then by putting the fundamentals of innovation in place. Once these fundamentals are established, it is possible to add other innovation concepts to further develop the enterprise’s innovative sophistication. The fundamentals are not hard to understand, but they are extremely hard to practice. The only way to really learn them is through repeated application. Few make the effort but those that do often excel. Experience shows that large improvements in innovative performance are possible. Even a ten percent improvement would make a significant contribution to the profitability of most enterprises. In many cases, improvements have gone well

226 References Ri d l e y , M. (2010), The Rational Optimist, Harper Collins. Sh e w h a r t , W. A. (1931), Economic Control of Quality of Manufactured http://en.wikipedia.org/wiki/PayPal Product, New York: Van Nostrand Company. http://en.wikipedia.org/wiki/Population_decline St o n e , Douglas (2008), “Winning the New Product Innovation Game”, http://en.wikipedia.org/wiki/Stage-Gate_model Corp!, December 4. http://en.wikipedia.org/wiki/Timeline_of_historic_inventionshttp:// Ta l e b , N. (2007), The Black Swan: The Impact of the Highly Improbable, www.sri.com/about/history/nielson_book.html Random House. http://mt.kargo.com/v/News/HowChinaWillChange/?KSID=3189 Ta y l o r , E., et al. (2008), “Encouraging Industry-University d3546687c862a6eebeb2eaf0ef7bhttps://www.cia.gov/library/ Partnerships”, Kaufman Foundation, http://www.kauffman.org/ publications/the-world-factbook/ uploadedFiles/EAC_UIP_report_v4.pdf http://uh.edu/engines/epi1163.htm Vo g e l , E. F. (1979), Japan as Number One: Lessons for America, http://www.commerce.gov/news/press-releases/2010/07/13/ Replica Books; republished in 2001. locke-announces-national-advisory-council-innovation-and Wa d h w a , V. (2005), “Ah out that Engineering Gap”, Business Week, entrepreneurhttp://topics.nytimes.com/top/news/business/ December 13. companies/toyota_motor_corporation/index.html http://www.sri.comhttp://dougengelbart.org/). http://www.theinspirationroom.com.au/who-is http://www.whatsbestnext.com/2010/02/an-example-of-bad- management/ Br a f m a n , O. and R. Be c k s t r o m (2006), The Starfish and the Spider, Portfolio Hardcover. Ca r l s o n , C. R. (2008), “The Imperative for Including Innovation in a Technical Education”, Keynote at the Kern Family Foundation Annual Meeting at Thunderbird University in Arizona, January 7. Ca r l s o n , C. R., and J. Sc h a u f e l d (2011), “Technical Education in the Innovation Economy”, to be published in Shaping Our World, John Wiley and Sons. Ca r l s o n , C. R., and W. W. Wi l m o t (2006), Innovation: The Five Disciplines for Creating What Customers Want, New York: Crown‑Random House. Ch r i s t e n s e n , C. M. (1997), The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, Boston: Harvard Business School Press. De m i n g , W. E. (1986), Out of the Crisis, The MIT Press. Do w d , A. (2007), “Three Centuries of American Declinism”, Real Clear Politics, August 27. Dr u c k e r , P. (1993), The Practice of Management, New York: Harper & Collins. Fo s t e r , R., and S. Ka p l a n (2001), Creative Destruction: Why Companies that Are Built to Last Underperform the Market—How to Successfully Transform Them, New York: Doubleday-Currency. Fr i e d m a n , G. (2009),The Next 100 Years: A Forecast for the 21st Century, Doubleday. Fr i e d m a n , T. (2010), The World is Flat: A Brief History of the Twenty- First Century, Farrar, Straus and Giroux. Ga r r e t t , G., and G. Da v i e s (2010), Herding Cats: Being Advice to Aspiring Academic and Research Leaders, Devon: Triarchy Press. Ho p e , J. (1996), “A Better Mousetrap”, American Heritage Magazine, October, pp. 90-97 and http://www.americanheritage.com/ articles/magazine/ah/1996/6/1996_6_90.shtml Ho s a k a , T. (2010), “China overtakes Japan in 2Q as No. 2 Economy”, MyWay, August 16, http://apnews.myway.com/article/20100816/ D9HKI1E00.html Ka p o r , A. (2010), “Urban Greatness Awaits Good Governance”, New York Times, May 20. Ke l l e y , T., J. Li t t m a n and T. Pe t e r s (2001), The Art of Innovation, New York: Crown Business. Ku r z w e i l , R. (2005), The Singularity is Near: When Humans Transcend Biology, Viking Press, September 22, 2005. Ma n d e l , Michael (2009), “America’s Innovation Shortfall”, Bloomberg BusinessWeek, June 3. Ma r k o ff , J. (2005), “It’s Moore’s Law but Another Had the Idea First”, New York Times, April 18. Mi t c h e l l , L., “Moving Innovations to Markets”, Kauffman Foundation, http://www.kauffman.org/advancing-innovation/moving- innovations-to-market.aspx Mo o r e , G. A. (2002), Crossing the Chasm, Harper Paperbacks, August 20. Ni e l s o n , D. (2006), A Heritage of Innovation: SRI’s First Half Century. Oh n o , T. (1988), Toyota Production System: Beyond Large-Scale Production, Productivity Press. Po r t e r , M. E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press.

Curtis R. Carlson 227

Designing Radical Innovation

Harry West The Innovation Imperative Berlin wall, to the ascendancy of democracy Continuum The world is changing: customers, in Latin America, to customer reviews consumers, constituents—the users of our on Amazon.com. When people can see products and services—are now in control. alternatives they make choices. And following Users are more discerning, they have more the frontline of democratic change has choices and are more comfortable exercising been the baggage train of growing consumer these choices. Users are demanding that markets as citizens became empowered and products and services work for them in the resources were redistributed more equitably fullest sense: that their total experience is as and more productively. At the trivial end of good as it can be. Organizations, companies the democracy scale, communication has and even governments are finding that they made it possible for citizens to choose not have to address the demands of their users, only their government, but also the winners and do so with an unaccustomed urgency. on American Idol, Britain’s Got Talent, or Tú If they do not, their users will exercise sí que vales. No longer are our stars chosen their choices and change brand, change by record industry executives or an elite panel behavior, or change their government. This of judges, or in a long, painful process of is the innovation imperative; we cannot rely working their way up. Today we get to choose on momentum in the market to protect us. them real time, live. We are becoming used Customers, consumers and constituents to the idea of exercising individual choice, have learned how easy it is to change, and expressing dissatisfaction with the status so we have to make sure that we are always quo, and expecting an immediate response. providing the very best experience to stay Communication also fosters technical ahead of their expectations. parity; it is easier to learn, to track what What are the forces driving this change? others are doing, and to copy. MIT has The prime movers are communication made available the best technical lectures technology and the rapid growth in new in the world to everyone with a broadband markets. Communication has fueled the connection, free. In China we are seeing growth in democracy from the fall of the knock-offs preceding the original brands to

Harry West 229 the market. Today, there is little difference technology—for them this is the norm. They in the chips in our computers, in the engines are a large population, 80 million in the in our cars, or in the ingredients of many of US and over 100 million in Europe. The old the foods we eat. Since the ingredients are models of music, automobiles and banking the same, it is what we do with them that do not work for them; they have different differentiates the experience of the product expectations. Not all young people in the or service. We have to broaden what we US aspire to owning a car the way their deliver to be a more complete solution, or parents did, and when they do buy one they risk becoming just a supplier of commodity care as much about communication and components in the global business entertainment as horsepower. In addition to ecosystem. leading the adoption of many new specific And, of course, our increasing ability to digital and social products, they are also communicate has had a direct impact on driving the integration of digital tools and how people spend their money. As a species social networking into everything else—the we like to communicate. We get pleasure integration of the physical and the virtual. To from talking with others and sharing the hark back to an earlier time, it was not the stories of our lives, and over the millennia plastic product that was revolutionary; it was we have learned of new things through word the plastic in everything. Each generation of mouth. Social networking tools have establishes its own norms of material expanded this process over the last couple expectations and lifestyle, and Gen Y is now of decades. These tools greatly increase defining the new middle class. the network of advisers who tell us what Globally the growth of the middle class is we could be experiencing, how to get it, primarily an emerging market phenomenon. and the best offers out there. An increasing Each year about 70 million people enter the part of our monthly budget is spent on cell middle class in emerging markets—about the phone service, broadband, smart phones and population of France. As these populations other communication technologies. More become consumer societies they are adopting of our products and services incorporate many of the same expectations as North communication as an integral part of their America and Western Europe, albeit with experience; for example automobiles are local variations. And even amongst people now communication centers with satellite who are not yet middle class we can see the radio, cell phones, navigation systems, effect of new communication technology etc. And when we buy music or books, changing behavior. In Peru, one of the poorest seeing how others have reviewed them is countries in Latin America, frequent use of an integral and valuable part of the buying the internet extends down to level C. And experience. ask teenagers there what would they would In parallel with increasing communication do if they were given a Sol and they will has been the growth of two extraordinary new probably tell you they would head to a nearby markets, Gen Y and Emerging Markets. Gen internet kiosk to chat with their friends or Y—broadly speaking people born between check out what is happening on hi5.com. 1980 and 2000, have grown up in a time of The Gen Y population in Latin America is mostly peace and prosperity, of pervasive approximately 200 million, and in India communication and of low-cost computing and China even larger with approximately

230 400 million each. These populations dwarf Our challenge is to help our own companies those in North America and Western Europe. to benefit from change rather than become a They are so large that the preferences of victim of it. How does a company deliberately Gen Y and emerging markets are no longer see what’s next, recognize how they can profit the tail of the consumer dog, they are the from it, and then move their organization to dog and North America and Western Europe lead the change? are the tail. When the dog wags its tail This is difficult to do. For many established markets are shaken. We have businesses, innovation has not been a seen this already in consumer electronics; central part of their strategy. Successful companies based in what just a few decades businesses can be based on the continued ago were emerging markets have taken exploitation of some earlier innovation, and the lead, Sony (Japan) eclipsed Zenith focus on narrower goals of cutting costs, (US), Samsung (Korea) is in the process of improving quality, building distribution, and eclipsing Sony, and LG (Korea) has set its promoting sales; generally tightening control sights on overtaking Samsung. Meanwhile, over operations. It is only when there is a fast followers in China are pulling out into the disruption, such as a new or reinvigorated passing lane. competitor, that innovation becomes important again. The trouble is that by then Designing Radical Innovation the organization may have lost the ability What do we mean by designing radical to innovate. The trick is to learn to innovate innovation? To innovate is to change before you are cornered. something established by introducing new Innovation requires loosening control. products or services, new processes, or new The essence of innovation is that you do not ideas. By radical innovation we mean that know in advance what is going to emerge, the change is fundamental; it is not the same so the organization cannot define and control thing only shinier, it is a complete reset of the the innovation process in the same way it customers’ experience or a completely new does everything else. The only rules are business model. By design we do not mean rules of thumb, and the organization has a drawing to show how something looks; to put its trust in an unknown outcome. To we mean the purpose and the plan for the make matters even more challenging for innovation. Design is the deliberate process the business leader, it takes time to find the for purposefully creating the new. business value in innovation, and then time Our motivation for designing radical to communicate the innovation plan to the innovation is not that we want to be radical larger organization, and then more time to for its own sake, but that the situation calls execute it. Radical innovation has a longer- for it—the innovation imperative is radical. term cadence that does not play well with There are now so many points of connection quarterly reporting cycles between smart people, new technologies, Successful innovation requires the and ambitious businesses that it is inevitable careful evolution of new ideas. If we try to that innovation will happen somewhere innovate too quickly we end up with ideas in the business ecosystem. Increasingly, that merely reflect the current needs of 1 Eric Von Hippel, consumers, customers and constituents are consumers. The ideas will be liked today, “Democratizing Innovation,” 1 The MIT Press, 2006. taking control and innovating for themselves . but if they do not stake out new territory

Harry West 231 in the minds of consumers they will not be fifteen years designers have also learned distinct enough to be owned in the future. to develop stronger customer empathy For many organizations it is difficult to get through ethnography and other techniques the pace right. They have learned to make for immersion in the lives of the people they decisions at the end of every meeting. This are designing for. As our economy migrates is great for efficiency and showing clear from being about just products to one that leadership, but not so good for nurturing new trades in broader experiences, designers ideas. On the other hand, going too slowly is are able to use their customer empathy to just as bad. If the project is not on a ‘critical deliberately craft the emotional journey that path’ it becomes a second priority, part time is an essential part of experience innovation. project that risks suffocating any last traces And in interdisciplinary design, firms and of creative potential. The trick lies in pacing department designers have learned to innovation so that it fits into that magic collaborate with like-minded engineers creative window of opportunity with enough and business people and develop strong time to allow ideas to percolate and enough critical thinking skills. In parallel with the urgency to keep the team motivated. development of the innovation capabilities of Innovation is counter to many of the individual designers, we have also developed business processes instituted in the drive a well honed “design process” to provide towards six sigma quality, and the people a structure for the leap into the unknown. who are most capable of catalyzing innovation This process is not difficult to learn, but in a company may be outside its traditional the social and personal dynamic that structure. To learn how to innovate, many supports creativity, customer empathy and companies are working with outside groups collaboration is difficult to enculturate. experienced at thinking differently—a stimulus to jolt the system into a new Innovation Design Process state. Often, these outside groups include There are four essential elements in designers, whose processes and perspectives the process of how radical innovation is offer distinct advantages. successfully designed and deployed. We call Why is the design process good for these elements of the process rather than managing innovation? Designers are innately stages because they occur simultaneously, motivated by the “new”; that is why they not necessarily sequentially—innovation is an are designers. They have a complementary on-going integrated process. You can think of mindset to the “control” prevalent in these elements as four different spaces in the most large companies. More than any organization. other discipline, designers are naturally comfortable with abductive2 processes 1. Executive Space in which creation precedes analysis—the The first element is at the executive level knowing is in the leaping. Their “new” of the organization. It is how you acknowledge muscle is well developed; throughout their the need for change, accept that you do training they have been challenged to create not know yet what that change will be, and 2 Roger Martin, “The Design of ideas that are new and to communicate prepare the organization to embark on a Business: Why Design Thinking them to others so that they can then be process of learning what to do and then is the Next Competitive Advantage”, Harvard Business critiqued and evaluated. Over the last executing in accordance with what it learns. School Press, 2009

232 Challenges at this level are that there 3. Project Space needs to be a continued focus on executing The third element is building a team to the current strategy at the same time as the lead the process, evaluating it to make sure organization is learning what to do next, and that the innovation is right, and deploying often these will be in conflict. As the great it so that it can be executed by the larger American novelist F. Scott Fitzgerald wrote, organization. A radical innovation team “The true test of a first-rate mind is the will comprise a range of people with ability to hold two contradictory ideas at the complementary skills, disciplines, and same time.” In navigating change you need mindsets. It should include people who to manage both what is right for today and understand well the constraints that the what will be right for tomorrow, and continue business will have to work within, and to remain open to completely new ideas that should also include people who do not are not even in the framework of your current see any constraints at all. The team needs thinking. a strong leader who has the confidence You are asking your organization to to listen as well as to make decisions; commit to embarking on a journey without the leader should listen carefully to knowing the final destination. what the team is feeling even when they are obviously wrong. High-performing 2. Consumers, Customers, Constituents Space teams take advantage of communication The second element is how you technology to work remotely, but are immerse your organization in the lives of its collocated for much of the time in a consumers, customers and constituents. The dedicated project room. organization is to search for new solutions, A challenge at this level is that you are not inwardly as experts, but through the lens asking a team of people to completely focus of its users. Your team will be conducting on one thing—the future—for a long time. In research as if they were anthropologists that time they will become distanced from visiting an unknown tribe. The purpose of the main part of the organization that they the research is for the team to be able to will need eventually in order to execute the empathize with users and to help the team innovation. to create from the users’ point of view (see You are asking a scouting team to make a sidebar on customer research). long commitment to find the way for the main Challenges at this level are that users organization. probably do not know what they will want in the future so you cannot abrogate your creative 4. The Prototype Space responsibility to them; your job is to create for The fourth element is the prototype them. Ideas that come out of this research are space where you model and evaluate a provisional and their validity is not knowable range of ideas to learn, iterate and refine the until they have been envisioned and modeled innovation. Great ideas with small flaws fail; in a prototype form that can be tested. details matter. The prototype space is how You are asking people with the least you get the idea right. It is also how you help formal power in the organization, not the rest of the organization to understand executives or experts, but users, to direct its what it is that you are going to do, and enlist destination. their support.

Harry West 233 Learning from customers

The inspiration for innovation can come directly from watching or listening to people, but often we have to reflect deeply to find the meaning in the research that has been hidden from us in its simplicity or familiarity.3

We immerse ourselves in the lives of people—consumers, customers, constituents—in an open-ended way, acknowledging that not only do we not know the answer; we do not even know the question. We must watch and listen to people to learn from them how our organization can help. We need to unlearn our vocabulary, and learn again the words that people use. We want to uncover the issues that concern people, unaided and unbiased by our preconceptions.

To do this we typically spend one to four hours with about seven people per segment. We watch them in their context; their home, work, hospital, on the street, in a store, or whatever is the relevant context. We engage them in a conversation about their lives.

Of course, such a small sample cannot be used to infer proportions in the population, but we are looking for issues that are important to most people, and you are unlikely not to uncover these issues if you have a sufficiently in-depth conversation. Remember Newton: the story goes that an apple fell on his head as he was sitting under a tree, and from that stimulus he came up with the laws of gravity and a theory to explain the motion of the planets. He did not sit under a thousand apple trees; he used that time to think instead.

So how do we think about what we learn from customers? We look for two types of information. The problems they have; can we think of a way to solve their problems? And their values that make them want to participate in a category in the first place: can we create an experience that speaks to those values? A great idea is one that combines features that solve problems in an experience that speaks to people’s values.

Values

Aspirations

Features IDEA Experience

Solutions

Problem

3 Apologies to Wittgenstein

234 Swiffer Rethinking the everyday

In 1994 Procter & Gamble was looking to grow through innovation. Craig Wynett, Director of Corporate New Ventures asked, “Is there a better way to clean a floor?” The answer to that question not only reinvented how we clean floors, but also changed how we think about the role of design in driving business innovation.

A joint team from Continuum, Northlich Stolley, and P&G set out as design anthropologists to watch how people cleaned their kitchen floors. We noticed that most people swept their floors before they mopped and they had to assemble a system of products to get the job done. We noticed that mops worked mostly by the adhesion of dirt to the mop and that people seemed to be spending almost as much time rinsing their mop as they did cleaning the floor. We noticed that people wore old clothes when they were cleaning because it was a dirty job, and we could not help but notice that sometimes people had cleaned their floors before we got there, because they did not want us to see them cleaning a dirty floor. People were concerned about the cleanliness of their homes.

Out of watching those 18 women in Boston and Cincinnati (yes, they were all women, tsk, tsk) emerged an idea that we affectionately called “a diaper wipe on a stick” and that in consumer testing we called “Fast Clean”. When we first showed consumers the concept for “Fast Clean” they did not like it because they did not believe that it would clean well and they thought it would be expensive. We made a working prototype, an experiential model, to communicate the idea. Once people had experienced using “Fast Clean” they were sold.

It took several years to go from the first sketches and prototypes to launching what we know as Swiffer, but it is now one of the most successful new products that P&G has ever launched with sales of over $500 million per year. Swiffer succeeded because it is not just a new mop or a new broom, but a completely new and seamless home cleaning experience. It solves the technical problems people encountered cleaning their floor, by making the process quicker and cleaner for them, and it spoke to people’s value for the cleanliness of their home.

Harry West 235 Insulet Launching a new business

Insulin pumps are the most effective tool for managing diabetes because they closely mimic the function of a pancreas— delivering a constant stream of insulin to the body. The Insulet Omnipod is the first discreet, disposable, human insulin pump and has launched a new category.

Prior to Insulet the stakeholders in diabetes care—the patient, doctor, and insurance company—often advocated multiple daily injections instead of a pump. Patients struggled with technical issues: pumps were complicated, confusing, and uncomfortable at the injection site. Insurance companies were wary of the up-front costs associated with buying pumps, which were often abandoned. Doctors found pumps too complicated for patients to use effectively.

But the biggest barrier was an emotional one: unlike injections, a pump and its tubes broadcast to the world that the user had diabetes, and technical constraints prevented the user from showering, swimming or sleeping while wearing it.

Insulet, a small VC funded start-up, partnered with Continuum to systematically solve these problems. Together, we developed a pump system that was not just a medical solution for patients, but a human solution for people.

The OmniPod is the first wearable insulin pump that attaches directly to your skin. It is small, low cost, and disposable; after three days you simply replace it with a new one. It reduces pain by automating the insertion of the cannula into your skin. It is easy to use: instead of buttons on the pump, it is controlled wirelessly using a handheld device that looks like a cell phone. The wearable pump provides complete freedom—you can shower, swim, and sleep wearing it. And it is discreet—there are no tubes; managing your blood sugar looks like you are texting a friend. It is a completely new healthcare experience.

Each one of these breakthroughs is a revolution in diabetes care. Bringing them together was a business breakthrough. Doctors prescribe Omni-pod because they have confidence in its simplicity and efficacy. Insurance companies support it because its costs are distributed over a 2-3 year period. Users want it because it gives them back their freedom and privacy.

Working as Insulet’s user research, product design and engineering development team, Continuum partnered with Insulet for 3 years through initial 510k clearances. Insulet launched the OmniPod and completed an initial public offering of $116 million.

236 Spence Diamonds Helping people to make a lifelong decision

Choosing an engagement ring is a big decision. Spence Diamonds is the largest diamond retailer in Canada and their business depends on helping people through this process.

Talking with customers in-store and in their homes we heard their anxiety about cost, style, and about making such an important decision. After all, it is not just a diamond; it is a commitment.

We choreographed a new sales approach that is more self-service so that customers can manage the pace themselves, reducing anxiety and freeing up staff to engage later in the process when their expertise is most needed. We designed breaks into even this last part of the customer journey for our happy but anxious couples to talk in private; sometimes good service means stepping back. There are also moments when the brand should step forward to share its expertise and to take some responsibility in the decision. Based on what we heard from our customers we instituted a new, simpler language supported by professional tools to give customers the serious information they need to make the right “investment” decision. This new sales process was executed through the design of the retail environment, crafting of collateral and fixtures, and training for employees.

The net result is a better way for Spence Diamonds to help their customers that goes beyond traditional one-on-one customer service, enabling Spence Diamonds to continue to expand their business and to support their customers in the right way.

Harry West 237 A challenge at this level is allocating the resources to build experiential models that Radical innovation design will enable the learning and refinement “ needed before committing to launch. It is asks first, how can we make the sometimes easier for an organization to commit resources to a specific idea even if experience of our customers’ it is not right, than to fund the open-ended exploration of the right idea. lives better? And then only You are asking your scouting team to show the rest of the organization where they will be second, how can we use this going by building a facsimile of it in detail. These four essential elements in to drive business innovation managing radical innovation are linked by the project team, but cannot be the responsibility and support the needs of our of the team alone. Without executive support they will become disconnected from the company? mission of the company. ”

Designing Experiences In the process and examples just through a relentless focus on the good of the discussed we have turned convention on consumer. its head. Radical innovation design asks The change we are going through is a self- first, how can we make the experience reinforcing cycle. As consumers, customers of our customers’ lives better? And then and constituents experience a better product only second, how can we use this to drive or service their expectations ratchet up and business innovation and support the needs they continue to look for what is even better. of our company? This is counter to a Furthermore, people have learned to transfer conventional approach that starts with the their expectations from one category to opportunity for the firm and then looks for another: If it is so easy for me to buy music ways to make it wanted by customers. Even online, then why can’t I buy shoes the same among sophisticated companies that are way? Don’t tell me reasons why it is difficult; I espousing customer centricity, it is the day- don’t care that music is digital and shoes are to-day language spoken by executives and physical; the cost of shipping is your problem; I written in presentations that demonstrate have no respect for the former hierarchy in the whether or not they are truly thinking about shoe industry and will go with whoever solves the future from their customers’ point of this problem for me. Today, Zappos.com is view, or just trying to be more sophisticated a major US shoe retailer with sales of over in how they exploit them. To be clear, we $1billion a year. A big part of their success understand the needs of business and our goes beyond just the shoes themselves: motivation is not altruistic or philanthropic, Zappos offers free shipping, free returns, but we have seen how companies that and is constantly looking for ways to interact benefit consumers the most succeed the more with their customers through their most. The way to business success is website, by phone, or through social media.

238 As a result they have become widely known for their great customer service and have a By designing better and more very loyal customer base. Zappos has created “ what for many people is a better shoe buying complete experiences we give experience. Putting customers, consumers and the consumer bigger building constituents at the center means we consider the total experience of the user. Consumers blocks to construct their lives, improvise their experiences out of the products and services available to them; they which makes it simpler to make choices from available alternatives and substitute one for another. By designing construct richer experiences better and more complete experiences we ” give the consumer bigger building blocks to construct their lives, which makes it simpler to construct richer experiences. We reduce the most reassuring experience, the richest the need for the consumers to improvise, and experience. Some experiences are seemingly make it less necessary for them to consider trivial, like cleaning the floor; some are different options. Taking responsibility for life changing, like managing diabetes; more of the total experience of the user is and some are emotionally charged, like in the best interest of the firm because in a buying an engagement ring; but together world of technical parity products are easily these experiences add up to the whole of copied, but a seamless customer experience our material lives. Each part of the human is more difficult to imitate. experience deserves our respect and Experiences are more personal and should be designed with care. As a result of emotional than products. Designing advances in communication technology and experiences means we need to be increasing globalization it is now possible attuned to local nuance. As corporations to think more carefully than ever before developed global businesses, they moved about each element of our experience and from locally designed products to globally to amortize the design cost over ever larger distributed ones. We are now in the process numbers of users. As designers we are of transforming again to “globally local privileged to be able to use our talents to help experiences” that are customized to the people in this way. specific needs of each group of local consumers. We are nothing but the experiences of our lives. We want these experiences to be as good as they can be, and we want them to be validated by others. As users—customers, consumers and constituents—we are becoming accustomed to being in control and are demanding the right experiences; the simplest experience,

Harry West 239

Innovation: Behind the Buzzword

Pascal Sobol What is the difference between two world- So what? Isn’t being “innovative” just IDEO class cities like Sydney and New Orleans? one of many goals a company pursues? And The former has an impressive concert hall doesn’t it go without saying that some are that hosts memorable performances, while better at it than others? And yet, while many the latter is virtually synonymous with business leaders claim that they want to be great music. In other words, Sydney hosts more innovative in order to stay competitive— wonderful “cultural experiences,” whereas and increasingly believe that innovation is New Orleans cultivates them. Because New essential to an organization’s survival—they Orleans maintains an artistic mind-set—and rarely pause to consider to which level this so many of its residents and visitors identify actually needs to shape their organization as with its creative purpose—musicians from a whole. far-flung places flock there, eager to play, In order to truly make innovation a experiment, and challenge the status quo. competitive advantage that a business can When it comes to innovation, similar bank on, innovation needs to evolve beyond parallels can be drawn in the business world. being an activity a few are engaged in and Some companies routinely hire qualified become a state of mind across the entire R&D staff who produce worthwhile products organization. Let us take this opportunity to or services—and help the organization stay examine why an organizational culture of competitive in doing so. But other firms let innovation is so critical today, and how you as creativity permeate their corporate culture, a business leader can foster one. encouraging all employees, across silos and hierarchies to take creative approaches Why be innovative? to planning and problem-solving. In Every other year, IBM asks several other words, some companies rely on the thousand CEOs worldwide to comment on ‘creative’ experts hired into their innovation the state of the economy and to identify their departments to drive their innovation greatest business challenges going forward. attempts, while others have made innovation Organizational “complexity” currently tops a corporate priority across all departments. the list. The latest study (May 2010) also

Pascal Sobol 241 shows a remarkable shift in how executives A decade ago, it was sufficient to rethink think they should address this complexity. For a company’s offerings at regular intervals. the first time ever, CEOs said that the most Today it is critical to evaluate the whole important leadership quality to possess today organization—including its products and is “creativity.” services, its structure, and its relationships Reading the details of the study, one with customers and employees—on a realizes that these CEOs do not just mean continuous basis. creativity in the sense of good ideas for new products and offerings. It goes far deeper. Shift happens These executives refer to a clear demand Many cutting-edge businesses are already to creatively approach every aspect of their putting these three ideas into action. Creative organizations so they can adapt to rapid leadership at Zappos, for example, involves and sustained market change. They want to offering a considerable sum of money to experiment constantly with new business any new employee who decides to actually models and technologies, as well as to shape leave the company, to ensure that staffers and continuously reshape their relationships who stay really want to be there. Meanwhile, with customers. These CEOs need system- Nike is proving that reshaping customer level creative thinking to come up with relationships can be a serious business innovative means to address system-level opportunity—its “Nike ID” co-creation complexity. platform, which allows users to design their Based on its interviews, the study’s authors own sneakers within predefined limits broke singled out three ways to achieve this: embody the $100 million turnover barrier earlier creative leadership, reinvent customer this year. And Apple has been teaching the relationships, and build operating dexterity. world about operating dexterity for years: it In other words, even business leaders repeatedly demonstrates an uncanny ability who previously relied on the “Sydney” to branch out into new markets by rethinking approach to innovation now see the value of them on a systemic level and developing bringing a “New Orleans” mind-set to their highly desirable offers that disrupt incumbent organizations. offerings.

Embody creative leadership. “Creative leaders invite disruptive innovation, encourage others to drop outdated approaches and take balanced risks”, the authors noted. “They are open-minded and inventive in expanding their management and communication styles, particularly to engage with a new generation of employees, partners and customers.”

Reinvent customer relationships. “In a massively interconnected world, CEOs prioritize customer intimacy as never before. Globalization, combined with dramatic increases in the availability of information, has exponentially expanded customers’ options”, the authors wrote. “CEOs said that ongoing engagement and co-creation with customers produce differentiation. They consider the information explosion to be their greatest opportunity in developing deep customer insights.”

Build operating dexterity. “CEOs are revamping their operations to stay ready to act when opportunities or challenges arise”, the researchers observed. “They simplify and sometimes mask complexity that is within their control and help customers do the same. Flexible cost structures and partnering capabilities allow them to rapidly scale up or down.”

(IBM CEO study, p.10, May 2010)

242 The motivations for business leaders Change by Design to creatively innovate is not only to have Design thinking, inspired by real-world competitive offerings out in the market, but observations, is rooted in human behavior to make sure the organization as a whole and needs. As such, applying design remains able to quickly respond to a business thinking allows business leaders to base environment, which is changing ever more their decisions on reality rather than on rapidly on every level. theory or assumptions. It also enables CEOs to make strategic output tangible How to make an organization more much earlier in the process than traditional innovative? management approaches. As design is It might not be obvious how business at the core of this approach, strategies leaders can go about bringing out system- tend to be expressed as brand prototypes, level creativity within their organizations in hypothetical advertising and use scenarios order to address the system-level complexity instead of pie charts and bar graphs. This they have been observing. There is however, makes the outcome of a strategy project a breed of companies who have experienced much more communicable and easier to the marriage of creative approach and grasp within the organization. strategic consultancy for years, our company With the IBM study rating creativity as being one of them. So some of the answers the top leadership quality, it is clearly the are already out there. Let’s have a closer look right time to look at how design thinking at a few of them. can be applied to make whole organizations What the CEOs in the IBM study are more innovative. So, taking our cue from the essentially describing is the need for a more world’s CEOs let’s look a little deeper into design-driven approach to organizing and each of the high level opportunity areas that running their companies, one that is insight- they have outlined. Based on the study’s led and richer in experimentation. structure, we can highlight a number of Designers are adept at reinventing the recurring themes that we at IDEO have way they work along with whatever they observed in our daily conversations about are creating. Strategic innovation firms making organizations more innovative. like IDEO are taking on a broader array of challenges for clients in increasingly 1. Embody Creative Leadership: diverse industries, from developing a Purpose, Not Vision customer experience at government In order to harness innovative forces service centers to designing an early within the company, it is easy to assume that seed investment firm from scratch. Our senior management’s primary responsibility approach, now known as “design thinking”, is to project a strong vision of where the evolved over the past decade by applying a company is going. After all, the classical human-centered design process to myriad business paradigm positions the CEO as a projects. Once valued exclusively within “visionary”. Unfortunately, the idea that the the “creative profession”, design thinking boss always knows best doesn’t ring so true is now taught by major business schools anymore. In times of extreme complexity, it is to answer complex strategic challenges in unrealistic to expect C-level management to nearly every industry. have command of all of the answers, despite

Pascal Sobol 243 how thoroughly they may be briefed by team once and for all, to side with the many. What members. is good for our customers is also, in the Yet in most organizations today ideas are long run, good for us”, he said. He wanted to still more or less expected to come from the “create a better everyday life for the majority top. The CEOs in the IBM study, however, of people”. Note that this is not a vision about seem to throw their hands up and say, “Listen the future of flat-pack furniture or where the guys, that’s just not how it works anymore. brand can go. This is a mission statement of With everything else we are responsible almost political dimensions. Every business for, we can’t be the ones monitoring every decision can be measured by it, yet it leaves technology trend, every social phenomenon plenty of space for the organization to develop and every business play that is relevant to our into areas that Kamprad was unable to company.” foresee at the time. This admission that leaders do not have all the answers is a sign of strength rather Top-Down and Bottom-Up than weakness: it invites all employees into In order for innovation to enter everyone’s the dialogue about where the company is and consciousness throughout an organization, should be going. innovative thinking needs to be encouraged The most progressive companies are more and rewarded from the top down. At the same sharply defined by a unifying purpose than a time, leadership needs to provide the space leader’s vision. A “vision” implies top-down for good ideas to grow and blossom from the culture and suggests that management sets bottom up. This may sound simple, but it is the course while the rest of the organization contrary to how most organizations operate merely executes that vision. However, today. The predominant corporate mind-set innovative organizations are increasingly is one of hierarchy and of avoiding risks at all aware that there is no one “right” way to costs. do things and that no single person knows Employees of most organizations tend to enough to have a perfect master plan. believe that if something is “not their job”, they don’t need to take any responsibility Leaders as Curators for it. Yet innovation is too important to be Instead, innovative leaders see themselves left solely to designated Innovation Units. much more in the role of someone curating Although specialized personnel can prove an exhibition. They allow for—and demand— useful, no one group will ever be able to live experimentation from their employees within up to the creative potential of everyone’s the boundaries of an overall framework that brains combined. The specialist’s job is not they as curators provide. In turn, they make necessarily to have the answer, but rather to sure that everyone internally and externally locate and assemble the people who know is aware of the organization’s purpose—i.e., most about the task at hand and to give them what it stands for over all, in order to make permission and the necessary space to be sure that experimentation is compatible with creative in a focused way. company values. IKEA, for instance, has been carefully built Innovation is Everyone’s Job around the purpose that its founder Kamprad When a chain of private hospitals in the set out thirty years ago: “We have decided, US asked IDEO to help it improve its patient

244 Finding real-world inspiration next level. This enables P&G to support the by going through a patient experience best ideas, no matter where they originate inside the company.

Look Beyond What is Measurable Most organizations try to eliminate ambiguity anywhere in the development process. In order to avoid ambiguity, they designate quantitative data as the main information currency. This is a good thing when pursuing goals like quality control or regulation compliance. The problem is that to develop truly groundbreaking experience, our team stepped in to manage ideas, innovators have to look beyond what a co-creation process. All the ideas that we is measurable. By the time a need can be generated and prototyped came from doctors, quantified in surveys, it has passed from nurses, patients, and families. When we the latent to the explicit stage and chances invited and expected everyone to contribute are that it has been addressed by some their best thinking to the project and gave competitor. In other words, once people can them credit for its outcome, the ideas came clearly articulate what it is that they need, the pouring out of them, which meant we could solution is just around the corner. Insights concentrate on “curating” the process, or that are critical in creating breakthrough setting up some general guidelines and innovation cannot be expressed primarily in making sure that everyone was aligned on numbers. As innovators, we need to trade in a the purpose of the project. In doing so, our different currency and leadership needs to be team managed to make innovation a mind-set able to accept that currency. among all hospital staff. In order to enable innovation teams to IDEO isn’t alone in its design-thinking arrive at game-changing solutions, leaders approach. Procter and Gamble’s former CEO must alleviate employees’ fears that they A.G. Lafley recognized the need for spreading will be shot down in boardrooms if they lack innovative thinking throughout the firm much sufficient quantitative data to make their earlier than many of his competitors. In cases. Instead, leaders should encourage his book The Game Changer, he concluded, teams to work more like detectives than “Innovation is everyone’s job.” When Lafley statisticians and proceed without the revamped P&G’s innovation infrastructure perceived safety nets of pie charts and in the early 2000s, he underscored his percentages. Sometimes all it takes is expectation that everyone on staff was an one seemingly small insight to lead to a innovator by creating the P&G Gym. “The breakthrough idea. Gym” is a laboratory environment designed Just like detectives discovering clues to rapidly develop ideas and initiatives so that they can’t necessarily explain right away, they either excel or fail quickly. Any internal innovators find insights which are hard to team can check in to the Gym for innovation evaluate at first. But processed correctly, the guidance and support to take projects to the value will be relatively quick to determine

Pascal Sobol 245 in what is ideally an ongoing dialogue with potential customers. The quality of these insights serves as the currency in highly innovative organizations.

Embrace Ambiguity A few years ago, on a project for Bank of America, an IDEO team was developing innovative offers for mothers. The market had been flat, and customer turnover significant (the base was expensive to maintain). When the team met with a few dozen moms, two insights emerged: First, the act of saving was emotionally pleasing, even if the saved amount was very small. Second, some women in the target group had the curious habit of rounding up their utility bills paid by check. Nobody knew what these observations under the pressure of having to quantify the Analyzing and interpreting insights to make them would lead to, and we initially presented them value of the insights at every turn, the idea strategically valuable as just that: observations. Over the course would never have left the boardroom. of the project, however, it turned out that these insights established fertile ground for 2. Reinvent Customer Relationships cultivating ideas. Procter & Gamble’s Lafley not only One idea was to combine a checking fostered a culture of innovation within his and savings account in order to make the company, but also placed considerable act of saving unconscious and game-like: emphasis on customer relationships. He Every transaction on the checking account demanded that everyone in his organization gets rounded up, and the difference is get in touch with the end consumer. Lafley deposited into the savings account. This was known to show up for home visits in evolved into Bank of America’s “Keep the order to set an example and stay informed. Change” program, which has turned out to He realized that, in order to make good be an attractive and easily understandable decisions, his teams needed to have their proposition for many customers. The intuition grounded in the real world. He program allowed the bank to divert part of understood the importance of customer the marketing dollars spent on regaining relationships not only for marketing customers to a matching scheme aimed at purposes, but also for developing relevant retaining them. Since “Keep the Change” was offers. introduced, more than 12 million customers A decade later, many business leaders have signed up and collectively saved more recognize that the consumer needs to play than $3 billion. a central role in the innovation process. The “Keep the Change” program was However, opinions seem to increasingly based entirely on the careful observation of a differ about how to best achieve this user few individuals. If the IDEO team had worked involvement, especially when it comes to

246 input early in the process. Some companies The device was based on the insight that still rely on surveys and quantitative studies. consumers craved a sleek system that let Others have branched out and started them easily discover, purchase, store, and collaborating with consumers via online enjoy music on the go. Various technologies tools, which now provide a plethora of were then combined to create the system. Yet communication channels that companies it is unlikely that Apple would have arrived can use to get the consumer’s point of view at the same solution by looking at a cutting- represented early on in the process. edge hard drive at the time and wondering “So, what could we do with this?” From “What can we do?” to “What should we Today, engineers, coders and scientists do?” are capable of creating just about anything. It seems all too obvious to state that The question has shifted from the R&D- innovation should be driven through the oriented “What can we do?” to the customer- benefits delivered (to consumers?), not focused “What should we do?” The latter is, through the tools that allow us to deliver of course, a question that organizations must them. Yet in many of today’s organizations, answer as a whole. innovation is still anchored solely within R&D Companies should be wary of the so- departments. Traditionally, most research called “technology push trap.” It is always and development teams have a technology- seductive to use new technologies as a centric worldview. While looking to technology starting place when looking for innovative for innovation is a valid way to generate ideas, offers. But the danger lies in losing sight it is an inherently limited one. When holding of human need by narrowly focusing on a particular piece of new technology in hand technology. We have found that successful and looking for suitable applications, it is hard innovation most often occurs when to avoid the syndrome of “if I am a hammer, engineers, user specialists, and business the world looks full of nails”. experts jointly shape an initiative from the The most radical examples of innovation start. As an interdisciplinary team, together may feature new technology, but they were they can ensure that any solution proposed designed from deep consumer insights. will be desirable, technically feasible, and Take the poster child of innovation, the Apple financially viable. iPod. The iPod did not pioneer any particular technology; it reinvented an experience. Find Real-World Inspiration There is a common dilemma for companies who are leading in the innovation game: For them, it is not as obvious where to look for new ideas as it is for followers. The competition cannot provide much guidance, as that would essentially mean looking backward. Many innovation pioneers in diverse fields have figured out that the key is to be inspired by real-world behaviors and Generating a breadth of ideas attitudes. This allows them to find and act quickly through a series of brainstorm sessions on opportunities for a step change in their

Pascal Sobol 247 markets before anybody else can disrupt Individuals Inspire Big Changes them. How they detect these opportunities is Inspiration can usually be gained much a crucial part of their continuing success. more efficiently through an ethnographic Every large organization has a market approach, in which very few individuals are research department and is capable of observed, but are interviewed in great depth. conducting surveys and evaluating concepts This approach is much less expensive and with end consumers. The reality we see, time-consuming and much more likely to however, is that while many organizations point innovators in interesting directions. consider themselves knowledgeable about One particular IDEO project provides their consumers, they are all too often an illustrative example. While working for drowning in a sea of data, without gaining any a credit-card provider, our design team insight. interviewed a woman who considered herself Planning real-world inspiration gathering to be an impulsive shopper and had racked as a series of open-ended, inspiring exercises up considerable credit-card debt. When with tools like ethnography and analogous our research team asked her whether she experience audits is usually the best way to was happy with the credit card services approach an innovation challenge. her bank offered her, she replied, “Sure”. A quantitative survey would have stopped Inspire first, quantify later—much later there and noted that the user was satisfied In our experience research tools are often with the offer. But when we asked her to take used in a misguided fashion. It has become us through her online purchasing routine, customary to apply quantitative methods we learned that she kept her credit card early on in the process, when what is needed is in fact not numbers but inspiration. The sense of security that quantitative methods provide is clear: in order to convince anyone internally, employees feel they need to deliver statistically relevant numbers backed up by representative samples of their target audience. The need to verify through numbers is understandable, but it stifles inspiration and should be suppressed until much later in the process. Quantitative methods are great for evaluating sufficiently developed concepts, but they don’t inspire new thinking early on. On the contrary, applied at the beginning of the process they tend to make the search for innovation slow, expensive and ineffective. Quantitative studies are not designed to allow for unexpected results, because the realm from which interviewees choose their answers has been pre-determined when Interviewing ATM users about their financial perceptions and designing the study. observing their behaviors

248 BBVA ATM – humanizing say and do, but also what they think and feel. self‑service banking When we set out to “unlock the commercial possibilities of the self-service channel” for BBVA, for example, we observed and interviewed people who use automated teller machines on a regular basis. We did the same research with people who did not use ATMs. Uncovering the limitations of a current offering requires understanding not just the target group, but also the “extreme” users, or in a block of ice in her freezer, instead of people whose behaviors are in some relevant her wallet, to help her resist using it. When way extreme. quizzed about her behavior, she proceeded For instance when searching for to tell our team at length how she did not inspiration while engaged in a project with trust herself with making quick purchasing the flip-flop brand Havaianas, our teams decisions, so she forced herself to wait until spoke not only to Brazilian beach goers and the block of ice had thawed to free the card urban European fashionistas. In addition, until making the purchase. This gave her they chose to have in-depth conversations added time to consider and reconsider her with a self-confessed shoe fetishist and a decision. Buddhist monk who hadn’t worn shoes in This example illustrates how a design- years. People who exhibit extreme behaviors thinking approach can unearth a deeper truth usually do so because of an extreme need, than traditional methods: The “quantifiable” belief or attitude. These factors also tend to survey would have showed a customer exist in a given target group, albeit in much who was satisfied with her credit card. The less pronounced ways that are much harder human-centered observations delved more to detect. Thus talking to extreme users is deeply into how the customer actually used another way to reveal latent needs within a the card. The fact that she was trying to target audience. modify her self-perceived negative behavior In the case of BBVA, the main limitation of patterns provided design insight and customer interaction with ATMs wasn’t the inspiration. She is unlikely to be unique in information, services, or benefits provided, this need, which begs the question as to what but the way in which they were being kind of products banks may want to offer delivered. Many customers felt the machines that help credit-card users overcome their were insufficiently intuitive, transparent, or own shopaholic behavior. Whether the need trustworthy. The design project, which set out actually does exist widely can be tested within to consider expanding the ATMs’ feature set, weeks of generating new ideas and shaping quickly became about making the existing them into concepts. functions more accessible, more human and more intuitive. With BBVA, the design team Target Beyond the Target Group developed a new machine with a much more Our designers start every project by human interaction. On this platform the bank spending considerable time with a few end can expand the benefits it delivers in the customers to understand not only what they future.

Pascal Sobol 249 See Beyond Face Value As described, qualitative research can bring back fascinating insights from the field, yet they are not in a form that a typical organization can easily digest and act on. They usually take the form of anecdotes, photographs or individual quotes—not exactly data on which an enterprise is traditionally prepared to build a business strategy. What is crucial about inspirational research is how to interpret and use the results. In fact, translating user insights into business opportunities is the single most important—and at the same time underrated—capability in any innovation program. After all, as a business looking for future solutions, we can ask the consumer a lot Look Beyond the Industry Building prototypes enables teams to test and evaluate of questions, but we cannot expect them Often, inspiration can be found in ideas early in the process to serve up “The Answer” on the level that altogether different industries. This enables we need to base business decisions. The innovators to think outside of the proverbial consumers in question are usually not box. In particular, looking outside of an experts in technology trends, nor are they industry helps if the best practices within a up to speed on new ways to do business. given industry have led to stagnation on the Their horizon is naturally limited to their innovation front. experience of the status quo and of having When some surgeons redesigned their unconsciously adapted to it for better or emergency room operating procedures with for worse. Henry Ford’s century old quote IDEO’s help, they found inspiration in how still rings true: “Had I asked people what a Stock Car racing pit crew organizes its they wanted, they would have said faster work at the racetrack. Among other things, horses.” the team learned that the pit crew actually Instead of taking a consumer’s input works with redundant sets of tools that are at face value, an innovation team must sorted by likely usage scenarios (say, set search out patterns, commonalities and one for a flat tire, set two for replacing parts differences among the usually hundreds of of the car body, set three for suspension quotes and observations. This information failure—all of them ostensibly containing is then aggregated to a point where it opens an identical wrench among other tools). up interesting directions. None of these This saves critical time in gathering the directions are guaranteed to lead to success, right equipment when needed. Interestingly but as long as teams stay in short feedback enough, the surgeons tested this same loops with consumers, they will find out principle and found that it saved vital soon enough which direction resonates the seconds in their operations as well. They strongest in a market. implemented their own version of it.

250 Rapid and rough prototyping – the need in the market on the level of an sometimes it does not take much to bring a point across individual within the target audience. For instance, when working for a publishing house specializing in textbooks for university students, the IDEO project team discussed many possible starting points. Briefs such as “How do we sell more textbooks?” miss the point, because it would assume that both the media (books) and the business model (selling) would remain untouched, a seriously limiting assumption in times of fluid media and drastically evolving 3. Build Operating Dexterity business models. The authors of the IBM study essentially The brief we eventually agreed upon was describe “operating dexterity” as the ability “How do we better support students in their of an organization to adapt to change and its learning?” It enabled the team to safely move readiness to experiment with offer, structure, within the boundaries of the purpose of our or business models. The CEOs responding client’s organization, yet left room to explore to the study see this as a necessary new media, new ways to communicate with organizational skill. “Operating dexterity” students and to facilitate communication is thus shorthand for a whole range of among them as well. organizational skills and mind-sets, some of Having established how students learn which are crucial to bringing disruptive and what their explicit and latent needs innovation to fruition. were around this—often social—activity, the team was then able to delve into how to Find Question Zero best support students, building on not one An innovation initiative will only ever be technology, but a number of media channels as good as the question that it sets out to in which the students were already engaged. answer, or its brief. That is why it is crucial This meant a new way of doing business that a brief is shaped on the right level, for our client, but little or no learning curve meaning focused enough to yield the right for users and thus the assurance of speedy outcomes, yet open enough to leave room for adoption. unexpected, disruptive results. When shaping briefs, we often find that Failure is Essential For Iteration clients tend to roll part of an expected After bringing back interesting insights solution into the brief, which unnecessarily from the field, with qualitative data to back constrains it and leaves a team working on them up, companies can establish their value answering it with only one direction in which by prototyping and testing ideas quickly. Early to move. In our experience, the best way prototyping—albeit with crude tools—that to create a rich brief is to jointly determine allows for refining potential solutions step what “Question Zero” is in the context of the by step, is essential to evaluating how challenge. By this we mean the underlying technically feasible, financially viable, and human question, the one that asks for ultimately desirable an offering might be.

Pascal Sobol 251 Prototyping as an innovation tool is not damaging to images and careers. Yet the limited to products, but can include spaces, right kind of failure should be a requirement. services and processes as well. It is important As Seth Godin wrote in The Purple Cow, “Most that prototyping should take place early and learning, especially most organizational that innovators should only invest as much learning, occurs through trial and error. Error time as needed to answer the most important occurs whether you want it to or not. Error is question at that moment, but no more. difficult to avoid. It’s not clear that research The surgeons mentioned above learned or preparation have an enormous impact on from unlikely sources in their quest for error, especially marketing error. Error is innovation opportunities. What they did next clearly not in short supply. Trial, on the other was to prototype and iterate their way to an hand, is quite scarce, especially in some innovative solution. They built and tested organizations. People mistakenly believe that numerous ideas that failed, as was expected, one way to successfully avoid error is to avoid before finding the ideal solution. trial. We need more trial.” Often seen as negative, failure wasn’t a problem in this case. This is because they Start Small and Scale Up prototyped many ideas, so they had a number Having developed an innovative concept from which to choose and secondly, because deemed good enough to bring to market, failure occurred early on in the process. They there usually is a lot of learning still left to do immediately started prototyping potential on the path to perfecting it. In order to learn solutions and testing them out in a simulated in the real world while mitigating the risk operating room. If an idea didn’t work, they of failure, many companies have perfected found out within days or weeks, rather than the art of starting on a small scale and then months or years. This meant little time was scaling up as they go along. lost in testing, little money spent to that point 3M decided to launch the Post-It note as and little opportunity to fall in love with an a new product in 1977, but it failed because unrealistic idea. consumers had not tried the product. Convinced that the overall concept was Demystify Failure sound, a year later 3M distributed free Of course, no one wants to fail samples to residents of Boise, Idaho in the spectacularly after having spent millions in United States. Nine out of ten people who development costs. But when failure happens tried the notes said that they would buy the early, before major capital has been invested, product. By 1980, Post-Its were being sold and leads to more insights, a company has nationwide in the US The rest is history. a far greater chance of success in the next 3M managed to learn in a controlled iteration in the marketplace. setting about multiple dimensions of their Too many traditional organizations still new offering: They tested how to best consider failure to be taboo—and thus avoid advertise it, who to speak to and where to failing at all costs, including innovation. The place their products. They learned about primary problem seems to be that initiatives how the product is actually used and how that fail today tend to fail too late, which it is being received and how they could makes their failure expensive. Because improve it—all of this by focusing on one of that, all failure is perceived as bad and small town in Idaho. The “Boise Blitz”, as

252 it became reputedly known within 3M, was innovation on everyone’s agenda, to lead a very intelligent step taken to bridge the by example and to give their employees the gap between the R&D lab and a nationwide space and permission to be creative in a safe rollout, and a great example of starting small environment. That is a hard enough job as and scaling up. it is. Making an organization as innovative as The journey is indeed rather easy to 3M manages to be might seem a long way start for any leader. True to the spirit of out for most business leaders. To make design thinking, any company’s approach to innovation a mindset for all staff is not an innovation should be imagined, prototyped, easy task by any stretch of the imagination. iterated and evaluated on a small scale On the positive side though, usually no first in order to evolve into a bespoke, major structural changes are required: appropriately adapted organizational skill no re-org, no large-scale hiring efforts or before being scaled up. In fact, a few easy changed management processes necessarily experiments outlined in the side box can stand in the way of a company realizing serve as first steps. See them as suggestions its innovation potential. All that is needed on how to get the first few miles on the way to is for an inspired business leader to put New Orleans.

Starting the Innovation Journey

Many organizations wonder where or how to start becoming more innovative, user-centered, and adaptable.

Here are five experiments to try:

1. Tap the everyday experts within your organization. You already know more than you think you do. Every organization has employees who are in daily contact with customers, clients and partners. They may be sales staff, maintenance technicians, or call center employees. These are the people to whom the rest of the organization should listen closely and gather insights from.

2. Get to know a few customers yourself, one by one. Join your market research teams on home visits to your customers. Get to know a few of them and start seeing patterns emerge that point to new business opportunities. It’s rewarding, revealing, and sets an example within your organization.

3. Try out a ‘no numbers’ rule. Run an innovation initiative based purely on qualitative metrics. Learn to appreciate user anecdotes, to trust expert intuition, and to channel your staff’s passion. Think people instead of pie charts. Chances are the initiative will move faster, cover more ground, and unearth opportunities earlier than initiatives burdened with the need to justify their efforts quantitatively every step along the way.

4. Ask innovation teams to question everything. Within the purpose of the brand, your teams should be free to question every aspect of the status quo. Acknowledge that your company is not defined through the current product or service, nor through a business model. They are both just tools that help you achieve your purpose. Don’t let them study the competition, but instead let them figure out what it would take to disrupt your market. Results might be far out, but they will serve well to set a direction for you to head in.

5. Let your teams experiment early and safely. Request that any innovation initiative include some sort of prototype or experiment that shows its progress at every check-in meeting. Make it clear that you would like to see all results, including those that failed during testing, in order to talk about what the team learned. Challenge employees to discuss unfinished work with customers as soon as possible and to make potential results tangible, even if they feel half-baked. Allow for “safe” failures and celebrate eventual successes.

Pascal Sobol 253

Innovative Culture: Values, Principles and Practices of Senior Executives in Highly Innovative Companies

Joaquim Vilá 1. INTRODUCTION with my second point, innovation demands IESE Business School One of the reasons why many companies and relies on new developments: a new and institutions are so cautious about contribution to basic knowledge, a new increasing their innovative capacity is that process or a change of direction, some kind innovation represents a seemingly complex of internal development that complements problem for the senior executives who must the original new idea. Innovating today makes initiate and direct the changes that robust it easier to innovate tomorrow. innovation requires. Innovating entails The attention of many top executives transforming new ideas into tangible results. is largely focused on the urgent matters There are three important aspects to be of everyday management. Innovation is considered in this approach to innovation. often put on the back burner for, although First of all, merely coming up with new it is considered an important issue, it does ideas is not innovation; if the ideas are not not have the same priority as other more implemented, the desired effect cannot pressing concerns. If company directors were be achieved. Churning out new ideas for aware of the fact that postponing innovation the sake of it does not make us more today would undermine their ability to innovative. Secondly, when a new idea can innovate tomorrow, innovation would (or be applied without changing a company’s should) be given higher priority and create a day-to-day reality, it falls under the heading predisposition among senior executives to lay of continuous improvement rather than the foundations that will make it possible. innovation. Continuous improvement and When a senior management team innovation both make a contribution, a becomes aware of the transformations that market impact or an internal improvement, innovation requires, it identifies a series but the difference between innovation and of challenges that must be faced. These improvement is that the implementation of reflections usually address issues such as: an innovative idea requires a change of tack, • The need to protect innovation from a significant modification of the company’s potential threats that would prevent former routine. Thirdly, and in connection the company from taking off in a new

Joaquim Vilá 255 direction: management systems (like have great internal logic and are also within budget planning), chains of command reach of any management team that is willing opposed to change, organisational inertia to change, even if it means starting with and other determining factors carried over themselves. from the previous system. There are two key aspects to any • In order to be credible, innovation must organisational solution which aims to achieve produce consistent results. It cannot robust innovation in a conventional company. be a fortuitous, one-time contribution. First of all, innovation is a challenge that Innovation must become a permanent and has much more to do with human resources deeply embedded fixture of organisational management than with technical or design culture. problems. Developing the capacity to innovate • Coming up with new ideas requires a requires a paradigm shift in managerial certain attitude (thinking big, challenging strategy and in how people act. Secondly, things, seeing more possibilities than and more importantly, innovation targets problems, etc.) which in many cases is the the pinnacle of the management pyramid; exact opposite of how people have been it is a matter of transforming leadership taught to think in the corporate context. that brooks no delegation. Moving towards How can we make innovation both credible a completely innovative corporate culture and appealing to the people we work with? calls for new managerial skills and • Creativity will only flourish if there is a practices which, up until now, have not change in management style; executives been considered vital qualifications for top have to realise that the rules which govern corporate management positions. However, everyday management activities—such an examination of the working methods of as exercising bureaucratic control, senior executives at innovative companies communicating via the established chain reveals their awareness of one important of command, equating the value of a fact: that the singularity of their companies person’s idea with his/her status in the begins with a change in themselves. corporate hierarchy, and other similar rules that allowed operations to grow 2. INNOVATIVE CULTURE steadily and predictably in the past— When a company first launches an cannot be applied when innovation is on innovation process, it is usually focused on the agenda. the key performance areas within its business Faced with such a scenario, most strategy, such as product, service aspects executives tend to pull back, look away and or other business development issues. hope that the profit margin can be increased In every case, innovation is successfully by discovering a new way to cut costs. The brought to market by combining efforts rest, those executives who are willing to face in several different areas. The key is to the challenges involved in developing new spread the responsibility for innovation as capacities in the company, take comfort in much as possible rather than limiting it to the knowledge that innovation has prospered a small group of individuals or specialised in traditional companies in almost every departments. sector. The solution to the puzzle is based on As they acquire more experience with principles which, while not purely intuitive, do innovation, company directors begin to

256 see that any area of the business can be and share, the task can seem dauntingly revitalised by applying new ideas, and that complex. Values and beliefs are a part of innovation can be used to work towards a people; they have become a part of each number of goals, not just competitiveness. person, ingrained in his/her mind, and At this point, innovation ceases to be a are therefore hard to change if a direct specific responsibility assigned to one team approach is taken. Yet senior executives, in or department. The vision of immersion their daily routine and by their example—in in innovation becomes a project to make other words, the way they shoulder their innovation a broad core value for the entire responsibilities and interact, formally company. The approach becomes one of or informally, with the people around wide-scale innovation, which yields regular them—continually show what they value results. This represents a major change of in, and expect from, their co-workers. The perspective. The pursuit of management values and beliefs that comprise corporate innovation goes far beyond the initial culture are largely the result of accumulated intention of managing innovation within a experiences over time deriving from a limited area. The management soon sees the specific management style.1 This suggests advantages of creating an environment where the existence of a much easier way to everyone in the company can contribute, bring about change. The management can and creating an innovative corporate culture promote a culture favourable to innovation by becomes one of the top priorities on the changing the way they lead and interact with agendas of the senior executives and the their employees. This basically means that board of directors. organisational progress (the way leadership The most widespread notion of responsibilities are defined, different organisational culture is that it is the sum management systems, and the manner of of values and beliefs which people have integrating and coordinating management acquired over time and which dictate the practices, etc.) is achieved by recognising appropriate standards of behaviour within people’s contribution to creativity and a company. Edgar Schein, an MIT professor innovation. Clayton Christensen (1999), a famed for his valuable contributions in this professor at Harvard Business School and field, defined culture as a “pattern of basic a leading expert on innovation, reached assumptions that a given group has invented, a similar conclusion when he stated that discovered or developed in learning to cope “culture is comprised of processes, or ways with its problems of external adaptation and of working together, and of shared criteria internal integration and that have worked for decision-making [...] which have been 1 The idea of culture as a well enough to be considered valid and, employed so successfully so often, that they result of the sedimentation of management practices over therefore, to be taught to new members as come to be adopted by assumption”. time was proposed by Esteban Masifern, lecturer at the IESE the correct way to perceive, think and feel in This highlights one of the most serious Business School, in the late relation to those problems”. shortcomings of many companies—the 1980s. The conversations with Carlos Cavallé, also an How can management implement and ability to introduce organisational changes IESE lecturer, in 2007 were maintain an innovative culture? If the that facilitate the attainment of concrete instrumental in determining the importance of the behavioural directors think that culture can only be objectives while also opening up new attributes of senior executives changed by directly altering the values possibilities. Implementing management beyond their mere personality traits. and beliefs that employees have learned systems specifically geared towards

Joaquim Vilá 257 encouraging innovation is a much safer and predictable and so lay the foundations for and more solid option than attempting to an innovative culture.2 change the way people think. The best way When examining the best practices of to create an innovation-oriented culture is highly innovative companies, the executives’ not to replace executives opposed to change first reaction is to point out the unique or wait for a new generation of executives to features of their specific company. “Yes, step up whose talents and values are more that’s all well and good, but our company is in keeping with the new strategy. Companies different.” Senior executives tend to doubt the need to accept that the most effective way of feasibility of implementing the management creating the culture they want is to change practices of highly innovative companies their management practices, with a clear in their own organisations. Although it is orientation towards the desired goal. true that some of these practices are only The best tactic for creating an innovative applicable at advanced levels of innovative culture is to introduce management practices culture, the general rules for encouraging (progressively spreading to employees people to move towards innovation can at every level through various channels) be applied in almost any field. After that promote the desired innovative, analysing the management levers used in entrepreneurial and creative behaviour. By innovative companies and comparing them changing our management style (in each to those of less innovative organisations, and every aspect: how we set goals, plan, Tushman and O’Reilly (2002) noticed that allocate resources, evaluate co-workers, all innovative companies shared a similar reward and recognise, assign degrees set of management principles, regardless of responsibility and autonomy, manage of their geographic location or field of information, etc.), we are shaping corporate activity. The conclusion is that, although the culture, whether consciously or, as is often implementation of a new management style the case, unconsciously. Once again, these should be tailored to the specific needs of activities target the highest echelons of our each company, the basic principles which organisations. govern the pursuit of innovation are fairly The aim of this chapter is to outline the universal. best practices of highly innovative companies Another issue that management which any business corporation can look to teams must face is determining the most as examples to follow. I will focus on aspects appropriate approach. The innovative culture that point directly to various facets of the of companies which excel at innovation is role of senior management and leadership like a hologram. One can take a variety of styles, because I am convinced that this is the different approaches to the phenomenon and driving force behind the innovative capacity still get the feeling that they all effectively of many companies. Obviously, these case point to the same reality. It is relatively easy studies will not translate directly into specific to tell if a company is innovative by observing implications for innovation management in different aspects of its dominant culture. The every company, but the lessons that can be implication is that, although the companies 2 In another publication, I have described and discussed learned from their example will shed light described here may have used different different management on how senior executives can make their approaches and management strategies to approaches for moving towards an innovative culture (Vilá, interaction with employees more consistent promote innovation, the underlying patterns 2008).

258 of managerial logic and criteria have a great stimulating innovative capacity (Deschamps, deal in common. I believe that the solidity 2008).3 The most typical traits of a senior of the innovative nature of these companies executive’s favourable personal behaviour derives from the coherence of the rules of (as an individual) towards innovation can be the game that shape their innovative cultures analysed from several different angles. The (values, principles and practices). As I have approach I have chosen here is to analyse already mentioned, this essay does not aim what drives their efforts to spearhead the to discuss the different approaches and transformation of their companies, how mechanisms which allow a company to move they direct the progress towards that goal, towards an innovative culture; rather, my and how they face the problems that crop intention is to focus on the best practices up during the evolution towards innovation. of senior executives in highly innovative In this text I will not address the more companies. collective aspects, which are also essential for creating and maintaining an innovative 3. CONDUCT OF SENIOR EXECUTIVES IN THE AREA culture but which require a more detailed OF INNOVATION and separate analysis. Collective aspects In the course of their interactions with are those which require the coordinated other employees, senior executives give clear efforts of the management team, such as indications of their personal preferences. The the creation of a favourable environment way in which a management team interacts (creating an organisation for innovating with the rest of the organisation shapes that is compatible with the organisation the values and expectations of its workers of everyday activities) or the design and with regard to their conduct and attitude implementation of a senior management towards innovation. This performance is process that generates business and strictly analysed in the light of the senior management innovation initiatives with a management’s context of activity. The effect broad scope and potential implications for on culture is greater in situations where any area of management. I will now proceed employees understand that an innovative to describe the three fundamental pillars of approach can be more beneficial (for the actions of top-ranking executives, the example, in seeking solutions to important cornerstone of the process for inculcating problems, defining business development the values, principles and practices that strategies, evaluations when allocating will determine a company’s capacity for strategic funds, responding to unforeseen innovation and quality. opportunities, coming up with a new strategic approach when the market undergoes They are driven by the pursuit of a goal, ideal or major changes, etc.). In cases where the dream that makes sense to those who have to context calls for a management strategy make it possible governed more by the principles of everyday Senior executives act as leaders who seek operations, employees understand that it to make an impact with highly ambitious 3 Jean-Philippe Deschamps is not their place to interfere in executive initiatives that will offer unique contributions. (2008) was a valuable source of inspiration in my efforts to preferences in the area of innovation. On the same day Steve Jobs announced the pinpoint the different ways The leadership style and conduct of details of the iPad, his Apple co-founder in which senior executives contribute to innovation. senior executives is a vital factor for Steve Wozniak addressed a smaller, less

Joaquim Vilá 259 formal group at the Laxson Auditorium in enough goal for their product development Chino, California. The brilliant engineer engineers. In 1952, Ibuka wondered, “Would spoke about the late 1970s and early 80s, tape recorders be challenge enough for them, when he embodied a new way of thinking, far motivate them to use their best abilities, removed from the world of mainframes and or let them grow to their full potentials?” minicomputers, when he and Jobs helped This ambitious diligence paved the way for birth the personal-computer industry. “I ground-breaking product launches like the was turned on that little guys were going Trinitron television, the Walkman and many to do something of more value than the big others. corporations,” recalls Wozniak. “My friend Senior executives at the helm of innovative Steve Jobs… was always interested in doing companies are capable of rallying the efforts things that would change the world. He was of the entire organisation around ideals that a move-the-world-forward kind of guy.” will have social benefits and also motivate Source: http://www.successmagazine.com/ people to make their own contributions. steve-jobs-master-of-innovation/PARAMS/ Franck Riboud, chairman and CEO of Danone article/1054/channel/22 since 1992, sums up his company’s great Senior executives are strongly motivated ambition as the desire to “bring health to overcome challenges, and their efforts through food to as many people as possible”. also make perfect sense to their employees. These executives are very passionate about A challenge is a tangible goal that focuses the mission that gives meaning to their everyone’s attention on one point, and in company and to innovation. (See text box 2 many cases it is a more effective stimulus for on John Mackey of Whole Foods Market.) innovation than extrinsic incentives such as Their clarity of purpose and energy create an performance-based salary packages. (See infectious enthusiasm. The goal they pursue text box 1 on Ratan Tata.) A remarkable case is a powerful internal force that propels them in point is Akio Morita and Masaru Ibuka, and the company forward. The initial boost the founders of Sony, who expressed their is fundamental. They are attracted by the unease and concern about not having a big chance to do something unique. The analysis

Text Box 1. The Urge to Pursue a Dream

Ratan Tata started with a Dream. His dream was to provide every Indian an affordable and safe means of family transportation. What would be affordable for a middle class Indian family? At that point in time (2007), Maruti Udyog was the cheapest car at USD 7,000. Ratan Tata felt that a car of up to 1 lac rupees (100,000 rupees, roughly USD 2,500) would be affordable. So he set this goal to his engineers at the Tata Motors. “It’s a dream project for the man who has an impeccable record of accomplishing things which he dreams and the name of the car is Nano,” claimed Mr. Sunil Sinha, CEO of the Tata Quality Management Services.

It was never meant to be a 1 lac rupee ($2,500) car; that happened by circumstance. Ratan Tata was interviewed by Financial Times at the Geneva Motor Show: “I talked about this future product as a low-cost car. I was asked how much it would cost and I said about 1 lac rupees. The next day the Financial Times had a headline to the effect that the Tatas are to produce an Rs100,000 car (USD 2,500). My immediate reaction was to issue a rebuttal, to clarify that that was not exactly what I had said. Then I thought, I did say it would be around that figure, so why don’t we just take that as a target. When I came back our people were aghast, but we had our goal.” Ratan Tata had a choice to call the newspaper and correct the mistake. Instead he took it as a challenge for himself and his engineers.

Source: “The Making of the Nano”, Christabelle Noronha. January 2008. Tata Leadership with Trust. • Contributed by Preeti Sharma, Gemba-2010. http://www.tata.com/media/interviews/inside.aspx?artid=Sd75BUBmzSM.

260 Text Box 2. A Mission to Channel Innovation

John Mackey, CEO of Whole Foods Market, co-founder of the company in 1978, has pushed the company to exceptional growth and success (CAGR of 17% in sales and of 14% in profits in the period 2001-2010). In a conversation he had in April 2010 at Darden School of Business with Professor R. Edward Freeman, he reflected upon a renewed sense of purpose for himself and Whole Foods Market: “After a great deal of soul searching into some of my deepest passions about the purpose and meaning of my own life, I came to the conclusion about 18 months ago that continuing to help lead and evolve Whole Foods Market is exactly what I most want to do, and I recommitted to the company for the long term.

I have become especially excited about the potential to help improve the lives of millions of people through better education about the principles of really healthy eating and I’m helping lead these rapidly evolving efforts at Whole Foods Market. We have many exciting healthy eating and wellness initiatives in development that I believe are really going to help people live healthier and more vital lives, and I look forward to sharing them with everyone during the next few years.”

Source: The CEO’s Blog, “Darden School of Business Conversation” by John Mackey, 26 July 2010• Contributed by Dana Page, Gemba-2010. http://www2.wholefoodsmarket.com/blogs/jmackey/

of constraints, though important, takes a TV and Apple Pippin. However, Apple learned back seat and always comes afterwards. valuable lessons from its mistakes and At times, the goal that inspires the applied them to later developments. Thus, the collective efforts of the entire workforce mobile telephone developed with Motorola, is not a dream or a mission with a definite the E790 iTunes, and the Lisa computer could social contribution in mind, but an ambitious be described as unsuccessful projects, but strategy which senior executives take care to they made different contributions that were renew and reinvent over time. This is often successfully used in the revolutionary iPhone. the case of consolidated companies with a Jesús Vega, former director of human long history of innovation, as illustrated by resources at Zara-Inditex, once said, “The examples based on 3M, General Electric important thing is not to avoid the pitfall of or Procter & Gamble. The key ingredient in error but to climb out of the hole once we every case, however, is that the goal must have fallen in.” be shared in order to inspire a team effort, Senior executives are firmly committed and for that to happen it must be “tangible” to exploring new ways of operating, even in or sufficiently concrete, and it must also be the absence of pressing problems, and are appealing to those who are going to make it open to unconventional solutions and ways possible. of thinking. (See text box 3 on James Dyson, founder of Dyson.) IKEA’s management How they direct the progress towards the goal encourages employees to search for new The management style of an executive and improved ways of doing things in every team is a fundamental factor for aspect of their jobs. Even though IKEA is the understanding a company’s capacity for undisputed leader in the global furniture innovation. Senior executives in highly market, it still promotes continuous innovative companies share values that improvement and change. The people encourage experimentation and learning. working for the IKEA group often feel just as The history of Apple, one of today’s most motivated by the mission to find new ways innovative companies, is dotted with failed of achieving goals as they are by the goals attempts, such as the pioneering Newton themselves. They are inspired by discovery PDA or (though not all would agree) Apple and constantly looking forward to the next

Joaquim Vilá 261 new challenge. In a different context, Guy formal corporate procedure, as in the case Laliberté, founder and CEO of the Cirque du of Procter & Gamble’s “Connect + Develop” Soleil, refuses to rest on the laurels of past strategy or IDEO’s “Deep Dive” brainstorming success: “A typical day at the office for me technique; it can inspire an approach based begins by asking: What is impossible that I’m on strategic business partnerships, such as going to do today?” that embraced by Amazon, Nike or Federal This positive predisposition to explore even Express; or it may take the form of employee the risky options must be accompanied by initiatives supported by the management, a fundamental ingredient of any innovative like the participation in social networks culture: the acceptance of a degree of and forums practised by the employees of uncertainty and, consequently, a tolerance Sun Microsystems, or an open invitation for for good-faith errors. The words of William L. external agents—customers, for example—to McKnight, CEO of 3M from 1929 to 1949 and suggest ideas, a strategy used by many chairman of the board of directors from 1949 companies. Senior executives urge their to 1996, reveal his superior management employees not only to look outside the style: “Mistakes will be made. But if a person company but also to become keen and active is essentially right, the mistakes he or she observers and learn to identify business makes are not as serious, in the long run, as opportunities in the tangle of weak signals the mistakes management will make if it is bouncing around the market. This is exactly dictatorial and undertakes to tell those under what goes on in the business opportunities its authority exactly how they must do their evaluation process of the “Imagination job. Management that is destructively critical Breakthrough” initiative led by the CEO of when mistakes are made kills initiative, and General Electric, Jeffrey Immelt, which it is essential that we have many people with aims to generate ideas that will boost the initiative if we are to continue to grow.” company’s growth. Highly innovative companies accept the A flexible approach is vital for progressing fact that relevant information, good ideas towards the ambitious, challenging goal. and initiatives can come from sources Management at innovative companies outside the company. Keeping an open mind shows an open mind and is willing to to the outside world can become a part of work proactively and humbly to find other

Text Box 3. Urging Employees Not to Settle for the First Easy Solution

James Dyson, founder of Dyson Ltd., UK, built on a vacuum cleaner that uses centrifugal force to separate dirt from air he had invented in 1979. Having gradually stepped away from the day-to-day running of the business, he’s spent the past decade trying to create the perfect environment for innovation. He’s determined not to be an owner marooned from the workforce. “One of the most important things is I spend time, not in my glass office in Wiltshire, but going among creative people, not just the engineers, making sure they’re doing creative things. I don’t mean I go around like a policeman, but more just encouraging creativity.”

Offering praise, encouraging workers to take the challenging route rather than the obvious one, and taking an active role himself are pillars Dyson has built the company on. “What I’m talking about is people having the courage to take risks, make a mistake and be ridiculed. They should have no fear of doing something that’s not ‘normal’ or ‘sensible’ and worry I’ll clip them round the ear and say ‘don’t be so bloody stupid’,” he claims.

Source: “James Dyson”, by Ian Wallis. Growing Business Online. 1/4/2004. • Contributed by Federico Ciardelli, Gemba-2009. http://www. growingbusiness.co.uk/06959143454587923447/james-dyson.html

262 alternatives for moving forward. The leadership of Jeffrey Immelt) and companies managers of Starbucks tell their employees, whose markets are constantly evolving “When presented with negative feedback (such as Inditex, owner of the Zara chain from a customer, recognise that you may and a leader in the global fashion industry, have an opportunity to actually strengthen in which the founder Amancio Ortega has that relationship.” When employees see played a pivotal role), but also in traditional that management takes a healthy interest businesses like the Mexican cement in all feedback, both positive and negative, company CEMEX and even in much smaller appreciating its value becomes easier for the enterprises. At Metalquimia, a second- workers themselves. generation family business that manufactures Evaluation for the purpose of learning meat-processing equipment, the strong fosters innovation and enhances the ability to personal commitment of executive director achieve the established goal (Senge, 1998). Josep Lagares has been the driving force At Pixar Animation, executives like Brad Bird, behind initiatives to strengthen the company’s who can boast a string of blockbusters such capacity for innovation. He heads up the as The Incredibles, Cars and Ratatouille, treat product innovation and process committees their employees as equals. At team meetings, at Metalquimia, the entire workforce has everyone receives positive or negative received training in creative techniques, and feedback on their work before the entire he has introduced a computer application group. Everyone is encouraged to participate for managing creativity and innovation that and express their opinions about the work encourages everyone to contribute—“just of others. Brad Bird’s introduction of this another step towards my goal of socialising practice at Pixar has raised the bar in terms creativity”. In April 2010, Metalquimia of the quality of the company’s output. (See introduced Quick-Dry-Slice, a revolutionary text box 4 on Brad Bird, director at Pixar.) technology for speeding up the drying and These values, principles and practices curing process of sliced meat products which used by senior executives in highly innovative will reinforce the company’s already solid companies are not limited to a specific position in the global market.4 The executive industry or geographic region. They can director is the primary catalyst for the be found in large corporations with a process of democratising innovation within technological background (like GE under the this company.

Text Box 4. Value Based on Validity, Not Hierarchic Status

Brad Bird, director at Pixar: “From the beginning, I pushed and analyzed each person’s work in front of everybody. And they didn’t speak up. One day, I did my thing, and one of the guys sighed. I shouted, ‘What was that?’ And he said, ‘Nothing man, it’s OK.’ And I said, ‘No, you sighed. Clearly, you disagree with something I did there. Show me what you’re thinking. I might not have it right. You might. Show us.’ So he came up, and I handed him the dry-erase marker. He erased what I did. Then he did something different and explained why he thought it ought to be that way. I said, ‘That’s better than what I did. Great.’ Everybody saw that he didn’t get his head chopped off. And our learning curve went straight up. By the end of the film, that animation team was much stronger than at the beginning, because we had all learned from each other’s strengths. But it took two months for people to feel safe enough to speak up.”

4 http://www.metalquimia. Source: “Innovation lessons from Pixar: An interview with Oscar-winning director Brad Bird”, McKinsey Quarterly, April 2008 • Contributed com/productes. by Edinardo Figueiredo, Gemba-2010. http://www.mckinseyquarterly.com/innovation_lessons_from_pixar_an_interview_with_oscar- php?idm=3&subpagina=20 winning_director_brad_bird_2127

Joaquim Vilá 263 How they deal with adversity encapsulates the company’s positive As with any transformation of the obstinacy, perseverance and determination status quo, innovation entails dealing with to attain goals and never give up. However, unforeseen events. The reactions of senior this persistence is tempered by limits executives to difficulties that the company and principles that make it balanced and must overcome as it pursues its goal set financially viable for the business (Ingvar an example for the other employees by Kamprad, founder of IKEA, in his “Testament revealing the values and preferences of the of a Furniture Dealer”). This willpower management, and their response therefore is considered more effective at the team has a direct effect on the company’s level, where there must be mutual trust innovative culture. and general consensus before coordinated, Senior executives are persistent and show decisive action can be taken. unwavering support for an initiative even At Amazon, the management encourages when the early results are disheartening. employees working in areas of innovation In the early years of Sony’s history, Akio to pursue ideas and concepts even if they Morita and Masaru Ibuka were warned by do not yield short-term results. “You need their accountants that they were investing to be willing to be misunderstood for a long too heavily in new developments and even period of time. Innovation is hard for large putting the company’s financial viability at companies because you need to be long-term risk. The executives’ response was: “Just oriented.” Commenting on the need to think be patient a little longer and we will make a long-term, Jeff Bezos, founder and CEO of fortune.” Another example of perseverance Amazon, stated with conviction, “If you take a is Carlos Sumarroca, who refused to listen short-term approach, then you are constantly to a scientific/technical team’s repeated stuck with trying to deal with minutiae. I hate advice to scrap his project; today, Agromillora to see someone ‘sticking to their knitting’ Catalana is one of the world’s leading tree because they’re incapable of taking chances.” and rootstock suppliers. In highly innovative companies, senior In highly innovative companies, the phrase executives are visibly self-confident, but “it’s impossible” does not exist. When faced they also give clear indications of having with recurring failures, they simply say, confidence in the work of entrepreneurs. At “We don’t know how to do it right.” Some of 3M, an entrepreneurial spirit is encouraged the solutions that are now part of the IKEA by the application of a fundamental principle: business model came about thanks to dogged freedom to pursue ground-breaking ideas in attempts to solve problems that could have the workplace. Researchers at 3M can spend sunk the company. Their obstinate insistence up to 15% of their time working on projects on keeping costs low and finding an original of their choice, with no interference from solution to a transport strike led them to the management. Thanks to the atmosphere of ground-breaking idea of having customers freedom created by this policy, a 3M scientist transport and assemble the furniture in their named Art Fry was able to develop the own homes. famous Post-It note in 1973. Innovation requires persistence. “If Executives in charge of innovative at first you don’t succeed, try, try and try companies are willing to step outside their again.” The IKEA motto, “Never say never comfort zone to make innovation possible.

264 Text Box 5. Senior Executives Are Willing to Change Even Themselves

“Innovation should be at the basis of everything we do, not only the product formulation, but everything that touches the consumer. It’s the concept of innovating in all the ways that touch the consumer life. P&G has moved from a definition of innovation, which was probably a bit narrow, focusing on the product, to a concept of innovation that is a lot wider.

Innovation is becoming more demanding and pace is becoming shorter. We will never have enough resources, enough ideas internally to deal with it so quickly and broadly. P&G has set a great goal: to get about half of the ideas from outside. When you’ve made that decision, you need to change the way you work and make those connections. People have to want to come to you with an idea, they have to believe that you’ll listen and give them a chance. They have to believe that you’re prepared to change some of your processes to accommodate new ideas.”

Gianni Ciserani, Vice President and General Manager of Procter & Gamble UK and Ireland

Source: Brand Strategy, Published: 01 November 2005 “Learning to Listen to New Ideas: Interview with Gianni Ciserani” • Contributed by Andrey Lankovich, Gemba-2008 and Manuel Lapeira Gemba-M-2010. http://www.mad.co.uk/Main/News/Disciplines/Marketing/Articles/5f42852a91a640 7db37cf0114d285395/Gianni-Ciserani-the-Italian-job.html

Their confidence in the benefits of innovation, tangible commitment of corporate leaders and their commitment to making it possible, ends up becoming a necessary ingredient are evidenced by the fact that senior in both the transition towards and the firm executives are willing to consider initiatives consolidation of an innovative culture. which entail changes that may affect them Jeffrey Immelt, GE’s CEO, fosters GE’s personally, altering their own quality of life commitment to innovation by leading through in the company. They do not hide behind the example. As the world is resetting itself, shield of hierarchical authority. They are just Immelt says that his role is to turn fear another cog in the machine, subject to the into confidence.5 At a speech at Dartmouth same rules as everyone else. When Sony College he offered a grounded playbook decided that it needed to study the unique for leadership in the tough present. “Good traits of the world’s most advanced consumer leaders,” he said, “are very curious, and they electronics market firsthand, Akio Morita spend a lot of time trying to learn things.” moved to New York with his entire family in Immelt tries to set aside 20% of his time for July 1963—an eloquent example of personal thinking and re-conceptualising. He also said commitment. that “every innovation leader at GE will meet When the leaders of highly innovative with me at least once, and a great part of my companies are the most tangible examples job is that I get to go places to pick up that of personal commitment, it creates the next best idea”. Yet, like his predecessor Jack necessary climate for bringing about a Welch, known for deep dives into operating change in employee values and beliefs that details, Immelt said he is involved with 40 will favour innovation. Senior executives face projects at GE that represent “imagination adversity with courage and bravery, a clear breakthroughs”. He has developed his own reflection of their high self-confidence. Their guidelines to judge new opportunities and 6 5 http://ge.ecomagination. commitment leads them to play an active role progress. Good leaders manage by setting com/ and http://www. in innovation governance, supervision and boundaries with freedom in the middle. “The fastcompany.com/blog/ lewis-perkins/semantics- management, and their intense involvement boundaries are commitment, passion, trust, sustainability/sustainable- and discipline in spearheading the process and teamwork. Within those guidelines, strategy-goes-mainstream is understood by everyone as proof of their there’s plenty of freedom. But no one can 6 http://www.fastcompany.com/ magazine/84/pr.html serious sense of purpose. Logically, the cross those four boundaries.”

Joaquim Vilá 265 Jeffrey Immelt, in a conversation with Fast in situations involving innovation, whether Company editor-in-chief John A. Byrne in the consciously or unconsciously, has a direct CEO’s conference room at GE headquarters effect on the employees’ perception of the in Fairfield, Connecticut, was asked: “What values and beliefs they are expected to have you learned so far in the job as GE’s embrace, and so their actions determine the CEO?” Immelt responded: “One of the things degree to which the corporate culture is more Jack Welch said early on that I think is totally or less favourable for innovation. The task of right is: It’s a marathon. It’s not a sprint. All mobilising employees to pursue innovation these books about the first 90 days are kind begins with a change in attitude and conduct of rubbish in many ways. You have to have at the highest levels of authority in our a plan. You have to stick with it. You have to organisations. modify it at times, but every day you’ve got A study based on the role of senior to get up and play hard. Jack used to see executives in highly innovative companies me running around, even after he left, and suggests that their conduct can influence the he’d say to me, ‘Remember, it’s a marathon. creation of two important but very different Ten years. Fifteen years. You’ve got to get kinds of innovative cultures (Vilà, 2008). The up every day with a new idea, a new spin, first and most obvious is an innovative culture and you’ve got to bring it in here every day.’ that is largely defined by the personality of I always kind of knew that, but until you’re a founder (or a small team of founders) with right in the middle of it, you never get it. His a strong entrepreneurial spirit. The values advice was right. It’s the sustained ability to and beliefs of companies like Apple or IKEA change that really counts.” are closely bound up with the actions and traits of their respective managements. It 4. IN CONCLUSION would be impossible to conceive Apple’s Innovation requires making changes in early innovation without Steve Jobs, or IKEA the way a company works so that new ideas without Ingvar Kamprad, or Sony without can be transformed into results. These Akio Morita and Masaru Ibuka. The second changes must be understood and supported kind is a culture that transcends the figure by the majority of the company’s employees. of the founder and endures over time. We Moreover, innovation today is not confined to might say that in this case the values have the technological sector or to new product become part of the company’s DNA; they have launches, and building a solid support base been institutionalised. Does anyone know the for innovation is therefore a priority for senior names of the founders of companies like 3M executives. However, modifying values and or Danone? In the case of many companies beliefs to create a favourable environment for that were widely acclaimed as innovative innovation seems like an arduous task at first enterprises in their early years, it is difficult glance. to know who the current senior executives The organisational culture of highly are. A key responsibility of every senior innovative companies suggests that the management team has become the renewal most effective tool for changing mindsets is of the cornerstones on which the corporate management style, and the behaviour of the culture rests. I believe that the actions of company’s top executives is a crucial factor. senior executives (their values, principles How senior executives conduct themselves and practices) when setting ambitious goals,

266 supervising the progress towards those goals BIBLIOGRAPHY and facing the adversities that crop up on Ch r i s t e n s e n , C. M. (1999), “What Is an Organization’s Culture?”, the road to innovation are fundamental in Boston, MA: Harvard Business School Publishing, Note 9, pp. 399-104. determining whether a culture regenerates De s c h a m p s , J.-P. (2008), Innovation Leaders: How Senior Executives Stimulate, Steer and Sustain Innovation, New York, NY: John Wiley itself or fades over time. and Sons. Sc h e i n , E. (1988),Organizational Culture and Leadership, San It is imperative that a company’s senior Francisco, CA: Jossey-Bass Publishers. executives understand and accept their Se n g e , P. M. (1998),”The Practice of Innovation”, Leader to Leader 9, Summer, pp.16-22, also in Society for Organizational Learning. fundamental responsibility in a process Tu s h m a n , M. L., and C. A. O’Re i l l y III (2002), Winning Through Innovation: A Practical Guide to Leading Organizational Change and as critical as promoting innovation. The Renewal, Boston, MA: Harvard Business School Press. Vi l á , J. (2008), “SettingUp Innovation Management: Roadmap perception of employees makes it impossible towards a Fully Innovative Culture”, Paradigmes, 0, Departament to delegate any aspect of this responsibility. d’Universitats, Indústria i Empresa, Generalitat de Catalunya.

Acknowledgements My gratitude to Esteban Masifern, Carlos Cavallé and José Antonio Muñoz-Nájar for their suggestions on specific aspects which have substantially influenced the focus of this chapter; to Dana Page and her IESE Gemba-2010 team for their contributions on Whole Foods Market; to Edinardo Figueiredo and his Gemba-2010 team for their contributions on Pixar; to Preeti Sharma and her Gemba-2010 team for their contributions on the Tata Group; to Joost de Kinderen and his Gemba-2010 team and to Ariel Kestens and his Gemba-2009 team for their contributions on IKEA; to Federico Ciardelli and his Gemba-2009 team for their contributions on Dyson; to Andrey Lankovich and his Gemba-2008 team and to Manuel Lapeira and his Gemba-M-2010 team for their contributions on Procter & Gamble.

Joaquim Vilá 267

Economic development revisited: How has innovation contributed towards easing poverty?

Manuel Mira Godinho 1. Introduction correlated with progress towards economic ISEG (Technical University of Lisbon), UECE The literature on the global distribution prosperity. of income highlights how poverty worldwide However, as there are several has declined over recent decades. Sala-i- methodological drawbacks to the way Martin (2006) summarized his findings by poverty estimates are carried out, one must stating that poverty rates “in 2000 were be careful over their interpretation. The between one-third and one-half of what research quoted above refers to a poverty they were in 1970 for all four [poverty] line set at $1 a day in contrast with the lines. There were between 250 and 500 World Bank, which has been working with million fewer poor in 2000 than in 1970”. alternative poverty lines. International These findings have been confirmed by poverty lines are set close to the mean of more recent research. Pinkovskiy and the poverty lines identified in the poorest Sala-i-Martin (2009) pointed out that the countries. For this reason, it is difficult to percentage of the world population living argue in favour of just a single poverty line. on less than $1 a day (in PPP-adjusted 2000 Over the last few years, the World Bank has dollars) declined from 26.8% in 1970 to mostly been working with a poverty line 5.4% in 2006. of $1.25 a day while also having recourse In sum, the message from the literature to four other alternative thresholds, $1, on the evolution of global poverty shows $1.45, $2 and $2.5 a day respectively (Chen that, should the observed trends continue, and Ravallion, 2008). If one takes this last poverty will probably be eradicated on threshold, which is certainly adequate for planet earth by the middle of the present the many developing countries that are not century. Such a message is of course among the poorest, we quickly find that the good news. Particularly if we assume 1990 figure of circa 3 billion of world poor that underdevelopment is a synonym did not undergo any decline through 2005. In for extreme poverty in the developing any case, the available research does seem world, we can readily accept that the to confirm that poverty declined worldwide, observed decline in global poverty is highly where not in absolute numbers (even

Manuel Mira Godinho 269 though much research confirms precisely 2. How has the academic literature that) at least in relative terms, as the world on economic development approached population has been continuously growing innovation? from about 5 billion in 1990 to almost 7 billion The early days in 2010. Despite being intimately inter-related These observations of such a worldwide in practice, innovation and development trend enable us to raise several important have to a large extent been dealt with as questions from an economic development two separate academic topics. Economic standpoint. The central question relates to Development emerged and evolved as an the possible causes behind such a positive autonomous field of study essentially after trend. Certainly many factors are involved World War 2, as the implementation of the in accounting for what has been observed: Marshall plan in Europe and the newly- rising literacy, better health coverage, an gained independence of the former European expansion in trade, the adoption of innovation colonies raised the issue as to which were and potentially- industrial policies and the best developmental policies for the improvements to institutions being among new context. Regarding economic analysis the most important of such factors. In this of Innovation, many empirical studies on chapter we are specifically interested in technological change and innovation have this wider context and discussion as to been carried out since the 1960s, in the the role played by innovation in economic wake of Solow’s work, with the introduction development. We will focus upon possible of this topic as an autonomous subject in future roles for innovation in further pushing undergraduate or graduate curricula in effect back global poverty and bringing about since the 1980s. development worldwide in the next few For many years, the literature on economic decades. development did not even mention the word Keeping these questions in mind, innovation. As a matter of fact, the equivalent the present chapter unfolds into three terms that dominated that literature until sections. Section 2 provides an account of a few decades ago were technical progress how the economic development literature or technological change. This is ironic as has advanced and dealt with innovation, Joseph Schumpeter, best known for being the identifying what lessons one might derive first academic to systematically conceive of from the many different perspectives that innovation, published a book in 1912 entitled have emerged on the interrelationship precisely The Theory of Economic Development between development and innovation. Section (Schumpeter, 1912). In this work, he began 3 then reviews the innovation literature and by putting forward a model in which the its approach to economic development from a economy operated in a circular flow. It was rather symmetrical standpoint to the previous the introduction of innovations by pioneering section. Finally, section 4 summarizes the entrepreneurs that enabled the economy main topics dealt with throughout the chapter to move out of the initial static equilibria of and sets out a forward looking perspective the circular flow. Indeed, it was also within on how innovation and development may this sequence that creative destruction, be expected to interact over the next few brought about by the introduction of radical decades. innovations, generated the dynamics of

270 sustained by Marxist authors such as Dobb For many years, the literature (1951). “ Soon, however, there was a departure on economic development did from these views, perceived as too simplistic in assuming the economy to be mono- not even mention the word sectorial. The debates rapidly moved on to the problems of balanced versus unbalanced innovation. As a matter of growth and the structural composition of the economy. Lewis (1954) put forward his fact, the equivalent terms that dualistic model of a two- sector economy, composed of a traditional and a modern dominated that literature until a sector. The traditional sector coincided with agriculture in rural areas while the few decades ago were technical modern sector essentially coincided with the modern industries concentrated in urban progress or technological areas. Nowadays, we would state that the modern sector is the carrier of innovations change into the economy. Trickle-down effects ” from the modern to the traditional sector were the expected drivers of modernization and economic development. The views on the business cycle. However this insight of this sort of inter-sectoral dynamics were Schumpeter was not carried over into studies researched further by Hirshman (1958). on economic development produced in later According to this author, the critical aspect decades, possibly as such a view was seen of development was not so much the saving as more applicable to mature capitalist and investment rates but the actual ability economies than to poorer developing nations. to mobilize entrepreneurial capabilities. In his view, existing entrepreneurs needed Balanced versus unbalanced growth: searching encouragement in order to concentrate for the development engine their investments on specific sectors whose Rather than being inspired by backward and forward linkages would Schumpeter, early development theory was generate leverage effects throughout the influenced by Keynesian growth models. In whole economy. This emphasis on the these earlier approaches, the capacity to economic structure was later significantly raise saving levels so as to finance capital expanded by perspectives focusing on the accumulation was seen as a key condition for relevance of the international specialization growth to take place (Domar, 1946, Harrod, of the different economies. 1948). From this perspective, economic At odds with the dualistic and structuralist modernization and progress depended views, the proponents of balanced growth upon the possibility of raising savings and (Singer, 1952, Nurske, 1953) claimed that investment rates, an objective unachievable development required bringing about a through policy measures. A similar emphasis coordinated expansion of several sectors. As on the accumulation of tangible capital was markets are limited in developing economies

Manuel Mira Godinho 271 and as overall output growth depends on related to human needs. Amartya Sen existing demand, the balanced growth became the leading exponent of this group proponents stated that the existing sectors of approaches, given his proposition that had to co-evolve to generate mutual demand the critical aspect of development was the large enough to provide the necessary freedom of individuals to do or to become leverage for overall economic growth. This something. This right of access could was regarded as particularly important as only be achieved when individuals were developing countries were seen as having equipped with capabilities appropriate for only limited opportunities for exporting to an implementing their choices (Sen, 1980). international market dominated by the OECD It was within this qualitative set of economies. approaches that an influential book emerged It was this last insight that led to another entitled Small is Beautiful (Schumacher set of inter-related approaches within the 1973). The book brought to the debates on field of economic development. Prebisch development not only the idea that economic (1950), based at the United Nations Economic growth might not be a central objective, Commission for Latin America, formulated but further suggested that growth might his thesis that developing countries had be harmful and, perhaps best avoided by to promote import-substitution policies societies. These ideas originated within an as the world had evolved into a centre- intellectual climate rejecting the dominant periphery relationship in which developing prevailing materialistic culture of advanced nations were condemned to export raw capitalist economies, in conjunction with a materials and primary goods to rich nations, growing global perception as to the limits while importing capital goods and other of growth imposed both by environmental technology-rich imports from the latter. degradation and by limited stocks of non- Protectionism was needed to ensure that renewable natural resources (Meadows et al., domestic markets could expand and exploit 1972). In his book, Schumacher put forward economies of scale—a critical characteristic the idea that many modern technologies of the most advanced technologies of the day. were harmful and that societies had to gain These views crystallized afterwards to form by sticking to smaller-scale technologies, what became dependency theory, expounded which might be either traditional, or possibly upon by authors such as Furtado (1973), intermediate, technologies. Such intermediate Frank (1975) and Amin (1973). technologies were portrayed as more productive than traditional technologies Which technologies are best for developing but with a lower capital intensity and much countries? less damaging to the environment than Since the 1970s there were, however, modern scale-intensive technologies. several signs indicating progressive Schumacher’s ideas led to the establishment discontent with the direction of development of the intermediate technology movement theory over the decades. Internally, there that branched out into two streams, one were those such as Seers (1969) who within a developing context, with many contested the dominating growth of fetishism, locally- based experiments with appropriate calling for academic analysis of development technology implemented over the years in to turn instead to qualitative aspects more poorer countries, and another within the

272 developed economy context, with the search known for books on strategy and knowledge for environment-friendly technologies. It management, in 2004 published The Fortune must be stated that Schumacher’s work had on the Bottom of the Pyramid: Eradicating very important earlier roots in the thinking Poverty through Profits. The bottom of the of Mohandas Gandhi. India’s independence pyramid (or simply BoP as it became known) leader had advocated small, local-based is the 4 billion poor living worldwide on less technology as a means for Indian labourers than $2 a day. Basically, Prahalad’s idea to become self-reliant and able to compete was to adapt and integrate the solutions with the large-scale technologies deployed by of the past—development aid, subsidies, the British. In fact, large scale technologies government support, exclusive reliance on are typically centralized and, as such, were deregulation and the privatization of public used by the colonial power as a way of assets—within a broader market-based concentrating production and imposing prices approach. He made a call “to mobilize the on indigenous populations. investment capacity of large firms with the This intermediate (or appropriate) knowledge and commitment of NGOs and technology perspective is convergent with the communities that need help” through the Amartya Sen’s perspectives on individual co-creation of unique solutions. Thus, in this capabilities and self reliance. Appropriate view, the poor were not seen as a passive technology is regarded as empowering the market upon which business firms impose poor by allowing greater individual and local existing products, but rather as an active part community autonomy while simultaneously of the innovation process itself, which should respecting the environment. It was in keeping involve multinational national corporations with these perspectives that radical views (MNCs) in the co-creation with them of new were advanced by thinkers such as Vandana products adapted to their needs and wallets. Shiva (1992, 2000). In her 1992 book, she Prahald’s approach stimulated an important distilled criticisms made in respect of what is stream of literature focusing on: 1. how the termed the green revolution. While many have poor should be involved in the co-creative defended the achievements brought about by process for their own benefit (e.g. Ramani et the green revolution through the application al., 2009; Ghazi and Dusyters, 2009); 2. MNC of modern science to genetically recombining corporate social responsibility in the Third the existing varieties of agricultural species, World (e.g. Rangan et al., 2007); and 3. specific many others have criticized it on social, case studies that show how MNCs profit from political, health and environmental grounds. a global market worth $5 trillion, highlighting The green revolution represents a fascinating evidence on many important pro-poor case-study for discussing how innovation innovations.1 In a way, the literature on BoP impacts on development paths and how innovation goes beyond the older literature on technological choice is a current problem technology choice (e.g. Stewart, 1978), which 1 In this regard, the “Special that policies and societies should take into tended to conceive of the option between Report on Innovation in Emerging markets” published consideration. endogenous (traditional) technology and by The Economist in its 17th It is interesting to note that the foreign technology as alternative paths, as the April 2010 issue, is highly recommended as it provides intermediate technology views have more newer approach emphasizes the integration many interesting examples recently diversified into quite a different of efforts made by the local poor in developing of pro-poor (or by-the-poor) innovations. perspective. C. K. Prahalad, who was well countries and (mostly foreign) MNCs.

Manuel Mira Godinho 273 Has development economics developed? much empirical work has been produced Apart from the recent (qualitative) about successful instances of development contributions highlighted in the previous and catch-up in recent decades, providing paragraphs, most research on development valuable insights into the strategies advanced economics over the last two decades has for effectively learning and incorporating displayed an analytical character, more innovation into the development process. It is concentrated on technical problems than precisely to this last stream of literature that on the actual challenges of development. we turn in the next section of this chapter. This happened not only because the old development economics was discarded by 3. Innovation, learning and catching up: new mainstream economists as methodologically perspectives on economic development unsatisfactory, but also because the lack of This section offers a sort of mirror advancement in developing countries helped view of the previous one that reviews to make policy makers there grow weary in the research on innovation relating more the face of the excessively normative and directly to economic development. It starts impractical nature of the existing theories. by briefly presenting the main concepts of As a result, in recent years, a significant the innovation literature before highlighting percentage of research on development the approaches to technology transfer and economics has followed a different route, technological learning within a development especially under the auspices of the new context. Finally, it provides a summary growth economics, as a continuation and of the approach to catching up, in which refinement of the economic growth models innovation is seen as a central aspect to that Robert Solow and colleagues had countries attempting to swiftly move out of put forward in the late 1950s and 1960s. underdevelopment. Lundvall et al. (2009) provide an interesting account of this evolution, concluding that From innovation as a process to innovation as “currently mainstream economics tends a system to use developing countries’ problems as Innovation has been defined as the first offering interesting opportunities to make practical application of an invention. Normally, use of advanced theoretical models and that application takes place in an organized econometric tools while the interest in market in which innovating firms introduce understanding the structures that lie behind new products or supply already existing underdevelopment and the mechanisms that products through using new processes. As might trigger development tend to end up as Fagerberg (2005) pointed out, “To be able to being of secondary importance”. turn an invention into an innovation, a firm However, development economics has not normally needs to combine several types of exclusively moved along an analytical path. knowledge, capabilities, skills and resources. On the one hand, the perspectives opened For instance, the firm may require production up by Amartya Sen led to an important knowledge, skills and facilities, market reconsideration of what exactly is meant by knowledge, a well-functioning distribution development, concentrating on the relevance system, sufficient financial resources and so of the freedoms and capabilities of both the on.” In this view, innovation is essentially a individual and the society. On the other hand, knowledge-intensive process.

274 by technological opportunities, led to the The forces behind innovation suggestion of a science and technology-push “ model of innovation. These two contrasting have been divided into two main views on innovation came to be seen as complementary and later were integrated into groups of factors associated the interactive model of innovation (Freeman, 1979) and elaborated in the recursive chain- especially with market link innovation model (Kline and Rosenberg, 1986). opportunities and technological It was in this theoretical sequence that systemic views of innovation emerged, opportunities suggesting the concept of an innovation ” system. The innovation systems literature (Freeman, 1987 and 1995; Lundvall, 1992; Nelson, 1993; Edquist, 2004; Malerba, 2002) The forces behind innovation have has attempted to integrate the forces of been divided into two main groups of demand with science and technology in a factors associated especially with market wider, systemic, context, in which different opportunities and technological opportunities. actors and institutions with a role in The market opportunities argument was innovation interact. This view considers the formalized into the so-called demand-pull introduction and adoption of innovations to innovation model. In this model, innovation be a complex process stemming from the is stimulated by needs such as illnesses coordination of efforts between a diversity of or the search for more energy-efficient stakeholders. Furthermore, this approach processes for which the market has yet to has pointed out that the innovation process provide satisfactory solutions. This view was is strongly affected by historical trajectories argued in a book, Invention and Economic and by normative environments -- i.e., it Growth (Schmookler, 1966), based on the has demonstrated that innovation is an study of historical time-series of US patents, institutionally embedded process. The investment and production from around the innovation systems approach builds upon not turn of the 19th century through to the 20th only the simpler models of the innovation century. Such a view came in for criticism process, which were briefly reviewed from Mowery and Rosenberg (1979), who above, but also on the S&T system concept claimed that not all innovations stem from developed in the 1960s as well as the old and needs put forward in the marketplace. modern institutionalist schools. 2 An internet search carried out Specifically, these authors argued that many In recent years, this innovation- systems in mid-2010 of the “National Innovation System” concept, innovations, in particular in the industrial approach has fed through to the analysis brought about 742,000 results sectors that emerged in the second half of economic development in two streams in Google, while the search for th the equivalent “National System of the 20 century such as electronics, of analysis. Firstly, by putting forward the of Innovation” expression tended to stem from the application of national innovation system concept,2 which brought about a further 266,000 results. Together, this scientific discoveries or from the unexpected highlights the need for individual actors represents more than 1 million results of technological research and (firms, consumers, universities, financial references to the concept in documents available on-line! development. These innovations, driven operators, civil servants, intermediate

Manuel Mira Godinho 275 organizations...) coordinating their efforts though with significant limitations. A common through collective strategies and forward- view by the mid-1990s was that FDI was an looking visions presented at the national effective means of transferring innovation level. This concept has been applied to a but not necessarily the innovative capabilities huge array of economies, initially to mature themselves (Lall, 1996). economies but increasingly to emerging These technology transfer sources were economies and many poorer developing extensively discussed in relation to the cases countries (for example, see Arocena and Sutz, of several successful newly industrializing 2000; Gu and Lundvall, 2006a and 2006b; economies. Analyzing the four East Asian Joseph 2006; Lastres and Cassiolato, 2005; dragons (South Korea, Taiwan, Hong Kong Lastres, Cassiolato and Maciel, 2003; Liu and Singapore), Hobday (2000) pointed out and White, 2001; Oyelaran-Oyeyinka, 2006; how different mechanisms worked effectively Viotti, 2002). Secondly, as this approach has in each case. In the case of South Korea, evolved into the analysis of learning systems, several of the Korean chaebols started the focus has moved on to the mechanisms by subcontracting production capacity behind the production, adoption and diffusion as OEMs to large Japanese corporations of new productive knowledge, which are of before next proceeding to produce design course critical for developing economies. To a and development while still supplying certain extent, this second stream of analysis finished goods as subcontractors, before connects both with the older literature on later entering into merchandising and technology transfer as it looks into sources selling their products under their own of technology within a development context brands worldwide. This sequential process and with the more recent literature on allowed them to absorb critical know- technological learning, both of which are how from their contractors and acquire briefly reviewed in the two subsequent points. innovative capabilities in product and process engineering. In contrast to Korea, in the Technology Transfer Taiwanese case the smaller electronics In the older literature on technology and IT firms of this country focused mostly transfer, developing countries were portrayed on importing technology through licensing as followers, to a greater or lesser extent foreign technology, a path with a certain expected to passively absorb and adopt resemblance to that followed by Japan a few innovations pioneered by leading economies. decades earlier (Freeman, 1987). To this end, all they had to do was to tap A relevant recent development in these into the sources of foreign technology, of perspectives on technology transfer has which the most important was the import of been the analysis of global value chains capital goods.3 Other channels consistently (GVCs) (Ernst, 2001; Kaplinsky, 2005). This analyzed by the technology transfer literature analysis provides evidence and insight on included foreign direct investment (FDI), how developing countries and their domestic joint-ventures, technology licensing and companies are involved in global supply subcontracting by original equipment chains. A central topic of this perspective 3 This view brings us back to the problem addressed by manufacturers (OEMs). Concerning FDI, has been the governance mechanisms of earlier development models: this has generally been seen as having a the GVCs (Gereffi et al., 2005), assessing the ability of macroeconomic policy to optimize the savings positive role in the transfer of know-how, with which statute and in which operations and investment rates.

276 (assembly, design, marketing…) developing integrate these elements in an enormously country companies participate in the GVCs. variable range of different production It should be noted that the focus systems” (Bell and Albu, 1999). on the need and interest of absorbing Much of this research on technological foreign technology contrasts considerably learning began by analyzing the mechanisms with certain perspectives on economic of technological accumulation at the development that for several decades individual firm level, specifically looking influenced many countries, namely the into large-scale companies from countries structuralist and dependency schools such as Argentina, Brazil, Mexico, South that advised national governments and Korea and India (e.g. Dahlman and Fonseca, developing economy companies to rely as 1987; Katz, 1985). The focus was on how much as possible on their own resources individual companies organized their process and capabilities rather than on foreign of capability- building through learning by know‑how.4 doing, combined with endogenous R&D. More recently, however, the research on Technological Learning technological learning evolved into analysis To a certain extent, the literature on of the more complex structures in which technological learning in the developing developing country companies interact world context provides an integration of the with suppliers, customers and specialized more interesting aspects of the apparently knowledge-generating organizations, such conflicting approaches that highlight the as universities and R&D institutes. Thus, relevance of external and internal sources of interest moved on from the realm of the technological development. individual company to analysis of networks Technological learning has been defined or clusters. According to Bell and Albu (1999) as “any process by which the resources for such combinations of internally organized generating and managing technical change capabilities with external knowledge (technological capabilities) are increased resources “have come to be described as or strengthened” (Bell and Pavitt, 1993). industrial innovations systems, technology This view portrays technology as much systems or knowledge systems”. more than machinery-embodied knowledge In this systemic context, convergent to and instead has focused on the cognitive that put forward by the innovation systems aspects of the learning process, stating that literature, technological learning is seen as a “technology is a... bundle of knowledge, dynamic process of capability acquisition and with much of it embodied in a wide range development, with the success of this process of different artefacts, people, procedures depending on both historical trajectories and organizational arrangements. These and on the institutional setting in which the 4 One of the corollaries of these more inward-looking embodiments of knowledge include at least: process occurs. Furthermore, in contrast to perspectives was that economic product specifications and designs, materials the idea of technology absorption through development had to be balanced with the simultaneous growth and component specifications and properties; the importing of capital goods, technological of all economic sectors as the machinery and its range of operating capabilities are not seen as the result of a developing countries could not overly rely on specialization and characteristics; together with the various single occurrence or event but as a time- the opportunities presented kinds of know-how, operating procedure dependent process associated with a long- by a trading system largely dominated by OECD countries. and organizational arrangement needed to term purposeful organization of efforts by

Manuel Mira Godinho 277 firms and other relevant actors in the national views such as those put forward by W. innovation system. W. Rostow (1960). Rostow stated that all countries have to evolve through pre- Catching Up determined stages of growth, with developing Catching up refers to the ability of a given nations expected to mature along similar country to reduce its productivity differential lines to those of the US or the UK over vis-à-vis the leading economies over a given the 19th and 20th centuries. According to historical period (Fagerberg and Godinho, Rostow, the economic development problem 2005). The catching-up literature has basically related to the capacity to mobilize stressed that endogenous and exogenous the resources necessary for the take-off from factors combine in triggering productivity backwardness to modernity. The rejection of rises. The historical antecedents to the Rostow’s scheme to a certain extent echoes catching-up literature stretch back to early in the arguments reviewed earlier about the the 20th century, with the work of Thorstein need for developing countries to encourage Veblen on the German catch up. However, and deploy appropriate technology. However, it more systematic contributions took place should be noted that the research on catching concomitantly with the early literature up and the work of Gerschenkron himself do on development and economic growth, not impose any need for countries to evolve particularly the work of Gerschenkron (1962). through similar stages of development with Gerschenkron adopted an essentially catching up linked to the conditions necessary optimistic view about the possibilities of for reaching (and eventually surpassing) the countries evolving out of underdevelopment, productivity levels of the best performing suggesting that the more backward a country economies in each historical period in a is, the higher its potential for a fast catch-up relatively short period of time. process. This paradoxical view was seen as One possible reason for suspicious possible as underdevelopment originates a attitudes towards catching-up theory is the tension between the existing backwardness sheer frustration felt by both academics and and the promises offered by economic policy makers in the developing world given development. Such tension would facilitate the gigantic difficulties and backlashes faced a quick rise in the investment rate and a in overcoming underdevelopment. However, concentration on the rising industries and it should be pointed out that there are certain technologies. This view of Gerschenkron has variations within this approach ranging been extensively tested by many econometric from the more positive views that accept the studies, analyzing the negative relationship feasibility of technological leapfrogging, given between initial GDP per capita and its rate of certain windows of opportunity (e.g. Pérez growth for samples with a large number of and Soete, 1988), to other views that have countries (e.g. Baumol, 1986; Lucas, 1988; emphasized the many existing barriers and a Barro, 1991; Barro and Sala-i-Martin, 1992; very diverse set of pre-requisites, especially Quah, 1993). in relation to the need for prior technological Despite its essentially optimistic accumulation over lengthy periods of time outlook, for many in the developing world, (Pavitt, 1985). the perspective on catching up has been The mainstream catching-up literature negatively associated with linear historical has focused precisely on these latter

278 Furthermore, and also in accordance Some of the most influential with Gerschenkron’s insights and earlier “ approaches such as Veblen’s (1915) analysis empirical research on recent of the German catch-up, most research on technology gaps has stressed how cases of catching up converges catching-up candidates have to meet certain institutional pre-requisites. Abramovitz around findings within the (1994) pointed out that aspiring economies should combine technological congruence framework put forward by with an indispensable social capability. By technological congruence, he meant the economic historians working degree of coherence between economic aspects such as resource endowment, within an institutionalist the degree of specialization in different technologies, the configuration of demand, perspective the prevailing market characteristics and ” the country’s position in terms of physical infrastructures. By social capability, he essentially encapsulated cultural and aspects. Following Gerschenkron’s insight, institutional factors, such as the levels of most research on catching up soon education and technical competence, the concentrated on the technological pre- political climate, the capacity of business requisites, viewing innovation as a central and research organizations to interact and, aspect to efforts by poorer economies to in more general terms, the economic culture rapidly close the economic gap in relation framing entrepreneurship, innovativeness to mature economies. It was as part of this and the risk-propensity of economic actors. research that a technology gap hypothesis This focus on institutions follows in the was put forward (Posner, 1961; Fagerberg, footsteps of work by economic historians 1987; Fagerberg and Verspagen, 2002), such as Landes (1969, 1998) and North suggesting that the greater the technology (1981, 1990). Landes argued that the earlier gap, the greater the potential for catching economic advancement of some European up. However, while concentrating on the countries such as Britain was highly opportunities generated by investing in correlated with the presence of a set of technology and innovation, the theory efficient institutions, such as the enforcement underlying this hypothesis has emphasized of contracts and the personal liberties that technology is not a global, freely needed to guarantee geographic and social available public good. The difficulties faced mobility. North adopted a standpoint closer in absorbing foreign technology gained to economics in the sense that he departs particular emphasis in conjunction with from the uncertainty that characterizes the need to couple this with the local economic exchanges, depicting markets as accumulation of technological know-how part of the regulating institutions necessary through endogenous R&D and other learning for economic activity to advance. In his later activities. work, he also portrays government as part of

Manuel Mira Godinho 279 the institutional machinery needed to smooth following a similar sequential trajectory out economic exchanges. imposed the fate of following in the steps Some of the most influential empirical of the leading economies on the developing research on recent cases of catching up world. In this perspective, the task of converges around findings within the developing economies would above all be to framework put forward by economic concentrate on fine-tuning the absorptive historians working within an institutionalist mechanisms and sequentially adopt the perspective. Wade (1990) pointed out in his technologies invented earlier on by the analysis of Taiwan and other East Asian leading economies. Simplistically expressed, countries that the appropriate combination this is the rationale behind the most basic of free market and government intervention notions of technology transfer. It was in accounts for the rapid industrialization part the rejection of this view that led to achieved, particularly in terms of coordinated the concept of appropriate (or intermediate) resource-allocation decisions. Rodrick (2007) technology put forward by Schumacher was clear in stating that “the hallmark of and others, thereby suggesting there is a development is structural change—the technology space from which many alternative process of pulling the economy’s resources picks are possible. from traditional low-productivity activities Currently, the literature on technological to modern high productivity activity”, while choice extends far beyond the developing also feeling the need to stress that “this is countries context to claim that alternative far from an automatic process and requires technological routes might be pursued more than well-functioning markets. It even in a developed economy context. Such is the responsibility of industrial policy to a perspective, for example, underpins the stimulate investments and entrepreneurship longstanding critiques of Fordism and in new activities especially those in which the Taylorism that discuss the deskilling effects economy may end up having a comparative of modern technology (Braverman, 1974; advantage”. Noble, 1977, 1984), the works of the Tavistock Further to the focus on proper institutions Institute on socio-technical systems, or the and adequate coordination between markets approach that proposes ‘anthropocentric and government, recent empirical literature production systems’ (Lehner, 1992). has also demonstrated that rapidly catching The fact that some developing nations up in terms of productivity typically results have been creating and effectively diffusing from a combination of selective protectionism some appropriate (process and product) along with opening up to foreign sources of technologies seems to confirm the view knowledge (Chang, 2002; Hobday, 2000). that alternative technologies might actually be implemented with success. The recent 4. Concluding remarks introduction of the Tata Nano, designed One important topic present throughout and produced in India, is a very interesting the literature reviewed in the previous example confirming this assertion. This sections concerns the possibility of new car has involved important process and developing nations deciding on which product innovations that have been classified technologies best fit their needs. As seen as radical and disruptive at a world level (Lim above, Rostow’s linear view of all nations et al., 2010).

280 However, despite the idea of a technology composition of the economy is desirable. space -- within which different technological We may easily understand that most of the choices can be taken -- now being widely arguments set out in the paragraph above accepted, the consensus is also that such a in relation to the choice of technologies technology space has no infinite possibilities and high tech investment can easily be given natural resource shortages and limited replicated in the context of this discussion design alternatives. This view further implies on the sectoral composition of the economy. that as a nation evolves towards higher GDP Balanced development might certainly per capita levels, attempting to catch up be more desirable in social terms as it with and eventually overcome the leading would avoid mass migrations or the high economies, the choices available within this unemployment costs stemming from swift technology space become much narrower. changes in the economy’s composition. This happens because as a country or a Nevertheless, as economies wish to move regionally-concentrated cluster of firms on to leading edge technologies, there is begins to approach the state-of-the-art hardly any alternative to accepting the roller in any given technological field, the main coaster of creative destruction, at least to constraint for advancing further becomes the extent that the world continues to be a the scarcity of knowledge, which on the collection of competitive nations and regions state-of-the-art frontier is complex and as has happened over the last millennium. uncertain. The corollary is that when a nation Innovation is the epicentre of Schumpeterian seeks to become competitive at a world dynamics and even though all sectors level in advanced technology, the practical perform innovative activities, the intensity of choices for alternative technologies are such activities is unevenly distributed across significantly reduced. Of course, even in sectors. these circumstances, catching-up candidates The catching-up literature has shown do not need to invest in narrow-space high- that the nations that have been the most technology across all economic activities, successful in advancing rapidly in economic particularly in those activities whose outputs terms are those which have specialized in might be non-tradable. However, investing certain technologies and sectors. As pointed in at least a few of the most dynamic out by Fagerberg and Godinho (2005), the technologies of the day makes sense, not existing empirical evidence confirms that “the only because these typically generate higher countries that have been most successful in earnings in expanding markets, but also catching up, namely South Korea, Taiwan, because specialization in such technologies and Singapore (and Japan before them) might produce the network, trickle-down have all—after initially having acquired and dynamic effects mentioned by the earlier some capabilities through more traditional development literature (e.g. Rosenstein- activities—aggressively targeted the most Rodan, 1943; Lewis, 1954; Hirshman, 1958, or technologically progressive industries of the Kaldor, 1966). day, in which they today play an important Another important topic dealt with by the role”. The higher complexity of the newer literature reviewed in the sections above technologies in each historical period opens relates to the question of knowing whether up the possibility for innovative firms and a ‘proper’ or ‘most advisable’ sectoral countries to capture niche markets with

Manuel Mira Godinho 281 potential monopolistic rents. Further to development contexts. Taking as a basis their these arguments that focus on supply-side historical reality, countries need to build upon aspects, on demand grounds the analysis has and adapt their institutions to the challenges also shown that nations have advantages in of dealing with technological knowledge that specializing in certain sectors rather than often has a scientific background. This means in others. Following on from earlier insights a capacity for organizing and strengthening into the technology-gap theory (Posner, national innovation systems, setting up and 1961) and the life cycle approach (Vernon, improving communication channels between 1966), Lafay (1982) precisely demonstrated the relevant actors, while simultaneously that nations specializing in the products and nurturing the necessary trust so that these sectors where international demand grows interactions also intensify in quantity and faster also turn in better economic growth quality. performances. The recent advances of countries like The advocacy above of the advantages of China, India or Brazil stem to a large extent certain sectoral specializations over others from their ability to put in place the building does not mean, however, that an ‘optimal’ blocks of their national innovation systems. specialization might exist for each given For smaller countries, however, this task historical period. Specialization should be may prove harder as they lack the capacity seen and treated as context-dependent. for similarly establishing critical masses Resource allocation is a primary determinant of resources and benefiting from dynamic of specialization, as pointed out by classical economies of scale and networking effects trade theory. For example, economies well to effectively gain a proper return on their endowed with resources such as beaches, investments. Smaller countries might, sun, forests or valuable monumental heritage however, adopt different technological have advantages in specializing in tourism- strategies through relying more on natural related services. Indeed, the geography and resources or service-oriented strategies characteristics of each country, in terms of rather than on classical industrialization its territory, population and market size, bear strategies, while simultaneously integrating important implications in terms of possible further into the global knowledge networks sectoral specializations. However, historical so as to screen the technology sources evidence has made it clear that (at least needed. for larger-sized) developing nations willing One aspect that has changed dramatically to succeed, there is little alternative but to over the last two decades in relation to invest in the most dynamic and innovative innovation and economic development has technologies and industries. been the global geography of business R&D. Another central lesson stemming from While twenty years ago the R&D carried the literatures reviewed is that the successful out by MNCs was concentrated almost adoption and creation of innovations in the exclusively in their home countries, the developing world needs a corresponding situation has now substantially changed institutional climate; otherwise investment with a degree of R&D delocalization to third in technological accumulation risks failing countries never before experienced. Another just as investment in capital goods or aspect that has also changed dramatically infrastructures proved a failure in previous has been the international organization of

282 ninth.” Brazil is also more intensely using This means a capacity for trademarks and patents and while for this “ latter IPR type it is not yet in the global top organizing and strengthening 10, it ranked third worldwide for the former at the end of 2009. national innovation systems, The trends in this sort of indicators point to two different aspects that should be kept setting up and improving in mind for future debate on innovation and development. The first is that innovation is communication channels clearly becoming a central part of emerging- economy development processes in the between the relevant actors, same way as happened before in other cases of successful catch up. The second is while simultaneously nurturing that, nowadays, developing economies can hardly look inward if they want to further the necessary trust so that these their economic development prospects. On the contrary, while caring for domestic interactions also intensify in conditions, they need to search thoroughly for adequate sources of know-how, learn quantity and quality to benefit from participation in knowledge ” networks, compete for outward FDI in R&D and adapt creatively to the complexities of global institutional frameworks, such as IPR. intellectual property right (IPR) systems. Of course, as innovation becomes a central The TRIPS agreement was introduced as an component of economic development, as is Annex to the founding treaty of the WTO, and happening in China, India and other emerging as such almost all the world has come (or is economies, developing countries will need coming) under a common set of rules for IPR. wise policies to deal with both environmental It is interesting to note in this respect how spillovers and the Schumpeterian waves of countries like India and Brazil (and to a lesser creative destruction. Research carried out extent China as well), which disputed several over the past decade shows precisely how provisions of that agreement, are now among the acceleration in innovation has increased the countries where domestic IPR usage income concentration in the developed is rising fastest. As noted by Godinho and economies since the 1980s (Levy and Ferreira (2010), “both China and India have Murnane, 2007). Similar effects might be been experiencing a historical take-off in the expected in the developing economies as well use of intellectual property rights (IPR). As for if appropriate policies are not implemented to national IP office applications, the evidence combine leading-edge innovation with what is that by 2009 China became number one has been termed pro-poor innovation. worldwide in trademark applications, while India is just behind the US, Japan and the Republic of Korea. Concerning patent filings, China ranks third worldwide and India ranks

Manuel Mira Godinho 283 References Costa (eds.), Multinationals and Emerging Economies: the Quest for Innovation and Sustainability, London: Edward Elgar. Ab r a m ov i t z , M. (1986), “Catching up, forging ahead, and falling Go d i n h o , M. M., and V. Fe r r e i r a (2010), “Analyzing the Evidence of th behind”, Journal of Economic History 46(2), pp. 385-406. an IPR Take-off in China and India”, paper presented to the 7 Am i n , S. (1973), Le Développement inégal: essai sur les formations Asialics International Conference on Global Recession and Reform of sociales du capitalisme peripherique, Paris: Editions de Minuit. Innovation Systems in Asia, 15-17 April, Taipei, Taiwan. Ar o c e n a , R., and J. Su t z (2000), “Looking at National Systems of Gu, S., and B.-Å. Lu n d v a l l (2006a), “Policy Learning as a Key Innovation from the South”, Industry and Innovation, 7(1), pp. 55‑75. Process in the Transformation of the Chinese Innovation Ba r r o , R. J. (1991), “Economic Growth in a Cross Section of Systems”, in B.-Å. Lundvall, P. Intarakurmend and J. Vang (eds.), Countries”, The Quarterly Journal of Economics 106(2), pp. 407-443. Asian Innovation Systems in Transition, Edward Elgar. Ba r r o , R. J., and X. Sa l a -i-Ma r t i n (1992). “Convergence”, Journal of Gu, S., and B.-Å. Lu n d v a l l (2006b), “China’s Innovation System Political Economy 100(2), pp. 223-251. and the Move Toward Harmonious Growth and Endogenous Ba u m o l , W. J. (1986), “Productivity Growth, Convergence, and Innovation”, Innovation, Management, Policy and Practice 8 (1/2), Welfare: What the Long-run Data Show, American Economic pp. 1-26. Review 76(5), pp. 1072-1085. Ha r r o d , R. F. (1948), Toward a Dynamic Economics: Some Recent Be l l , M., and M. Al b u (1999), “Knowledge Systems and Developments of Economic Theory and Their Application to Policy, Technological Dynamism in Industrial Clusters in Developing London: Macmillan. Countries”, World Development 27(9), pp. 1715-1734. Hi r s h m a n , A. O. (1958), The Strategy of Economic Development, New Be l l , M., and K. Pav i t t (1993), “Technological Accumulation and Haven, CO: Yale University Press. Industrial Growth: Contrasts between Developed and Developing Ho b d a y , M. (2000), “East versus Southeast Asian Innovation Systems: Countries”, Industrial and Corporate Change 2(2), pp.7-209. Comparing OEM- and TNC-led Growth in Electronics”, in L. Br av e r m a n , H. (1974), Labor and Monopoly Capital, New York: Monthly Kim and R. Nelson (eds.), Technology, Learning & Innovation: Review Press. Experiences of Newly- Industrializing Economies, Cambridge: Ch a n g , H.-J. (2002), Kicking Away the Ladder: Development Strategy in Cambridge University Press. Historical Perspective, London: Anthem Press. Jo s e p h , K. J. (2006), Information Technology, Innovation System and Ch e n , S., and M. Rava l l i o n (2008),The World is Poorer than We Trade Regime in Developing Countries: India and the ASEAN, London Thought, but No Less Successful in the Fight Against Poverty, World and New York: Palgrave Macmillan. Bank, Policy Research Working Paper 4703. Ka l d o r , N. (1966), Causes of the Slow Rate of Economic Growth of Da h l m a n , C. J., and F. V. Fo n s e c a (1987), From Technological the United Kingdom: An Inaugural Lecture, London: Cambridge Dependence to Technological Development: The case of Usiminas University Press. Steel Plant in Brazil, Economic Commission for Latin America, Ka p l i n s k y , R. (2005), Globalization, Poverty and Inequality: Between a Buenos Aires. Rock and A. Hard Place, Cambridge: Polity. Do b b , M. (1951), “Some Aspects of Economic Development: Three Ka t z , J. (1985), “Domestic Technology Innovations and Dynamic Lectures”, Delhi School of Economics, Ranjit Publishers. Comparative Advantages: Further reflections on a Comparative Do m a r , E. (1946), “Capital Expansion, Rate of Growth, and Case-Study Program”, in N. Rosenberg and C. Frishtack (eds.), Employment”, Econometrica 14, pp. 137-47. International Technology Transfer: Concepts, Measures and Ed q u i s t , C. (2004), “Systems of Innovation—Perspectives and Comparisons, New York: Praeger. Challenges”, in J. Fagerberg, D. Mowery and R. Nelson (eds.), The Kl i n e , J., and N. Ro s e n b e r g (1986), “An Overview of Innovation”, in Oxford Handbook of Innovation, Oxford: Oxford University Press. R. Landau and N. Rosenberg (eds.), The Positive Sum Strategies: Er n s t , D. (2001), Global Production Networks and Industrial Harnessing Technology for Economic Growth, Washington DC: Upgrading—A Knowledge-Centered Approach Economics Study Area National Academic Press. Working Papers 25, East-West Center, Economics Study Area. La f a y , G. (1982), “Stratégies de specialisation ou division Fa g e r b e r g , J. (1987), “A Technology Gap Approach to Why Growth internationale du travail”, in J. Reiffers (ed.), Économie et finance Rates Differ”, Research Policy 16, pp. 87-99. internationals, Paris: Dunod. Fa g e r b e r g , J. (2005), “Innovation: A Guide to the Literature”, in J. La l l , S. (1996), Learning from the Asian Tigers, Basingstoke: Fagerberg, D. Mowery and R. Nelson (eds.), The Oxford Handbook Macmillan. of Innovation, Oxford: Oxford University Press. La n d e s , D. (1969), The Unbound Prometheus: Technological Change Fa g e r b e r g , J., and M. M. Go d i n h o (2005), “Innovation and Catching- and Industrial Development in Western Europe from 1750 to the Up”, in J. Fagerberg, D. Mowery and R. Nelson (eds.), The Oxford Present, Cambridge University Press. Handbook of Innovation, Oxford: Oxford University Press. La n d e s , D. (1998), “Wealth and Poverty of Nations: Why Some Are So Fa g e r b e r g , J., and B. Ve r s pa g e n (2002), “Technology-Gaps, Rich and Some So Poor”, W. W. Norton. Innovation-Diffusion and Transformation: an Evolutionary La s t r e s , H., and J. Ca s s i o l at o (2005), “Innovation Systems and Interpretation,” Research Policy 31, 8-9, pp.1291-1304. Local Productive Arrangements: New Strategies to Promote the Fr a n k , A. G. (1975), On Capitalist Underdevelopment, Oxford: Oxford Generation, Acquisition and Diffusion of Knowledge in Innovation University Press. and Economic Development”, Special issue of Innovation: Fr e e m a n , C. (1979) “The Determinants of Innovation: Market Management, Policy & Practice 7(2). Demand, Technology and the Response to Social Problems”, La s t r e s , H., J. Ca s s i o l at o , M. Ma c i e l (2003), “Systems of Innovation Futures 11(3), pp. 206-215. for Development in the Knowledge Era”, in J. Cassiolato, Fr e e m a n , C. (1987), Technology, Policy, and Economic Performance: H. Lastres and M. Maciel (eds.), Systems of Innovation and Lessons from Japan, London, New York: Pinter Publishers. Development: Evidence from Brazil, Cheltenham: Elgar, 2003. Fr e e m a n , C. (1995), “The ‘National System of Innovation’ in Historical Le h n e r , F. (1992), Anthropocentric Production Systems: The European Perspective”, Cambridge Journal of Economics 19(1), pp. 5-24. Response to Advanced Manufacturing and Globalization, Brussels: Fu r t a d o , C. (1973), “The Concept of External Dependence in the CEC, DGXII-Monitor/FAST. Study of Underdevelopment”, in Wilber (ed.), Political Economy of Le v y , F., and R. J. Mu r n a n e (2007), “How Computerised Work and Development and Underdevelopment. Globalisation Shape Human Skill Demands”, in M. M. Suárez- Ge r e ff i , G., J. Hu m p h r e y , and T. St u r g e o n (2005), “The Governance Orozco (ed.), Learning in the Global Era: International Perspectives of Global Value Chains”, Review of International Political on Globalization and Education, Berkeley, CA: University of Economy 12(1). California Press. Ge r s c h e n k r o n , A. (1962), Economic Backwardness in Historical Le w i s , A. (1954), “Economic Development with Unlimited Supplies Perspective, Cambridge, MA: The Belknap Press of Labour”, Manchester School of Economic and Social Studies 22, Gh a z i , S. S., and G. Du s y t e r s (2009), “Serving Low-Income Markets: pp. 139‑191. Rethinking MNCs Strategies”, in G. Duysters, W. Dolfsma and I. Lim, C., S.-H. Ha n and H. It o ( 2009), “Disruptive Innovation by a Developing- Country Firm: Product Development Processes without Strong Technological Prowess in Tata Motor’s Nano”,

284 paper presented to the 7th Asialics International Conference on Se e r s , D. (1969), “The Meaning of Development International”, Global Recession and Reform of Innovation Systems in Asia, 15-17 Development Review 11(4), pp. 3-4. April, Taipei, Taiwan. Se n , A. (1980), “Equality of What?”, The Tanner Lecture on Human Liu, X., and S. Wh i t e (2001), “Comparing Innovation Systems: a Values, vol. I, Cambridge: Cambridge University Press, pp. 197- Framework and Application to China’s Transitional Context”, 220. Research Policy 30(7), pp. 1091-1114. Sh i v a , V. (1992), The Violence of the Green Revolution: Third World Lu c a s , R. Jr. (1988), “On the Mechanics of Economic Development”, Agriculture, Ecology and Politics, New Jersey: Zed. Books Ltd. Journal of Monetary Economics 22(1), pp. 3-42. Sh i v a , V. (2000), Stolen Harvest: The Hijacking of the Global Food Lu n d v a l l , B.-Å. (1992), National Systems of Innovation: Towards a Supply, South End Press. Theory of Innovation and Interactive Learning, London: Pinter. Si n g e r , H. W. (1958 [1952]), “The Mechanics of Economic Lu n d v a l l , B.-Å., et al. (2009), “Bridging Innovation System Development”, in A. N. Agarwala and S. P. Singh (eds.), The Research and Development Studies: Challenges and Research Economics of Underdevelopment, London, New York: Oxford Opportunities”, paper presented to the 6th Globelics International University Press, 1973. Conference, Dakar, Senegal: 6-8 October. St e w a r t , F. (1978), Technology and Underdevelopment, London: Ma l e r b a , F. (2002), “Sectoral Systems of Innovation and Production”, Macmillan, Research Policy 31(2), pp. 247-264. Ve b l e n , T. (1915), Imperial Germany and the Industrial Revolution, New Me a d o w s , D. H. et al. (1972), Limits to Growth: A Report for the Club of York: Macmillan. Rome’s Project on the Predicament of Mankind, Universe Books. Ve r n o n , R. (1966), “International Investment and International Trade Mo w e r y , D. and N. Ro s e n b e r g (1979), “The Influence of Market in the Product Cycle”, Quarterly Journal of Economics 80(2). Demand upon Innovation: a Critical Review of some Empirical Vi ot t i , E. (2002), ‘National Learning Systems: A New Approach on Studies”, Research Policy 8, pp. 102-153. Technological Change in Late Industrialising Economies and Ne l s o n , R. R. (1993), National Systems of Innovation: A Comparative Evidence from the cases of Brazil and South Korea”, Technological Analysis, Oxford: Oxford University Press. Forecasting & Social Change 69, pp. 653-680 No b l e , D. (1977), America by Design, New York: Knopf. Wa d e , R. (1990), Governing the Market: Economic Theory and the Role No r t h , D. (1981), Structure and Change in Economic History, Norton. of Government in East-Asian Industrialization, Princeton: Princeton No r t h , D. (1990), Institutions, Institutional Change and Economic University Press. Performance, Cambridge University Press. Nu r k s e , R. (1953), Problems of Capital Formation in Underdeveloped Countries, Oxford: Blackwell. Oy e l a r a n -Oyeyinka, B. (2006), “Systems of Innovation and Underdevelopment: An Institutional Perspective”, Science, Technology and Society 11(2), p. 239. Pav i t t , K. (1985), “Technology Transfer among the Industrially- Advanced Countries: An Overview”, in N. Rosenberg and C. Fristack (eds.), International Technology Transfer: Concepts, Measures and Comparisons. New York: Praeger. Pe r e z , C., and L. So e t e (1988), “Catching up in Technology”, in G. Dosi, C. Freeman, R. Nelson, G. Silverberg and L. Soete (eds.), Technical Change and Economic Theory, London. Pinter. Pi n k o v s k i y , M., and X. Sa l a -i-Ma r t i n (2009), Parametric Estimations of the World Distribution of Income, NBER Working Paper 15433. Po s n e r , M. (1961), “International Trade and Technological Change”, Oxford Economic Papers 13, pp. 323-341. Pr a h a l a d , C. K. (2004), The Fortune on the Bottom of the Pyramid: Eradicating Poverty Through Profits, Upper Saddle River, NJ: Wharton School. Pr e b i s c h , R. (1950). The Economic Development of Latin America and Some of its Problems, New York: ECLA/CEPAL. Ra m a n i , S., S. Sa d r e Gh a z i and G. Du y s t e r s (2009), “Taking Innovation to the Poor: Lessons from Sanitation Activists in India”, paper presented to the VIth Globelics International Conference, Dakar, Senegal: 6-8 October. Qu a h , D. (1993), “Empirical Cross-Section Dynamics in Economic Growth”, European Economic Review 37(2-3), pp. 426-434. Ra n g a n , V. K. et al. (2007), Business Solutions for the Global Poor: Creating Social and Economic Value, John Wiley & Sons, Inc. Ro d r i c k , D. (2007), One Economics, Many Recipes: Globalization, Institutions, and Economic Growth, Princeton: Princeton University Press. Ro s e n s t e i n -Ro d a n , P. N. (1943), “The Problems of Industrialisation of Eastern and South-Eastern Europe”, The Economic Journal. Ro s t o w , W. W. (1960), The Stages of Economic Growth, Cambridge: Cambridge University Press. Sa l a -i-Ma r t i n , X. (2006), “The World Distribution of Income: Falling Poverty and... Convergence, Period”, Quarterly Journal of Economics 2, pp. 351-397. Sc h m o o k l e r , J. (1966), Invention and Economic Growth, Harvard University Press. Sc h u m a c h e r , E. F. (1973), Small Is Beautiful: A Study of Economics as if People Mattered, Vintage. Sc h u m p e t e r , J. A. (1912), The Theory of Economic Development. Leipzig, Duncker and Humblot, translated by R. Opie, Harvard University Press, 1934, Reprint, Oxford University Press, 1961.

Manuel Mira Godinho 285

Innovation and the Service Economy

Ian Miles This essay will be concerned both with the most recent period partly reflects use of Manchester Business School, University of Manchester, U.K. Innovation in Services and Service Innovation. this phrase in library service research and a Innovation in Services refers to both product range of computer and informatics contexts.) and process innovation in service firms, While innovation studies were taking off— sectors and industries. It may involve the almost 300 publications using “innovation” in development of new or improved services, their titles were recorded in 1970 alone, and while Service Innovation specifically relates almost 500 in 1975 alone—the overwhelming to the creation of new services—though this focus was on innovation in manufacturing can involve service-providing organisations in industries. We can locate some earlier all sectors. The phrases have these different studies of innovation in health and local meanings first, because the term “service” government, for example, but there was can refer to the service product or to the rarely much attention to services as a whole, industries that specialise in such products; or even to a broad range of types of service and second, because service products can industry. Manufacturing industry provided be generated by organisations that do not the paradigm for innovation analysis, and specialise in services. Thus manufacturing services would thus be considered as deviant, firms may deliver all sorts of customer and low-innovation industries. Where there after-sales services. were technology-based services—such as Both terms reflect themes that were telecommunications or indeed health—then long neglected by social and management the main source of innovation was seen to researchers, but that have received come from manufacturing industries such increasing attention since the 1980s and as electronics or pharmaceuticals. Service especially since the 1990s. Table 1 displays industries and organisations were largely data on the prevalence of various terms in passive receivers of these innovations. Thus publication titles. These results are certainly in Pavitt’s (1984) classification of industrial “noisy”, but point to a striking increase in innovation styles, service industries were all attention to these themes. (The dramatic classified as “supplier-led”—though he had increase in use of “service innovation” in modified this view by the 1990s (Pavitt, 1994).

Ian Miles 287 The growth of attention to innovation (2009) proposed that the two classifications involving services has been driven by the actually propose four approaches in all: rising significance of service activities in • Assimilation approaches (noted by industrial societies and around the world, Coombs and Miles)—The basic idea as well as the emphasis on service in here is that most economic attributes the competitiveness of firms of all types. of services are fundamentally similar to Recent research draws on many sources, those of manufacturing sectors. What including earlier traditions of work on service differences exist are more a matter organisation and marketing, as will be of (often relatively minor) quantitative indicated below. Some researchers stress the placement on one or other continuum. continuities between innovation in service and Both services and manufacturing can manufacturing industries (this is particularly be effectively studied and statistically the case with research using large-scale documented according to the methods and surveys) while others stress distinctive concepts developed for manufacturing. features of innovation in services (this is Such approaches assume that the theories particularly prevalent in case study research). and concepts developed in manufacturing Two rather similar accounts of these various contexts readily apply to innovation in approaches were developed by Gallouj services. Innovation can be measured in (1998) and Coombs and Miles (2000). Each similar ways, and is liable to be produced account proposes that approaches to service and managed in similar ways. What innovation can be conveniently classified differences there are reflect the fact that into three groups (they even give the same services tend to lag behind other sectors. name to two of these groups). Each of these Such an approach is apparent in many of classifications has been adopted by several the earlier statistical studies of innovation subsequent scholars, but in a recent overview in services that deployed the data of service innovation research Droege et al produced in the Community Innovation

Table 1. Publications located by using various search terms

YEARS Terms sought for in document titles Innovation in service Innovation in services Service innovation New service development 1975-1979 0 0 1 0 1980-1984 2 0 5 1 1985-1989 3 6 2 9 1990-1994 5 5 4 6 1995-1999 12 45 20 12 2000-2004 24 92 83 69 2005-2009 57 99 417 81

Source: data produced by using terms for various time periods in Harzing’s Publish or Perish (Harzing, 2010), searching all types of publications and examining title words only. An effort has been made to remove duplications by examining document authors and titles—while this had a major impact on a few cases (years with few publications, in particular), the overall trends are unaffected. There is some overlap between cases in the various columns, sometimes reflecting more than one of the terms being used; sometimes the search tool simply fails to differentiate between the terms. Because the term “service innovation” frequently received hits where formulations beginning “innovation in…” were used instead, the data in the fourth column come with the word “in” barred from the title.

288 Surveys (CIS). Such studies typically failed require novel theories and instruments. to reveal striking differences in the ways This approach is displayed in many case manufacturing and service firms set studies of service activities. It suggests at about innovating. A similar viewpoint is one extreme that quite new instruments advocated in many mainstream accounts are required for investigation of service of topics such as trade and productivity, activities, or that the results of established where it is suggested that existing instruments need to be interpreted in new instruments will work effectively to ways. For instance, since services conduct describe the service economy. little R&D (on the whole), R&D-intensity • Technologist approaches (identified by is a poor indicator for identifying “high- Gallouj. In Gallouj and Savona (2010) tech” or “knowledge-intensive” services, he suggests that these are actually the and new approaches are required (e.g. same as Coombs and Miles’ assimilation skill profiles of the workforce). Since approach, though Droege et al. consider much service internationalisation takes the two approaches to be distinctive). the form of investment, franchising and Here stress is put on the important partnerships rather than conventional role of new technologies (especially exports, the analysis of services “trade” Information technologies) in services. has to pay more attention to such modes Gallouj and Savona see this as leading of presence. The distinctive features to an assimilation of ideas from studies of services include intangible and of innovation in manufacturing, which unstoreable products, and high degrees also tend to stress technological of interaction with customers (up to the innovation. But some authors have point where consumers are often seen as stressed technological innovation, while “coproducing” services). Such features arguing that the trajectory of service not only mean that service industries lag innovation is distinctive. For example, behind In terms of innovation, but also that the “reverse product cycle” proposed by their types of innovation and innovation- Barras (1986, 1990) implies that service management processes are very different organisations follow a distinctive trajectory from those seen in manufacturing. A case of technology-based innovation, beginning for demarcation is also made in much of with use of new technology to render the service marketing literature, and in production of services more efficient, some studies of productivity analysis that and culminating in the creation of new point to particular problems in assessing services. The emphasis on technology may service productivity in conventional terms resemble that of many assimilationists, -- e.g. Gadrey, 2002, (Grönroosa & Ojasalo, but the upshot is more like the 2004) demarcation approach we discuss next. • Synthesis approaches (proposed by both • Demarcation approaches (identified sets of authors)—accept that studies by both sets of authors)—argue that of services bring to the fore issues service activities are highly distinctive. that require examination. But the idea They may still be poorly understood, but here is that these are not exclusive to what is clear is that in many respects service industries and organisations. they have dynamics and features that Thus studies of service innovation have

Ian Miles 289 highlighted features of innovation that a survey-based study, see Avadikyan and have been neglected in most examination Lhuillery, 2007, and an examination of of manufacturing innovation, and the small and medium-sized firms’ goods and argument goes that a comprehensive service strategies by Susman et al., 2006). analysis and more adequate indicators More generally, there have also been many can provide an enriched understanding of accounts of servicisation/ servitisation innovation right across the economy. This processes in recent years.) Typically, this will not only cover the service activities involves providing services related to the of manufacturing firms, but also help goods manufacturers produce, or to their account for variations within and across production processes. In the former case, goods and service innovation. the new services may be “product services” The idea that a synthesis of approaches such as after-sales support, or other ways to innovation in manufacturing and services of redefining the product that is sold to can be achieved is a promising one. For one include, or even to consist of, services, thing, many manufacturing firms actually rather than merely the delivery of a material sell services as well as goods, and all of artefact. Sometimes servicisation involves them produce some services for internal complementing the goods with services or external use. It is likely that innovation such as finance, insurance, maintenance, in these service activities will differ from software, etc. Sometimes it involves a shift conventional manufacturing product and to a service focus, in which the firm sees its process innovations; for example, it is likely job in terms of providing the outcomes for that the web portal of a manufacturing firm customers that the goods themselves would will develop along similar lines to, and pose be used to create: the firm can then sell similar issues to, that of a service firm. a promised amount of service rather than Furthermore, it can be argued that in sell—or even rent—the goods. A famous many respects there is convergence between case of this is Rolls-Royce contracting manufacturing and service sectors (Miles, to supply hours of flight time rather than 1993). One aspect of this convergence is that aircraft engines; and the efforts by computer there is a greater resemblance between companies to sell cloud-computing services manufacturing and the traditional view rather than a computer kit itself can be of services (for example, producing more seen in a similar light. Such servicisation customised products, having closer links strategies are liable to influence innovation with consumers, etc.). At the same time, pathways, as different costs are internalised many services are becoming like traditional and externalised by the partners. The manufacturing (standardised and mass manufacturer will need to pay more production of services by large firms, for attention to the ways in which its goods are example). consumed—for example, by monitoring Another aspect of convergence may be usage through new sensors and software— the increased emphasis on service on the and in turn this might promote new product part of manufacturers. Thus Howells (2001) services in providing customer support and is just one of many recent researchers equipment maintenance and disposal. who have studied the “servicisation” of Even without the phenomena of manufacturing (and extractive) firms. (For convergence and servicisation, the synthesis

290 Even now statistical data are often sparse, The manufacturer will need to though this situation is being addressed very “ seriously by statisticians in many countries pay more attention to the ways in and international organisations. One achievement has been to establish a far more which its goods are consumed— detailed classification of service industries than was available previously, and Table 2 for example, by monitoring outlines the current high-level structure of the standard industrial classifications usage through new sensors and (NACE Rev 2), in which service industries feature as sections G to R.1 (“Section” is software—and in turn this might used by statisticians as less ambiguous than “sector”.) promote new product services This statistical classification demonstrates the range of activities that are covered in providing customer support by service sections. Some services store, transport and repair goods—and indeed and equipment maintenance catering services can also produce meals from raw ingredients. Some services deal and disposal directly with people—educating or healing ” them, providing haircuts and other personal services. Some are much more concerned with processing information—moving it approach would argue for comparative around as in telecommunications services, studies of (various) manufacturing creating new knowledge as in research and service sectors, and examination of the services, and applying knowledge for service activities of manufacturing sectors; business or personal use as in professional it certainly does not imply that there is no services. need for close examination of innovation This wide range of activities already in services and service innovation. Rather, suggests that we might find different sorts of the issues raised in such studies should be innovation taking place in the various sectors: viewed in terms of their potential importance surgical or pharmaceutical innovations across the whole economy. may be important for hospitals but not for supermarkets or hotels; new financial Services: Diversity and Commonalities products may have little relevance for sports Just as service innovation was long centres or garages, and so on. These different neglected in innovation studies, so the service sections are engaged in very different sorts sectors were long neglected in economic of activity, and may thus be undertaking 1 Section T actually includes the role of households as analysis and, not least, in the development of quite different sorts of innovation—some employers of domestic economic statistics. For a long time indeed, supplier-led, perhaps, while others may personnel, which was traditionally a major type there was very limited information available be much more the products of the firms of service employment— on the “tertiary sector” (which was even themselves. Additionally, there are important “domestic service”, household services. sometimes known as the “residual sector”). differences in terms of the way in which

Ian Miles 291 the sections are typically organised. Many knowledge-intensive ones in the economy (in sections are dominated by smaller firms terms of educational credentials, at least). In than is typical for manufacturing, and indeed innovation research, particular attention has there are many micro-businesses, involving been paid to two of the latter areas of service just a few employees, in many services— activity—public services (NACE sections O, P family shops, freelance artists, consultants and Q), and Knowledge-Intensive Business and accountants. But some sections are Services (KIBS, mainly NACE section M). dominated by larger organisations—the It is interesting to note, in contrast, that financial services are typically composed of earlier explanations of the supposedly poor larger firms, and public services like health productivity growth in services related this to and education can be immense—the UK’s the low-skill nature of many of the industries National Health Service employed practically (e.g. Fuchs, 1968). There are also differences 1.5 million people in 2010! The occupational in terms of the markets served—consumers, profile of sections also varies widely—some businesses, and public authorities. (For sectors have high levels of unskilled documentation of these variations, see employees, while others are the most Miles, 2008).

Table 2. Broad Structure of NACE Rev. 2 (NACE stands for “Nomenclature générale des Activités économiques dans les Communautés Européennes”)

Section Title A - Agriculture, forestry and fishing B - Mining and quarrying C - Manufacturing D - Electricity, gas, steam and air conditioning supply E - Water supply; sewerage, waste management and remediation activities F - Construction G - Wholesale and retail trade; repair of motor vehicles and motorcycles H - Transportation and storage I - Accommodation and food service activities J - Information and communication K - Financial and insurance activities L - Real estate activities M - Professional, scientific and technical activities N - Administrative and support service activities O - Public administration and defence; compulsory social security P - Education Q - Human health and social work activities R - Arts, entertainment and recreation S - Other service activities T - Activities of households as employers; undifferentiated goods- and services-producing activities of households for own use U - Activities of extraterritorial organisations and bodies Source: Eurostat (2008)

292 Howells (2010) has even suggested that consumers about the superiority of innovative a “segmentalist” approach to innovation in services. services is emerging, reflecting the diversity As noted, some services have quite of service activities and innovation patterns, tangible outputs. But typically the material and moving away from analysing services costs of the dental filling or the optical disc is as a whole. Even a casual encounter with a small fraction of the cost of the professional the literature on services is likely to reveal labour involved in tailoring the filling or that for every generalisation that can be creating the information content of the disc. It made about these activities, there will be is the less tangible aspects of the service that numerous exceptions. (For example: Services typically count as most important, and which only create intangible products—what then can be difficult for prospective purchasers about this dental filling? Services cannot or clients to assess. One result of this is that be stored—what about this website or many innovations from service organisations computer software? Services are coproduced involve adding more tangible elements to the with their customers—what about this TV service (loyalty cards, for example), while broadcast?, and so on.) But there are several others involve the creation of demonstrator features that are common to many services, products (demo discs, movie trailers, free even if many exceptions can be found. It is trials) or certification of various forms (quality worth considering these commonalities. standards, membership of professional The foreground social and economic bodies, etc.). characteristics are quite distinctive from The second key feature of services is those typical of manufacturing, and the their “interactivity”—referred to in other implications for innovation are significant. studies by such terms as “consumer- There are many ways in which differences intensity” (Gartner and Reissman, 1974), between manufacturing and services can and “servuction” (Eiglier and Langeard, be conceptualised—see Miles (1993) for an 1987). This reflects the high level of contact, extensive list—but two interrelated features exchange, and “touch” that is involved in underpin most of these. The first of these most services (Miles, 2005). It is helpful to features is the “intangibility” of the service think of the client as coproducing the service, product. While manufacturing is about not least because this implies that service making goods, service activities are about innovation (if not necessarily innovation in doing things—about changing (or reducing service organisations) is liable to involve change in) the state of people, artefacts, learning and behavioural change on the part symbols, etc. Intangibility is associated of the user as well as the nominal service with such attributes of service products supplier. and processes as the difficulty in storing or The extent of interactivity can vary transporting them, problems in patenting considerably. In the case of a consultancy service innovations, and the difficulty in service, there may be protracted discussion demonstrating the service in advance of about just what the problem is, there may purchase. This latter point accounts for be in-depth questioning and observation the need for regulation of many services, from the consultant, the final report and and the challenge that can confront the recommendations may be presented in a service supplier when it comes to convincing variety of face-to-face settings, and need to

Ian Miles 293 be reflected upon and further explored by users is needed to make the experience the client. In contrast, a bus ride may involve worthwhile, while in other cases the little more than turning up at the stop, buying consumer may really prefer to be alone. a ticket, and sitting in a suitable seat until One consequence of interactivity is that the destination is reached. Consultancy the service supplier and client often need activities and bus trips can of course also to be at the same place at the same time, vary immensely! though the use of Information Technology There are many forms that interactivity may reduce the need for this in respect can take, for example: of information services, at least. Other • Since the interaction involves information important consequences of this feature of exchanges, there is much scope many services are that service quality will be for application of new Information a matter not only of supplier effort, but also Technology—from using powerpoints to of the clients’ own inputs; that productivity support consultants’ presentations and as measured by labour inputs by the supplier electronic whiteboards in teaching, to may be achieved at the cost of more labour automated teller machines and online required from the user; and that there is banking services. These new technologies liable to be much heterogeneity among the are pervasive in service industries, and outputs of a service organisation. Some continue to be the site of considerable services may be relatively standardised, innovation, not least as the organisations but many others are customised or at least learn new ways of enhancing their mass-customised by the assembly of the services through their application. service out of multiple modules, put together • Much innovation centres, too, on the according to customer requirements. Some distribution of activities between supplier other services are completely bespoke ones, and client, with “self-service” proving one specialised to a particular client requirement. popular approach—not simply because Manufacturing varies as well, between it can reduce labour inputs on the part of mass production, mass customisation, and the service organisation, but also because small-batch specialised production (rapid it can improve the quality and efficiency prototyping is a rare case of a service industry of the experience for the customer. Such that actually makes physical goods—though innovations require creation of a mutually the objective is to test the viability of designs). acceptable framework for identifying and The heterogeneity of outputs contributes accessing the objects of the service, be to the difficulty in assessing service quality this bank account details or consumables prior to service production, and to the on supermarket shelves. difficulties confronting service productivity • The experience provided by many services measurement. is often dependent on the behaviour One of the main trajectories of service of multiple consumers, whether these innovation has been what Levitt (1972) are contributors to a social networking recognised four decades ago as the website, other passengers in public industrialization of services. As service firms transport vehicles, or the other users grew, they could adopt a “production line of sports or cinema facilities. In some approach,” with more standardized products cases some sort of input from other produced on an almost mass production

294 basis, with high division of labour and use of that could be dealt with by a little elaboration technology. Increased standardization, we can of the methods used for marketing goods. now see, can accompany mass customisation, Instead, the focus is on service as a process: with standardised service modules combined service is the process of applying resources in numerous ways to produce services whose to create benefits; and it is a coproduction quality varies little from branch to branch process, where both “supplier” and “client” or franchise to franchise of hotels, fast make contributions and gain benefits. food restaurants, supermarkets, and the All economic activity can be seen in this like. Many firms in such sectors that adopt perspective as an exchange of services. this model of service industrialisation are Of course, the amount and type of effort dependent on relatively high levels of low- that is put in by the partners varies from wage and fairly unskilled staff, often working service to service, but the point that service on part-time or insecure bases. users are typically engaged in activities other than just purchase, and that these activities Service Innovation and New Service have a very important impact on the quality Development of the service that is produced and received, This essay began by noting some is important. This clearly relates to the notion ambiguities connected with the term of “interactivity” introduced earlier, and to “service”, and in addition there is one sense research examining innovations involving of the term that is particularly important these activities and the service relationship. in terms of these common features. This Currently there is much interest in the ways is the sense that a service is something in which service customers can be mobilised done for somebody—that a service is about as “prosumers” to enhance each others’ providing value to another human being or experiences, for example in Web2.0 and set of human beings. (There are inevitable social networking applications, but there exceptions. In informatics it is commonplace has been earlier work on how innovation to talk of computer systems and components may centre on the servuction process (e.g. as providing services to each other, as in Belleflamme et al, 1986). Service-Oriented Architecture. Then there Change in service relationships and are services that are oriented to the well- associated experiences has also been a being of natural environments, which may central theme in the emerging discipline of directly affect no human beings though “service design”. Recent years have seen they may be thought of as providing some many established industrial design firms satisfaction to those people who know move to handling aspects of service design, about them.) This sense of service comes as well as the appearance of specialised to the fore in the recent stream of work on firms with this focus. Education and scholarly “service-dominant logic” (see, for example, research have only recently begun to catch up Lusch et al., 2008, Vargo and Lusch, 2006). with this, with a journal of service design— This stream originally stems from service Touchpoint—being launched in 2009. But a marketing studies, though it has achieved few early pioneers had written on topics such much wider influence. It sought to move as service design and quality (Gummesson, beyond approaches to service marketing that 1990), so that sufficient material has been saw services as simply intangible products produced for reviews to be available (Moritz,

Ian Miles 295 2005; Saco and Goncalves, 2008).2 Among the things revealed in such accounts are the The need for quite different distinctive techniques required for service “ design, so as to reflect the co-evolution design strategies from those of user and supplier behaviours and experiences in the course of service delivery. that have been prevalent in Such techniques include service blueprinting, storyboarding, and interface and interaction industrial product design reflects design. The need for quite different design strategies from those that have been the importance for services of prevalent in industrial product design reflects the importance for services of such features such features as intangibility and as intangibility and interactivity. Den Hertog (2000) makes the point that interactivity service innovators need to be attentive to ” technological opportunities, but should avoid a technologist’s view of New Service Development (NSD) (“technologist” is used service; their informed cooperation is also herein the Gallouj sense). They should rather vital. Typically studies of NSD attempt to consider what changes might be effected identify which factors make for successful in addition in terms of service concepts, introduction of new services, with Martin and client interfaces, and delivery systems. This Horne (1993, 1995) also noting the need for suggests that any innovation can be thought customer and employee (and managerial) of as a combination of, and possibly as participation in the NSD process, together changes in, these dimensions as well as in with strategic use of customer information. the technologies being employed. In the service firms they studied, specialized Much in the same way that discussions of innovation functions were uncommon, and service design and innovation have emerged successful NSD was rarely achieved by a few rather recently, so the study of New Service experts. The NSD literature frequently pays Development (NSD) is relatively young—but attention to the strategies and characteristics rapidly growing, and already the subject of service-producing organisations. of several reviews. In this case, Johne and Considerable emphasis is placed on the role Storey had already by 1998 been able to of service-employees training and broader examine a range of studies, reflecting what learning opportunities, on the scope for we have earlier termed the interactivity of sharing information and experiences, on the services. Customers and the understanding ease of establishing multifunctional project of their roles, expectations and experiences, teams, and the like. Similar prescriptions are particularly important in NSD, given the also emerge from studies of manufacturing likelihood that their cooperation is critical in innovation, and it remains to be established shaping the quality of the service outcome. whether successful NSD is really that

The employees who interact with customers different—and indeed, whether there are 2 See also the service design also have to be taken into account—both as not huge differences across services of network, at http://www.service- design-network.org (accessed sources of insight and co-producers of the different types. But it is clear from numerous 24 August 2010).

296 studies (reviewed in Miles, 2005 2010, and 2. The Services Professional Pattern elsewhere) that new services are rarely is often found in knowledge-intensive produced through formal R&D departments organizations such as KIBS, whose and/or production engineering—though professionals frequently generate such an approach is used in some very solutions for clients that are ad hoc and large service firms and technology-related highly customized. Their innovations services in fields such as information typically rely on employees’ professional technology and engineering. More skills. Much innovation intelligence may commonly, service innovation is organised flow through professional networks and through transitory project management associations, or other communities of structures—and much innovation emerges practice. Many consultancy firms, and some from ad-hoc, on-the-job experimentation. “creative industries” (e.g. advertising and Surveys of innovative service firms (e.g. design) follow such a model. One major Arundel et al., 2007, IOIR, 2003) suggest challenge for these firms is “capturing” that—perhaps surprisingly—such firms tend and replicating innovations that are made to report less use of suppliers and customers in practice by professionals, and much as sources of information for innovation attention in knowledge management is than do manufacturing firms. (In contrast, directed to this. consultancies and competitors seem to 3. A Neo-Industrial Pattern lies between be more important sources of information patterns (2) and (3): alongside a specialized for service firms than for manufacturers.) R&D or innovation department, there is One sector that does report more use much more distributed innovation in the of clients as sources of information is course of professional practice. This often Business Services—where there is often a characterizes, for example, health services very deep level of interactivity. Wholesale and some large consultancies. and retail trade services are more likely to 4. The Organized Strategic Innovation see suppliers as influential, as might be Pattern is encountered in large service firms, expected. such as airlines, hotel chains, and retailers. Sundbo and Gallouj (2000) suggest that Innovation is organized in the form of projects several different ways of organising service that are directed by more or less transitory innovation can be differentiated (their cross-functional teams, working through analysis can be applied to process innovation distinct steps of project management, and in service organisations as well as to NSD). often with strong leadership from marketing Miles (2010, pp. 523-524) summarises groups. their approach as indicating seven broad 5. An Entrepreneurial Pattern patterns, while noting that particular service characterises start-up firms that offer innovations may be organized in different services based on more or less radical ways within the same organisation: innovations: these may be technological or 1. The classic R&D pattern, with rely more on new business models: many so- specialized departments conducting research called gazelles, online services, and others of a strategic nature does exist in some follow this pattern, across many sectors: service organisations—mainly large and/or typically it is short-lived and they move into technology-based ones, as noted above. one of the other innovation modes.

Ian Miles 297 6. The Artisanal Pattern is found in do not always apply this model across their many smaller-scale and low-tech physical range of activities—the distribution and retail (“operational”) services, such as clearing activities, and other product services, may and catering. These are classic supplier- evolve quite independently of the product driven sectors, where major innovations innovation itself.) are imported from other sectors (e.g. Survey studies which allow for manufacturing), though innovation may comparisons to be made across sectors also be driven by regulations and demand. have confirmed that service firms do Employees and managers may be sources of introduce innovations, although overall the (typically incremental) innovation. service sectors may have lower rates of 7. Finally, the Network Pattern involves such innovation than manufacturing firms a network of firms acting together, and overall. But there are high variations across adopting common standards or operating different sections of services. The innovation procedures. There may be a dominant budgets of service firms also tend overall to company in such a network, and this has be lower than those of manufacturing firms, been the case in the rolling-out of such even when we compare firms of similar sizes innovations as ecommerce, where often (important because innovation behaviour a major customer has requested that tends to be strongly associated with firm its suppliers use standardised means size, and, as noted, most service sections of electronic trading. Many services are are more dominated by small firms than is organized in franchise networks through manufacturing). However, the various parts which such diffusion of innovations may of the service sector differ considerably in take place: this is familiar in sectors such terms of how frequently they innovate and as fast food and hotels, and also in some how far they invest in innovation. While there professional sectors. are exceptions in all service subsectors, the general trend is for more physically-oriented Innovation in Service Industries services like transport and wholesale Overviews of innovation in service and retail trade to report lower levels of industries have been available for some innovation, and for more information- years, too (e.g. Miles, 1994, and later oriented services, such as financial services reviews in 2005 and 2010), and much of and KIBS, for example, to be much more the Handbook of Innovation and Services innovation–intensive. This result may be (Gallouj and Djellal, 2010) also considers rather different from what might have been this theme. These studies confirm the found had we undertaken such surveys in argument that the organisation of innovation the 1920s, rather than the 2000s. In the first in service organisations typically takes forms half of the twentieth century, the physical different from the R&D model supposedly services were being transformed through the characteristic of manufacturing. In fact, as application of electrical energy and petroleum already implied by Pavitt’s (1984) taxonomy, engines. By the turn of the century, it was the many manufacturing firms do not follow this new information technologies that were being model—it is most common in high-tech firms used to create new and improved services, and in larger firms in other manufacturing and these were particularly important for subsectors. (And, we might add, such firms activities such as financial and computing

298 services, and all sorts of professional activity. (especially financial and wholesale sectors) Technology-related KIBS in particular— are more prone to initiate organizational firms providing computer, and engineering change; Schmidt and Rammer (2006) and services, for instance—typically have large Miles (2008) report that manufacturers and innovation budgets. Information Technology service firms tend The availability of large-scale surveys to emphasize technology-based innovation, makes it possible to apply cluster analysis while most services emphasize organizational and similar approaches to identify and innovation—though on the whole, sectors that classify distinctive sets of firms or sectors. are more technologically innovative sectors Thus Hipp and Grupp (2005) differentiated are also more organizationally innovative) between knowledge-intensive, network- There are now numerous studies exploring intensive, scale-intensive and external the broad picture of service-sector innovation innovation-intensive patterns in German from CIS data (e.g. using CIS2 data for service firms. There were clear tendencies Europe, Tether et al. (2002; presenting CIS4 for certain types of service industry to follow results, Arundel et al. (2007) and Eurostat particular types of innovation dynamic. The (2008). Below, we shall focus on three knowledge-intensive pattern, for instance, particularly interesting services—KIBS, was particularly marked in technical and creative services, and public services. R&D services and computer services. The network-based model was prevalent in KIBS banking, while the supplier-dominated model KIBS are generally classified into two was especially important in other financial groups—T-KIBS (technology-based ones) services. But Hipp and Grupp also warn such as (computer services, architectural against a simple identification of sectors with and engineering activities, technical testing innovation patterns. Though there are more and analysis, R&D services, etc—and P-KIBS, or less strong trends, all sectors have their more traditional professional services such exceptions—and indeed, some cases of each as legal and accountancy support, market of the innovation patterns were located in research and management consultancy. Many each of the service sectors. studies have shown that KIBS overall tend These studies typically focus on issues to have high levels of innovation, and have such as innovation expenditure and the suggested that they behave more like high- sources of information for innovation. tech firms than other services. But Rodriguez Less attention is given to the nature of the and Camacho, (2010) analysed Spanish innovations themselves, but several studies CIS4 data to show that there are actually indicate that service firms are somewhat quite different types of KIBS innovators. more prone than manufacturers to report Some are like high-tech manufacturers— non-technological and organisational “hard innovators” who develop product innovations. Howells and Tether (2004) report innovations, largely based on internal that while a substantial share of service firms R&D. But there were three other groups. considered their main innovative activities “Knowledge diffusers” are those KIBS who to have been solely organizational, this act as agents of knowledge transfer, who was very rare among manufacturing firms. have close relationships with other agents Kanerva et al. (2006) report that service firms across the innovation system, including

Ian Miles 299 universities and public research institutes and P-KIBS, covering for example advertising, and technological centres. The other design, and graphics and multimedia services groups were “lonely innovators”—with few supplied to organisations. Until recently, collaborations, reliant on their own innovation such activities were seen as more the domain capacity for developing technological and/ of media studies and cultural criticism or organisational innovations—and a small than of innovation research, and there are group of “soft innovators” that mainly develop certainly difficulties in trying to specify the organisational and process innovations, often innovativeness of a new fashion design or TV largely based on acquisition of machinery and format, for example. equipment. Clearly we need to be cautious in But we are now beginning to see generalising about KIBS. studies focusing on innovation strategies Equally clearly, the innovative activity in experience industries (e.g. Voss of KIBS can be important for the whole and Zomerdijk, 2007), and evidence is economy. Even those KIBS whose primary accumulating that demonstrates that creative role is not “knowledge diffusion” are active in industries engage both in familiar sorts of providing solutions for their business clients’ product and process innovation, and in many problems. Often these will involve helping the other forms of organisational and business client to undertake innovations in practice model innovation (e.g. Miles and Green, or technology. Sometimes this involves a 2007). With a few exceptions, these industries coproduction of innovation on both sides (den have been neglected in innovation surveys, Hertog, 2000), as new knowledge is produced despite being the focus of a good deal of through the combination of the KIBS firm’s policy rhetoric. Some of them play important generic understandings and the more local roles in relating businesses to changing knowledge of the client. Through negotiation social milieux; some of them contribute to concerning the nature of the problem and the the creation of more innovative and creative potential solutions, both service supplier and milieux, as argued in many accounts of the client can learn: the challenge is for these creative city and economy. organisations to capture this learning and replicate the innovations. Public Services Finally, we briefly consider public services, Creative Services which are at the centre of policy concern (with In recent years, much policy attention at persistent concerns about their productivity national and local levels has been focused on and cost), and also have been neglected in 3 Online resources on public service innovation include the “creative industries”, which are mostly innovation surveys (which almost always the PUBLIN project (http:// activities defined by their focus on end- only examine private services). At a time www.step.no/publin/ ), the Innovation Journal (http:// user experience and production of creative of considerable reform of public services, www.innovation.cc/ ) and NESTA studies on public content (though typically some sorts of and redrawing of the boundaries between services (http://www.nesta. entertainment—theme parks, sports—and public and private sectors, there is a striking org.uk/assets/documents/ ready_or_not and numerous cultural service—museums—are omitted absence of evidence on which to base policy. other publications at NESTA’s from the classifications, while computer It is widely argued that public sectors are website). The ServPPIN project is an interesting recent effort software is often included!). Some of the less innovative than private firms (though the to explore public-private services here are aimed at businesses, and a evidence on this is mixed—see Halvorsen et innovation networks—see http://www.servppin.com/ (all 3 category of C-KIBS might be added to the T- al., 2005). This is often seen to result from accessed 20/07/2010).

300 lack of competition and bureaucratic (and explore innovation processes and trajectories political) control structures, so one very that go well beyond those familiar from popular solution has been the reforms known studies of automobiles, electronics and as the “New Public Management”, that pharmaceuticals. They suggest, too, that we introduce market-like structures and more should be prepared to uncover a very wide entrepreneurial management into the public range of different structures and strategies, sector—with some moves towards public- which are evolving as the service economy private partnerships and privatisation (there continues to develop. is now a sizeable private “Public Services This has considerable implications Industry” in some countries—Julius, 2008). for policy—one size will not fit all, and Most public services consist of multiple innovation policies will need to pay attention “branches” of very large organisations, in to the challenges of service innovation in many cases requiring highly skilled staff a competitive world (as well as in public (doctors, teachers, etc.), though other services). Likewise, new management cases involve more low-skill operational capabilities, and training to support their staff (cleaners, security staff, etc.). As large development and deployment, are needed. organisations, there is scope for economies Often the issue of cross-disciplinary and of scale, and public sectors were early cross-professional team working rises to the pioneers in the use of information technology fore, as innovations involve the combination of for back-office functions. There is also scope multiple goods and services in what has been to influence the innovation system more dubbed a “product-service system”, requiring generally through public procurement, and knowledge of technologies, social institutions “innovative procurement” has been a recent and regulations, and specific types of client theme. However, the proliferation of local and client interface. bodies and specialised professions, dealing Service innovation and innovation in with complex social issues, may create a services were themes that remained risk-averse attitude to innovation, push it neglected for a surprisingly long time. Now in inappropriate directions, or restrict the they have risen to the fore, and are engaging diffusion of innovations created in the course the attention of researchers and practitioners of practice. New Public Management alone is of many kinds. One of the striking unlikely to resolve all of these problems, and developments in the recent past has been thus we see numerous efforts to create new the commitment of IBM and several other institutions that can identify and disseminate large firms—mostly but not exclusively those

4 See for example http://www. ideas for and examples of good practice and dealing with Information Technology services ibm.com/developerworks/ creative solutions. (and hoping to apply Information Technology spaces/ssme for links to conferences and online within a huge range of service activities) to resources of many sorts, Concluding Remarks including curricula for new the creation of a new “science of service” or training programmes. A With service sectors being the bulk of SSME (Services Science, Management and network of SSME researchers is organised through http:// the economy, and service forming an even Education). This has been manifest in the www.ssmenetuk.org/ and a larger share of all economic activities, it foundation of a new journal of Service Science, symposium on “Succeeding 4 through Service Innovation” is is difficult to present a succinct account the organisation of numerous conferences, described at http://www.ifm. of service innovation. What the studies and several substantial publications (e.g. eng.cam.ac.uk/ssme/ (all sites accessed 31/10/2020). reviewed here do point to is the need to Maglio et al., 2010) outlining new concepts

Ian Miles 301 of service systems and the various elements References that might comprise a service science. The Ar u n d e l , A., M. Ka n e r v a , A. v a n Cr u y s e n and H. Ho l l a n d e r s (2007), notion of a service science is a formidable Innovation Statistics for the European Service Sector, UNU-MERIT, INNO-Metrics Thematic Papers at: http://www.proinno-europe. challenge; even information-processing eu/sites/default/files/page/10/07/Innovation_Indicators_for_the_ European_Service_Sector.pdf Accessed 31/08/2010. services take a wide range of forms, engaging Ava d i k ya n , A., and S. Lh u i l l e r y (2007), Innovation, Organisational Change and Servicisation: a Micro Data-Level analysis in Five suppliers and users in many ways. But the European Countries, paper presented at DIME Workshop concentration of effort is already beginning to “Organisational Innovation: the Dynamics of Organisational Capabilities and Design”, GREDEG—DEMOS, West-End Hotel, yield promising perspectives on the analysis Nice, 15-16 November. Ba r r a s , R. (1986), ‘Towards a Theory of Innovation in Services’, and design of service systems, and we may Research Policy 15(4), pp. 161-173. Ba r r a s , R. (1990), ‘Interactive Innovation in Financial and Business well see the new thinking about service and Services: the Vanguard of the Service Revolution’, Research services being reflected in new forms of, and Policy 19, pp. 215-237. Be l l e f l a m m e , C., J. Ho u a r d , and B. Mi c h a u x (1986), Innovation and strategies for, service innovation over the Research and Development Process Analysis in Service Activities, Brussels, EC, FAST, Occasional papers no. 116. coming years. Co o m b s , R., and I. Mi l e s (2000), “Innovation, Measurement and Services”, in J. S. Metcalfe and I. Miles (eds.), Innovation Systems in the Service Economy: Measurement and Case Study Analysis, Boston, MA: Kluwer Academic, pp. 85-103. d e n He r t o g , P. (2000), “Knowledge Intensive Business Services as Co-Producers of Innovation”, International Journal of Innovation Management 4(4), (December), pp 491-528. Dr o e g e , H., D. Hi l d e b r a n d and M. A. He r a s Fo r c a d a (2009), “Innovation in Services: Present Findings, and Future Pathways”, Journal of Service Management 20(2), pp. 131-155. Eiglier, P., and E. La n g e a r d (1987), Servuction, Paris: McGraw-Hill. Eurostat (2008) Science, Technology and Innovation in Europe, Luxembourg: Office for Official Publications of the European Communities. Fu c h s , V. (1968), The Service Economy, New York: National Bureau of Economic Research. Ga d r e y , J. (2002), “The Misuse of Productivity Concepts in Services: Lessons from a Comparison between France and the United States” in J. Gadrey and F. Gallouj (eds.) Productivity, Innovation and Knowledge in Services: New Economic and Socio-Economic Approaches, Cheltenham: Edward Elgar. Ga l l o u j , F. (1998), “Innovating in Reverse: Services and the Reverse Product Cycle”, European Journal of Innovation Management 1(3), pp. 123-38. Ga l l o u j , F., and F. Dj e l l a l (eds.) (2010), The Handbook of Innovation and Services, Cheltenham: Edward Elgar. Ga l l o u j , F., and M. Sa v o n a (2010), “Towards a Theory of Innovation in Services” in Gallouj and Djellal The Handbook of Innovation and Services, Cheltenham: Edward Elgar. Ga r t n e r , A., and F. Re i s s m a n (1974), The Service Society and the New Consumer Vanguard, New York: Harper and Row Gr ö n r o o s a , C., and K. Oj a s a lo (2004), “Service productivity: Towards a Conceptualization of the Transformation of Inputs into Economic Results in Services”, Journal of Business Research 57, pp. 414– 423. Gu m m e s s s o n , E. (1990), “Service Design”, Total Quality Management 2(2), pp. 97-101. Ha lv o r s e n , T., J. Ha u k n e s , I. Mi l e s and R. Rø s t e (2005), On the Differences between Public and Private Sector Innovation, PUBLIN Project, report D3, Oslo: STEP; available at: http://www.step.no/ publin/reports.html (accessed 31/08/2010). Ha r z i n g , A. W. (2010), Publish or Perish, version 3.0.3883 (18 August 2010), available at http://www.harzing.com/pop.htm (accessed 20 August 2010). Ho l m l i d , S. (2007), Interaction Design and Service Design: Expanding a Comparison of Design Disciplines, Stockholm, Nordic Design Research—Design Inquiries available at http://www.nordes.org/ data/uploads/papers/143.pdf (accessed 24 August 2010). Ho w e i l s , J. (2010), “Services and Innovation and Service Innovation”, in F. Gallouj, F. Djellal and C. Gallouj (eds.), The Handbook of Innovation and Services, Cheltenham: Edward Elgar.

302 Ho w e l l s , J., and B. Te t h e r (2004), Innovation in Services: Issues of Commerce) RFP 05-480-5824 Available at: http://www.smeal. at Stake and Trends, Inno Studies Programme (ENTR-C/2001), psu.edu/cmtoc/research/nistnpd.pdf (accessed on 31/08/2010). Brussels: Commission of the European Communities available Te t h e r , B., I. Mi l e s , B. Bl i n d , C. Hi p p , N. d e Li s o and G. Ca i n e l l i at: http://www.cst.gov.uk/cst/reports/files/knowledge-intensive- (2002), Innovation in the Service Sector: Analysis of Data Collected services/services-study.pdf (accessed 24 August 2010). under the CIS2 Manchester: University of Manchester, CRIC IoIR (Institute of Innovation Research) (2003), Knowing How, Knowing Working paper no. 11, ISBN 1 8402 006X—redraft of 7,45 Whom: A Study of the Links between the Knowledge-Intensive available at ftp://ftp.cordis.europa.eu/pub/eims/docs/eims_ Services Sector and The Science Base, Manchester, University of summary_98_184.pdf (accessed on 31/08/2010). Manchester; Report to the Council for Science and Technology, Va r g o , S., and R. F. Lu s c h , (2006), “Service-Dominant Logic: What available at: http://www.cst.gov.uk/cst/reports/files/knowledge- It Is, What It Is Not, What It Might Be”, in R. F. Lusch and S. Vargo intensive-services/services-study.pdf (accessed 20 June 2009. (eds.), The Service-Dominant Logic of Marketing: Dialog, Debate, and Jo h n e , A. and C. St o r e y (1998), “New Service Development: a Review Directions, Armonk, New York: M. E. Sharpe. of Literature and Annotated Bibliography”, European Journal of Vo s s , C., and L. Zo m e r d i jk (2007), “Innovation in Experiential Marketing 32(3/4), pp. 184‑251. Services—An Empirical View”, in DTI (ed.), Innovation in Services, Ju l i u s , D. (2008), Public Services Industry Review—Understanding the London: Department of Trade and Industry, pp. 97-134. Public Services Industry: How Big, how Good, where Next? London: BERR—Department for Business Enterprise & Regulatory Reform. Ka n e r v a , M., H. Ho l l a n d e r s and A. Ar u n d e l (2006), Can We Measure and Compare Innovation in Services? Luxembourg: European TrendChart on Innovation, 2006 TrendChart report available at http://archive.europe-innova.eu/servlet/Doc?cid=6373&lg=EN (accessed 31/08/2010). Lu s c h , R. F., S. Va r g o and G. We s s e l s (2008), “Toward a Conceptual Foundation for Service Science: Contributions from Service- Dominant Logic”, IBM Systems Journal 47(1), pp. 5-14. Ma g l i o , P. P., C. A. Ki e l i s z e w s k i , and J. C. Sp o h r e r , (eds.) (2010), The Handbook of Service Science, New York: Springer. Ma r t i n , C. R., and D. A. Ho r n e (1993), “Services Innovation: Successful Versus Unsuccessful Firms”, International Journal of Service Industry Management 4(1), pp. 49-65. Ma r t i n , C. R., and D. A. Ho r n e (1995), ‘Level of Success Inputs for Service Innovations in the Same Firm’, International Journal of Service Industry Management 6(4), pp. 40-56. Mi l e s , I. (1993), “Services in the New Industrial Economy”, Futures 25(6), pp. 653-672. Mi l e s , I. (1994), “Innovation in Services”, in M. Dodgson and R. Rothwell (eds.) Handbook of Industrial Innovation, Aldershot: Edward Elgar. Mi l e s , I. (2005), “Innovation in Services”, in J. Fagerberg, D. Mowery and R. Nelson (eds.), The Oxford Handbook of Innovation. Oxford: Oxford University Press. Mi l e s , I. (2008),“Pattern of Innovation in Service Industries”, IBM Systems Journal 47, pp.115-128. Mi l e s , I. (2010), “Service Innovation”, in P. P. Maglio, C. A. Kieliszewski, and J. C. Spohrer (eds.), The Handbook of Service Science, New York: Springer 2010. Mi l e s , I., and L. Green (2008), “Hidden Innovation in the Creative Industries”, London: NESTA Research report HICI/13 at: http:// www.nesta.org.uk/assets/Uploads/pdf/Research-Report/hidden_ innovatioI_in_creative_Industries_report_NESTA.pdf (accessed 31/08/2010). Mo r i t z , S. (2005), Service Design: Practical Access to an Evolving Field Koln: Koln International School of Design, accessed from http:// stefan-moritz.com/welcome/Service_Design_files/Practical%20 Access%20to%20Service%20Design.pdf (accessed 24 August 2010) Pav i t t , K. (1984), “Sectoral Patterns of Technical Change: Towards a Taxonomy and a Theory” Research Policy 13(6), pp. 343-373. Pav i t t , K. (1994), “Key Characteristics of Large Innovation Firms” in M. Dodgson and R. Rothwell (eds.), The Handbook of Industrial Innovation, Aldershot: Edward Elgar. Ro d r i g u e z , M., and J. A. Ca m a c h o (2010) “Are Knowledge-Intensive Business Services so ‘Hard’ Innovators? Some Insights Using Spanish Microdata”, Journal of Innovation Economics 5(2010/1), pp. 41-65. Available at http://www.cairn.info/revue-journal- of-innovation-economics-2010-1-page-41.htm (accessed 31/08/2010). Sa c o , R. M., and A. P. Go n c a l v e s (2008), “Service Design: An Appraisal”, Design Management Review 19(1), pp. 10-19. Su s m a n , G., A. Wa r r e n and M. Di n g (2006), Product and Service Innovation in Small and Medium-Sized Enterprises, State College, Pennsylvania, Smeal College of Business; report to The National Institute of Standards and Technology (United States Department

Ian Miles 303

Financial Innovation: A Balanced Look

Robert E. Litan1 Financial innovation—once an past several decades, though the critics are Brookings Institution, Kauffman Foundation unquestioned positive for any economy— right that there have been “bad” ones as has been much less celebrated since the well. In this chapter I attempt to sort out the financial crisis that began in 2007 and the two, concentrating primarily on innovations Great Recession that followed in its wake. introduced into the US market since the Some leading economists, notably Paul 1960s, the period in which Chairman Volcker, Volcker (former Chairman of the Federal in particular, claims there has been little Reserve), Paul Krugman (Nobel prize- socially useful innovation. I conclude by winning economist at Princeton and a New offering some suggestions on how policy York Times columnist) and Simon Johnson makers and regulators can best facilitate (former chief economist of the IMF), have future “good” financial innovations while each expressed skepticism about the social weeding out the “bad” ones before they can value of financial innovation in general, and do much damage. with much justification, since some recent innovations helped lead to the crisis. More Financial vs. Real Sector Innovations: Are

1 Senior Fellow, Economic significantly, the sweeping Dodd-Frank Wall They Different? Studies Program, The Street Reform and Consumer Protection Act Before I turn to the main topics of the Brookings Institution and Vice President, Research and Policy, enacted in the United States in summer of chapter, however, it is important to address a The Kauffman Foundation. Excellent research assistance 2010 for the purpose of preventing financial threshold issue that lurks behind the critique by Adriane Fresh is greatly crises or at least minimizing their harmful of financial innovation: that it is somehow appreciated. This chapter is based on an earlier, longer impacts, contains numerous provisions that, different from innovations in the real essay, “In Defense of Much, But depending on how they are implemented by economy, and therefore deserving of more Not All, Financial Innovation,” available on the website of the future regulators, could slow future financial skepticism. Several such differences have Brookings Institution, at www. innovation. been alleged. Do the allegations have some brookings.edu. My thesis here is that financial innovation basis? does not deserve all the blame that has One common view, for example, is that been heaped on it. In fact, there have been financial innovation consists of little more a number of “good” innovations over the than arbitrage, and that even successful

Robert E. Litan 305 trading strategies provide no net social investors or venture capitalists, and later value, since for every winner there is a were financed through public stock sales. loser. This view is misplaced. By definition, Although the stock market implosion caused arbitrage eliminates differences in prices significant losses to stockholders—and of like products or assets in different not just those with investments in the dot. locations. Innovations that permit this to be coms—these losses for the most part were accomplished more quickly and efficiently not compounded by leverage. As a result, the reduce costs, provide more accurate price real sector fallout from the dot.com bust was signals at any point in time, and generally far less damaging than the damage caused by make markets more liquid and efficient. the popping of the real estate bubble. Added liquidity and efficiency, in turn, make The third alleged difference between it easier and less costly for firms to raise financial and real sector innovations is capital. that the former are often said to be driven To be sure, there is something to the largely by the desire to circumvent rules “zero-sum” critique of trading innovations. and statutes, while the latter are supposedly But as we will soon see, many useful financial motivated overwhelmingly or even entirely by innovations over the past several decades innovators seeking to do or make something have little or nothing to do with trading. “faster, cheaper, better.” This distinction A second very real difference between is not as clear as some may believe. Both innovations in finance and those in the financiers and manufacturers and service real sector is that the former are often providers engage in games of “cat and more heavily leveraged, or financed with mouse” with their regulators. Moreover, debt. Among many other things, the recent these games are not necessarily socially financial crisis has illustrated how dangerous pernicious. To the contrary, efforts to get excessive leverage can be. For example, around “bad” or inefficient rules—such as the infamous collateralized debt obligation the Depression-era limits on interest that (CDO) that enabled far too many subprime banks could pay their depositors—are to be mortgages to be originated and sold (with applauded. Other efforts (such as the creation the mistaken blessings of the credit rating of the supposedly off-balance sheet SIVs by agencies) and which fueled the wider real banks) that get around “good” rules, such as estate bubble of the last decade, was a debt capital standards, deserve condemnation. instrument that turned out to have largely My bottom line: when financial innovation destructive consequences. Likewise, the leads to a better, faster or cheaper outcome, “structured investment vehicle,” or SIV, was it is no different from real sector innovation. one of the primary means by which large It is only when financial innovation is banks financed CDOs. I have more to say defined by or augmented by leverage that about both these innovations below. it can significantly differ from and be more By contrast, real sector innovation tends dangerous than real sector innovation. to be financed more by equity than debt. The “dot.coms” of the late 1990s, many of Why Does Financial Innovation Matter? which disappeared rapidly when the stock Financial institutions, markets and market bubble popped in April 2000, got their instruments perform four broad social and start largely with equity provided by angel economic functions. Innovations that improve

306 commercial banks), and among major banks When financial innovation in the United States and other developed “ economies through the Clearinghouse for leads to a better, faster or Interbank Payments System (CHIPS). Second, by offering methods for earning cheaper outcome, it is no interest, dividends and capital gains on monies invested in them, financial different from real sector institutions and instruments encourage saving. Saving is socially important because innovation. It is only when it funds investments in physical and human capital that in turn generate higher incomes financial innovation is defined by in the future. By the 1960s, most of the major institutions that exist today for facilitating or augmented by leverage that saving were already in place: banks (and savings and loans, or specialized banks it can significantly differ from placing deposits in residential mortgages), insurance companies, mutual funds (but not and be more dangerous than real yet money market funds or the increasingly popular index funds, each discussed below), sector innovation and corporate pension plans. In addition, ” investors who had the time and the means could buy various financial instruments directly: government or corporate bonds and the way these functions are carried out, by corporate stocks. definition, are useful. Others may temporarily Third, financial institutions and markets, appear to be improvements, but in fact turn if they are working properly, channel savings, out to have socially pernicious collateral whether by domestic or foreign residents, effects. Before I give specific examples of into productive investments. Well before the both types, it is important to know what these 1960s, it was commonplace for companies functions are. wanting to build new buildings or to purchase The first function of finance is to provide a new capital equipment, to borrow the funds means of payment and storing wealth. What we from banks or insurers (whose primary know as “money” was first embodied in coins, functions as “financial intermediaries” are livestock and foodstuffs, later in paper, and to direct the funds placed with them into then in bank checking accounts. More recently, private and public sector investments), or to “money” has become digitized, found on issue new bonds or even to sell additional general purpose credit cards (first introduced stock. The US government was instrumental by American Express and Bank of America in in facilitating investment in residential 1958), and is transferred in large wholesale housing by aiding the mortgage market. In amounts electronically, through automated the 1930s, the government established the clearinghouses, the Fedwire system operated Federal Housing Administration to insure by the Federal Reserve (which also plays a mortgages taken out by low and moderate central role in clearing checks written on income households and the Federal Home

Robert E. Litan 307 Loan Bank System. Later and over time, the limited. Insurers were willing to bear the federal government launched Ginnie Mae, risk of default of municipal and state bonds Fannie Mae and Freddie Mac to provide a and certain other financial instruments, but secondary market for most mortgages. generally no other financial risks. Futures Likewise, the government facilitated contracts for various commodities, which had investment in education, or “human capital” long been present, were available on futures by guaranteeing loans for post-secondary exchanges, but there were no widely-used education. And, of course, the US government mechanisms yet for insuring against other funded some of its own investment kinds of financial risks—due to fluctuations activities—such as the construction of the in interest rates, currencies (there was no interstate highway system and the support of need for this as exchange rates between much scientific research—in part by issuing currencies were fixed under the post-war bonds (when tax revenues were not sufficient Bretton Woods agreement), or stock prices to pay for all this). But with the exception (of individual companies or indexes). As will of a few small “venture capital” limited be discussed in the next section, various partnerships, to be discussed shortly, the US financial innovations over the past several financial system had yet to develop by the end decades have filled this gap. of 1960s a reliable institutional way to fund the inherently risky process of firm formation Assessing Recent Financial Innovations and initial growth. It is now time to list and assess specific A final, and sometimes overlooked, financial innovations since the 1960s, or essential function of finance is to allocate around the time that the ATM machine, risks to those who are most willing and able the one financial innovation celebrated to bear them. This function is sometimes by Chairman Volcker, was introduced confused with the belief that finance reduces into the US banking system. I assess overall risk. Clearly it does not, and cannot. the innovations qualitatively along three Instead, the best that finance can do is to dimensions: the degree to which they widen shift risk to those who most efficiently can access to a particular financial service, bear it and to spread it out so that it is not enhance convenience of users, and add to or unduly concentrated among a handful of detract from GDP or productivity. For each parties. One of the most important lessons dimension, I give scores ranging from -- to ++ from the financial crisis is that the kinds of on what I believe to be the net impacts. Table “securitization” that made subprime lending 1 summarizes the results of my assessments, possible did not end up de-concentrating which I now describe verbally with respect to risks of default of the underlying mortgages, the innovations relating to each of the four as so many market participants and other financial functions just identified. analysts (including me) argued or expected. As of the 1960s, insurance companies Innovations in Payments dominated the risk-bearing/allocation The ATM machine is not the only socially function of finance by underwriting various useful innovation in payments in recent personal (auto, house, life, and health) and decades. As noted, general purpose credit commercial (primarily property-related) (and debit) cards—both introduced since risks. But insurance for financialrisks was the 1960s—have become key parts of the

308 Table 1. Scoring Net Impacts of Recent Financial Innovations: A Summary

Access Convenience Productivity/GDP Payments ATMs ++ ++ + Credit card expansion ++ ++ + Debit cards ++ ++ + Saving Money market funds ++ ++ 0 Indexed mutual funds ++ ++ + Exchange-traded funds + + 0/+ Limited partnerships Hedge Funds 0 0 0/+ Private Equity 0 0 + TIPS ++ ++ 0/+ Investment Credit scoring ++ ++ 0 ARMs ++ N/A+ -/-- Home Equity Lines of Credit ++ ++ - Asset-backed securities ++ ++ -/+ (see text) CDOs* ++ ++ -- SIVs* ++ ++ -- Rise of Venture Capital + + ++ (but future not clear) Risk-Bearing Options/Futures Exchanges and Pricing + + +/++ Interest/Currency Swaps ++ ++ +/++ *The positive scores here were Credit default swaps + + + temporary Permutas de cobertura por incumplimiento crediticio + + + Source: Analysis in text.

payments systems in developed economies, to borrow, which has widened consumers’ and recently, some emerging markets access to unsecured credit, at lower cost, (notably China). On balance, despite some than was previously available, if at all, in continuing complaints about credit card grey markets, pawn shops or loan sharks. disclosures and some pricing practices, In the United States in particular, credit these “plastic monies” have been welfare- card borrowing also has enabled many enhancing. Credit and debit cards have not entrepreneurs to launch their businesses only become more convenient and in some at a scale beyond what would be possible respects safer than money (in the United through the entrepreneurs’ liquid net worth States, consumers are liable for only $50 alone. Perhaps more for this reason than any for fraudulent uses or stolen cards, whereas other, credit cards in this fashion have made they can lose all the money they carry if they some positive contribution toward long-run are robbed). Credit cards also permit users economic growth.

Robert E. Litan 309 Savings Innovations Up until the 1970s, American retail For decades since the investors (and those outside the United “ States) had relatively limited choices about Depression, the US government where to put their savings: in bank deposits or their functional equivalents, in bonds, has adopted a variety of stocks of individual public companies, and a limited range of mutual funds. A series of measures to promote home financial innovations since then, driven in part by interest rate deregulation and in part ownership, including the creation from the commercial application of academic insights, have greatly expanded the range of of agencies to insure, purchase, available options. The new choices include: money and guarantee securities backed market mutual funds (developed as a way of circumventing interest- rate controls by residential mortgages on bank deposits, a clear example of a ” “bad” regulation), indexed mutual funds (originating from the academic insight that actively managed funds rarely outperform in 2006-2007. Since the recession and the the indexes), exchange traded funds or steep fall in both real estate and stock prices “ETFs” (a cost-saving innovation developed that followed, private savings rates have by the financial industry), financial limited rebounded somewhat. Through mid-2010, partnerships, such as hedge funds and when this chapter was written, the broader private equity funds (“alternative” assets range of savings choices does not appear that until relatively recently outperformed to have given much comfort to many newly more liquid stock portfolios, though often risk-averse households, perhaps with the because they are leveraged), and inflation- exception of TIPs and some commodity protected government bonds or “TIPs” ETFs. These two instruments have come to (promoted by academic economists, first be viewed as hedges as against the possible adopted in the United Kingdom in the 1980s future inflation that may eventually follow in and roughly ten years later, by the United the wake of the significant monetary easing States). engineered by central bankers in the 2008- Broadly speaking, these savings vehicles 09 period to keep developed economies have expanded access and convenience from falling even deeper into the recession for investors, while most likely modestly triggered by the financial crisis. enhancing economy-wide GDP. All of this occurred even while, in the United States, Intermediation-Related Innovations the private savings rate itself declined to Ask most economists about the function roughly 0, most likely because households of finance they believe to be most important, counted on the rising values of their homes and the answer they will most likely give to add to their wealth, a belief that had some is the effective translation of savings into validity until the real estate bubble popped socially productive investments. Yet it is the

310 innovations in financial “intermediation” homeowners tend to take greater care of that have proved to have had the most mixed their homes and have more interest in the record of all of the innovations surveyed in welfare of their neighborhoods than renters. this chapter, and largely for this reason, In addition, the Bush Administration in these innovations deserve more discussion particular viewed home ownership as one, than the others. albeit very important, element of its larger In retrospect, the mixed record of the interest in developing a broad “ownership intermediation-related innovations is due society.” On this view, the greater the overwhelmingly to what turned out to ownership interest people have in a broad be hugely costly innovations in housing array of assets—homes, companies, and finance in particular. The outcome was the like—the greater will be their affinity for not an accident, however, as it was heavily market-oriented policies. influenced if not directly promoted by Whatever the precise reason or mix of US government policies that took the reasons, the strong bipartisan consensus advancement of home ownership too far and favoring increased home ownership required by regulatory policies and attitudes that failed that mortgage credit be made available on to police obviously unproductive innovations. affordable terms to individuals and families To whom should blame then be assigned: with lower and less stable incomes than the unwelcome innovations or the policies those who had earlier borrowed money to buy that facilitated if not directly led to them? The a home. This outcome, in turn, could only be answer, of course, is both. realized if mortgage underwriting standards The general story of how all this happened and down payments were relaxed for these is by now, of course, well known. For decades “subprime borrowers.” since the Depression, the US government has The financial industry responded with a adopted a variety of measures to promote series of innovations, encouraged by federal home ownership, including the creation of policy, but also only made possible by a agencies to insure, purchase, and guarantee record bubble in housing prices to which securities backed by residential mortgages. both the innovations and the policies they In addition, the federal tax code has long fostered contributed. In combination, these permitted taxpayers to deduct the interest innovations gave millions of Americans with paid on home mortgages. In 1978, the federal less-than-stellar credit histories, many (but government encouraged depository lenders not all) with low incomes, access to mortgage to extend credit to lower-income households credit, eventually pushing the home and to other borrowers in low-income ownership rate to 69% of all households. neighborhoods. This feat could not have been accomplished For years, this combination of incentives unless each and every one of the innovations and mandates steadily lifted the home about to be described had been developed ownership rate to roughly 64-65% of all and successfully marketed. In fact, some of households by the mid-1990s. Both the these innovations were innocuous or mildly Clinton and Bush Administrations, as well as constructive on their own but in combination, Congress, wanted that rate to go still higher, they proved to be deadly dangerous to the premised largely on the notion that home financial system and ultimately to the rest of ownership yielded important externalities: the economy:

Robert E. Litan 311 • To give subprime borrowers access to the mortgages, while investors in less seemingly “affordable” mortgages, the safe, but higher-yielding tranches had mortgage lending industry (banks to a later claims. CDOs were central to the limited extent, but most importantly, a over-development of the subprime new class of mortgage lenders that were mortgage market because they allowed not adequately supervised or regulated the originators of the mortgages to by federal authorities) invented a new offload them (and thus not care about variation of the adjustable rate mortgage their quality) to the buyers of the different which charged borrowers very low initial tranches of the securities. “teaser” interest rates that reset to rates • CDOs, and specifically the first and substantially higher than the Treasury supposedly their safest tranches, could benchmark rate several years later not have been sold, however, without when presumably higher real estate other parties and still other innovations. prices would permit the borrowers to Even with their first call on the cash flows, easily refinance. In fact, this Ponzi-like the first tranche of the CDOs would not scheme worked, up until about 2006, when have been attractive to risk-averse, yield- home prices quit rising, which triggered hungry investors (who were starved for higher subprime mortgage defaults, and safer, higher yielding securities in the low- eventually a full-blown financial crisis. interest environment engineered by the • Mortgage lenders would not have Federal Reserve to sustain the recovery) been comfortable extending subprime unless the ratings agencies bestowed loans without the invention and later their coveted AAA ratings on these propagation by both major commercial particular securities (the lower ratings for and investment banks of a new financial the riskier tranches were less important instrument—the collateralized debt to the other investors with higher risk obligation (CDO). The CDO transformed tolerances). When the CDOs were first what once was a socially productive developed, the ratings agencies balked innovation, a “mortgage-backed security” at doing this—the right instinct because (MBS) backed by a pool of mortgages the mortgages, after all, were subprime, extended to prime quality borrowers, and and the agencies had no actuarial data turned it into a financial Frankenstein. of how these mortgages fared over an The CDO’s chief “innovations” included entire business cycle—but were ultimately the use of newer securities backed by persuaded when the banks and their allies subprime (instead of prime) mortgages made use of yet another recent innovation, (increasingly underwritten without the credit default swap. Although it has verification of the borrowers’ income or been much maligned in the popular press job history) and the slicing of the cash and in some journalistic accounts of the flows from those securities into different financial crisis, there is nothing inherently classes or “tranches” (as they came to evil about the CDS itself: it is, after all, be called) designed to appeal to investors the functional equivalent of insurance and with different appetites for risk. Those it is precisely for this reason that when investors wanting the safest instruments packagers of CDOs added CDS protection, got first rights to the cash flows from or even explicit bond insurance, to the

312 first tranches, that the ratings agencies of this “asset-backed commercial paper” then awarded their AAA ratings. The CDS refused to roll it over or buy new issues. later became infamous, not because of This triggered a wider run on many bank- its flawed design, but because one of sponsored SIVs, and after an aborted its largest issuers, AIG, failed to provide attempt by the Treasury to organize an sufficient collateral when it was due under industry-financed bailout of all major the terms of the contract. But not all CDO SIVs, the banks wound down their SIVs tranches (or even all CDOs) had protection and assumed their assets, and more from CDS or bond insurance, and thus importantly their liabilities. investors in them lost heavily when In sum, SIVs proved to be temporary, but subprime mortgages began defaulting ultimately flawed, vehicles for financing CDOs after residential real estate prices before they could be off-loaded to third- quit climbing and started to plummet. party investors. In this activity, they were Ultimately, therefore, by facilitating the joined by CDOs, teaser rate ARMs, and other unbundling of mortgage origination mortgage-financing innovations that for a from the risk of holding the mortgages time provided access to mortgage credit to a to maturity, CDOs greatly weakened, wider pool of homebuyers with sub-par credit if not destroyed, lenders’ incentives to histories. In combination, these innovations underwrite mortgages prudently. fueled the bubble in real estate prices • One other dangerous financial innovation generally that eventually popped and brought helped make the subprime mortgage the whole subprime mortgage experiment to debacle possible: the creation and an abrupt and highly painful halt. greatly expanded use of the “structured Intermediation-related innovations, investment vehicle” by some of the largest including some affecting mortgage lending, commercial banks active in creating and have not all been socially destructive, marketing CDOs and other risky asset- however, and thus this review would not be backed securities. SIVs were an entirely complete without mentioning the few that legal, ostensibly off-balance sheet, way for have made financial intermediation more the banks to park their CDOs for sale to efficient and improved social welfare during the public without having to raise or hold the past several decades. additional bank capital, as was required A good place to start is with the by the prevailing bank capital rules. The securitization process, which began with SIVs had an Achilles heel, however: they mortgages in the early 1970s and later were funded almost entirely (except for spread to other assets that served as a small sliver of capital supplied by the collateral. The fundamental idea behind banks and outside investors) by short- securitization—standardizing loans and using term commercial paper, which although them to back securities to attract financing it was secured by the CDOs and other from the capital markets and not simply from assets, proved to be highly susceptible banks—was and remains sound. A broader to a creditor “run”. In fact, this is just pool of financing, even without an implicit what happened in mid-2007: when the government guarantee, leads to modestly market value of this collateral began to lower interest rates and thereby facilitates fall as home prices turned down, buyers investment. But the subprime mortgage

Robert E. Litan 313 debacle revealed a significant downside of bursting of the Internet stock bubble, venture this new “originate-to-distribute” lending capitalists have moved away from “seed” model. The separation of the origination of investing—providing the initial equity to help loans from those who ultimately hold them launch companies—toward less risky later undermines incentives of the originators to financing “rounds.” Not surprisingly, returns be prudent. To some degree, securitization for limited partners in VC have plummeted. contracts address this problem by giving Accordingly, after its remarkable successes those who buy the loans rights to “put” of the 1980s and 1990s, the VC industry is them back to the originators under certain now at a crossroads. Not only do few VCs conditions. But these conditions are narrow provide seed capital of any kind, but the and often contested. The better answer is for industry is wary of financing capital-intensive originators and securitizers to retain some startup firms, such as those attempting to credit risk—the Dodd-Frank bill requires develop new drug therapies or “clean energy” 5% except for securities meeting high alternatives to carbon fuels. Seed financing underwriting standards—so that both have arrangements therefore are a ripe area for stronger incentives for careful underwriting. future innovation. A second, related financial innovation is the development and now widespread use Financial Innovations and Risk-Bearing of credit scoring algorithms for personal The fourth key function of finance is to and business borrowers. Credit scores have spread or allocate risk to those parties most improved lenders’ ability to predict and thus willing and able to bear it. In recent decades, to better price risk through the interest rates a variety of derivatives—financial instruments they charge on loans. Credit scoring has whose value depends on some other widened availability of credit and, by making “underlying” asset—have proliferated to take credit ratings more objective, has reduced on this role: exchange-traded stock options (though not entirely eliminated) racial and financial futures and “over-the-counter” discrimination by lenders. swap arrangements (relating to exchanges Finally, there has probably not been an of cash flows with different interest rates; iconic financial innovation over the past four in different currencies; and to possible loan decades in the US that has more greatly defaults, or “credit default swaps”). improved the allocation of savings toward Derivatives have also become a media productive investment than the formalization poster child for what supposedly went and subsequent rise of the venture capital wrong in the financial crisis. Mostly, this industry, and to a lesser extent, of angel is because one of the largest sellers of investing (equity injections in startups by mortgage credit derivatives in particular, wealthy individuals or groups of them). AIG, was brought to its knees in the fall of Venture capital firms—limited partnerships 2008 and was essentially taken over by the managed by the venture capital general federal government (through a massive partner(s)—have been rightly credited with bailout orchestrated by the Federal Reserve) having given birth to some of America’s most in an effort to contain systemic risk when famous companies, including Google, eBay, that risk was at its peak. Mortgage-related Amazon and Genentech, among others. credit default swaps also seemingly played Over the past decade, especially since the the villain in Michael Lewis’s highly popular

314 and well-researched book, The Big Short, which contributed to the popular ire over this In all markets there are particular financial innovation. “ Several points should be made about winners and losers, but the fact financial derivatives to put them in their proper perspective. First, financial derivatives that there are both does not are hardly new: options (the right to buy a product or instrument at a fixed price by condemn markets as institutions. a certain date) and futures (which require the holder to buy or sell the product or Financial derivatives are no instrument at a fixed price at the maturity date) are several centuries old, and neither exception played any role in the recent financial crisis. ” Second, the vast majority of the hundreds of trillions of dollars (in nominal or face value) of the newer financial derivatives—those hedgers would have much more difficulty whose value is tied to movements in interest finding counterparties. Perhaps just as rates and currencies—also played no role important, because CDS markets are typically in the crisis. Furthermore, these derivatives far more liquid than are the markets in the have been socially constructive: both interest underlying loans or bonds, CDS prices— rate and currency swaps permit parties which reflect the views of both hedgers and with different risk preferences to act on speculators—provide more accurate, timely them, without having to sell the underlying market-based signals about the financial instruments (loans or bonds) to which the health of the company (or other issuer) swaps refer. whose debt is subject to the swap, than the Third, even the credit default swap, market prices of the debt itself. perhaps the most maligned of all financial Fourth, the mortgage-related CDSs derivatives, is fundamentally a constructive that have attracted so much attention and innovation. As a device to insure against loan notoriety account for less than 5% of the default, the CDS affords a way for various overall debt market. Virtually all other CDSs parties—lenders, suppliers, customers, and relate to corporate bonds or loans. others—to hedge against a very specific Still, over-the-counter (OTC) markets for adverse event. Even when these swaps are financial derivatives are far from perfect. bought by “speculators,” or those without They are dominated by a handful of dealers, an economic interest in the underlying prices are less than transparent and not debt, they serve a useful function, as long timely, and as the AIG episode demonstrated, as those selling these instruments have they are subject to breakdown if one or posted adequate collateral or margin and more large participants cannot honor their have sufficient capital to honor the contracts obligations. These problems should be (as AIG did not). For one thing, without largely, if not entirely, addressed once all the speculators, as in options markets where regulations relating to OTC-traded financial buyers typically do not own the underlying derivatives in the Dodd-Frank financial security on which the option is based, reform bill are developed and implemented.

Robert E. Litan 315 In particular, the bill’s requirement that one or more parties do not spill over and standardized OTC financial derivatives threaten to destroy the viability of the entire of all types must be cleared by a central system. Recent legislative reforms in the clearinghouse should remove the risks of United States, likely to be emulated in other cascading defaults entailed when derivatives countries, should substantially mitigate this contracts are bilateral and the counterparties risk. can look only to each other for performance— and not to a central organization with Public Policy toward Financial Innovation the ability to set and enforce margin and in the Future collateral requirements. In addition, the The US Congress enacted and the bill requires such standardized contracts President signed into law in the summer of to be traded on quasi-exchanges (“swap 2010 the Dodd-Frank bill, the most sweeping execution facilities”, a term yet to be defined financial reform legislation enacted since by regulators) and for their prices to be the Depression. This is not surprising. reported more frequently than is currently The financial crisis of 2007-2009 was also the case. Better transparency, in turn, will the most traumatic such event since the make it easier to specify appropriate margin 1930s, and it would have been shocking had requirements and thus further reduce— Congress done nothing in response. beyond central clearing itself—the potential Debate will surely continue for years for system-wide collapse if one or more key over the merits of Dodd-Frank, as it was derivatives participants are unable to honor enacted and more importantly, as it will be their obligations. implemented through the more than 200 In sum, financial derivatives enhance the rulemakings that will eventually convert its ability of both financial and non-financial generally ambiguous statutory language parties in an economy to hedge and control into more concrete regulatory guidance. their financial risks. That some parties may As regulators go about their jobs, and use these contracts to bet correctly on the as future legislators consider tweaks or failure of particular companies or entire possibly major changes to Dodd-Frank, their markets—as was the case with subprime attitudes toward financial innovation will be mortgages—does not disprove this central critical. proposition. In all markets there are winners For example, if a skeptical view of financial and losers, but the fact that there are both innovation takes hold—either because does not condemn markets as institutions. the benefits of innovation are perceived to Financial derivatives are no exception. be presumptively small and/or the risks However, recent events have underscored of catastrophic damage are feared to be the possibility that precisely because non-trivial—then policymakers (and even derivatives have become such important voters) are likely to demand some sort of financial instruments, and that some of pre-emptive screening and possibly design the parties who trade them are heavily mandates before financial innovations are interconnected with each other and with the permitted to be sold in the marketplace. rest of the financial system, it is essential This attitude would put regulators rather to have an appropriate infrastructure to than the market in charge of screening ensure that performance difficulties of innovation, a process that runs significant

316 extensively in both animals and humans, So, which model should before they can be sold to consumers. “ Analogously, the dangers of a core meltdown apply to financial innovation of a nuclear reactor, however remote, have driven policymakers from the very beginning in the future: the preemptive of the nuclear age to require the utilities that construct such facilities to comply with drug/nuclear power approach, specific design and performance standards. The European Commission has gone further or the wait-and-see policy by adopting the “precautionary principle” in a number of arenas—environmental policy, generally pursued in most other for food products, and consumer protection generally. Although this principle has been contexts? applied differently in different contexts, ” it essentially means that where there are plausible grounds for believing that a new (or currently-existing) product or activity poses risks of chilling innovations before they a risk to human health or the environment, have even had the chance to be tested in policymakers can regulate it in advance (or the marketplace. Conversely, a more open, even ban it). wait-and-see approach to innovation would With the narrow exceptions of wait for the innovations to emerge and then pharmaceuticals and nuclear power, only regulate them if they generated costs however, US regulatory and social policy greater than their benefits. This has been the has not followed the precautionary principle, reining-in approach to financial innovation and thus has so far taken a very different so far, and it clearly is the way US policy course from that in Europe. Government has generally handled innovation in the real regulates only once evidence of detrimental sector of the economy. A wait-and-see policy side-effects becomes reasonably clear, and gives the market the first crack at screening then, where the underlying statute permits, innovations, but runs the opposite risk from only when the benefits of regulating outweigh the preemptive approach: if regulators are the costs, and the content of the regulation late to act, because of their own laxity or due represents the least costly way to achieve to strong political counter-pressures, they those benefits.2 can permit socially harmful innovations to So, which model should apply to financial wreak considerable havoc before they are innovation in the future: the preemptive drug/ reined in. nuclear power approach, or the wait-and- In some areas of life, of course, it is see policy generally pursued in most other appropriate for policymakers to take a contexts? Regulators in the United States and skeptical approach toward innovation. elsewhere will be wrestling with this question 2 The balancing of benefits The concern about possible catastrophic in many contexts for years to come. Despite and costs and the least-cost requirement for regulation have outcomes is the reason Congress established the clear damage caused by this most recent been embodied in one fashion the Food and Drug Administration, requiring crisis, I believe that, generally speaking, or another in Executive Orders since the Ford administration. among other things, that new drugs be tested financial innovation should continue to be

Robert E. Litan 317 screened by the market first and regulators and see” policy to regulation, it is conceivable later, for at least two reasons. that many of the innovations that make First, unlike in the pharmaceutical up modern life today would have been industry, it is difficult if not impossible to introduced much later, or even not at all: conduct clinical trials in the financial sector. the automobile (with side-effects of more New drugs can be and are tested on sample than 40,000 auto related deaths a year), the populations, first for their safety and then airplane (which has its share, albeit much their efficacy. If they pass both tests, the FDA lower than the car, of fatalities), and even makes the reasonable assumption that the the Internet (which is used by terrorists and behavior of the drug among a representative criminals, not just ordinary citizens). population may be extrapolated to the Advocates of preemptive screening in larger population. In contrast, while one the financial arena no doubt will argue, theoretically could test a new financial possibly taking their cue from Paul Volcker’s product—say, a mortgage, on a sample skepticism toward the social value of population—its behavior among that sample financial innovation in general, that because is likely to be heavily time-dependent. the benefits of innovation in the financial Subprime, adjustable-rate mortgages with arena are likely to be less than in the real low initial “teaser” interest rates that were sector and the dangers of harmful innovation extended in 2002 and 2003 may have been much greater, financial innovation therefore quite safe because real estate prices then should be treated differently for regulatory were rising, enabling borrowers to refinance purposes than real sector innovation. My at a later point. But the very same mortgages foregoing summary of financial innovations extended in 2006 or 2007, just when real provides a more optimistic assessment than estate prices had peaked, would and did this view. Moreover, the case for preemption have a different delinquency record. In short, wrongly assumes, in my view, that “wait-and- the results of a “clinical test” of a financial see” regulation cannot be improved. product at a particular point in time cannot be I believe it can, in part precisely because safely extrapolated for all time. regulators made mistakes, which they have One possible response to this problem, admitted, in the run-up to the most recent of course, would be to test new financial crisis. One of the silver linings of the crisis is products over an entire business cycle before that it has demonstrated to elected officials letting them on the market. But this would the dangers of interfering with regulatory subject such products to substantial delay, attempts to clamp down earlier on products and thus surely cut down on incentives of and practices that permit asset bubbles to financial institutions to innovate. unduly expand and later pop, with devastating Second, the danger that preemptive consequences. At least for a good long while, screening will chill productive innovation, regulators—specifically the new Systemic even without the kind of regulatory delay just Risk Council of regulators in the United suggested, is another powerful reason to States created by the Dodd-Frank bill—will generally reject the preemptive approach to have not only greater freedom to act, but the regulation in the financial arena. Thus, had legal duty to do so to prevent future bubbles, US policymakers followed the precautionary especially those fueled by leverage, from or preemptive approach rather than a “wait getting out of hand.

318 Another lesson from the recent crisis is But this exception should remain that way that potentially dangerous bubbles may be and not become the rule. forming when particular asset classes or In sum, a balanced look at financial financial instruments are rapidly growing. innovation over recent decades reveals a Future regulators would be greatly aided more positive picture than has been painted in their efforts to identify and prevent by some skeptical observers. But regardless future bubbles and thus possible sources of how one assesses past financial innovation, of systemic crises by harnessing important the recent crisis teaches us that policy market-based signals of distress, such as makers must stand readier to correct abuses those provided by the markets in credit when they appear and not let destructive default swaps, which regulators can use to financial innovations wreak the kind of justify their own early, preventative actions. economic havoc that we have unfortunately Indeed, this potential use of CDSs is an just witnessed. important reason why attempts by regulators in some countries to ban or limit “naked” CDSs or short selling are severely mistaken. They punish the messenger, when in fact we need more market-based messaging to help guide regulators and policy markets. Finally, notwithstanding the strong general case for a wait-and-see approach to financial regulation, there may be certain aspects of finance where the more intrusive preemptive approach toward innovation may be warranted. One such appropriate area involves financial products involving long- term contracts entered into by consumers, such as mortgages (when borrowing) or annuities (for retirement). There is a growing literature in behavioral finance indicating that individuals are not always rational in their investment decisions. This tendency is dangerous when even well-informed individuals are making long-term financial commitments, with heavy penalties (in the case of mortgages) or perhaps no exit strategies (in the case of annuities) for changing one’s mind later. In these cases, preemptive approval of the design of the financial products themselves may be necessary to prevent many consumers from locking themselves into expensive and/or potentially dangerous financial commitments.

Robert E. Litan 319

The Financial Industry and the Crisis: The Role of Innovation

Xavier Vives* 1. Introduction innovation in the transformation of banking IESE Business School The acceleration of the process of and the financial markets, determine whether liberalization and globalization in the financial it has increased the fragility and risks of the sector which began in the United States in the system, put the contribution of regulation 1970s, initiated and spurred on by changes in context, and consider the relationship in information technologies, has not been between economic growth and innovation in accompanied by a parallel development of the financial industry. the system’s regulatory framework, whose This chapter discusses the role of instability has steadily increased. Financial financial innovation in the transformation innovation in derivatives and securitization, of the banking industry (section 2) and in fuelled by a lax monetary policy, created the progress of the crisis (section 3), the a bubble in the housing and credit-supply effects of asset securitization (section 4) markets which burst when the subprime and regulatory reform and the role of agent mortgage crisis hit in 2007. In the past, incentives (section 5), and concludes in major technological changes such as the section 6. railway, the automobile or the internet have been accompanied by speculative bubbles 2. Financial Innovation and the * Public-Private Sector Research Centre at the IESE in a context of asymmetric information and Transformation of Banking Business School. This text was written for inclusion in the biased predictions, and the effects of financial The recent history of the financial book Innovación. Perspectives innovation on derivatives and securitization sector can be divided into two periods. The for 21st Century published by BBVA. I am grateful for the are no exception to this historical trend. first, characterized by strict regulation, excellent research assistance What were the mechanisms that produced interventionism and stability, encompasses provided by Karla Perca and for the sponsorship of the this outcome? How can potential crises be the years from the 1940s to the 1970s, Abertis Chair of Regulation, averted or mitigated in the future? Should we while the second was an era of liberalization Competition and Public Policy. impose restrictions on innovation? What role and growing instability which lasted from should regulation play? the 1970s until 2007, when the subprime In order to answer these questions, we mortgage crisis began. The stability of must first understand the role of financial the first period contrasts sharply with the

Xavier Vives 321 considerable increase in the number of management, advice and insurance) and bankruptcies and crises registered during companies (consultancy services, insurance, the second period, when the sector was mergers and acquisitions, underwriting liberalized. The heightened instability share offerings and debt securities, of the latter period has its origin in this securitization, risk management), while liberalization accompanied by a woefully also engaging in proprietary trading. In a inadequate regulatory framework, as financial conglomerate we can find a retail evidenced by the crises in the United States, bank, an investment or merchant bank, Japan and Scandinavia.1 However, and asset management, proprietary trading, and despite these periodic crises, financial insurance. The now-infamous “originate-and- liberalization has contributed to the general distribute” banking model is a good example development of the financial industry and of the banking industry’s process of evolution. consequently to the growth of the economy. At the same time, although banks created The liberalization of the financial sector off-balance-sheet entities (SIVs, ABCP cannot be explained without taking financial conduits), these were guaranteed by liquidity innovation into account. To this we must lines. add the progressive globalization of the New developments in information financial sector and the “shareholder value” technology have intertwined intermediaries movement, which has affected the market for and the financial markets almost inextricably. corporate control of banks and companies The importance of a bank’s investment and has put pressure on banks to obtain portfolio at market value has increased higher profitability. substantially because there are now more The second period witnessed the advent opportunities for trading assets, which means of numerous innovations in forms of that the risk profile of a financial institution payment (credit and debit cards), transaction can change in a matter of seconds with processing (ATMs, telephone and online financial market transactions (for example, banking, e-commerce for financial assets), using e-commerce and derivatives). The saving options (such as investment funds banking industry has increased its market and structured products), loans (automated funding, particularly in short-term funds credit scoring) and risk management that can be liquidated very quickly. As a techniques (derivatives and securitization). result, banking is now more vulnerable to the Breakthroughs in information technologies vicissitudes and volatility of the market, herd- are largely responsible for these new behaviour phenomena, and asset price boom- 1 See Reinhart and Rogoff 2 developments which boost productivity, bust cycles. This in turn increases the risk of (2009) and the analysis in permit a better diversification of risk, and illiquidity. Meanwhile, agents may have even section 2 of Vives (2010a). 2 generate economies of scale in internal greater incentives to take excessive risks that See chapters 6 and 8 in Vives (2008). activities as well as a need for highly qualified remain hidden from investors—risks that are 3 In addition, if investors and specialized human resources. significant but quite unlikely to materialise demand financial instruments with guaranteed returns and Prior to the 2007 crisis, banking had (tail risk) due to compensation schemes are unaware of the improbable evolved from the traditional business based on the short-term results achieved by or tail risk, there will be an excess of share offerings and 3 of accepting deposits and granting and other agents. The effective compensation the market will become fragile supervising loans, to providing services received by agents, with the approval of when the investors finally understand the risks involved to investors (asset/investment fund the financial intermediaries’ shareholders, (see Gennaoli et al., 2010).

322 tends to soar when things are going well, and is more inflexible when they are not (in Prior to the 2007 crisis, technical terms, it is markedly convex), thus “ providing an incentive to take excessive risks. banking had evolved from the Paradoxically, an increase in market depth may be accompanied by a significant rise in traditional business of accepting systemic risk (Rajan, 2006). The progress of the present crisis is a perfect example. deposits and granting and

3. The Course of the Crisis and Regulation supervising loans, to providing In the current financial crisis, the contagion spread and was exacerbated services to investors (asset/ via market channels. The globalization of the financial markets can lead to greater investment fund management, diversification, but it also increases the likelihood of domino-effect contagion between advice and insurance) and entities and contagion due to information difficulties. The result was the collapse of the companies (consultancy asset-backed commercial-paper market (via securitizations) and of the interbank market. services, insurance, mergers and Wholesale funding made the situation even more fragile and revealed itself as a critical acquisitions, underwriting share weakness of the balance sheets of financial institutions, two cases in point being Northern offerings and debt securities, Rock and Lehman Brothers (Shin, 2009; Adrian and Shin, 2010). Leverage evolved securitization, risk management), procylically with fair value accounting. When asset values rose, the balance sheets of the while also engaging in proprietary institutions were strengthened, which in turn allowed them to increase their debt levels, trading and new asset purchases fuelled the upward ” climb of prices and leverage. This process was inverted during the second stage of the crisis when de-leveraging began.4 with this model is that it leaves mortgage However, at the epicentre of this crisis monitoring in limbo, it is opaque and, given was the originate-and-distribute model, the complexity of the products, it leads to an which gave rise to an inverted pyramid of underestimation of true risk levels. Moreover, complex derivatives based on subprime the mortgage risk reappears on the bank’s mortgages. In the originate-and-distribute balance sheet when its structured investment model, banks try to get rid of credit risk vehicles (SIVs) begin to experience liquidity by originating mortgage loans and quickly problems owing to the institution’s explicit securitizing them with a chain of increasingly and implicit obligations. Risk underestimation

4 See chapter 2 in EEAG (2009). complex structured products. The problem was further aggravated by the use of

Xavier Vives 323 scores to the riskiest products; and the short- “At the epicentre of this crisis term compensations available to financial agents led many to take excessive risks (this was the originate-and-distribute is true of the originators and distributors of complex products as well as of the buyers). model, which gave rise to an This chain thrived on the incredibly low interest rates that financed the real estate inverted pyramid of complex bubble. Meanwhile, monetary policy only concerned itself with inflation, ignoring the derivatives based on subprime bubbles in asset prices and the balance- sheet situation of financial institutions. mortgages” The crisis was brought about and exacerbated by inadequate regulation. The first major flaw in regulation was a dualist framework that permitted regulatory statistical models based on short series arbitrage between the regulated sector and historical correlations (and fat-tailed of depository institutions and the parallel distributions) without taking into account the banking system of structured vehicles and systemic risk generated by the new products investment banking. The second shortcoming and high levels of leverage. Mechanical was qualitatively and quantitatively risk assessment models that only work insufficient capital requirements. These within very strict parameters were routinely low levels of capital were compounded by misused. The opacity of the new derivatives low liquidity, rendering the system more (partially attributable to over-the-counter or fragile, while leverage continued to rise. To (OTC) transactions, which make it difficult make matters worse, because capital ratios to provide a comprehensive assessment of remained fixed they accentuated the cycle counterparty risk) led to an underestimation instead of modulating it. In addition, fair value of the tremendous systemic risk that had accounting evidenced procyclical tendencies built up in the market as well as to a very in the leverage cycle. Financial regulations serious problem of adverse selection, given failed to take systemic risk into account, that no one knew when the crisis would regulators were not properly informed of that hit or what the magnitude or distribution risk, and potentially-systemic institutions of exposure to toxic products derived from were not given special treatment. The opacity subprime mortgages would be. This problem of the parallel banking system and the of asymmetric information paralysed the unorganized OTC-derivatives markets helped interbank markets, making them illiquid. to camouflage the underlying systemic risk. A chain of misaligned incentives Finally, the important role played by credit culminated in catastrophe. Public agencies in scoring agencies in the field of regulation the United States encouraged the granting of (for example, in determining capital subprime mortgages to families with limited requirements) was reduced to a competition ability to repay the loans; the credit scoring to see who could lower their standards agencies, siding with securities issuers, vied faster, without the proper supervision of any to see who could give the most favourable regulatory authority.

324 source of funds which allows them to extend Spreading the credit risk more credit. At the same time, securitization “ makes it possible to reduce their legally- among investors with different stipulated capital requirements by selling the loans to off-balance-sheet vehicles. risk profiles facilitates a more These loans can be entirely dissociated from the originating institution or not in order efficient use of capital, and to lower capital requirements.5 Naturally, the ability to maintain a high level of credit banks acquire an additional supply with less capital allowed banks to cut financing costs for loan recipients and source of funds which allows offered people who would not normally be considered creditworthy the chance to take them to extend more credit” out mortgages (and other types of loans).6 Loan Quality Deterioration The originate-and-distribute model 4. The Effects of Asset Securitization gave rise to the application of laxer criteria In light of the pivotal role that asset when selecting loan recipients and fewer securitization has played in the current crisis, incentives to monitor borrowers. The ability it would seem that an analysis of its benefits to quickly shift at least part of the risk onto

5 Under the terms of Basel and disadvantages is in order. There is little other investors by using structured products, I, by selling loans to off- doubt that securitization has facilitated coupled with the assumption that mortgage balance-sheet vehicles, banks were able to reduce the the development of financial markets, refinancing was always possible given the capital they needed to meet permitted credit expansion and contributed steady rise of housing prices, resulted in the regulatory requirements. In the Basel II framework, to economic growth. However, the recent application of lower standards for evaluating banks could transfer loans financial crisis has exposed the weaknesses the default risk of loan recipients. This to off-balance-sheet vehicles and endow them with liquidity of this innovation, such as the incentives to situation increased the level of risk in the lines, turning them into instruments with the highest over-expand credit by compromising on loan entire financial system (Keys et al., 2008). possible rating (triple-A). In quality, or the complexity of the structured this way, banks could then buy back these instruments and products derived from those loans, which Higher Systemic Risk include them in their balance made it hard for investors to evaluate the Securitization allows banks to redistribute sheets, thus lowering their capital requirements. (See risks to which they were exposed. The result risk to those investors most willing to bear it. Brunnermeier (2009) and was a substantial yet hidden increase in However, when evaluating the diversification chapter 2 in EEAG (2009)) systemic risk. potential of securitization risk, one must bear 6 See ECB (2008). Sabry and Okongwu (2009), for example, in mind that lower diversifiable risks increase show that securitization in the United States has resulted in an Credit Expansion and Regulatory Arbitrage the level of systemic risk. Thus, when faced increased availability of credit By means of securitization, banks can with an event which negatively affects the and lower loan costs. Between 1999 and 2006, a 10% increase turn illiquid loans, such as mortgages, into economy as a whole, such as plummeting in the level of securitization led tradable instruments. Spreading the credit housing prices, structured products will to a decrease of between 4 and 64 basis points in loan yield risk among investors with different risk be harder hit than traditional instruments spreads, depending on the type profiles facilitates a more efficient use of with the same credit rating (Colval et al., of loan analysed (mortgages, car loans and credit card loans). capital, and banks acquire an additional 2008). Meanwhile, liquidity risk also rose and

Xavier Vives 325 contributed significantly to systemic risk, because off-balance-sheet vehicles were Given the complexity of funded by commercial-paper issuance which “ was backed by long-term mortgages but had structured products, investor short- or medium-term maturities (average of 90 days and one year, respectively). Thus, purchase decisions were largely the principal and the interests were paid in part with the cash flow generated by based on the ratings provided by mortgages, and the rest was paid by issuing new securities. Banks further increased risk assessment agencies this risk by providing their vehicles with ” liquidity backstops to safeguard against any temporary inability to pay investors.7 Finally, structured products derived from rated instruments by creating tranches loans, which were often granted without according to priority of payment, targeting considering the credit risk, are hard to investors with different risk profiles.9 In this evaluate. The structure of these products— way, investors could purchase products with built upon a portfolio of loans which is the best possible rating but which offered a subsequently divided into tranches with higher yield than traditional bonds. Moreover, different risk/return profiles, and is usually the banks made sure that payment tranches restructured into new complex securities were designed in such a way that they just (re-securitization via collateralised debt barely met the minimum requirements for obligations or CDOs)—can ultimately result in AAA rating (a practice known as rating at the a lack of information about the risks to which edge). Secondly, investors did not account investors are exposed, given their distance for the fact that credit ratings were based on from the underlying loans, and making direct calculations which only considered default assessment virtually impossible. This opacity risk and ignored the risk that the ratings derived from the securitization process is themselves could be revised downwards considered a crucial factor in the loss of or that the situation of the housing market confidence in the financial system, which could change (IMF, 2008). Another factor ended up triggering the crisis.8 that contributed to the favourable rating of structured products in comparison to Credit Rating Agencies and Complexity traditional bonds is the fact that rating Given the complexity of structured agencies charged the issuers higher products, investor purchase decisions were commissions for structured products. 7 See chapter 2 in EEAG (2009) largely based on the ratings provided by and Brunnermeier (2009). risk assessment agencies. The subprime 5. Reforming Regulation and Incentives 8 See, for example, Gorton (2008), Brunnermeier (2009) mortgage crisis revealed two major Like any technological breakthrough, and chapter 2 in EEAG (2009). problems in this area. Firstly, the same financial innovation can either improve the 9 Approximately 75% of all rating scale was applied to structured and economy’s efficiency or introduce activities subprime mortgages in the United States have been traditional products, yet one of the things that that generate private benefits as well securitized. Of this percentage, characterizes structured products is their as social costs (negative externalities). 80% were funded by tranches of senior or AAA-rated securities ability to transform risky loans into highly- Innovations that enhance markets, (IMF, 2008).

326 providing financial instruments that offer new possibilities of diversification and risk Like any technological coverage (such as options and futures), “ and help them overcome problems of breakthrough, financial asymmetric information (the typical debt contract, for example) are beneficial. innovation can either improve Examples of the second possibility include financial instruments that facilitate rent the economy’s efficiency or seeking, taking advantage of investors or consumers through obfuscation, the inflation introduce activities that generate of speculative bubbles, the increasing fragility of the system, and regulatory private benefits as well as social arbitrage when adequate regulation exists. Following the advent of the crisis, prominent costs (negative externalities) economists and public decision-makers ” (Paul Volcker, Lord Turner, Paul Krugman, Simon Johnson and James Kwak, to name but a few) voiced their scepticism about the therefore agree to compensation contracts positive contributions of financial innovation. for executives that encourage risk-taking, Nevertheless, it is obvious that many financial with a remuneration package that is innovations have boosted economic growth, unaffected when share prices drop but shoots and the relationship between financial up when they rise. There is recent evidence progress and economic progress is well which indicates that this occurred in the documented (Levine, 2005). We should also pre-crisis period.11 Of course, there can also remember that financial innovation (venture be additional problems of agency (conflicts capital, for example) has played an important of interest) between shareholders and part in the development of new technologies executives and between executives and the and innovative firms in a variety of sectors.10 financial intermediaries’ traders. How innovation is used is determined Therefore, the main issue is actually by the incentives of the economic agents, incentives and reforming the regulatory who are in turn influenced by the regulatory framework so that private agents shoulder framework. For example, some analysts the potential social costs of their decisions. 10 See Litan (2009) for a defence of many financial are now exploring the degree to which The regulatory reform now underway will innovations. pressure to generate value for shareholders be successful if it embraces the following 11 See Fahlenbrach and Stulz and possible flaws in corporate governance principles: the existence of a systemic risk (2009), Cheng et al. (2010), Bebchuk and Spamann (2010), mechanisms contributed to the crisis. The regulator; standardized regulations for all and Bebchuk, Cohen and Spamann (2010). The words of limited responsibility of shareholders in a entities that provide banking services (to Chuck Prince, CEO of Citigroup context of deposit guarantees and explicit or avoid regulatory arbitrage); risk premiums (Financial Times, July 2007), can also be interpreted in this implicit TBTF (too big to fail) policies leads and limited scopes of activity in keeping with light: “When the music stops, investors to demand high-risk options, given the characteristics of each intermediary; in terms of liquidity, things will be complicated. But as long as that the profits are private and the losses, capital requirements and rates that take the music is playing, you’ve got in the event of bankruptcy, are shouldered systemic risk into account; and a holistic to get up and dance. We’re still dancing.” by society to a large extent. Shareholders approach that brings the incentives of the

Xavier Vives 327 of losses in the event of failure of a major Derivatives markets player in the OTC market of credit default “ swaps (CDS), which offers protection against provide economic agents with potential default on a loan or bond. The act also establishes prudential standards and opportunities for risk coverage rules on transparency, designed to help the securitization market recover its pivotal and signposts that condense the role in funding the economy. For example, originators are now required to retain part scattered information floating of the credit risk (5%), giving them a good incentive to monitor loans. In addition, around the market, and this role the law created a consumer protection agency to help restore investor confidence can be maintained with trading and overcome the conflicts of interest that have infested the financial industry. This in organized markets, monitoring, agency may be instrumental in improving transparency for consumers and investors, and transparent information on facilitating the comparison of financial products and services offered by different counterparty risk companies, and curtailing the deleterious ” effects of innovations that increase opacity. However, there are some questionable aspects of the regulatory reform. The system’s various agents into line, both proposed reforms for corporate governance domestically and internationally. in the financial sector run the risk of being The process of reforming liquidity and ineffective if they fail to address the root capital requirements (known as Basel III) problem of the incentives generated by and the legislative reforms introduced in deposit insurance and the bailouts of TBTF the EU and the USA are headed in the right institutions which, combined with limited direction, though they may have limitations; responsibility, induce shareholders to take however, since these reforms have not yet risks which are excessive from a social taken root, it is still too soon to determine standpoint. With regard to market reform, whether or not they will be sufficient (Vives, the desirability of the restrictions on short 2010b). For example, the Dodd-Frank Act selling or naked shorting imposed in certain passed in the United States in July 2010 has countries is questionable given that the root established a variety of measures to align problem is market manipulation. private and social incentives in innovative products or markets. Banks wishing to 6. Conclusion complete derivative transactions must now go Financial innovation has been accused of through central clearing instead of engaging destabilising the banking industry and the in direct OTC transactions, which are under financial markets and of helping operators federal supervision. Among other things, get around regulatory requirements. this regulation seeks to prevent a cascade Although these accusations are true in

328 some cases (such as the abuse of certain Bibliography complex structured products), the real Ad r i a n , T., and H. S. Sh i n (2010), “Liquidity and Leverage”, Journal of underlying problem is not innovation per Financial Intermediation 19(3), pp, 418-437. Be b c h u k , L., A. Co h e n and H. Spa m a n n (2010), “The Wages of Failure: se but inadequate regulation. For example, Executive Compensation at Bear Stearns and Lehman 2000-2008”, Yale Journal on Regulation 27(2), pp. 257-282. derivatives markets provide economic Be b c h u k , L., and H. Spa m a n n (2010), “Regulating Bankers’ Pay”, Georgetown Law Journal 98(2), pp. 247-287. agents with opportunities for risk coverage Brunnermeier , M. (2009), “Deciphering the Liquidity and Credit and signposts that condense the scattered Crunch 2007-2008”, Journal of Economic Perspectives 23(1), pp. 77‑100. information floating around the market, and Ch e n g , I.-H., H. Ho n g and J. Sc h e i n k m a n (2010), “Yesterday’s Heroes: Compensation and Creative Risk-Taking”, mimeo. this role can be maintained with trading Co l v a l , J., J. Ju r e k and E. St a ff o r d (2008),”The Economics of Structured Finance”, Working Paper 09-060, Harvard Business in organized markets, monitoring, and School. transparent information on counterparty risk. EEAG (2009), “The EEAG Report on the European Economy 2009”, Munich: CESifo. Securitization is an innovation that allows European Central Bank (2008), “Monthly Bulletin”, February 2008. Fa h l e n b r a c h , R., and R. St u l z (2009), “Bank CEO Incentives and the investors to transfer risk and diversify, which Credit Crisis”, ECGI Finance Working Paper 256. Ge n n a i o l i , N., A. Sh l e i f e r and R. Vi s h n y (2010), “Financial Innovation in turn increases the amount of available and Financial Fragility”, NBER Working Papers 16068. credit in an economy. The problems that Go r t o n , G. (2008), “The Subprime Panic”, Yale ICF Working Paper no. 08-25. have been detected derive from a chain International Monetary Fund (2008), “Global Financial Stability Report: Containing Systemic Risks and Restoring Financial of inappropriate incentives in a context of Soundness”, April. deficient regulation. Ke y s , B., T. Mu k h e rj e e , A. Se r u and V. Vig (2008), “Did Securitization Lead to Lax Screening? Evidence from Subprime Loans”, EFA 2008 Innovation is necessary for the progress of Athens Meeting Paper. Le v i n e , R. (2005), “Finance and Growth: Theory and Evidence”, in the financial system, and this progress is an P. Aghion and S. Durlauf (eds.), Handbook of Economic Growth, Amsterdam: Elsevier/ North-Holland. essential ingredient for economic growth. The Li t a n , R. (2010), “In Defense of Much, But Not All, Financial challenge is to devise a regulatory framework Innovation”,The Brookings Institution Working Paper. Ra j a n , R. (2006), “Has Finance Made the World Riskier?”, European which allows innovation, globalization and the Financial Management 12(4), pp. 499-533. Re i n h a r t , C., and K. Ro g o ff (2009), This Time is Different: Eight financial system to develop while ensuring Centuries of Financial Folly, Princeton: Princeton University Press, p. 496. a proper balance between private and social Sa b r y , F., and C. Ok o n g w u (2009), “Study of the Impact of incentives. Securitization on Consumers, Investors, Financial Institutions and the Capital Markets”, NERA Economic Consulting. Sh i n , H. S. (2009), “Reflections on Northern Rock: The Bank Run That Heralded the Global Financial Crisis”, Journal of Economic Perspectives 23(1), pp. 101-119. Vi v e s , X. (2008), Information and Learning in Markets, Princeton: Princeton University Press. Vi v e s , X. (2010a), “Competition and Stability in Banking”, CESifo WP 3050, soon to be published in Monetary Policy under Financial Turbulence, Proceedings of the Annual Conference of the Central Bank of Chile. Vi v e s , X. (2010b), “La crisis financiera y la regulación”, soon to be published in Mediterráneo Económico.

Xavier Vives 329

Innovation and Climate Change

Edward S. Rubin Introduction environment. Would you voluntarily pay an Carnegie Mellon University To a large extent, the study of innovation extra $1,000 to install air pollution emission and technological change has been controls on your automobile if it were up to motivated by a desire to understand and each consumer to decide? Most individuals shape the forces that underlie economic would not, recognizing that their action development and competitiveness in a alone would do little to solve the air pollution market economy. Thus, there is a large problem unless all drivers were required to literature, contributed mainly by social take the same action. scientists, examining the many facets of In cases such as this, the role of innovation and the factors that contribute government policies and regulations to it—ranging from the behavior of becomes critical, since most environmental individuals and organizations, to the role and problems require collective action to effectiveness of government policies aimed effectively address the problems. Similarly, at spurring innovation in particular sectors of the nature and extent of innovations that the economy or targeted areas of technology lower the cost and/or improve the efficiency such as computers, aircraft, or agriculture. of environmental controls depends heavily The role of technological innovation in on the actions of government agencies at all addressing societal problems such as air levels. pollution and water pollution is a more In this paper we focus on the links recent development. Unlike innovations between technological innovation and global in industries such as pharmaceuticals or climate change—which is arguably the most electronics—where the result is new products far-reaching and formidable environmental that consumers desire (such as more challenge facing the world today. First we effective or lower-cost medicines, cell phones present a brief overview of the climate and internet services)—there is little or no change problem and the innovation needs “natural” market for most environmental that motivate this paper. Then we examine in technologies whose function is to reduce greater detail some of the options available to or eliminate a pollutant discharge to the accelerate the innovations needed to address

Edward S. Rubin 333 the climate change challenge. While many of Figure 1. Historical trend in the atmospheric concentration of the examples cited in this paper are drawn major GHGs from experience and studies for the United Carbon Dioxide 1.5 360 States, the general concepts and approaches 340 1.0 that are discussed are widely applicable to all 320

(ppm) 0.5 2 300 nations faced with the challenges of climate CO 280 0.0 change mitigation. 260

Methane ) The Climate Change Problem 1750 0.5 –2 Over the past 150 years, there have been 1500 0.4 0.3

(ppb) 1250 significant increases in the concentration 4 0.2 CH 1000 of “greenhouse gases” (GHGs) in the 0.1 750 0.0 Radiative forcing (Vm atmosphere, notably carbon dioxide (CO2), Atmospheric concentration 0.15 methane (CH4) and nitrous oxide (N2O) (see 310 Nitrous Oxide figure 1), as well as a group of industrial 0.10 290 GHGs including hydrofluorcarbons (HFCs), 0.05 O (ppb) 2 N perfluorocarbons (PFCs), and sulfur 270 0.0 hexafluoride (SF6). Greenhouse gases drive 250 climate change by trapping heat in the 1000 1200 1400 1600 1800 2000 atmosphere, which tends to raise the average Year Source: IPCC, 2007a temperature of the planet. This, in turn, alters the patterns and intensity of precipitation as well as the flows of air and ocean currents Figure 2 shows the recent growth in global around the globe—all of which directly or GHG emissions, expressed in terms of “CO2 indirectly influence the climate (defined as equivalent” tonnages, which accounts for the average weather in a region over a period differences in the heat-trapping ability of of several decades.) different gases relative to carbon dioxide The main sources of increased GHGs (see IPCC, 2007 for details). The largest in the atmosphere are the GHG emissions contributor is CO2 from the combustion of from a variety of human activities (table 1). fossil fuels (petroleum, coal, and natural gas,

Table 1. The major greenhouse gases and common sources of emissions

Símbolo Nombre Fuentes comunes

CO2 Carbon Dioxide Fossil fuel combustion, forest clearing, cement production, etc.

CH4 Methane Landfills, production and distribution of natural gas & petroleum, fermetation from the digestive system of livestock, rice cultivation, fossil fuel combustion, etc.

N2O Nitrous Oxide Fossil fuel combustion, fertilizers, nylon production, manure, etc. HFC’s Hydrofluorocarbons Refrigeration gases, aluminium smelting, semiconductor manufacturing, etc. PFC’s Perfluorocarbons Aluminium production, semiconductor industry, etc.

SF6 Sulfur Hexafluoride Electrical transmissions and distribution systems, circuit breakers, magnesium production, etc. Source: IPCC, 2007b

334 Figure 2. Recent growth in global emissions of greenhouse composed mainly of carbon and hydrogen). gases Because our use of energy also releases

Gt CO eq/yr 2 some non-CO2 GHGs (primarily CH4 and N2O), 5

HFCS, PFCs, SF6 energy use accounts for roughly 85 percent of 0 all GHG emissions. 5 N2O other The essence of the climate change N2O agriculture 0 problem is that if current trends continue, 10 CH4 other future global emissions of greenhouse gases CH4 waste 5 CH4 agriculture will grow significantly in coming decades

0 CH4 energy in response to growth in world population, economic development, and other factors 0 that increase GHG emissions. As a result, 0 CO2 decay and peat the average global temperature is projected CO2 deforestation 0 to increase by 1.1ºC to 6.4ºC by the end of 30 CO2 other this century (IPCC, 2007). While there is 25 considerable uncertainty in such projections 20 (as evidenced by figure 3), the potential

15 impacts of global warming could seriously CO2 fossil fuel use

10 endanger human health, water supplies,

5 agriculture, and human settlements— especially in coastal areas vulnerable to sea 0 1970 1980 1990 20002004 level rise and storms (IPCC, 2007b; NRC,

Source: IPCC, 2007b 2010b). In light of these large uncertainties, why not simply wait until there is stronger empirical evidence about the magnitude and impacts of climate change? A fundamental difference between greenhouse gases and “conventional” air pollutants like sulfur

Figure 3. Historical trend and future scenarios of global dioxide (SO2) and particulate matter is warming from 1900 to 2100. Ranges shown at the right are for that GHGs, once emitted, remain in the six scenarios (labeled B1 through A1F1) modeled by the IPCC atmosphere for very long periods of time—

6.0 A2 typically decades to millennia. For example, A1B 5.0 B1 roughly half the CO2 emitted today will still be Year 2000 Constant Concentrations in the atmosphere a century from now, still 4.0 20th century contributing to global warming. Centuries 3.0 later some of today’s CO2 emissions will 2.0 still be in the air! In contrast, conventional 1.0

Global surface warming (˚C) pollutants like SO2 stay in the atmosphere 0.0 for relatively short periods of time—typically –1.0

B1 A1T B2 A1B A2 A1FI days or weeks—before they are removed or 1900 2000 2100 washed out by various physical and chemical

Source: IPCC, 2007b processes. Thus, if we quickly reduced

Edward S. Rubin 335 emissions of conventional pollutants their Table 2. Key linkages between human activities and global atmospheric concentrations (and associated climate change impacts) also would fall quickly. Not so Increases Increases Human Emissions in atmos- in average Changes activities of green- for GHGs. Because of their long lifetimes, pheric con- global in global and energy house centration tempera- climate demands gases atmospheric concentrations would continue of GHGs ture to rise unless emissions were curtailed dramatically. (Think of a bathtub being filled from a large faucet, with only a slow trickle draining from the bottom; the water level concentrations at levels only slightly greater would continue to rise unless the faucet were than current levels. That, in turn, would turned down nearly all the way to match require a reduction in annual global GHG the slow drainage.) Thus, if climate change emissions of 50% to 80% below 1990 levels impacts prove to be as serious as projected, by 2050, according to recent studies (IPCC, reducing GHG emissions in the future would 2007b). do little to quickly reduce atmospheric The technological implications and concentrations to mitigate those harmful challenges of meeting such a goal are impacts. formidable. This is illustrated in figure 5, which shows the results of recent modeling What Actions are Needed? studies for the United States. These results International policy goals for global show there is no unique solution or pathway climate change were established in 1992 to achieving large reductions in GHG under the United Nations Framework emissions—different models give different Convention on Climate Change (UNFCCC). solutions based on different assumptions To date, 192 nations have adopted the about the future availability and cost of UNFCCC goal of “stabilization of greenhouse alternative technologies and other factors. gas concentrations in the atmosphere What all models show emphatically, however, at a level that would prevent dangerous is that dramatic changes in the energy anthropogenic interference with the climate system will be required, since this is the system”. Scientific research has sought to dominant contributor to climate change. better understand and quantify the links Today about 85% of the world’s energy is between human activities, GHG emissions, provided by fossil fuels. Approximately half the resulting increases in atmospheric of that is in the form of oil (used mainly for concentration, the consequent changes in transportation), followed by roughly equal global temperature, and the impacts of those amounts of coal (used primarily for electricity changes (figure 4). The largest uncertainties generation) and natural gas (used for a are in the links between global temperature variety of domestic and industrial heating increases and resulting impacts. However, applications, and increasingly for electric based on current science many policymakers power generation). The CO2 released from worldwide advocate no more than a 2°C the combustion of those fuels—primarily rise in long-term global temperature as from power plants and automobiles—is the the climate policy goal needed to prevent key source of GHG emissions. Achieving dangerous impacts. Achieving that goal would a transition to a sustainable low-carbon require actions to stabilize atmospheric GHG (ideally zero-carbon) energy system is the

336 major challenge we face to avoid potentially Figure 4. Results from five models showing the least-cost dangerous climate change. US energy mix in 2050 for a policy scenario requiring an 80% reduction in GHG emissions below 1990 levels. Actual energy use in 2000 is shown for reference. [Note: CCS = carbon The Need for Technological Change capture and storage].

Technological change on a massive scale 160 will be needed to achieve large reductions 140 in global GHG emissions. The results in 120 figure 5 illustrate the four general strategies available to transform the energy system of a 100 country or region: 1. reduce the demands for 80 EJ/yr energy in all major sectors of the economy 60 (buildings, transportation, and industry), thus reducing the demand for fossil fuels; 2. 40 improve the efficiency of energy utilization so 20 that less fossil fuel is required to meet “end 0 use” energy demands, resulting in lower 2000 EPPA ADAGE MERGE CO2 emissions; 3. replace high-carbon fossil MiniCAM MRN-NEEM fuels such as coal and oil with lower-carbon Oil w/o CCS Oil w/CCS Coal w/o CCS or zero-carbon alternatives such as natural Coal w/CCS Gas w/o CCS Gas w/CSS Bioenergy w/o CCS Bioenergy w/CCS Nuclear gas, nuclear, and renewable energy sources Non-Biomass Renewable Energy Reduction such as biomass, wind and solar; and, 4. Source: adapted from Fawcett et al., 2009 capture and sequester the CO2 emitted by the combustion of fossil fuels to prevent its release to the atmosphere. As illustrated for the scenario in figure 5 (an 80% reduction below 1990 emissions it in deep geologic formations or depleted oil by 2050), all four approaches are needed to and gas reservoirs. This option has gained reduce emissions at lowest cost. Reductions substantial worldwide attention in recent in energy demand, which include the years, with efforts now underway to develop effects of improved efficiency, play the most and demonstrate the applicability of CCS for prominent role in all but one of the five climate change mitigation. models shown. The uncontrolled combustion The same types of energy system of coal is eliminated or sharply curtailed transformations that are illustrated in figure in all cases, and the direct use of oil and 5 for the United States emerge in other natural gas also is reduced relative to the modeling studies at the global level (e.g., year 2000 reference case. In contrast, the IPCC, 2007b; Clark et al., 2009). While energy use of nuclear power, biomass, and non- use is the dominant contributor to GHG biomass renewables (mainly wind) increases emissions, technological change in other significantly in these studies. So too does sectors will also be needed to deal effectively the use of carbon capture and storage (CCS). with climate change. For example, changes in This technology could make it possible to land-use practices, especially deforestation, capture the CO2 from power plants and other are needed to reduce or prevent the release large industrial sources, and then sequester of CO2 from natural “sinks” such as forests

Edward S. Rubin 337 plants, have yet to gain widespread social The development and adoption and political acceptance. Because the “ rates of development and adoption of new of new technology is an essential technologies respond to government policies as well as to market forces such as energy element of any comprehensive prices, we next look more closely at the processes of technological change and response to global climate innovation and the factors that influence them. change ” The Process of Technological Change As discussed elsewhere (e.g., NRC, 2010a), the general process of technological and soils. Technological change similarly change can be characterized as involving a can reduce or avoid emissions of non-CO2 number of steps or stages. Different terms GHGs, such as PFCs in the semiconductor are used in the literature to describe these industry or nitrous oxide emissions from stages, but four commonly used descriptors the agricultural sector. More broadly, at are: least some adaptation to climate change Invention: Discovery: the creation of new will almost certainly be necessary, and such knowledge or new prototypes; adaptations also will require some degree of Innovation: Creation of a new or improved technological change (NRC, 2010c). commercial product or process; In short, the development and adoption of Adoption: Initial deployment and use of the new technology is an essential element of any new technology; comprehensive response to global climate Diffusion: Increasingly widespread change. But technological change on the adoption and use of the technology. scale required cannot happen overnight. The first stage—invention—is driven

To achieve the substantial reduction in CO2 in large part (but not solely) by research emissions underlying figure 5, for example, and development (R&D), including both the United States alone would have to retrofit basic and applied research. The second or replace hundreds of electric power plants, stage—innovation—is a term often used tens of millions of vehicles, and hundreds of colloquially to describe the overall process of millions of consumer appliances, building technological change. As used here, however, systems (for heating, cooling and lighting), it refers only to the creation of a product and industrial processes and equipment. or process that is commercially offered; it Change on this scale will take many decades does not mean the product will be adopted to achieve. or become widely used. That happens only Many of the technologies needed do if the product succeeds in the final two not yet exist commercially or are too stages—adoption and diffusion, which reflect costly (alternatives to gasoline-powered the commercial success of a technological automobiles is a good example). Some innovation. Those two stages are the ones alternatives, such as carbon capture and that inevitably are most critical to reducing sequestration technologies for power GHG emissions via technological change.

338 Studies also show that rather than Table 3. Stages of technological change and their interactions being a simple linear process in which one stage follows another, the four stages of Innovation Adoption Diffusion (new or technological change are highly interactive, Invention (early (improved better use) technology) as depicted in figure 6. Thus, innovation product) is stimulated not only by R&D, but also by the experience of early adopters, plus Learning Learning added knowledge gained as a technology R&D By By Doing Using diffuses more widely into the marketplace. Thus, “learning by doing” (economies in the Source: Rubin, 2005 manufacture of a product) and “learning by using” (economies in the operation of a product) are often (though not always) critical elements that enable the adoption an incentive to purchase a more expensive and diffusion of new technologies. Along with but more energy-efficient appliance. Thus, sustained R&D (sometimes called “learning in addition to technical considerations, the by searching”), these stages often help to widespread adoption and dissemination of improve the performance and/or reduce the a new technology may require measures to cost of a new technology—trends that are address social and institutional barriers that commonly characterized and modeled as a affect the nature and pace of technological “learning curve” or “experience curve” (IEA, change. 2000; McDonald and Schrattenholzer, 2002). Each stage of the process also requires The Importance of Technological Innovation different types of incentives to promote Any successful strategy to reduce the overall goal of technological change. GHG emissions significantly will require An incentive that works well at one stage actions not only to deploy the low-emission of the process may be ineffective—or even technologies that are available today, but counterproductive—at another. Large- also to foster innovation on new technologies scale change also must be viewed and that are needed. Accordingly, there has been considered from a “systems” perspective growing interest in recent years on ways to since the success of any new technology is foster such innovation, in particular, the role often dependent upon other technological that governments can and should play in that and non-technological factors. For process. example, the diffusion of energy-saving Although research and development technologies that can automatically adjust is a major element of the innovation home appliances like air conditioners process, there is growing recognition that and water heaters may depend on the technological innovation is a complex process development and dissemination of “smart that commonly involves interactions with grid” technology in electrical networks. other stages of technological change, as Similarly, the dissemination of energy- depicted in figure 6. Thus, gains from new efficient appliances may be inhibited by technologies often are realized only with institutional arrangements, such as landlord- widespread adoption—a process that usually tenant relationships where neither party has takes considerable time (often decades) and

Edward S. Rubin 339 typically involves a sequence of incremental Figure 5. Global carbon (CO2-equiv) prices needed to reduce improvements that enhance performance and emissions from fossil fuel use and industrial sources with and without advanced technologies reduce costs (Alic et al., 2003). 2005 $/t CO In the context of this paper, a key question 2 500 is: what strategies and policies can most 450 Known Technologies Advanced Technologies effectively foster technological innovations 400 that help reduce GHG emissions? As 350 discussed earlier, GHG emissions depend 300 250 mainly on the types of energy sources and 200 technologies used to provide the goods 150 and services that society seeks. Thus, 100 technological innovations can help reduce 50 0 GHG emissions in a variety of ways (NRC, 2005 2020 2035 2050 2010). For example: Source: Kyle et al., 2009. • New or improved technologies can enable devices such as vehicles, machinery and appliances to use energy more efficiently, thereby reducing their energy use and GHG emissions per unit of useful product in residential and commercial buildings. or service (such as a vehicle-mile of travel Institutional innovations could provide or a lumen of lighting for illumination). incentives for electric utility companies and • New technologies can create or utilize others to invest in measures that reduce the alternative energy carriers and chemicals demands for energy, as opposed to policies that emit less GHG per unit of useful that favor increased energy sales. product or service (such as renewable Figure 7 shows one estimate of how energy sources or new low-nitrogen technological innovations can reduce the fertilizers). future cost of reducing GHG emissions. In • New technologies can create alternative this modeling study, a “business as usual” ways of providing goods and services that case—which includes historical rates of are less GHG-intensive (such as by using technological improvements—is compared to substitute products or materials that have a case with more rapid technological change. lower GHG emissions, or by facilitating The cost of meeting a stringent emission- larger system-wide changes such as reduction scenario is reduced dramatically replacing automotive and air travel with when “advanced technologies” are available. teleconferencing and telecommuting). This reduction in the unit cost of abatement Technological innovations can facilitate translates into large national and global cost this full spectrum of possibilities. An even savings, especially as emission-reduction broader set of innovations would include requirements grow more stringent over time. social and institutional systems and designs. For example, innovations in urban planning The Critical Role of Government Policy and development could help reduce future A major challenge in reducing GHG energy demands (and associated GHG emissions is that few if any markets exist emissions) for transportation as well as for many of the more efficient and low-

340 emission technologies that are needed. What In general, policy options can be grouped electric utility company, for example, would into two categories: voluntary measures want to spend a large amount of money and mandatory requirements (“carrots” on carbon capture and storage technology and “sticks”). The first group—often called if there is no requirement or incentive to “technology-policy” options—provides

significantly reduce CO2 emissions? How incentives of various types to encourage many individuals would willingly buy an certain actions or technology developments. advanced electric vehicle that costs much The second group consists of government more than a conventional automobile simply actions that impose requirements or to reduce their carbon footprint? Costly limitations on specified activities, facilities, actions by firms or individuals to reduce or technologies, typically in the form of their GHG emissions provide little or no regulations and standards. Table 2 lists tangible value to that firm or person. Only examples of policy options in each of these by government actions that either require or two general categories. The discussions make it financially worthwhile to reduce GHG below elaborate briefly on policies in each emissions are sizeable markets created for category to illustrate their role in stimulating the products and services that enable such innovations that reduce GHG emissions. reductions. Government actions to create or enhance markets for GHG emission-reducing Technology-policy options technologies are thus a critical element of the Technology-policy measures can stimulate technological innovation process. innovation and help create markets for Different policy measures influence GHG-friendly technologies by providing technological innovation in different ways. incentives and support for the development

Table 4.Policy options that can foster technology innovations to reduce GHG emissions

“Technology Policy” Options Regulatory Policy Options Direct Government Direct or Indirect Support Knowledge Dissemination Economy-wide Measures and Sector or Funding of Knowledge for Commercialization and and Learning Technology-specific Regulations and Generation Production Standards • R&D contracts • R&D tax credits • Education and • Emissions tax with private firms • Patents training • Cap-and-trade program (fully funded or cost • Production subsidies • Codification and • Performance standards (for shared) or tax credits for dissemination emission rates, efficiency or other • R&D contracts firms bringing new of technical measures of performance) and grants with technologies to market knowledge (e.g., via • Fuels tax universities and non- • Tax credits, rebates interpretation and • Portfolio standards profits or payments for validation of R&D • Intramural R&D purchasers/users of new results; screening; in government technologies support for laboratories • Gov. procurement of new databases) • R&D contracts or advanced technologies • Technical standards with consortia or • Demonstration projects • Technology/Industry collaborations • Loan guarantees extension programs • Monetary prizes • Publicity, persuasion and consumer information Source: NRC, 2010a

Edward S. Rubin 341 Figure 6. Growth in electricity generation from wind in the United States Studies have documented “ 60 the ability of energy and 50 40 environmental regulatory policies 30

Billion kWh 20

to influence the development 10

0 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 and deployment of major energy- 1984

Source: EIA, 2010 related technologies, and also to

stimulate innovations that reduce

GHG emissions and other air of investment tax credits and production tax credits (or feed-in tariffs) have fueled pollutants the rapid growth in wind-power systems, as ” illustrated in figure 8. Additional measures such as loan guarantees and support for demonstration projects are currently being and deployment of new technology. Table 2 used to stimulate investments in “clean coal” lists a number of available measures, grouped technologies such as coal gasification and into three categories. The first is direct carbon capture and storage systems. government support for R&D to generate The third group of technology policy new knowledge (including new concepts and options in table 2 reflects measures to technologies). This is the most common form stimulate learning and the diffusion of of government support for innovation, and knowledge. These include support for typically involves a variety of public and private education and training programs, as well as organizations (Alic et al., 2003; CATF, 2009). measures such as the development of codes The second column lists additional and standards that facilitate the diffusion of policy options that directly or indirectly new technologies. support the development, deployment and commercialization of new technologies. Regulatory policy options Such measures have had a major impact Energy and environmental regulatory on technology development in the past. policies respond to “market failures” in which For example, US government procurement individuals and organizations have little or of jet aircraft and computers during their no economic incentive to curtail activities early stages of commercialization following that adversely affect society as a whole (such World War II was critical to their subsequent as emitting pollutants to the environment), development and widespread deployment and lack of government intervention. Studies in the marketplace (Alic et al., 2003). More have documented the ability of energy recently, government support in the form and environmental regulatory policies to

342 influence the development and deployment Figure 7. Trends in average energy use, price and size of new of major energy-related technologies, and US refrigerators also to stimulate innovations that reduce GHG Adjusted Average Volume (cubic feet) U.S. Sales-Weighted Average Energy Use emissions and other air pollutants. Highly- Average Real Price cited examples include fuel economy and 2200 22 2000 pollutant emission standards for automobiles 1800 18 1600 1978 CA Standard (Lee et al., 2010), energy efficiency standards 1400 14 (cubic feet) 1980 CA Standard $1,272.03 1200 for major appliances such as refrigerators 1987 CA Standard 1000 $999.00 1990 NAECA 10 (Rosenfeld, 2008), new source performance $893.58 2001 800 1999 DOE DOE 600 $576.11 6 standards for power-plant air pollutants and Price (2002 U.S. $) 400 $462.99 (Rubin et al., 2004), and market incentives 200 2 Average Energy Use Per Unit (kWh/yr) such as the cap-and-trade rules for power 0 1947 1955 1963 1971 1979 1987 1995 2003 plant SO2 emissions (Popp, 2003). Source: Rosenfeld, 2008 In 1975, for example, the US government imposed Corporate Average Fuel Economy (CAFE) standards on all new cars sold in the United States in order to reduce US oil Energy efficiency standards also have consumption in the wake of the 1973 Arab oil reduced the average energy use of major embargo. The standards called for roughly a household appliances including refrigerators, doubling of the average 1973 fuel economy dishwashers, and air conditioners. Figure 9, of approximately 13 miles per gallon (mpg) for example, shows the dramatic decrease to the CAFE standard of 27.5 mpg for new in the average energy consumption passenger cars. This provoked a series of new refrigerators—then the most of technological innovations that affected energy-intensive home appliance in the nearly all aspects of automobile design. In US—following the adoption of California little more than a decade, the US auto fleet state standards beginning in the 1970s, and became nearly twice as efficient as it had subsequent national standards beginning been (EIA, 2010). In 2007, in response to in 1990. As a result of technological renewed concerns about oil imports, the US innovations, the average annual energy use adopted more stringent CAFE standards. The of refrigerators was reduced to a third of its new rules call for a fleet-wide average fuel 1975 value. At the same time, the average economy (including both passenger cars and retail price of a new refrigerator fell by a trucks) of 34.1 mpg by 2016 (NHTSA, 2010). factor of two, even as the average size of These standards also will reduce emissions new units increased. The overall savings in of greenhouse gases (CO2) from fuel burning. electricity demand avoided the need for many Although the United States has long avoided new power plants and their associated air energy pricing policies and fuel taxes to pollutant and GHG emissions. encourage energy efficiency, evidence from The case of sulfur dioxide (SO2) emissions other countries, including many in Western from electric power plants further illustrates Europe, indicates that a substantial boost the potential influence of performance in gasoline taxes would also be a powerful standards on innovation for environmental stimulus for innovation in automotive control technologies. Stringent national limits technologies. on SO2 emissions from new coal-fired plants

Edward S. Rubin 343 Figure 8. US patenting activity in sulfur dioxide removal technologies, 1880-2000

No Federal R&D Some Federal R&D CAA Regs + R&D 120

110

100

90

80

70 All Methods of U.S. Clean Air 60 SO2 Removal Act of 1970 50

40 Number of Patents Filed 30

20

10

0 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Year Patent Filed Source: Taylor, et al., 2005

were adopted in the US starting in 1970. The regulatory policies illustrated above The result was a dramatic rise in “inventive are examples of what are often referred to activity” as measured by the number of US as “command-and-control” regulations that patents filed (from around the world) in the compel polluters or manufacturers to meet area of SO2 control, as seen in figure 10. As specified levels of technology performance post-combustion capture technology became at individual facilities. The more recent required and more widely implemented, the adoption of “market-based” regulations, capital costs of such systems fell by more such as the cap-and-trade systems adopted than half over two decades, while operating for compliance with acid rain legislation and costs also declined sharply (Taylor et al., summer ozone control (Yeh et al., 2005), gives 2005, Rubin et al., 2007). During this time the polluters greater flexibility in complying with performance of such systems also improved national or regional requirements for an considerably: in the 1970s SO2 “scrubbers” overall level of emissions reduction. Such typically captured 80% of the potential flexibility can significantly lower the cost of emissions. By 1990 the norm was about 90% compliance.

SO2 removal, climbing to 95% or more just An economy-wide cap-and-trade program five years later (Rubin, 2001). Today the best is a regulatory policy approach that has systems are up to 99% effective in capturing been widely advocated and proposed as the

SO2. If CO2 capture and storage technologies most cost-effective means of greenhouse are to become a cost-effective option for gas mitigation (e.g., Jaffe et al., 2003). This GHG reductions, similarly sustained cost approach is also the centerpiece of the and performance improvements will likely current Emissions Trading System (ETS) for be needed (Rubin, 2009). This history of carbon dioxide emissions in the European post-combustion SO2 capture suggests that Union. Alternatively, many economists well-crafted regulatory policies can help advocate a tax on GHG emissions as the accomplish that goal. preferred market-based approach for

344 role for market-based policies in an overall “Voluntary technology policy strategy for dealing with climate change. measures alone will not be Choosing policy options The merits and limitations of alternative sufficient to stabilize GHG policies for climate change mitigation is a topic widely discussed in the literature (greenhouse gases) levels. and debated in policy forums. Inevitably, the choice of policies adopted by any Sufficiently stringent regulatory nation, either unilaterally or as part of an international accord, will depend on many policies are also needed to limit factors and circumstances, discussion of which is beyond the scope of this paper. GHG emissions and to foster Rather, the preceding discussion was intended to illustrate some of the ways in technology innovation which policy choices can affect technological ” innovation for GHG mitigation. Similarly, we note that other types of policies, such as patenting and anti-trust enforcement, can reducing GHG emissions (NRC, 2010a). also have an indirect influence on innovation, Both approaches can stimulate innovation as discussed by Alic et al. (2003). by establishing economic incentives and In most cases, the preferred path for markets for emission-reduction measures. climate change mitigation and technology In the case of cap-and-trade, this requires a innovation will be a combination of policies sufficiently stringent cap, while in the case of that offer both “carrots” and “sticks”. The an emissions fee, a sufficiently stringent tax. simple but important message of this Because there is less historical experience section is that voluntary technology policy with such market-based regulations, measures alone will not be sufficient to there is limited empirical evidence of their stabilize GHG levels. Sufficiently stringent effectiveness in stimulating technology regulatory policies are also needed to limit innovations that reduce environmental GHG emissions and to foster technology emissions. However, in the case of SO2 innovation. control, a study of patent data found that the US cap-and-trade program enacted in 1990 Resource Needs for Technological fostered innovations that lowered the cost Innovation of operating SO2 capture units and improved Achieving climate change goals will their SO2 removal efficiency (Popp, 2003). require not only a set of policy drivers, but

Studies also found that the SO2 cap-and- also an infusion of financial and human trade program promoted changes in the resources to support each stage of the internal procedures of regulated firms as well technological-change process depicted as innovations and investments by upstream earlier in figure 6. Such resources are suppliers (Burtraw et al., 2005). Strong especially critical for the technology- theoretical grounds also support a major innovation stage. In particular, there are

Edward S. Rubin 345 significant needs for increased financial Figure 9. Government spending on energy R&D in Japan and support for R&D and for people with the the United States, 1974–2008 requisite training, skills and creativity 0.16% Japan US to innovate—not only with regard to 0.14% technologies for energy supply and 0.12% demand, but also in other sectors that emit 0.10% GHGs, including agriculture, forestry, and 0.08% 0.06% manufacturing. as a Percent of GDP Energy R&D Spending 0.04% The present outlook for a major infusion 0.02% of such resources is decidedly mixed. In 0.00% recent years, for example, China—which 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 is now the largest emitter of GHGs in the Source: NRC, 2010a world—has embarked on a major expansion of investment in “green” energy technologies that has propelled it to become the world’s leading manufacturer of photovoltaic solar past three decades, the US percentage has cells, as well as a dominant force in wind been considerably lower than that of Japan. power systems. China is also investing While in absolute terms the US spending heavily in nuclear power generation, and is higher than in other smaller nations, the is developing a number of clean coal normalized data suggest that energy R&D is technologies, including carbon capture and a lower national priority in the United States storage systems. than in many other industrialized countries. In contrast, national government funding Ultimately, the private sector must play for energy R&D in the United States has the major role in technology innovation declined sharply over the past three decades. if the climate change problem is to be In 2008, such funding was less than a fifth dealt with successfully. Reliable data on of what it was in 1980, in real terms. While private-sector funding of energy-related federal energy R&D funding in the US has R&D is less readily available. Estimates by increased in the past few years—including the International Energy Agency (IEA) and a sharp rise in 2009 as part of an economic others suggest that the current rate of R&D stimulus program—US expenditure for spending by the energy industry is far below energy R&D remains much lower than for that of industries such as pharmaceuticals, other key areas of science and technology biotechnology, and software and computer such as space and health (NRC, 2010a). services—industries whose profitability Compared to many other industrialized depends more strongly on the ability to create countries (including Canada, Denmark, new or improved products. Within the energy Finland, France, Japan, Korea, Norway, and sector, the electric-power industry tends to Sweden), the US also spends substantially have the lowest rate of R&D spending as a less on energy R&D as a fraction of gross percentage of sales (a widely-used indicator) domestic product (GDP) (IEA, 2009). This (NRC, 2010a). This suggests that a significant is illustrated in figure 11, which compares increase in private-sector investment in R&D government spending on energy R&D by the will be needed to develop and commercialize US and Japan as a percentage of GDP. For the new low-emission technologies to address

346 climate change. In turn, government policies must provide the signals and potential Technological change on a markets needed to stimulate private-sector “ investment in R&D to reduce greenhouse gas massive scale will be needed emissions. Technology innovations to reduce GHG over the coming decades to emissions will also require increased numbers of skilled workers, especially achieve the international goal engineers and scientists in a wide variety of disciplines (including the social sciences). of stabilizing atmospheric levels Limited data for the US suggests that the energy industry currently has far fewer of greenhouse gases (GHGs) R&D workers as a percentage of the total workforce than the average for all US at levels that avoid dangerous industries. Over the past two decades the percentage of US college graduates impacts in engineering fields has also declined ” significantly (NRC, 2010a). While other countries exhibit more favorable trends, increased efforts will be needed to direct require replacing current GHG-intensive human resources and talent to focus on technologies—especially energy technologies innovations that support climate change based on fossil fuels (oil, gas and coal)—with mitigation. newer technologies that emit fewer or no greenhouse gases. In many cases this will Conclusion require advanced technologies that have While the study of technological not yet been developed or adopted on a innovation historically has been motivated significant commercial scale, or which have by a focus on economic development and not yet been invented. competitiveness in a market economy, the Studies of technological change show that links between innovation and the attainment it is a complex process involving interactions of environmental quality goals has become among all stages of the process (invention, a subject of growing interest. This paper innovation, adoption, and diffusion of new has discussed the critical role of technology technology into the marketplace). In general, innovation in addressing the problem of gains from new technologies are realized only global climate change—arguably the most with their widespread adoption, a process pressing environmental challenge we that usually takes considerable time. presently face. Government policies influence outcomes As elaborated in this paper, technological at each stage of this process. The stage of change on a massive scale will be needed technological innovation—which leads over the coming decades to achieve the to the development of new processes and international goal of stabilizing atmospheric technologies—is especially uncertain levels of greenhouse gases (GHGs) at levels because development pathways and the that avoid dangerous impacts. This will likelihood of success cannot be predicted with

Edward S. Rubin 347 confidence. Nor does the development of a support for energy-related R&D are required new technology guarantee its commercial to address the challenges of climate change. viability. Large increases are also needed in private- The role of government policies is sector support for R&D, especially in energy- especially critical in fostering innovations related industries. Government policies that address the problem of climate change. again play a vital role by establishing the In the absence of government mandates or requirements and market signals needed by incentives to mitigate the problem, there the private sector to justify R&D investments. are few if any markets for new technologies Finally, reducing GHG emissions through whose sole purpose is to reduce emissions to innovations in technology and institutions the environment (air, water or land). Thus, to will require increased numbers of skilled achieve the large reductions in greenhouse workers, especially engineers and scientists gas emissions needed to reduce the risks of across a wide variety of disciplines, including climate change, a broad portfolio of policies the social sciences. At the end of the day, is required—not only to foster technological it is people who innovate. Both government innovation, but also the subsequent adoption and the private sector have critical roles to of new technologies by a large range of actors play in attracting and retaining the best and including individuals, governments, and firms brightest people worldwide to address the of all size. challenges and invent the opportunities for The policy portfolio to foster innovation mitigating global climate change. should include a combination of “sticks” in the form of regulatory policies that directly or indirectly set limits on GHG emissions (such as through market-based mechanisms, technology performance standards, or a combination of measures), together with “carrots” in the form of technology policies that provide voluntary incentives to encourage technology innovation and deployment (such as through support for R&D, tax credits, loan guarantees, government procurement programs and other measures). To realize the full benefits of technological innovation, the policy portfolio also should support diffusion of knowledge, such as through financial support for education and training, along with other measures. Although R&D alone is not sufficient to achieve widespread technological change, it is nonetheless a critical element of the policy portfolio needed to foster innovations that reduce GHG emissions. As discussed in this paper, substantial increases in government

348 References Initiative Reports, White Paper Series, Pew Center on Global Climate Change, May.

Ta y l o r , M. R., E. S. Rubin and D. A. Hounsell (2005), “Control of SO2 Bu r t r a w et al. (2005), “Economics of Pollution Trading for SO2 and Emissions from Power Plants: A Case of Induced Technological NOx”, Annual Review of Environment and Resources 30, pp. 253‑289, Annual Reviews, Palo Alto, CA. Innovation in the US”, Technological Forecasting and Social CATF, Consortium for Science, Policy & Outcomes and Clean Air Change 72(6), pp. 697-718, July. Task Force (2009), Innovation Policy for Climate Change: A Report Ye h , S. et al. (2005), “Technology Innovations and Experience Curves to the Nation, A Joint Project of the Consortium for Science, Policy & for Nitrogen Oxides Control Technologies”, Journal of the Air & Outcomes and Clean Air Task Force, Clean Air Task Force, Boston, Waste Management Association 55: December, pp. 1827‑1838. MA. September Cl a r k e , L. et al. (2009), “International Climate Policy Architectures: Overview of the EMF 22 International Scenarios”, Energy Economics 31 (Supplement 2): pp. 64-81. Fa w c e t t , A. A., et al. (2009), “Overview of EMF 22 US Transition Scenarios”, Energy Economics 31 (Supplement 2), pp. 198-211. IEA, International Energy Agency (2000), Experience Curves for Energy Technology Policy, Paris, France. IEA, International Energy Agency (2009), Ensuring Green Growth in a Time of Economic Crisis The Role of Energy Technology, Paris, France, p. 7. IEA, International Energy Agency (2010), Annual Energy Review 2009, Washington D.C.: Energy Information Administration, US Department of Energy. IPCC (2007a), Climate Change 2007: The Physical Science Basis, Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, S. Solomon et al., eds. Cambridge University Press, Cambridge. IPCC (2007b), Climate Change 2007: Mitigation, Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, B. Metz et al. (eds.), Cambridge: Cambridge University Press. Ja ff e , A. B., R. G. Ne w e l l and R. N. St a v i n s (2003), “Technology Policy for Energy and the Environment”, in A. Jaffe, J. Lerner, and S. Stern (eds.), Innovation Policy and the Economy, Conference Report, National Bureau of Economic Research. Ky l e , P. et al. (2009), “The Value of Advanced Technology in Meeting 2050 Greenhouse Gas Emissions Targets in the United States”, Energy Economics 31(2), pp. 254-267. Le e , J. et al. (2010), “Forcing technological change: A case of automobile emissions control technology development in the US”, Technovation 30, pp. 249–264. McDo n a l d , A. and L. Schrattenholzer (2002), “Learning Curves and Technology Assessment”, International Journal of Technology Management 23, pp. 718-745. NHTSA, National Highway and Traffic Safety Administration (2010), “NHTSA and EPA establish new national program to improve fuel economy and reduce greenhouse gas emissions for passenger cars and light trucks”, at: http://www.nhtsa.gov/fuel-economy, Accessed August 15. NRC, National Research Council (2010a), Limiting the Magnitude of Climate Change, Washington DC: The National Academies Press. NRC, National Research Council (2010b), Advancing the Science of Climate Change, Washington, DC: The National Academies Press. NRC, National Research Council (2010c), Adapting to the Impacts of Climate Change, Washington, DC: The National Academies Press. Po p p , D. (2003), “Pollution Control Innovations and the Clean Air Act of 1990”, Journal of Policy Analysis and Management 22(4), pp. 641‑660. Ro s e n f e l d , A. H. (2008), “Energy Efficiency: The first and most profitable way to delay Climate Change”, Oppenheim Lecture, Los Angeles: UCLA Institute of the Environment, University of California, February 25, at: http://www.energy.ca.gov/commission/ commissioners/rosenfeld.html. Accessed March 15. Ru b i n , E. S. (2001), Introduction to Engineering and the Environment, Boston, MA: McGraw-Hill. Ru b i n , E. S. et al. (2004), “Learning Curves for Environmental Technology and their Importance for Climate Policy Analysis”, Energy 29, pp.1551-1559. Ru b i n , E. S., et al. (2007), “Use of Experience Curves to Estimate

the Future Cost of Power Plants with CO2 Capture”, International Journal of Greenhouse Gas Control 1, pp. 188-197. Ru b i n , E. S. (2009), A Performance Standards Approach to Reducing

CO2 Emissions from Electric Power Plants, Arlington, VA: Coal

Edward S. Rubin 349

Life Innovation with Therapeutic Robot, Paro

Takanori Shibata Introduction In medical applications, especially in the Intelligent Systems Research Institute, National Institute of Interaction with animals has long been United States, animal-assisted therapy and Advanced Industrial Science and known to be emotionally beneficial to people. activities (AAT&AAA) are becoming widely Technology. Japan In recent years, the effects of animals on used in hospitals and nursing homes (Delta humans have been researched and proved Society, 1996; Fine, 2006). AAT has clear scientifically. Friedmann investigated the goals set out in therapy programs designed one-year survival rate of patients who were by doctors, nurses and social workers, in discharged from a coronary-care unit and cooperation with volunteers, while AAA refers found that survival among those who kept to patients interacting with animals without pets was higher than among those who particular therapeutic goals, and depends on did not (Friedmann et al., 1980). Baun et volunteers. AAT and AAA are expected to have al. reported that patients’ blood pressure three effects: dropped when they petted their dogs (Baun et 1. a psychological effect (relaxation, al., 1984). Garrity et al. studied older people motivation); who were socially isolated and had lost their 2. a physiological effect (the improvement partner during the previous year, and found of vital signs); that the intensity of depression among those 3. a social effect (stimulation of who had no pets was higher than among communication among inpatients and those who did (Garrity et al., 1989). Lago et caregivers). al. researched through telephone interviews For example, a hospitalized child, who the influence on older people of owning pets. was in significant pain on account of his They found that mortality and attrition were illness, was afraid to get up and walk around. higher for former owners than for current However, when he was asked to take a owners (Lago et al., 1989). Hart et al. studied therapy dog for a walk, he immediately the social influence of animals on people, and agreed and walked off happily, as if all his found that those with dogs were approached pain had disappeared. Moreover, the dog in a friendly way by strangers more frequently acted as a medium for interaction between than those without dogs (Hart et al., 1987). him and the other children (Kale, 1992). In

Takanori Shibata 351 another case, a boy who was born as a crack- Mental-health care for the elderly is an exposed baby was unable to speak or walk. important issue for caregivers at nursing However, through interaction with therapy homes (Daies and Knapp, 1981) as depressive dogs and birds, both his linguistic and motor disorders are common among old people who abilities improved (Delta Society, 1991). have experienced difficult situations such as For AIDS patients, it is important to the loss of their family, friends, social roles, reduce their stress as it greatly affects the and physical functions (WPA/PID). In addition, complications of immune deficiency. AAT those who suffer from mental diseases such helps them to relax and stay connected with as dementia, hallucinations, aggression and the world (Haladay, 1989). wandering cause psychiatric and behavioral In addition, AAT and AAA at nursing homes disturbances (ADI, 1999). Such disorders have help to rehabilitate older people, make them a negative impact on their quality of life and laugh, and bring happiness to patients who that of their caregivers. In order to improve have only a short time to live (Gammonley communication with older people, caregivers and Yates, 1991). AAT reduces loneliness conduct recreational activities, such as in residents of long-term care facilities singing songs, coloring, drawing pictures, (Banks and Banks, 2002). The presence of and origami. However, some people are too therapy animals has been particularly useful embarrassed to sing songs, and others lack in reducing agitated behavior, decreasing finger mobility when attempting to draw. In episodes of verbal aggression and anxiety, addition, communication is complicated on and increasing social interaction among account of a lack of common topics. institutionalized old people suffering from This paper introduces robot therapy dementia (Richeson, 2003; Fick, 1993; Fritz et for “life innovation”, and discusses its al., 1995). potential in care for the elderly. The next However, most hospitals and nursing section describes the new area of robotics: homes, especially in Japan, do not allow human-interactive robots for psychological animals, although they recognize the positive enrichment. We then explain the required effects of AAT and AAA. They are afraid of the functions for therapeutic robots and the seal negative impact of animals on human beings, robot, Paro. Finally, we describe examples of in the form of allergic reactions, infection, robot therapy for older people, and present bites, and scratches. our conclusions. Society in most advanced countries is aging. Among them, Japan has the most Human-interactive robots for psychological old people: 23.1 percent of the population enrichment (29.4 million out of 127 million) in 2010 are Industrial robots have been used widely more than 65 years old. Many old people stay in manufacturing industries since the healthy, but some of them need care at home early 1960s. Industrial robots typically or in institutions, depending on their levels of perform welding, assembling, painting, physical disabilities and cognitive disorders. packaging, and palletizing in automotive Among the cognitive disorders, dementia manufacturing and other industries. Such presents the most problems. About 2 million robots work very fast and accurately, people suffer from dementia in Japan In although initially they need to be taught by a 2010. human operator and their environment needs

352 to be especially designed to enable them to These robots offer more interaction accomplish their tasks. Most industrial robots with humans than industrial robots. They are considered a potential danger to humans, are evaluated not only in terms of objective and therefore are kept isolated from them. measures, such as speed and accuracy, Meanwhile, the rapid development in high but also in terms of subjective measures technology has produced robots not only for regarding interacting with humans, such as factories but also for our living environment, providing comfort and happiness. Robots such as homes, offices, and hospitals. For for entertainment are good examples of the example, wheelchair robots enable elderly importance of a subjective evaluation of their people to move easily outside (Matsumoto et value (fig. 1). al., 2006). Robotic suits, which can expand the There are four categories of human physical capability of humans, are expected interactive robots for psychological to reduce the workload of caregivers (see enrichment, in terms of their relationship HAL). A horseback-riding robot promotes with humans: 1. performance robots; 2. tele- a patient’s physical strength (see JOBA). operated performance robots; 3. operation, Human-interactive robots for psychological building, programming, and control robots; enrichment, in particular, are expected to and 4. interactive autonomous robots. be a new application of robotics and are attracting many researchers and companies 1. Performance robots: (Shibata, 2004). Human-interactive robots are Performance robots have a long designed for entertainment, communication history and they execute movements that (social activity), guidance, education, welfare, express meanings to humans, mostly for mental therapy, and other purposes. Various entertainment. Mechanical puppets that were types of robots, such as humanoid, animal, able to play an organ, draw pictures, and and robots with a unique appearance, have write letters were developed in Switzerland been developed. in the 18th century. Karakuri dolls were

Figure 1. Objective and Subjective Measures for Evaluating Artifacts

Medical Robot Welfare Robot

Industrial Robot Aesthetic Objects Automatic Machine working with Human

Entertainment

Home Appliance

Objective Evaluation: Subjective Evaluation: fast, accurate, cheap, etc. interesting, beautiful, comfortable, etc.

Takanori Shibata 353 developed in Japan during the same era One) are popular examples, as are LEGO- to dance, perform magic tricks, and so on. Mindstorms and I-Blocks. Because building Recently, many performance robots have and programming robots can stimulate been used at exhibitions, museums, movies, children’s creativity, this activity combines and amusement parks such as Disneyland entertainment with education, and is often and Universal Studios. Recent humanoid referred to as “edutainment” (Druin and robots, such as Honda’s ASIMO and Sony’s Hendler, 2000; Lund, 2004). QRIO, can be included in this category (Hirai, 1998; Kuroki et al., 2002). Performance robots 4. Interactive autonomous robots: are able to amuse sizable audiences at any Interactive autonomous robots connect time. However, their movements are probably with humans in the physical world. They preprogrammed and mostly repetitive; use verbal and nonverbal communications, therefore, they are not usually very interactive depending on their functions. Contrary with humans. A high degree of complexity in to the interactions of robots in the other performance robots is required in order to categories, human-robot interactions keep humans amused. are mostly personal. For example, Sony’s dog robot, AIBO, which is designed for 2. Tele-operated performance robots: entertainment, has a mechanical appearance Tele-operated performance robots are and attracts people’s interest using controlled remotely by hidden operators. nonverbal communication (Fujita, 2004). Their movements can appear reactive to the The communication robot, Ifbot, produces humans who interact with them because conversation using facial expressions and the operator, based on the audience’s a large number of prepared conversation actions, sends commands to the robots to scenes (see ifbot). The human-friendly simulate reactive behavior. At exhibitions information terminal, PaPeRo, can control or amusement parks, for example, human- home electric appliances and collect type robots are used as tele-operated information via the Internet by voice performance robots. command, and even entertain people by dancing and playing games (see PaPeRo). 3. Operating, building, programming, and Guide robots in museums and exhibitions controlling robots: (Bischoff and Graefe, 2004), and mental- Humans derive a great deal of commitment robots described in this paper entertainment from operating, building, also belong to this category. programming, and controlling robots. In the area of welfare and mental therapy, Moreover, they can watch the performance of Shibata et al. studied and developed a the robots that they are operating. A simple mental-commitment robot, which aims to example of this is the “UFO catcher”, a engender mental effects, such as pleasure stuffed-animal game machine at amusement and relaxation, in its role as a personal centers. Building and programming a robot robot (see Shibata, 1996-2009). They also is also included in this category. Contests proposed “robot therapy,” which used robots between robots such as Micro-mouse, as substitutes for animals in animal-assisted RoboCup (robot football, Kitano et al., 1998), therapy and activity. Robot therapy targets and RoboOne (robot wrestling, see Robo- the people in medical and welfare institutions

354 where animals are not allowed. A seal-type their physical strength and healing capability mental-commitment robot, named Paro on account of aging or illness are expected to (fig. 2), was developed especially for robot interact with the robots. Therefore, the robots therapy and is used at pediatric hospitals must be easily accepted by people and also and facilities for elderly people in several be harmless and hygienic. A cause of concern countries. Recent research has revealed regarding such robots is that individuals are that robot therapy has the same effects on expected to physically interact with them by people as animal therapy. Robot therapy, in touching and hugging them, and therefore particular, is recognized as a new method there exists a possibility of them being of mental health care for elderly people harmed. Furthermore, in case robots are (including dementia patients). used by hospital patients with deteriorated immune systems such as leukemia, the Therapeutic robot robots may transmit germs. Furthermore, Required functions some people visit medical-welfare facilities In robot therapy, it is important to stimulate for a few hours at a time for day care and people’s knowledge and experience of animals ambulant treatment, but some stay or are through interaction with the robots, and to hospitalized for years (e.g., in nursing homes touch their feelings when they are interacting for long-term care). Therefore, the robots with animals. Therefore, the shapes, have to sustain long-term interaction with feelings of touch, autonomous behaviors people in their daily lives. and responses that mimic animals are the These robots are used by doctors, nurses, features that are required in the robots. therapists, caregivers, and volunteers for In addition, the devices are used not only long periods of time. In addition, users play in people’s homes but also in hospitals and with them whenever they want. Therefore, it nursing homes. Many people who have lost is important that the robots be designed in

Figure 2. Seal Robot, Paro

Takanori Shibata 355 such a manner that anyone is able to operate using its three internal elements, sensory them, and that no specialized knowledge is information from its sensors, and its own required to do so. diurnal rhythm (morning, afternoon, and night) to perform various activities during its Mental-commitment robot, Paro: interaction with people. Mental-commitment robots are not Subjective evaluations of the cat and seal intended to perform physical work or robots were conducted using a questionnaire service (see Shibata, 1996-2009). Their (Shibata et al., 1999; Shibata and Tanie, 2000). function as personal robots is to engender Both robots were evaluated highly. However, mental effects, such as pleasure and subjects complained about the softness and relaxation. These robots have a purpose reactions of the cat robot in comparison and act independently, although, like living with their knowledge of real cats. On the organisms, they receive stimulation from the other hand, most people do not have much environment. Their actions during interaction knowledge of seals, and hence were unable with people make it seem that they have to compare the seal robot with what they hearts and feelings. knew about them. Therefore the evaluation Mental-commitment robots are able to of the seal robot following the interaction stimulate the different senses of human was higher. These results revealed that more beings through physical interaction. people accepted the unfamiliar animal shape. Thus, the primary characteristic of Cross-cultural studies on the subjective mental-commitment robots is nonverbal evaluation of the seal robot were conducted communication. A basic psychological in seven different countries: Japan, the UK, experiment was conducted on the subjective Sweden, Italy, Korea, Brunei, and the US interpretation and evaluation of robot (Shibata et al., 2002; Shibata et al., 2009). behavior following human-robot interaction. The data were obtained from about 2,000 This study showed the importance of respondents. The subjective evaluation appropriately stimulating the human senses provided overall high scores, and revealed and extracting associations. Sensor systems, that the seal robot could be widely accepted consisting of visual, aural, and tactile senses despite cultural and religious differences. for robots, were studied and developed. A However, from the results of the principal plane soft tactile sensor was developed to component analysis, there were two different cover the robot to enhance bodily contact sets of expectations regarding Paro: one was between people and the robot (Shibata, 2004). as a pet, and the other was for therapy (fig. 3). This sensor can detect position and force In Asian countries, Japan and Korea, people when people touch the robot, and at the same accepted Paro as a pet, but not for therapy. time, it is soft to touch. In European countries, the UK, Sweden, and There are three categories of animal Italy, people accepted Paro for therapy, but robots: not as a pet. In the US and Brunei, people 1. familiar animals (e.g., dog, cat); accepted Paro as a pet and for therapy. This 2. unfamiliar animals (e.g., seal); may be because of the different relationships 3. imaginary animals or characters. between humans and pets, and the attitudes The dog, cat, and seal robots were toward robots in general. In Asia, pets are developed as models. Each robot operates popular, but their status is lower than that

356 of humans. In addition, animal therapy is Figure 3. Expectations of Paro from Results of Questionnaires in not known or trusted very much. In Western Seven Countries countries, however, pets are loved and their Pet status is equal or higher than that of humans. US Japan Brunei In addition, animal therapy is well known and Korea is practiced. However, robots are considered to be dangerous or even evil, and there is a Sweden Italy fear that jobs might be taken by them. UK The seal-type mental-commitment Therapy robot, Paro, was designed both as a pet and for therapy. Even though Paro’s surface is covered with pure white or light gold fur (fig. 2), Paro contains high-tech mechanisms of sound source direction and speech (fig. 4). Ubiquitous surface tactile sensors are recognition), balance, and a tactile sense. inserted between the hard inner skeleton and In addition, Paro has a temperature sensor, the fur to create a soft, natural feel and to which maintains a constant warm body permit the measurement of human contact temperature. His mobile parts are as follows: with Paro. His weight is approximately 2.7 vertical and horizontal neck movements, front kg., his weight and size simulating those and rear paddle movements, and independent of a human baby. Paro has four senses: movement of each eyelid, which is important sight (light sensor), audition (determination for creating facial expressions.

Figure 4. Sensors, Actuators, Distributed Control System, and Artificial Intelligence in Paro

CPU Microphone (32 bit RISC)

Posture sensor Light Sensor

Temperature sensor Whisker Tactile Sensor

Speaker

Ubiquitous Surface Tactile Sensor (head, under jaw, back and Actuators side,front flipper, (eyelid, neck, front flipper, rear flipper) rear flipper)

Takanori Shibata 357 Figure 5. Handcrafted Processes

(a) Process of Trimming Fur

(b) Process of Sewing Eyelashes

In order to be evaluated highly by people enables users to learn Paro’s name and interacting subjectively with him, Paro was become acquainted with his behavior, thereby functionally designed to be soft and evoke a preventing them from losing interest, allowing feeling of warmth. Each Paro was trimmed them to gradually build a relationship with with artificial fur, and eyelashes were sewn him, and showing their affection for him. In onto him by craft workers to achieve high addition, baby harp seals were investigated so quality (fig. 5). In addition, his artificial fur that their liveliness and cuteness could serve is antibacterial and dirt resistant, and will as models for the robot; real baby seal calls not fall out. An electromagnetic shield was were sampled and used. installed in the internal circuit to prevent any ill effects on pacemakers. The withstand- Robot therapy voltage test, a drop test, a one hundred- Robot therapy using seal robots is thousand times stroking test, and a long-term conducted at hospitals and nursing homes in seven- year clinical test confirmed that Paro many countries: Japan, Sweden, Denmark, is very safe and durable. Paro was designed Italy, the US, and so on. Robot therapy to be simple enough for anyone to operate. consists of robot-assisted therapy programs He has only one on/off switch for power, and designed by doctors, nurses, and social a pacifier-type charger. Artificial intelligence workers, and also robot-assisted activity,

358 which allows patients to interact with robots ability to overcome stress also improved. without any particular therapeutic goals. Moreover, the stress levels of the nursing Such activities do not depend on volunteers, staff decreased because the old people but are conducted by facility staff. Robot- required less supervision while interacting assisted therapy is mainly conducted at with the robots. medical facilities, such as hospitals and A long-term experiment was conducted clinics, and also at welfare facilities such as at a health-service facility, starting in August nursing homes (fig. 6) 2003 (Wada et al., 2004). Approximately 10 people joined the interaction with Paro for Robot therapy for the elderly one hour, twice a week. One or two caregivers As an example of robot therapy, Paro was managed the interaction with Paro. To used to assist elderly people at a day service investigate the effects of Paro, face scales center (Shibata et al., 2001; Saito et al., 2002; and geriatric depression scales were used Wada et al., 2004). To investigate the effects (Yesavage, 1988). The results showed that of seal robots on the elderly, their moods the feelings of the old people improved over were evaluated using face scales (Lorish the year, and depression in the participants and Maisiak, 1986) and questionnaires. was also reported to have decreased. The Changes in their reactions to stress were caregivers commented that interaction with measured by the hormones in their urine: Paro made the old people laugh and become 17-ketosteroid sulfate (17-KS-S) and 17 more active. Their facial expressions changed, hydroxycorticosteroids (17-OHCS) (Selye, softened, and brightened. On the day of the 1970; Nishikaze et al., 1995). In addition, the activity, they looked forward to interacting stress that the nursing staff experienced was with Paro, sitting down and waiting even investigated by questionnaires -- i.e., the before the interaction session began. Some burnout scale (Pines, 1981). The day service people who usually stayed in their rooms center was provided with seal robots for five came out and willingly joined the activity. weeks, and the feelings of the old people In addition, Paro encouraged people to improved as a result of their interaction with communicate with each other as well as with the robots. Urine samples showed that their the caregivers by becoming their common

Figure 6. Interactions between Older People and Paro

Takanori Shibata 359 topic of conversation. Thus, the general diet cure are expected to slow the progress atmosphere became brighter. Even now, of dementia (Andrade and Radhakrishnan, these older people enjoy playing with Paro. 2009). But unfortunately, there is no In another example, Paro was introduced permanent cure for dementia at present. in the public area of a care house, a type of Recent data suggest that art, music, and communal housing for older people, and was learning, which stimulate patients’ emotions activated for over nine hours each day for and brain, can slow its progression once it the researchers to investigate the effects of has begun (Kimura et al., 2002; Brotons and free interaction with him (Wada and Shibata, Koger, 2000; Kawashima, 2002). However, 2007).To examine the psychological and there is room for improvement in all such social effects, each subject was interviewed treatments. and his or her social network analyzed. As for the interaction between Paro In addition, the activities of the residents and dementia patients in nursing homes, in public areas were video recorded. For behavioral improvements were observed in physiological analysis, residents’ hormones in several cases. For example, a patient who urine; 17-KS-S and 17-OHCS, were analyzed. moaned continuously was able to relax and The results indicate that interaction with then started to talk to the therapist (Marti et Paro increased their social interaction. al., 2006). After playing with Paro, another Furthermore, the urine tests showed that patient who often tried to return home the reactions to stress of the subjects’ vital stopped doing so; her wandering symptom organs improved after interacting with Paro. improved. Robot therapy for dementia patients Effects on patient with dementia was conducted at a neurosurgery clinic to Dementia is a major problem in care for investigate the physiological influences the elderly. According to Alzheimer’s Disease of the treatment (Wada et al., 2008). International (ADI), an estimated 24.4 million Diagnosis Method of Neuronal Dysfunction people suffer from dementia worldwide, and (DIMENSION) was used to record each the number will increase to 82 million by patient’s EEG before and after 20 minutes of 2040. Dementia is a progressive, disabling robot therapy (Musha et al., 2002). In addition, neurological condition that occurs in a wide a questionnaire concerning each subject’s variety of diseases. The most common cause impression of Paro was conducted. The of dementia is Alzheimer’s disease (AD), results showed that 50% of 14 valid subjects’ which accounts for approximately half of the condition of cortical neurons activity improved people with dementia. Other causes include by interacting with Paro. This was especially vascular disease, Lewy body dementia, true for patients who were particularly fond and many other diseases (see ADI, 1999). of Paro. Psychiatric and behavioral disturbances, In Japan, the cost of care for a dementia such as personality changes, hallucinations, patient by social welfare insurance is about paranoid ideas, aggression, wandering, 40,000 USD per year, and the patient’s life and incontinence are common features of expectancy is about 8 years. In Denmark, dementia and are the leading causes of the cost is about double. This represents an the need for long-term care (Garrity et al., enormous burden on the municipalities that 1989). Donepezil, physical exercise, and provide long-term care insurance. Useful

360 and convenient methods for the prevention Kanamori et al. examined the effects of AIBO of dementia are urgently needed. Paro has on the elderly in a nursing home (Kanamori been on the market since 2005. The price is et al., 2002). By measuring the hormones in about 4600 euros. However, the running costs saliva, they found that stress decreased after consist almost only of a battery-recharging a one-hour interaction with AIBO, and that fee as the battery is designed to last for over loneliness was reduced after 20 sessions over 10 years. Paro can be used even without a a seven-week period. Tamura et al. compared specially-trained therapist although people the exposure of patients to AIBO with the must attend a one-day seminar in the EU in effect of exposure to a toy dog (Tamura order to use him. Several municipalities in et al., 2004). They found that AIBO did not Japan know about Paro’s effects and support encourage much interaction, and required his introduction. For example, Nanto city, more intervention from an occupational Toyama, bought eight Paros and introduced therapist. them to day-service centers in the city. Because they are not designed for Tsukuba city, Ibaraki, established a subsidy therapy, these commercially-produced robots for purchasing Paro. easily break while interacting with people. Meanwhile, a dementia-care center in Therefore, it is difficult to use them in long- Copenhagen, Denmark, investigated the term situations. effects of robot therapy on dementia patients as part of the national project “Be-Safe”. Conclusion Twelve Paros were introduced in 10 different Various robots have been developed places. The results obtained from the seven- and are being introduced into our lives as month clinical trial showed that Paro had commercial products. Each robot is designed positive effects on the patients. Based on for a specific purpose. The seal-type mental- the results, the Danish government decided commitment robot, Paro, whose goal is to to introduce 1,000 units of Paro to nearly all enrich daily life and heal human minds as the elderly-care facilities in Denmark. So far, “life innovation”, is designed to maintain more than 100 institutions, with more than long-term interaction with people and provide 200 licensed staff, have been using Paro in them with psychological, physiological, and 2010. In addition, other European countries social benefits. including Norway, the Netherlands, and Robot therapy, or mental-health care Germany, have adopted the same system, using animal-type robots, is an emerging and have started to use Paro with licensed field. The results of exploratory experiments staff. showed that Paro has a great potential to provide mental-health care for older people. Other research However, more subjects and a control Robot therapy, using commercially- group are necessary to scientifically verify available animal-type robots, such as AIBO its effects. Further experiments will be and NeCoRo has been attempted (Libin and conducted in this respect. Libin, 2004; Kanamori et al., 2002; Tamura As for ethical issues, the experiments et al., 2004). For example, Libin introduced using Paro mentioned above were conducted NeCoRo to a nursing home and observed the under the supervision of the ethical patients’ interaction (Libin and Libin, 2004). committee of each organization. Only people

Takanori Shibata 361 who, and whose relatives who, agreed with Figure 7. Paro as Social Mediator between the Elderly and robot therapy, participated. In addition, some Caregiver (at an Assisted-Living Center in Denmark) were worried that old people would be left alone with Paro when the caregiver left them to interact with him. But, the opposite has proved true. Paro acts as a social mediator, providing a common topic for the elderly and encouraging them to communicate with each other (fig. 7). Currently, the methods used in robot-therapy are the responsibility of the caregivers and its effects are influenced by them. To ensure Paro’s potential by developing effective ways to use it is the next step. At present, approximately 1700 units of Paro have been sold worldwide (about 1500 units in Japan, 120 units in Denmark, and Bibliography 100 units in other countries). Paro has a high ADI Factsheet (1999), “The Prevalence of Dementia”, Alzheimer’s Disease International, 3. rate of acceptance and similar psychological ADI Factsheet (1999), “Psychiatric and Behavioural Disturbances in Dementia”, Alzheimer’s Disease International, 7. effects are seen in each country. However, An d r a d e , C. and R. Ra d h a k r i s h n a n (2009), “The Prevention and there are initially some cultural differences Treatment of Cognitive Decline and Dementia: An Overview of Recent Research on Experimental Treatments”, Indian J in the acceptance of Paro. People in Europe Psychiatry 51(1), pp. 12-25. Ba u n , M., N. Be r g s t r o m , N. La n g s t o n and L. Th o m a (1984), tend to note the effects of interaction with “Physiological Effects of Human/Companion Animal Bonding”, Nurs. Res. 33(3), pp. 126-129. Paro and accept him as a therapeutic tool Bi s c h o ff , R. and V. Gr a e f e (2004), “HERMES—a Versatile Personal because animal therapy has been used widely Robotic Assistant”, Proceed IEEE 92(11), pp.1759-1779. Br o t o n s , M. and S. Ko g e r (2000), “The Impact of Music Therapy in hospitals and nursing homes. Therefore, on Language Functioning in Dementia”, J Music Ther 37(3), pp. 183‑195. all Paros are used at institutions in Europe. Da i e s , B. and M. Kn a p p (eds.) (1981), Old People’s Homes and the Production of Welfare, Routledge & Kegan Paul PLC. Meanwhile, in Asian countries, animal Delta Society (1991), Animal-Assisted “Therapy and Crack Babies: a therapy is not commonly accepted although New Frontier”, Newsletter 1(2). Delta Society (1996), Standards of Practice for Animal-Assisted many people have owned pets recently. In Activities and Therapy. Dr u i n , A. and J. He n d l e r (eds.) (2000), Robots for Kids; Exploring New Japan, nearly 70% of users are individuals. Technologies for Learning, Morgan Kaufmann Pub. Fi c k , K. M. (1993), “The Influence of an Animal on Social Interactions They tend to accept Paro as their companion of Nursing Home Residents in a Group Setting”, Am J Occupat more than as a therapeutic tool. In the U.S., Ther 47(6), pp. 529-534. Fi n e , A. H. (2006), Handbook on Animal Assisted Therapy: Theoretical they tend to accept Paro as a therapeutic tool Foundations and Guidelines for Practice, 2nd edition, Academic Press. as well as a companion (Shibata et al., 2009), Fr i e d m a n n , E., A. Ka t c h e r , J. Ly n c h and S. Th o m a s (1980), “Animal though the Food and Drug Administration Companions and One-year Survival of Patients after Discharge from a Coronary Care Unit”, Public Health Rep; 95(4): pp. 307-312. (FDA) of the U.S. certified Paro as a “medical Fr i t z , C. L. et al. (1995), “Association with Companion Animals and the Expression of Non-cognitive Symptoms in Alzheimer’s device” in 2009. Therefore, it is important to Patients”, J Nerv Ment Dis 183(7), pp. 459-463. Fu j i t a , M. (2004), “On Activating Human Communications With Pet- introduce Paro in a suitable manner based on Type Robot AIBO”, Proceed IEEE 92(11), pp. 1804-1813. the cultural differences. Ga m m o n l e y , J., J. Ya t e s (1991), “Pet Projects Animal Assisted Therapy in Nursing Homes”, J Gerontol Nurs 17(1), pp. 12-15. Robot therapy in medical and welfare Ga r r i t y , T., L. St a l l o n e s , M. Ma r x and T. Jo h n s o n (1989), “Pet Ownership and Attachment as Supportive Factors in the Health of facilities is spreading in our society. Further the Elderly”, Anthrozoos 3(1), pp. 35-44. HAL, http://wwwcyberdynejp. studies should be conducted to integrate Ha l a d ay , J. (1989), “Animal Assisted Therapy for PWAs—Bringing a robot therapy into our societies at large. Sense of Connection”, AIDS Patient Care, pp. 38-39.

362 Ha r t , L., B. Ha r t , B. Be r g i n (1987), “Socializing Effects of Service Sh i b a t a , T., K. In o u e and R. Ir i e (1996), “Emotional Robot for Dogs for People with Disabilities”, Anthrozoos 1(1), pp. 41-44. Intelligent System - Artificial Emotional Creature Project”, Hi r a i , K. (1998), “Humanoid Robot and Its Applications”, Proceedings Proceed. IEEE RO-MAN, pp. 466-471. IARP Int. Conf. Humanoid and Human Friend Robot 1, pp. 1-4. Sh i b a t a , T. and R. Ir i e (1997), “Artificial Emotional Creature for ifbot. http://wwwbusiness-designcojp. Human-Robot Interaction - A New Direction for Intelligent Jo b a , http://panasonicjp/fitness. System”, Proceed IEEE/ASME Int Conf AIM 47. Ka l e , M. (1992), “Kids & Animals”, Interactions 10(3), pp. 17-21. Sh i b a t a , T., T. Mi t s u i , K. Wa d a and K. Ta n i e (2002), “Subjective Ka n a m o r i , M., M. Su z u k i and M. Ta n a k a , “Maintenance and Evaluation of Seal Robot: Paro - Tabulation and Analysis of Improvement of Quality of Life among Elderly Patients Using a Questionnaire Results”, J Robot Mechatron 14(1), pp. 13-19. Pet-Type Robot”, Nippon Ronen Igakkai Zasshi 39(2), pp. 214-218. Sh i b a t a , T., T. Mi t s u i , K. Wa d a , A. To u d a , T. Ku m a s a k a , K. Ta g a m i et al. Ka w a s h i m a , R. (2002). “[Cognitive Rehabilitation for Alzheimer (2001), “Mental Commit Robot and its Application to Therapy of Disease -- the Learning Therapy]”, Rinsho Shinkeigaku, 45(11), Children”, Proceed. IEEE/ASME Int. Conf. AIM, pp. 1053-1058. pp. 864‑866. Sh i b a t a , T. and K. Ta n i e (2000), “Influence of A-Priori Knowledge in Ki m u r a , S., K. Ka n e k o , K. Nishida, K. Se k i n e , T. Mu s h a and M. Oh Subjective Interpretation and Evaluation by Short-Term Interaction (2002), “[Effectiveness of the Creative Art Therapy by Using the with Mental Commit Robot”, Proceed.IEEE/RSJ Int Conf IROS 1, Diagnosis Method of Neuronal Dysfunction (DIMENSION)]”, Report pp. 169-174. Kansei Fukushi Res. Cent. 3, pp. 195-200. Sh i b a t a , T., T. Ta s h i m a and K. Ta n i e (1999), “Subjective Interpretation Ki t a n o , H. et al. (1998), “The Robocup ‘97 Synthetic Agents of Emotional Behavior through Physical Interaction between Challenge”; in RoboCup-97: Robot Soccer World Cup I. Springer, Human and Robot”, Proceed. IEEE Int. Conf. SMC, pp. 1024-1029. pp. 62-73. Sh i b a t a , T., K. Wa d a , Y. Ik e d a and S. Sa b a n o v i c (2009), “Cross- Ku r o k i , Y., T. Is h i d a , J. Ya m a g u c h i , M. Fu j i t a and T. Do i (2002), “A Cultural Studies on Subjective Evaluation of Seal Robot”, Advanced Small Biped Entertainment Robot, J. Robot”, Mechatron 14(1), Robotics, in press. pp. 7-11. Sh i b a t a , T., K. Wa d a , T. Sa i t o and K. Ta n i e (2001), “Robot Assisted La g o , D., M. De l a n e y , M. Mi l l e r and C. Gr i l l (1989), “Companion Activity for Senior People at Day Service Center”, Proceed. Int. Animals, Attitudes toward Pets, and Health Outcomes among the Conf. ITM, pp. 71-76. Elderly: A Long-Term Follow-up”, Anthrozoos 3(1), pp. 25-34. Ta m u r a , T., S. Yo n e m i t s u , A. It o h , D. Oi k a w a , A. Ka w a k a m i , Y. Hi g a s h i et Libin, A. and E. Libin (2004), “Person-Robot Interactions from the al. (2004), “Is an Entertainment Robot Useful in the Care of Elderly Robopsychologists’ Point of View: The Robotic Psychology and People With Severe Dementia?”, J Gerontol. A Biol Sci. Med. Sci. Robotherapy Approach”, Proceed. IEEE 92(11), pp. 1789-1803. 2004 59A(1), pp. 83-85. Lo r i s h , C. D. and R. Ma i s i a k (1986), “The Face Scale: A Brief, Wa d a , K. and T. Sh i b a t a (2007), “Living with Seal Robots – Its Socio- Nonverbal Method for Assessing Patient Mood”, Arthritis and Psychological and Physiological Influences on the Elderly in a Rheumatism 29(7), pp. 906-909. Care House”, IEEE Trans. Robot 23(5), pp. 972-980. Lu n d , H. (2004), “Modern Artificial Intelligence for Human-Robot Wa d a , K., T. Sh i b a t a , T. Mu s h a and S. Ki m u r a (2008), “Robot Therapy Interaction”, Proceed. IEEE 92(11), pp. 1821-1838. for Elders Affected by Dementia”, IEEE Eng Med Biol Mag 27(4), Ma r i a n , R. Banks and William A. Ba n k s (2002), “The Effects of pp. 53‑60. Animal-Assisted Therapy on Loneliness in an Elderly Population Wa d a , K., T. Sh i b a t a , T. Sa i t o , K. Sa k a m o t o and K. Ta n i e (2005), in Long-Term Care Facilities”, J Gerontol A: Biol Sci Med Sci 57, “Psychological and Social Effects of One Year Robot-Assisted pp. 428-432. Activity on Elderly People at a Health Service Facility for the Ma r t i , P., M. Ba c i g a l u p o , L. Gi u s t i , C. Me n n e c o z z i and T. Sh i b a t a Aged”, Proc. IEEE ICRA, pp. 2796-2801. (2006), “Socially Assistive Robotics in the Treatment of Wa d a , K., T. Sh i b a t a , T. Sa i t o and K. Ta n i e (2004), “Effects of Robot- Behavioural and Psychological Symptoms of Dementia”, Proceed. Assisted Activity for Elderly People and Nurses at a Day Service Int. Conf. BioRob, pp. 483-488. Center”, Proceed. IEEE 92(11), pp. 1780-1788. Ma r t i , P., V. Pa l m a , A. Po l l i n i , A. Ru l l o and T. Sh i b a t a (2005) “My Wa d a , K., T. Sh i b a t a , T. Sa i t o and K. Ta n i e (2004), “Psychological Gym Robot”, Proceed. Symp. Robot Companions, pp. 64-73. and Social Effects in Long-Term Experiment of Robot-Assisted Ma t s u m o t o , O., K. Ko m o r i ya , T. Ha t a s e and H. Nishimura (2006), Activity to Elderly People at a Health Service Facility for the Aged”, “Autonomous Traveling Control of the ‘TAO Aicle’ Intelligent Proceed. IEEE/RSJ Int. Conf. IROS, pp. 3068-3073. Wheelchair”, Proceed IEEE/RSJ Int Conf IROS, pp. 4322-4327. WPA/PTD Educational Program on Depressive Disorders “Depressive Mu s h a , T., T. As a d a , F. Ya m a s h i ta , T. Kinoshita, Z. Ch e n , H. Ma t s u d a et Disorders in Older Persons”, Module 3: Depressive Disorders in al. (2002), “A New EEG Method for Estimating Cortical Neuronal Older Persons http://www.wpanet.org/education/ed-program- Impairment That Is Sensitive to Early-Stage Alzheimer’s Disease”, guidelines.html Neurophysiol Clin 113, pp. 1052-1058. Ye s ava g e , J. A. (1988), “Geriatric Depression Scale”, NeCoRo. http://wwwnecorocom/homehtml, in press. J Psychopharmacology Bulletin 24(4), pp. 709-711. Nishikaze, O. et al. (1995) “Distortion of Adaptation (Wear & Tear and Repair & Recovery)-Urine 17- KS-Sulfates and Psychosocial Atressin”, Humans-Job Stress Res 3, pp. 55-64. PaPeRo. http://wwwincxneccojp/robot/robotcenterhtml. Pi n e s (1981), “The Burnout Measure”, paper presented at the National Conference on Burnout in the Human Services, Philadelphia, November. Ri c h e s o n , N. E. (2003), “Effects of Animal-Assisted Therapy on Agitated Behaviors and Social interactions of Older Adults with Dementia”, Am J Alzheim. Dis. Other Dement 18(6), pp. 353-358. Robo-One. http://wwwrobo-onecom. Sa i t o , T., T. Sh i b a t a , K. Wa d a and K. Ta n i e (2002), “Examination of Change of Stress Reaction by Urinary Tests of Elderly before and after Introduction of Mental Commit Robot to an Elderly Institution”, Proceed. Int. Symp. AROB 1, pp. 316-319. Se l y e , H. (1970), “Stress and Aging”, Journal of American Geriatric Society 18, pp. 669-676. Sh i b a t a , T. (2004), “An Overview of Human Interactive Robots for Psychological Enrichment”, Proceed. IEEE 92(11), pp. 1749-1758. Sh i b a t a , T. (2004), “Ubiquitous Surface Tactile Sensor”,TExCRA, p. 56.

Takanori Shibata 363

Innovation: Changing the Face of Disability

Hugh Herr and Ernesto Approximately 650 million people in the the physical capabilities of healthy able- Martinez-Villalpando world suffer from some type of disability bodied individuals. The Affective Computing MIT Media Lab and as the population ages this figure is group works towards the development of expected to increase. Those afflicted with technologies to expand our understanding of a physical, emotional or cognitive disability affect and its role in the human experience, face a myriad of serious and debilitating with a focus on autism research and therapy. challenges. Fortunately, the modern The interdisciplinary nature of the work of explosion in scientific and technological both groups integrates a broad gamut of innovations provides an extraordinary disciplines, ranging from medicine to opportunity to deliver profound improvements engineering. to their quality of life. Moreover, the same The Biomechatronics Group and Affective cutting-edge technology that can minimize Computing Group are part of MIT’s Human 2.0 or eliminate the adverse effects of disabling initiative to mitigate the effects of disability conditions can also be used to expand human and redefine the limits of human capability. abilities and transcend the ordinary limits of the human condition. Biomechatronics: Disabled People or At the Massachusetts Institute of Disabled Technologies? Technology’s (MIT) Media Laboratory, the Though often taken for granted, walking Biomechatronics Group and the Affective remains essential in modern life, as stairs, Computing Group are focusing on developing uneven terrain, and other obstacles easily novel technologies that can deeply impact conquered by legs but not wheels remain people’s lives at the physical and emotional ubiquitous. The loss or disability of a leg levels. The Biomechatronics Group seeks tremendously impacts quality of life and to understand the basic principles of patients strive to regain or retain the ability biological locomotion in order to develop to walk even in the presence of severe both rehabilitation technologies that restore impairment. functionality to the physically challenged In the United States there are more and augmentation technologies that amplify than 26 million people with physical

Hugh Herr and Ernesto Martínez-Villalpando 367 disabilities including more than 1.7 million comfort. Such technologies cover a large (more than 1 in 200) living with limb loss spectrum, from gel liners and vacuum- (NLLIC, 2008). In order to restore lost assisted sockets to modern interfaces limb functions, prosthetic and orthotic that rely on residual limb laser scanning technology is generally required. The need and computer-aided manufacturing. Two for rehabilitation and prosthetic technology particular technologies that have proved to is latent, as the total number of persons be successful in pain reduction have been with an amputation and using a prosthesis is shock absorbing pylons and dynamic elastic expected to reach 2.4 million by the year 2020 response (DER) prosthetic feet (Perry et al., (Ziegler-Graham, 2008). 1992). The damping and compliance features Currently commercially-available they provide have made them popular in technologies for lower limb amputees most of the commercially available prosthetic are still far from providing fully functional systems. Despite their success in preference replacements of biological legs. Even with the among amputees, abnormal gait patterns most advanced prosthetic systems available and associated with walking fatigue are still on the market, amputees still exhibit clinical prevalent. problems associated with lack of adequate Walking fatigue is synonymous with mobility. These include gait asymmetry, higher metabolic expenditure and is a instability, decreased walking speeds and common affliction of lower-limb amputees. higher energy requirements. Together these Walking fatigue in lower-limb amputees is gait pathologies result in significant pain considerably higher than in their matched and walking fatigue for lower limb amputees able-bodied counterparts at comparable (Postema et al., 1997). speeds. Measures of metabolic expenditure Although the pain felt at the residual limb during walking are commonly obtained by corresponds to the behavior of the entire analyzing oxygen level consumptions. For prosthetic system (i.e. from the liner and unilateral below-the-knee amputees, the socket interface to the pylon and the rest of rate of oxygen consumption is 20-30% higher the prosthetic components), it is particularly (Herbert et al., 1994; Molen, 1973) than that associated with the coupling between the for healthy persons with no impairments, residual limb and the prosthetic leg. The and for above-knee amputees this rate imperfect coupling allows relative motion increases by an additional 25% (James, 1973; between the socket and the femur stump Waters and Mulroy, 1999). caused by the compression of soft tissue. Conventional lower-limb prostheses, This motion is uncomfortable for the amputee despite their damping and compliance and causes a lack of confidence to apply large features, have not provided a real metabolic forces to the prosthetic leg. In addition, the advantage for amputees (Lehmann et al., relatively short moment arm between the hip 1993; Torburn et al., 1990; Colborne et joint and the socket reduces the force that the al., 1992; Huang et al., 2000; Thomas et hip muscles can apply to the artificial limb al., 2000). In addition to higher energetic (Whittle, 1991). requirements, lower-limb amputees show a Recent advances in socket technology reduction in their self-selected speed, and in have reduced pain in patients by focusing consequence they present overall diminished on cushioning, a primary contributor to endurance.

368 Robotic Ankle-Foot Prosthesis Currently commercially- The human ankle joint is essential “ to locomotion because it provides a available technologies for significant amount of energy to push the body off the ground and propel it forward lower limb amputees are during walking, especially at moderate to fast speeds (Winter, 1983; Palmer, 2002; still far from providing fully Gates, 2004). For transtibial (below-the- knee) amputees, the loss of this energy functional replacements of generation at the ankle produces an abnormal asymmetric gait, with higher biological legs metabolic energy requirements and slower ” speeds. Additionally, the mechanical behavior of commercially available ankle- foot prostheses greatly differs from that of a Prosthetic systems ideally need to fulfill healthy human ankle-foot. Even though most a diverse set of requirements in order to of these prostheses offer some compliance restore the biological behavior of normal and function as initial and terminal rockers and healthy limbs. For the Biomechatronics due to their shape, they cannot provide Group, the biomechanics of normal the amount of external energy required walking provide a basis for the design and in walking, making them inadequate in development of new actuated artificial limbs. replicating the natural ankle’s flexibility and This unique biomimetic approach to the actuation (Whittle, 1991). design and development of these prostheses In order to overcome the disadvantages shows promise in improving amputees’ gait of current prosthetic technologies for below- symmetry, walking speed and metabolic knee amputees, the Biomechatronics Group requirements while enhancing the adaptation has developed the world’s first robotic to the particular amputee’s gait. ankle-foot prosthesis that can successfully One of the objectives of the recreate the actions of the biological lower Biomechatronics Group is to develop leg (Au and Herr, 2006; Au et al., 2007). Using sophisticated modular biomimetic leg advanced biologically-inspired design and prosthesis for lower-limb amputees that intelligent computer algorithms, this novel is capable of restoring the functionality device can propel an amputee forward while of the ankle and knee joints of the intact easily adapting to changes in ambulation human leg and fully emulating their natural speed and the walking environment. This behavior. This task poses many challenges artificial ankle-foot prosthesis allows for researchers as they investigate novel amputees to enjoy a natural human gait over electromechanical designs and control level ground, stairs, ramps, and even uneven strategies that can adequately integrate and terrain. Moreover, the device’s low weight and adapt to the patients’ needs. The complete biological form-factor make it comfortable to robotic lower l3 limb is comprised of two wear and inconspicuous to even the trained modular robotic joint prostheses: a powered eye. Most importantly, this innovative device ankle-foot and robotic knee prosthesis. reduces the rate of oxygen consumption in

Hugh Herr and Ernesto Martínez-Villalpando 369 walking amputees by up to 20% relative to accurate control of the knee joint, particularly conventional prosthetic devices (Au et al., while the leg is swinging during each step. 2009). The knee cannot be allowed to swing freely The success of the active ankle prosthesis because it will extend too rapidly and stop derives from the Biomechatronics Group’s suddenly as it reaches full extension. On commitment to biomimetic design. The the other hand, the knee joint cannot be so mechanical design of this motorized device rigid that it does not bend in response to imitates the biological structures of the ankle dynamics; such rigidity would result in a large joint by using elastic elements and flexible increase in the amount of energy required by materials in similar roles to those of the the patient to go from one step to the next. tendons and ligaments of the human joint. To prevent these extreme cases, several This exploitation of elastic elements reduces prosthetic knees that behave as dampers the weight of the necessary motor and (e.g. energy-dissipation mechanisms) have minimizes the overall power that this battery- been developed using friction, hydraulic, operated system requires, allowing an pneumatic, or electro-mechanical systems. amputee to walk all day on a single charge. Some have been designed as variable This cutting-edge bionic research device damping devices which adapt to angle, speed has been so successful that it was awarded and direction of motion. These mechanisms Time Magazine’s Best Invention of the year have partially addressed abnormal gait in 2007 and led to the creation of iWalk LLC., patterns in amputees (Whittle, 1991), but have a start-up company commercializing this not yet been able to mimic fully the complex prototype. behavior of the knee joint. Building on the work that led to Robotic Knee Prosthesis the world’s first powered ankle, the For above-knee amputees, a particular Biomechatronics group has continued source of pathological gait while wearing its line of innovation in bionic limbs by conventional prostheses is the lack of developing a state-of-the-art robotic knee

Figure 1. Biomechatronics’ Robotic Ankle-Foot Prosthesis (photograph by Webb Chappell ©MIT Media Lab) and most recent prototype by iWalk, LLC.

370 joint prosthesis which overcomes the prosthetic system yields the world’s most limitations of conventional prosthetic knees. advanced powered artificial lower limb for This prosthesis is capable of replicating the transfemoral amputees. Together, the active behavior of the biological knee joint while knee and ankle are expected to have great seamlessly interfacing with the powered clinical impact while their novel architectures ankle, producing a full artificial lower-limb contribute to the development of future prosthesis (Martinez-Villalpando et al., 2008; integral assistive technologies that adapt to Martinez-Villalpando and Herr, 2010). the needs of the disabled. The active knee prosthesis is a novel motorized device with a unique biomimetic Exoskeletons electro-mechanical design. The artificial knee Physical disabilities that often result mimics the functionality of the musculo- in leg weakness include lower-extremity skeletal structures around an intact biological amputation, spinal-cord impairment knee joint, producing a system that, like (SCI), multiple sclerosis (MS) and stroke. the artificial ankle, is small, light-weight, For individuals who have suffered partial and efficient. Its design incorporates a leg paralysis resulting from neurological microcomputer and a sophisticated sensory pathology, the use of exoskeleton technology suite that enables an artificial intelligence will offer a dramatic improvement in mobility capable of inferring the intentions of the capabilities over conventional leg orthotic amputee. The advanced design and control technology. of this prosthesis aims to improve amputee The Biomechatronics group is leveraging gait beyond what other commercially its understanding of human locomotion available prostheses can offer, not only and its experience in prosthetic limb design while walking on even ground but also while towards the development of exoskeletons traversing difficult terrain, including ramps (Walsh et al., 2006; 2007). These wearable and stairs. The integration of the robotic assistive structures help augment human knee and ankle prosthesis into a single mobility, increase human endurance and

Figure 2. The Biomechatronics Groups’ Robotic Knee Prosthesis

Hugh Herr and Ernesto Martínez-Villalpando 371 assist physically-challenged persons. The Figure 3. The Biomechatronics Group’s load-carrying exoskeleton group’s walking exoskeleton is an orthotic system that works in parallel to the body, transmitting forces between the ground and the user’s torso during standing and walking, effectively reducing the portion of body weight borne by the legs and making it easier for a disabled person to stand and to walk. Because the exoskeleton offers support normally provided by biological legs, physically disabled people suffering from leg weakness may walk with confidence while wearing it (Dollar and Herr, 2007, 2008). In particular, the exoskeleton work developed at Biomechatronics Group looks into the passive dynamics of human walking in order to create lighter and more efficient devices with three specific goals in mind. Firstly, the exoskeleton currently under development aims to be the first wearable system that demonstrates a reduction in human energy usage during walking. Secondly, the exoskeleton should serve in potentially life-saving occupations, increasing impairments in socialization, communication, the user’s endurance while reducing and circumscribed interests, including damaging loads on the knee and ankle. These stereotypical behavior patterns and potential users include active soldiers and behavioral rigidity to changes in routines firefighters, among others, who perform (APA, 1994). Current studies of ASD suggest activities that require brisk movement a rate as high as 1 in 110 in children by the over varying terrain while burdened with age of 8 years in the United States (CDCP, significant loads. Finally, this technology 2009). ASDs typically manifest in infancy aims to assist impaired human mobility. This and persist throughout the lifespan. These exoskeleton architecture could be modified disorders have a profound impact on families into a walking orthosis which permits an and often result in enormous emotional and active lifestyle by reducing load on injured financial costs. For instance, recent estimates joints while providing the necessary support suggest that the societal costs in the United for normal walking to patients with otherwise States to care for all individuals diagnosed limited mobility. each year over their lifetime approaches $35 billion (Gantz, 2007). ASDs clearly Affective Computing: The Autism Challenge represent an emerging public health problem Autism Spectrum Disorders (ASD) (Newschaffer et al., 2003). are a collection of neuro-developmental Through the Affective Computing disorders characterized by qualitative group and the Autism and Communication

372 Technology Initiative at the MIT Media difficulties for individuals with ASD and Laboratory, a variety of innovative their families. First, persons with ASD often technologies are being developed to better engage in SMMs. Preventing or stopping understand and support individuals with these movements can be problematic as ASD in natural environments. Three of individuals with ASD may become anxious, these applications, briefly reviewed in agitated, or aggressive if they are interrupted the following paragraphs, include: 1. (Gordon, 2000). Second, if unregulated, SMMs automatically detecting stereotypical motor can become the dominant behavior in an movements using wireless accelerometers individual with ASD’s repertoire and interfere and pattern recognition algorithms; 2. with the acquisition of new skills and the developing unobtrusive, wireless measures performance of established skills (Koegel of physiological arousal; and 3. creating a and Covert, 1972). Third, engagement in suite of wearable, wireless technologies that these movements is socially inappropriate enable the capture, real-time analysis, and and stigmatizing and can complicate social sharing of in situ social-emotional cues from integration in school and community settings faces, voices, and gestures of self and/or (Jones et al., 1990). Finally, SMMs are thought interaction partners. to lead to self-injurious behavior under certain environmental conditions (Kennedy, Sensor-Enabled Detection of Stereotypical 2002). Motor Movements To better measure, understand, and Stereotypical motor movements (SMMs) remediate this complex class of behavior, are generally defined as repetitive motor we are developing an innovative system for sequences that appear to an observer to be automatically recognizing and monitoring invariant in form and without any obvious SMM. Our system uses a miniature sensory eliciting stimulus or adaptive function. suite that is comfortably worn on an Several SMMs have been identified, the individual’s wrists and torso and transmits most prevalent among them being body motion data to a mobile phone. Pattern- rocking, mouthing, and complex hand and recognition algorithms running on the phone finger movements (Lewis and Bodfish, 1998). receive these motion data streams wirelessly, SMMs occur frequently in people with mental compute a variety of characteristic features, and developmental disabilities, genetic and automatically detect SMM topography, syndromes (Bodfish et al., 2000), and less onset, offset, frequency, duration, and frequently in normally developing children intensity (Munguia-Tapia et al., 2004). and adults. Currently, this system has been able to While investigations of ASD have increased correctly identify stereotypical body rocking, in recent years in response to growing hand flapping, and head hitting approximately awareness of the high prevalence rates, 90% of the time across six individuals with the majority of this work focuses on social ASD in both laboratory and classroom and communication deficits, rather than on settings (Albinali et al., 2009). restricted and repetitive behavior. This is a There are several potential benefits potential problem given the high prevalence associated with this novel system. Easily of SMMs reported in individuals with ASD. automating SMM detection could free a Also, when severe, SMMs can present several human observer to concentrate on and

Hugh Herr and Ernesto Martínez-Villalpando 373 Figure 4. The MIT’s 3-axis wireless-accelerometer sensors housed in plastic cases with external battery holder. The cases can be worn on the wrists using elastic armbands.

note environmental antecedents and and repetitive behaviors. Unfortunately, consequences necessary to determine what however, there are several methodological functional relations exist for this perplexing issues associated with these studies that and often disruptive class of behavior. The cast doubt on the reliability, validity, and system could also be used as an outcome generalizability of the data obtained. For measure to facilitate efficacy studies of instance, the majority of ANS studies to behavioral and pharmacological interventions date use obtrusive equipment that requires intended to decrease the incidence or severity individuals to sit still while multiple wires of SMM. Finally, with minor modifications, are adhered to their chest or fingers, limiting the system could be programmed to serve the number of participants who can comply as an intervention tool by providing real-time with the procedures and thus contribute feedback to individuals with ASD and/or their data to a study. ANS observations are also caregivers when SMMs are detected. undertaken primarily in unfamiliar research laboratories that are potentially stress- Unobtrusive, Wireless Measures of inducing, and are often limited to short Physiological Arousal intervals of measurement that may or may The Autonomic Nervous System (ANS) not represent a person’s true ANS patterns is a control system in the body with far- when going about everyday activities. Data reaching influences, including maintenance from these studies are also often averaged of heart rate, digestion, respiration rate, across persons so that no individual profiles and perspiration that mediates regulation of are retained, obscuring the heterogeneity of emotion, shifting of attention, sleep, signaling response patterns across individuals. of anticipation and salience, biasing of To overcome some of these memory, and more. methodological problems, a novel technology A number of investigators over the past platform is being developed for sensing thirty years have recorded ANS activity in sympathetic and parasympathetic autonomic individuals with ASD to assess physiological data comfortably off the wrist and ankle responsivity during attention and habituation without wires or boxes (Fletcher et al., 2010; tasks, while exposed to social and sensory Poh et al., 2010). The system captures: 1. stimuli, and when engaged in self-injurious electrical conductivity of the skin, which

374 provides a sensitive measure of changes methods of recording the ANS in persons in sympathetic arousal associated with with ASD. For instance, these sensors could emotion, cognition and attention; 2. heart enable longitudinal studies of individuals that rate and heart rate variability that provides yield data beyond the traditional “snapshot” information related to the sympathetic and timeframe, providing new insights on parasympathetic branches of the ANS; within-person, within-group, and across- 3. temperature; and 4. motor movement group differences over time, and capturing and posture changes through 3-axis phenomena of interest that are hard to accelerometry. The 3-axis accelerometer and replicate in laboratory settings, e.g., panic temperature sensors provide information attacks. Measuring and communicating ANS about a person’s activity and account for patterns that precede, co-occur, and follow the influence of motion and environmental an event could also provide rich data enabling temperature on electrical conductivity of the new ways to anticipate, respond to, and skin and cardiovascular signals. ultimately prevent problem behaviors (e.g., Monitoring autonomic reactivity using self-injury, aggression towards others). comfortable, wireless, wearable packages could enable new in situ experimental Interactive Social-Emotional Toolkit (iSET) paradigms and address some of the Many first-hand accounts from people with shortcomings associated with traditional ASD highlight the challenges of interacting

Figure 5. MIT Media Lab wearable EDA sensor. (Right) Sensor with disposable Ag/AgCl electrodes attached. (Left) Elastic strap with hardcase form factor that contains the sensor.

Hugh Herr and Ernesto Martínez-Villalpando 375 socially and difficulties inherent in the real- time processing of high-speed, complex, and Utilizing recent advances unpredictable information like nonverbal “ cues (e.g., facial expressions) or making eye in pervasive and ubiquitous contact while processing language at the same time. Difficulties such as the following computing, sensors, and camera are also well-documented in a large body of empirical literature: 1. difficulty relating to technology, it is now possible to other peoples’ nonverbal cues and mental states (Baron-Cohen, 1995); 2. atypical have a range of on-body sensors eye-gaze processing (Klin et al., 2002); 3. difficulty understanding and expressing that communicate to a portable one’s own feelings (Hill et al., 2004); and 4. trouble gauging the interests of others device such as a mobile phone or in conversation (Klin et al., 2000). These challenges affect interaction partners as ultra mobile PC well, making it hard for family members ” and others to understand what the person is trying to communicate. Utilizing recent advances in pervasive and hope that it will allow this population to ubiquitous computing, sensors, and camera systemize, quantify, and reflect on their technology, it is now possible to have a range social interactions, which otherwise may of on-body sensors that communicate to a seem confusing, overwhelming, and beyond portable device such as a mobile phone or their control. iSET is also designed to be fun, ultra mobile PC. Building on these advances, turning social interactions into a stimulating we are developing an interactive social- game that might motivate participants to emotional toolkit (iSET) (figure 4): a suite of engage in communication. The data and wearable, wireless technologies that enable analyses offered by iSET also facilitate the the capture, real-time analysis, and sharing sharing of social experiences with family of in situ social-emotional cues from faces, members, teachers, and friends, and thus are voices, and gestures of self and/or interaction inherently social. partner(s). The technology components of Currently this system is being iteratively iSET include a wearable camera that can be tested in the following scenarios at a large worn facing the wearer (Self-Cam) or facing school for individuals with ASD: outward (Head-Cam). The captured video Face and eye contact. “Head-Cam” or is processed using real-time video-pattern “Third-Eye” is a wearable camera that points analysis algorithms and is tagged at multiple outward and is aligned with the wearer’s field granularities (facial actions, communicative of vision (Lee et al., 2008). The video stream facial/head gestures, and emotions) (el is input to face-detection software that Kaliouby and Robinson, 2005). quantifies how much face-contact happens in The iSET project makes these wearable a natural conversation. components available and accessible to Systemizing social-emotional cues in self individuals on the autism spectrum in the and others. Many individuals on the autism

376 Figure 6. A student on the autism spectrum using iSET with his teacher to capture, tag, and analyze facial expressions.

spectrum report difficulties expressing the task of eliciting and capturing various themselves in socially appropriate ways, and facial expressions such as smiles or frowns find it hard to identify their own feelings, as from others using a wearable camera. In this well as the feelings of others. “Self-Cam” game, wearers have to think about eliciting, is designed to help a person re-experience not just recognizing and capturing a state. and reflect on how he/she appears to others (Teeters, 2007). Redefining the Human Condition Learning what matters. While many We live in exciting times, as interventions address the problem of unprecedented progress in science and recognition of social-emotional cues, very technology redefines human disability. few teach individuals on the autism spectrum Institutional collaboration and the integration how to identify the cues to which it is most of a broad range of disciplines are producing important to pay attention. Without this sophisticated solutions which allow people aspect of social processing, a person might with once-debilitating physical and mental attempt to process every single instance of health conditions to lead healthy full lives. social cues, an undoubtedly time-consuming Meanwhile, novel technologies that create and cognitive overloading process that intimate connections between man and detracts from that person’s ability to respond machine are augmenting human abilities in real time to his/her interaction partner. beyond natural limits. Without a doubt, “Expressions Hunt” is a situated game we the contributions of leading scientists are developing in which individuals are given and engineers, including those at MIT’s

Hugh Herr and Ernesto Martínez-Villalpando 377 Biomechatronics and Affective Computing References http://affect.media.mit.edu/ Groups, are forcing society to reexamine http://biomech.media.mit.edu/ disability and what it means to be human. http://www.iwalk.com/ http://www.disabled-world.com http://www.media.mit.edu/research/autism-communication- technology-initiative Acknowledgements Al b i n a l i , F, M. S. Go o d w i n and S. S. In t i l l e (2009), “Recognizing Stereotypical Motor Movements in the Laboratory and Classroom: The authors would like to express their A Case Study with Children on the Autism Spectrum”, Proceedings th utmost gratitude and appreciation to Dr. Mattew of the 11 International Conference on Ubiquitous Computing, New York: ACM Press, p. 80. S. Goodwin (director of clinical research at the American Psychiatric Association (1994), Diagnostic and statistical manual of mental disorders, 4th ed., Washington, DC: Author. MIT Media Lab and associate director of research Au, S., and H. He r r (2006), “Initial Experimental Study on Dynamic Interaction between an Amputee and a Powered Ankle-foot at the Groden Center, an institute for autism Prosthesis”, Workshop on Dynamic Walking: Mechanics and Control spectrum disorders in Providence, RI) and to of Human and Robot Locomotion, Ann Arbor, MI. Au, S., J. We b e r , E. Ma r t i n e z -Vi l l a pa n d o , and H. He r r (2007), Professor Rosalind W. Picard, Sc.D. (founder and “Powered Ankle-Foot Prosthesis for the Improvement of Amputee Ambulation”, IEEE Engineering in Medicine and Biology International director of the Affective Computing Research Conference, August 23-26, Lyon, France, pp. 3020-3026. Group ) for their invaluable contributions to the Au, S., M. Be r n i k e r and H. He r r , (2008), “Powered Ankle-Foot Prosthesis to Assist Level-Ground and Stair-Descent Gaits“, content of this article. Neural Networks 21, pp. 654-666. Au, S., J. We b e r and H. He r r (2009) “Powered Ankle-foot Prosthesis Improves Walking Metabolic Economy”, IEEE Transactions on Robotics 25, pp. 51-66. Ba r o n -Co h e n , S. (1995), Mindblindness, Cambridge, MA: The MIT Press. Bo d f i s h , J. W., F. J. Sy m o n s , D. E. Pa r k e r , and M. H. Le w i s (2000), “Varieties of Repetitive Behaviors in Autism: Comparisons to Mental Retardation”, Journal of Autism and Developmental Disorders 30, pp. 237-243. Centers for Disease Control and Prevention (2009), Prevalence of Autism Spectrum Disorders—Autism and Developmental Disabilities Monitoring Network, United States, Surveillance Summaries [December 18, 2009], MMWR 58 (no. SS-10). Co l b o r n e , G. R., S. Na u m a n n , P. E. Lo n g m u i r and D. Be r b r ay e r (1992), “Analysis of Mechanical and Metabolic Factors in the Gait of Congenital Below-Knee Amputees: a Comparison of the SACH and Seattle Feet”, American Journal of Physical Medicine and Rehabilitation 71, pp. 272-278. Do l l a r , A., H. He r r (2007), “Active Orthoses for the Lower Limbs: Challenges and State-of-the-Art “, Proceedings of the 2007 IEEE International Conference on Rehabilitation Robotics (ICORR), Noordwijk, Netherlands. Do l l a r , A., H. He r r (2008), “Lower Extremity Exoskeletons and Active Orthoses: Challenges and State-of- the Art”, IEEE Transactions on Robotics 24(1). Ei l e n b e r g , M. F., H. Ge y e r and H. He r r (2010), “Control of a Powered Ankle-Foot Prosthesis Based on a Neuromuscular Model”, Transactions on Neural Systems and Rehabilitation Engineering. e l Ka l i o u b y , R. and P. Ro b i n s o n (2005), “Real-Time Inference of Complex Mental States from Facial Expressions and Head Gestures”, Real-Time Vision for Human-Computer Interaction, pp. 181-200, Springer-Verlag. Fl e t c h e r , R. R., K. Do b s o n , M. S. Go o d w i n , H. Ey d g a h i , O. Wi l d e r - Sm i t h , D. Fe r n h o l z , and R. W. Pi c a r d (2010), “iCalm: Wearable Sensor and Network Architecture for Wirelessly Communicating and Logging Autonomic Activity”, IEEE Transactions on Information Technology in Biomedicine 14, pp. 215-223. Ga n t z , M. L. (2007),”The Lifetime Distribution of the Incremental Societal Costs of Autism”, Archives of Pediatrics and Adolescent Medicine 161, pp. 343-349. Ga t e s , D. H. (2004), “Characterizing the Ankle Function during Stair ascent, Descent and Level Walking for Ankle Prosthesis and Orthosis Design”, Boston, MA: Boston University, Master’s Thesis. Go r d o n , C. T. (2000), Commentary: “Considerations on the Pharmacological Treatment of Compulsions and Stereotypes with Serotonin Reuptake Inhibitors in Pervasive Developmental Disorders”, Journal of Autism and Developmental Disorders 30, pp. 437-438

378 He r b e r t , L. M., J. R. En g s b e r g , K. G. Te d f o r d and S. K. Gr i m s t o n Activity”, IEEE Transactions on Biomedical Engineering 57, (1994), “A Comparison of Oxygen Consumption during Walking pp. 1243‑1252. between Children with and without Below-Knee Amputations“, Po s t e m a , K., H. J. He r m e n s , J. d e Vr i e s , H. F. Ko o p m a n and W. H. Physical Therapy 74: pp. 943-950. Ei s m a (1997), “Energy Storage and Release of Prosthetic Feet, Hi l l , E. L., S. Be r t h o z and U. Fr i t h (2004), Brief report: “Cognitive Part 1: Biomechanical Analysis Related to User Benefits”, Journal Processing of own Emotions in Individuals with Autistic Prosthetics and Orthotics International 21, pp.17-27. Spectrum Disorder and in their Relatives”, Journal of Autism and Te e t e r s , A. (2007), “Use of a Wearable Camera System in Developmental Disorders 34, pp. 229-235. Conversation: Toward a Companion Tool for Social-Emotional Hu a n g , G. F., Y. L. Ch o u and F. C. Su (2000), “Gait Analysis and Energy Learning in Autism”, Cambridge, MA: Massachusetts Institute of Consumption of Below-Knee Amputees Wearing Three Different Technology Media Laboratory, Master of Science. Prosthetic Feet”, Gait Posture 12, pp. 162-168. Th o m a s , S. S., C. E. Bu c k o n , D. He l p e r , N. Tu r n e r , M. Mo o r and Ja m e s , U. (1973), “Oxygen Uptake and Heart Rate During Prosthetic J. I. Kr a j b i c h (2000), “Comparison of the Seattle Lite Foot and Walking in Healthy Male Unilateral Above-Knee Amputees”, Genesis II Prosthetic Foot during Walking and Running”, Journal of Scandinavian Journal of Rehabilitation Medicine 5: pp. 71-80. Prosthetics and Orthotics 12, pp. 9-14. Jo n e s , R. S. P., D. Wi n t and N. C. El l i s (1990), “The Social Effects of To r b u r n , L., J. Pe r r y , E. Ay y a p p a , and S. L. Sh a n f i e l d (1990), “Below- Stereotyped Behavior”, Journal of Mental Deficiency Research 34, knee amputee gait with dynamic elastic response prosthetic feet: pp. 261-268. a pilot study”, Journal of Rehabilitation Research and Development Ke n n e d y , C. H. (2002), “Evolution of Stereotypy into Self-Injury, in 27: pp. 369-384. S. R. Schroeder, M. L., Oster-Granite et al., (eds.), Self-Injurious Wa l s h , C., K. En d o and H. He r r (2007), “A Quasi-Passive Leg Behavior: Gene-Brain Behavior Relationships, Washington, D.C.: Exoskeleton for Load-Carrying Augmentation”, International American Psychological Association, pp. 133-143. Journal of Humanoid Robotics. Kl i n , A., W. Jo n e s , R. Sc h u l t z , F. Vo l k m a r and D. Co h e n (2002), Wa l s h , C., K. Pa s c h , H. He r r (2006), “An Autonomous, “Visual Fixation Patterns During Viewing of Naturalistic Social Underactuated Exoskeleton for Load-Carrying Augmentation”, Situations as Predictors of Social Competence in Individuals with IEEE/RSJ International Conference on Intelligent Robots and Systems Autism”, Archives of General Psychiatry 59, pp. 809-816. (IROS), Beijing, China, October 9-16. Kl i n , A., F. Vo l k m a r and S. Spa r r o w (2000), Asperger Syndrome, New Wa t e r s , R. L. and S. Mu l r o y (1999), “The Energy Expenditure of York: Guilford Press. Normal and Pathologic Gait”, Gait Posture 9, pp, 207-231. Ko e g e l , R. L., and A. Co v e r t (1972), “The Relationship of Self- Wh i t t l e , M. W. (1991), Gait Analysis: an Introduction, 3rd ed., Oxford: Stimulation to Learning in Autistic Children”, Journal of Applied Butterworth-Heinemann. Behavior Analysis 5, pp. 381-387. Wi n t e r , D. A. (1983), “Biomechanical Motor Pattern in Normal Le e , C. H., R. Mo r r i s , M. Go o d w i n and R. W. Pi c a r d (2008), “Lessons Walking”, Journal of Motor Behavior 15(4), pp. 302- 330. Learned from a Pilot Study Quantifying Face Contact and Skin Wi n t e r , D. A., and S. E. Si e n k o , (1988),”Biomechanics of Below-Knee Conductance in Teens with Asperger Syndrome”, Extended Amputee Gait”, Journal of Biomechanics 21(5), pp. 361-367. Abstract of CHI 2008. Zi e g l e r -Gr a h a m , K., E. J. Ma c Ke n z i e , P. L. Ep h r a i m , T. G. Tr a v i s o n and Le h m a n n , J. F., R. Pr i c e , S. Bo s w e l l -Be s s e t t e , A. Dr a l l e and K. R. Br o o k m e y e r (2008), “Estimating the Prevalence of Limb Loss Qu e s t a d (1993), “Comprehensive Analysis of Dynamic Elastic in the United States: 2005 to 2050”, Archives of Physical Medical Response Feet: Seattle Ankle/Lite Foot versus SACH Foot”, Rehabilitation 89(3), pp. 422-429. Archives Physical Medicine and Rehabilitation 74: pp. 853-861. Le w i s , M. H., and J. W. Bo d f i s h (1998), “Repetitive Behavior Disorders in Autism”, Mental Retardation and Developmental Disabilities Research Reviews 4, pp. 80-89. Ma r t i n e z -Vi l l a l pa n d o , E. C., and H. He r r (2009), “Agonist-Antagonist Active Knee Prosthesis: a Preliminary Study in Level-Ground Walking”, Journal of Rehabilitation, Research and Development 46(3), pp. 361-373. Ma r t i n e z -Vi l l a l pa n d o , E. C., J. We b e r , G. El l i ot t and H. He r r (2008), “Design of an Agonist- Antagonist Active Knee Prosthesis”, IEEE BIORobotics Conf., Scottsdale, AZ. Ma r t i n e z -Vi l l a l pa n d o , E. C., J. We b e r , G. El l i ot t and H. He r r (2008), “Biomimetic Prosthetic Knee using Antagonistic Muscle-Like Activation “, ASME International Mechanical Engineering Congress and Exposition (IMECE), Boston, MA. Mo l e n , N. H. (1973), “Energy-Speed Relation of Below-Knee Amputees Walking on a Motor-Driven Treadmill”, International Z Angew Physiology 31, pp.173-185. Mu n g u i a Ta p i a , E., S. S. In t i l l e and K. La r s o n (2004), “Activity Recognition in the Home Setting Using Simple and Ubiquitous Sensors”, A. Ferscha and F. Mattern (eds.), Proceedings of PERVASIVE 2004, vol. LNCS 3001, pp. 158-175, Berlin Heidelberg: Springer-Verlag. Na t i o n a l Li m b Lo s s In f o r m at i o n Ce n t e r (2008), “Amputation Statistics by Cause: Limb Loss in the United States”, Amputee Coalition of America, Knoxville, TN. Ne w s c h a ff e r , C. J., and L. K. Cu r r a n (2003), “Autism: An Emerging Public Health Problem”, Public Health Reports 118, pp. 393-399. Pa l m e r , M. (2002), “Sagittal Plane Characterization of Normal Human Ankle Function Across a Range of Walking Gait Speeds”, Boston, MA: Massachusetts Institute of Technology, Master’s Thesis. Pe r r y , J. (1992), “Gait Analysis Normal and Pathological Function”, Slack, Inc., Thorofare, NJ. Po h , M., N. C. Sw e n s o n and R. W. Pi c a r d (2010), “A Wearable Sensor for Unobtrusive, Long-Term Assessment of Electrodermal

Hugh Herr and Ernesto Martínez-Villalpando 379

The City to Come

Carlo Ratti What will the cities of tomorrow be like? include less and less dependence upon being and Nashid Nabian Back in the 90s, many scholars speculated in a specific place at a specific time, and MIT SENSEable City Lab about the ongoing digital revolution’s impact the transmission of place itself will start to on cities, and the possibility of replacing become possible” (Negroponte, 1995). physical space with virtual space, or atoms Yet, it became apparent in the years 1 There are numerous accounts of possible conditions of this with bits. They fantasized about the dark, following the first wave of enthusiasm about nature. Sherry Turkle describes sexy image of disappearing urban spaces digitality, that this was not the destiny of digitally savvy individuals for whom the worlds they inhabit inhabited by individuals who would lead a either our digitally enhanced race, or the through their computer screens mostly virtual life in cyber space, engaging constructed spaces and landscapes that are as real as the real world (Turkle, 1997). in digitally encoded interactions rather than accommodate our activities. Cities and the 1 2 Vincent Mosco argues that face-to-face communication. Enthusiasts constructed spaces that they contain have these readings are caused by of digital technology pushed the envelope been multiplying at an unprecedented rate, man’s historical fascination with new technology. After to the extreme by announcing the official and the spatial production and consumption examining the enthusiastic claims about end of space, death of history, space, time, geography, and of mankind still fall very much within the time, history, economics, cities cities, among other things.2 The mainstream physical realm. In fact, cities have never and the like by cyberspace, and going back in history to view was that digital media and the Internet prospered as much as they have in the past look at the similar mythic would kill cities in the same way that they couple of decades. For example, China is pronouncements prompted by past technological advances— had killed distance. Technology writer currently building more urban fabric than the telephone, the radio, and George Gilder proclaimed that “cities are humanity has ever constructed in one era. And television, among others— Mosco explains how such myths leftover baggage from the industrial era,” a particularly noteworthy moment occurred are created, and why we feel and concluded that “we are headed for the two years ago: for the first time in history, compelled to believe in them (Mosco, 2004). death of cities” due to the continued growth more than half the world’s population—3.3 3 According to a UN report, of personal computing, telecommunications billion people—lived in urban areas.3 “In 2008, the world reaches an invisible but momentous and distributed production (Peters and Gilder, Thus, despite a generalized obsession milestone: For the first time 1995). At the same time, MIT Media Lab’s with the vision of an all-digital world, a new in history, more than half its human population, 3.3 billion Nicholas Negroponte wrote in Being Digital situation has emerged where the digital and people, will be living in urban that “the post-information age will remove the physical world are merging, and atoms areas. By 2030, this is expected to swell to almost 5 billion.” the limitations of geography. Digital living will are augmented by bits of information. The

Carlo Ratti and Nashid Nabian 383 digital did not and will not kill the physical, as as cybernetic systems that function via fantasized during the 90s. In fact, the digital sentient control mechanisms. With a plethora and the physical are recombining, or, in the of possibilities in telecommunication, words of Hiroshi Ishii: “The bits and bricks people who live in digitally augmented are marrying.”4 A layer of networked digital cities will benefit from real-time access elements blankets our built environments, to vast repositories of information. And, blending the information sphere and the with the aid of new sensing and actuating physical space inhabited by contemporary technologies, all constitutive elements of subjects in a seamless way. urban living will be transformed into context- What are the consequences of such aware, decision-making entities. In such transformations? This question can be intelligent environments, people will be able addressed on several levels. In this article to be incorporated as entities with transient we will focus on one particular aspect desires, needs and preferences: hyper- that we have found most productive: the individualized “users” as opposed to generic transformation of our cities into cybernetic, “inhabitants.” real-time control systems with a combined We will conclude by speculating about static and dynamic nature that consists of the new generation of denizens that are to things that exist in the material sphere, and inhabit these cities: user-inhabitants who things that happen in the info-social sphere. are digitally augmented and well informed This illustrates my claim What follows is a speculation on the about the dynamics of the cities that they that cities and other human- constructed landscapes are factors that will most significantly contribute inhabit. In other words, we will focus on how and will be multiplying due to to the birth of this new generation of urbanity. people who are environmentally digitally the demands of the increasing world population of urbanites Our cities of the near future will operate enhanced start acting like sensors in their (Ahmed Obaid, 2007).

4 Hiroshi Ishii coined the term “tangible bits”, which focuses on the idea of “graspable & manipulable” bits by “coupling the bits with Figure 1. How can a city perform as an open-source, real-time system? MIT SENSEable City Lab Vision Poster everyday physical objects and architectural surfaces”. Once bits of information become tangible, they can be considered building blocks of our inhabitable spaces, bridging the gap between cyberspace and physical space with digital technology. Thus, bits and bricks are married in a new paradigm shift in the realm of spatial practices (Ishii and Ullmer, 1997: 234-241).

5 Mark Weiser is the father of Ubiquitous Computing or Ubicom. In his 1991 paper, “The Computer for the Twenty-First Century”, Weiser discusses the idea of integrating computers seamlessly into the world: “The most profound technologies are those that disappear. They weave themselves into the fabric of everyday life until they are indistinguishable

384 processes that are based on detected With a plethora of possibilities spatio-temporal changes. It is actuated “ through embedded virtual or physical in telecommunication, people agents that provoke changes detectable by the inhabitant, or that enhance the spatial who live in digitally augmented experience of the occupant in an explicit or implicit way. It is also enhanced with cities will benefit from real-time memory of the past and anticipation of the future, and is endowed with some level of access to vast repositories of data connectivity, especially if the monitoring and actuating agents are physically separate information and the distance needs to be technologically ” bridged. These steps imbue the city with a limited awareness of contextual change over time, and the capacity for responding to it own right, actuated in a real-time feedback accordingly. mechanism between the city and themselves, In terms of sensing, cameras and and mediated with the aid of new digital microcontrollers are used ever more technology and telecommunication networks, extensively to manage city infrastructure, while the city itself is the interface for such optimize transportation, monitor the mediation. environment, and run security applications. Advances in microelectronics now make it The City as a Cybernetic, Real-Time Control possible to implement “smart dust” networks Mechanism of tiny, wireless, micro electro–mechanical In his 1969 article “The Architectural system (MEMS) sensors, robots or devices. Relevance of Cybernetics”, Gordon Pask Besides, we are witnessing an explosion proposed that architectural spaces should be in mobile-phone use around the globe. designed as systems capable of responding According to ITU World Telecommunication to emerging conditions, and adapting to Indicators Database, more than four billion the needs of their inhabitants (Pask, 1969: mobile phones were in use worldwide by early 494-496). To this effect, he compared such 2009. Across socioeconomic classes and five spaces to cybernetic systems. Following the continents, mobile phones are ubiquitous: same line of thought, we may conceive of they allow us not only to communicate with the digitally enhanced, postmodern city as a each other in unprecedented ways, but to cybernetic mechanism that accommodates create a pervasive sensing network that interaction in its capacity as a spatial system covers the whole globe. capable of extracting contextual information, In terms of regulation and actuation, the acknowledging the inhabitants’ desires and city already contains actuators such as traffic needs, and adopting behavior patterns based lights, remotely updated street signage, on what it learns. etc. More profound actuation is relatively Such a cybernetic urban system achieves problematic: for instance, we cannot double its monitoring with sensing technology. the size of a street in real time if we detect from it.” He proposes the It is conditioned through computational traffic congestion. However, unlike other

Carlo Ratti and Nashid Nabian 385 real-time control systems, cities have a special feature: citizens. By receiving real- Processing urban information time information, appropriately visualized “ and disseminated, citizens themselves can captured in real-time and become distributed, intelligent actuators who pursue their individual interests in making it publicly accessible can co-operation and competition with others. Processing urban information captured in enable people to make better real-time and making it publicly accessible can enable people to make better decisions decisions about the use of urban about the use of urban resources, mobility, and social interaction. resources, mobility, and social This feedback loop of digital sensing and processing could begin to influence interaction various complex and dynamic aspects of the ” city, improving the economic, social, and environmental sustainability of the places we inhabit. Feedback loops could grow inside systems, regulated by a number of feedback one another: buildings and other spatial loops. In the text that follows, we would like devices throughout the city could become to focus on the possibilities of sensing and probes and ambient displays, but also evolve actuation in the cities of the near future. into real-time, responsive devices in their own right. The Cybernetic City and its Different A cybernetic city operates on the logic of Mechanisms of Sensing a hybrid computing paradigm that examines In his Traité des Sensations, Étienne the ramifications of installing sensors that Bonnot de Condillac offers an interesting detect changes in the physical properties reflection on sensibility as the source of of the context; examines how an embedded subjectivity.6 He imagines a living statue, microprocessor or computer processes devoid of any sensations but the sense the resulting digital signal; and finally of smell. He walks the reader through examines how the system activates a series a sequence where sensation leads to of actuators installed, embedded, or situated comparison, which leads to judgment, which in the space. At times, the microprocessors leads to reflection and reasoning, which term “embodied virtuality” act in isolation. Yet, once these micro- leads to abstraction: the sum of all of the to refer to the process of drawing computers out of their systems are networked, communication, above results in what can be characterized discreet places, and seamlessly sensing, and information-processing will as understanding and [human] agency. This integrating computing into the environments of our day-to-day disappear into the environment to create an sensationalist approach can be applied to life experiences (Mark Weiser, 1991: 94-100). Internet of Things with world-wide coverage, cities as cybernetic mechanisms. Sensors are 6 In History of Philosophy, Alfred as in the idea of Ubicom proposed by Mark devices capable of registering one or more Weber offers a very complete Weiser.5 One consequence of this dual quantifiable aspects in the contexts where account and interpretation of the Condillac’s sentient statue process of sensing and actuation within the they are used. Once populated with large argument. I have borrowed contemporary city is particularly important: number of sensors and endowed with the from his interpretation in making my point (Weber, 1912: cities can start to work as real-time control capacity to register changes in its context, 399-403).

386 a city can acquire a limited level of agency With advancements in the field of through comparison, judgment, reflection, data connectivity and telecommunication reasoning and abstraction. technologies, connection to the To reach this goal, we should ask aforementioned datasets of distant servers ourselves, how can we sense a city and is improving, allowing data management its dynamics? One approach is to leverage engines to get real-time updates on the systems already in place that have been state of the monitored entities. The urban developed for other reasons, but can function spaces of digitally annotated terrain as a source of information on how our cities augmented with mined datasets create operate. A great example is the cellphone mediated landscapes that allow for new network. We define this as viral sensing, since forms of expression, such as public or the computational algorithms of such sensing museum exhibitions, or urban demos. For practices install themselves on the digital example, MIT SENSEable City Lab has networks that already augment cities, much conducted numerous experiments that led like a virus settles in an already-operational to such exhibitions and urban demos over environment within another organism in recent years, some examples of which are order to support its internal bio-processes. Wikicity Rome and NYTE. In both cases, The premise of such sensing practices is the real-time visualization of data mined that the contemporary subject voluntarily from communication networks is cross- and involuntarily leaves digital traces on referenced with the geographical terrain, various networks that are juxtaposed over to allow for revealing urban dynamics in urban areas. Every time a credit card is used, real-time to observers. Such technologically a text message or an email is sent, a Google enhanced spectacles—real-time info-scapes query is submitted, a phone call is made, projected onto architectural surfaces, or a Facebook profile is updated, a photo is accessed via worn and handheld devices— uploaded or tagged on Flickr, or a purchase is provoke a temporary displacement of the made on a major, on-line store like Amazon. observer from the physical terrain he/she com, an entry with the time and location of inhabits to a distant location, providing this action is added to a dataset on a central him/her with a overview of the dynamics server, administered and maintained by the contained within the urban landscape. organizational entity providing the platform The Wikicity Rome project tapped into for these, and hundreds of other day-to-day aggregated data from cellphone usage. The operations. Once the datasets are spatially resulting visualizations depicted the pulse and temporally attached to entities and points of the city, providing an overview of phenomena in the physical terrain, the urban how the urban landscape is occupied, and landscapes that accommodate these traces where and in which temporal patterns the are transformed to info-scapes. An info- cellphone-using crowd is dispersed. Crowd scape, in this sense, is a digital terrain both sensing based on cellphone usage allows temporally and spatially associated with the for spotting the hot locations and congested physical terrain. Info-scapes can be delivered spots of the city in real-time. This can help on publicly used, architecturally installed administrative agencies to regulate traffic digital screens, and personal, handheld and the flow of resources within the city, computing units. based on real-time dynamics.

Carlo Ratti and Nashid Nabian 387 Figure 2. Wikicity Rome, 2007. MIT SENSEable City Lab: Assaf Biderman, Francesco Calabrese, Kirstian Kloeckl, Carlo Ratti, Bernd Resch y Andrea Vaccari

Madonna Concert Cellphone activity in Stadio Olimpico Rome 2006-08-06 At Rome’s Olympic Stadium Located abaout three kilometres from the Vatican 19:00 During the song Live to Tell... Madonna appeared against a mirrored cross night morning afternoon evening

When the system was exhibited at the information “can give city dwellers a deeper 10th International Architecture Exhibition knowledge of urban dynamics and more of the Venice Biennale, researchers at MIT control over their environment by allowing SENSEable City Lab also supplemented them to make decisions that are more the resulting, cellphone-based evaluation informed about their surroundings, reducing of urban dynamics with data based on the the inefficiencies of present day urban instantaneous positioning of buses and taxis. systems” (Calabrese et al, 2010). This provided information about mobility, Aside from tapping into existing networks, ranging from traffic conditions to the customized sensor networks can also movements of pedestrians throughout the be implemented to decode various flows city, in real time. The visualizations provided within the cities. The cybernetic city can a qualitative understanding of how the receive its input from different networks of aggregated data of network cellphone usage sensing mechanisms. The first is a network and public transit locationing information of centrally managed sensing agents, can be used to provide valuable services embedded within the fabric of the city. To to citizens and authorities. Researchers at this effect, smart dust saturates the space MIT SENSEable City Lab believe that such of urbanity, extracting large amounts of

388 information about the processes contained system to create a virtual model of the within the built environment and constructed physical terrain that is perpetually updated spaces, and channeling it to a central control with real-time information about the context. and command mechanism. From there, this Depending on the nature of the sensed data, data is aggregated, managed, and used as the the virtual model can represent different basis for how the monitored space of the city aspects of the physical terrain. should be regulated and actuated. Sensor networks can consist of fixed The technology to geo-localize the whole sensor agents, or they can incorporate surface of the world is not that far from agents capable of navigating or probing becoming a reality. At this point, Google Maps the monitored terrain. If the sensors are API offers a two-dimensional, virtual model of embedded, they create a fixed backdrop for the world. With advancements in the Google a virtual model of the monitored space’s Earth API and platform, this virtual model real-time dynamics that corresponds to is moving towards a fully realized, three- the permanent geographical location of the dimensional, virtual copy of the physical sensors. If the nodes are implemented world. Imagine a day when such a model as dynamic probes, this backdrop layer is is augmented with geo-localized layers of also animated. In some cases, once the information about each and every object geographic locations of the sensors are it contains. This scenario would have two coded, the only transmission required different but closely-related impacts on our to update the virtual model is the consumption and production of space. First, sensor-detected change, and the unique the data extracted from all things would identification code of the sensor transmitting allow spatial practitioners to make sense of the data. In the second category of mobile the dynamics of our constructed landscapes sensors, each transmission also needs to be by analyzing these large, real-time data tagged or annotated by the current location of sets. This real-time knowledge of spatial the sensor. dynamics could be fed back into the process Furthermore, a sensor network may be of spatial design and the management of implemented so that the agents automatically spatial resources. On the other hand, if report the current state of the monitored access to such layers of information were phenomena at pre-defined intervals, or democratized, then the inhabitants of our so that agents report their current state constructed landscapes would also benefit. in response to an update request from If a collectivity of sensors capable of the central server aggregating the sensed communicating with a centrally managed information. This gives us the dichotomy server is embedded and distributed within a of self-reporting sensor networks versus spatial context, the prospect of distributed request-based sensor networks. sensing is shown as one aspect of a In urban sensing mechanisms that completely networked world, or an Internet operate based on networks with central of Things. If the sensors are well situated control-and-command structure, with within the physical terrain, meaning that algorithms that allow for the context- the digitally encoded transactions they send sensitive interpretation of the information the server are annotated with their exact transmitted to the database, we arrive at locations, this network allows a cybernetic spatial scenarios where whole geographic

Carlo Ratti and Nashid Nabian 389 regions are digitally augmented by the Smart Trash is but one possible scenario in a ubiquity of these sensor/transmitter devices. more comprehensive conception of a world In the extreme version of this scenario, one populated with sensors. can envision a world where any object is As previously discussed, in viral capable of sensing its context and reporting sensing, the involuntary digital footprints of it back to a central data-management facility contemporary urbanites stored in central where its identity, its real-time location, and databases of service providers is the basis for its contextual state are cross-referenced, making sense of city dynamics. Again, sensor stored, and managed computationally. A great networks employ a top-down architecture example of such a scenario is the 2009 Trash where all the sensors report information Track project by MIT SENSEable City Lab. from the environment to a central database, The project consisted of digitally from where this information is aggregated, enhanced tags that could be attached to managed, and stored. Instead of such top- objects and could report their location to down approaches, we should also consider an Internet backbone infrastructure via more grassroots, bottom-up systems for cellular network. Trash Track made use sensing the dynamics of cities. One possibility of these location-reporting tags to track is thinking of each urbanite as a human sensor, urban disposal and study the efficiency an agent for sensing and reporting on his or of the urban waste-removal chain. The her individual experience through tapping into platform allowed designers and planners to data generated by user-contributed content analyze the acquired data, and make well- on content-sharing platforms. Hence, we informed, high-level decisions about how the arrive at the third possibility of urban sensing: given constructed landscape is managed. crowd-sourcing. User-generated content- Therefore, a multiplicity of questions about sharing platforms allow everybody to report the dynamics of the urban removal chain his or her experience to others in real-time, could be addressed empirically: Is our and in a multi-modal, high-resolution format. removal chain efficient? Is hazardous waste On these platforms, the users constantly managed properly, or are there loopholes in project the physical world onto the digital our system that need to be taken care of? Is world. Websites such as Flickr, Twitter, the recycled waste really recycled, or does Facebook, and Wikipedia are repositories of it end up in dumps? The Trash Track system what people “sense” in the city. This dynamic can have a great impact on the nature of the is gradually creating a digital world that perceptual relationship that a city or region mirrors the physical world. For almost every develops with its waste disposal habits. city in the world, a parallel digital version, as Generally, people assume that once rich in diversity and content as its physical they dispose of waste, it is no longer their counterpart, is spread across different responsibility. Offering a real-time view of platforms and systems. This is because the how the disposed items travel through the digitally- augmented, contemporary urbanite landscape of their daily lives will expand each uploads pictures of popular events, sends citizen’s perceived sphere of responsibility tweets about new happenings in real time, from the domestic space, to the space of the and creates and updates pages on Wikipedia city. Perhaps such real-time urbanity can about the city. These acts of communication result in a more responsible urbanity. Yet, generate different kinds of data that provide

390 Figure 3. Trash Track, 2009. MIT SENSEable City Lab: Carlo Ratti, Director; Assaf Biderman, Assoc. Director; Dietmar Offenhuber, Team Leader; Eugenio Morello, Team Leader; Musstanser Tinauli, Team Leader; Kristian Kloeckl, Team Leader; Lewis Girod, Engineering; Jennifer Dunnam, E Roon Kang, Kevin Nattinger, Avid Boustani, David Lee, Programming; Alan Anderson, Clio Andris, Carnaven Chiu, Chris Chung, Lorenzo Davolli, Kathryn Dineen, Natalia Duque Ciceri, Samantha Earl, Sarabjit Kaur, Sarah Neilson, Giovanni de Niederhausern, Jill Passano, Elizabeth Ramaccia, Renato Rinaldi, Francisca Rojas, Luis Sirota, Malima Wolf, Armin Linke, Video

2) Waste products transmit 6) Real-time data signals to antennas that is sent back to determine their position users via different through triangulation applications: 4) Data is sent to online through 1) Wireless device SENSEable City Lab’s a dedicated is embedded server at MIT website into waste products

through exhibitions 3) Data is collected spaces by the cell-phone provider 5) SENSEable City Lab processes the data and produces real-time visualizations

Plastic Container of Liquid Soap

Disposed at Traveled 457 Madison Ave 18,3 Miles New York, NY 10022 Category Plastic

Deployment Sep 4th, 2009, 2:00 PM 457 Madison Ave New York, NY 10022

En Route Plastic Container of Liquid Soap Last seen from: 786-798 Bellevue Turnpike Kearny, NJ 07032

Carlo Ratti and Nashid Nabian 391 unique views on how people experience, reveal how cities are interpreted by their navigate, and view the city. The crowd occupants—e.g., which locations are therefore becomes a distributed network considered more or less important, and what of sensors that allows us to understand is captured by the eyes of the people who the dynamic patterns of the city and the are there. The “virtual city” created through experiences of its citizens at a quasi real-time the geo-localization of user-generated rate. Hence, we call this phenomenon crowd- content reflects reality of the city dynamics, sensing (Pereira et al.). and can become a powerful resource for Accessing the possibilities offered by understanding these (Pereira et al.). user-generated content-sharing platforms, For example, an animation of the photos researchers at SENSeable City Lab have geo-tagged to different neighborhoods of conducted various projects that focus on Barcelona with descriptive tags that relate revealing the dynamic of civic landscapes, to “partying” in the summer of 2007, shows as viewed and collaboratively reported by that Barcelona’s old town (Ciutat Vella) is their inhabitants. For example, in the Los where one goes to have fun. This observation Ojos del Mondo/The World’s Eyes project, the is validated by the fact that the area contains attractiveness and popularity of places and both a high density of tourists, the Bohemian events are revealed by visualizing the density district of Gracia, and the Forum area (where of user-generated data, in particular, the various music festivals are held). photographs tagged with information about Another visualization in the same set looks their location and time uploaded by Flickr at how Spain is photographed by tourists users. Then, user-generated electronic trails over the course of one year. While the photos based on the sequences of photographs are overlap in certain locations and expose places used to reveal the presence and movement that attract the photographer’s gaze, in other of visitors in a city. Such data visualizations locations, the absence of images is eye- that geo-localize the content generated by catching, revealing the more introverted parts the user’s experience of a given urbanity of Spain.

Figure 4. Los Ojos del Mondo/The World’s Eyes, 2009. MIT SENSEable City Lab: Carlo Ratti, lab director; Assaf Bidermann, associate director; Fabien Girardin, project leader; David Lu, visual designer; Andrea Vaccari, data mining. Universitat Pompeu Fabra: Ernesto Arroyo, interaction designer.

The World’s Eyes The World’s Eyes Where are the photographers? Where are the locals?

392 integrating digital technologies into the Actuators and information design of buildings and artifacts. “ Actuators and information delivery delivery interfaces are the interfaces are the components of the space controlled by the output of the operating components of the space system, based on changes registered by the sensors and reported to the operating system controlled by the output of as an input. The actuation of a digitally augmented space can be considered in terms the operating system, based of provoking the type of physical motion we see in kinetic architectures. Motion-initiating on changes registered by the agents can provoke rotation, vertical and horizontal disposition, or vibration in the sensors and reported to the elements of spatial settings that are of a substantive nature. Another possibility operating system as an input is to use materials that change shape ” when exposed to an electrical current. For example, depending on the pattern in which muscle wires are woven in to the fabric of Now that we have covered three different an architectural surface, when an electrical ways of providing input for the real-time current is applied, the surface changes form control mechanism of a cybernetic city—viral to accommodate the change in the length of sensing, implemented sensor networks, the wires. and crowd-sensing—we will move on to Once the inhabitable spaces of cities are speculating about the output of such urban transformed into context-aware, decision- systems, or in other words, the actuation making entities with the aid of sensing mechanisms. mechanisms that are also capable of analyzing the sensed data, the human subject The Cybernetic City’s Different Mechanisms inhabiting the space can be incorporated as of Actuation and Regulation an entity with transient desires, needs and Parallel to mechanisms of sensing, preferences. This allows the environment to mechanisms of actuating are integral to acknowledge its inhabitants’ input, or at least cities that are cybernetic systems. In terms the specificities of their behavior. Inhabitants of spatial actuation and regulation, we can are then identifiable, each deserving specific speculate on two sets of possibilities. The treatment from the space he/she inhabits. first is regulating the landscape through A user-subject is a hyper-individualized actuator agents embedded within the space inhabitant, and an interactive space respects and controlled via algorithms that are the specificities of, and offers a customized conditioned by the information received from experience for each one. various sensing mechanisms. This vision Physical locomotion is not the only way opens up a multiplicity of possibilities for the of initiating change within spatial settings. design and implementation of responsive Change may also be invoked by manipulating environments and interactive spaces by the soundscape to inject the space with

Carlo Ratti and Nashid Nabian 393 Figure 5. the Cloud, 2009. Architecture by: Carlo Ratti, Walter Nicolino, Alex Haw. Team from carlorattiassociati and MIT SENSEable City Lab: Giovanni De Niederhausern, Alberto Bottero, Pietro Leoni, Coen Smets, Assaf Biderman, Mauro Martino, E Roon Kang.

auditable [white] noise, or melodic and civic-scale interface for delivery of real-time musical pieces that vary over time in terms information to the inhabitants and visitors of of content, volume, and intensity. Perceivable the city. change can be suggested visually, by Another example of display technologies light-emitting agents that vary in terms that can actuate the space of the city is of intensity and color. Dispensing fog in explored in the Flyfire project. Flyfire, a different densities can also manipulate the project by the SENSEable City Laboratory visual aspects of the space by changing the in collaboration with ARES Lab (Aerospace depth of the perspectival field. Architectural Robotics and Embedded Systems surfaces can be endowed with variable Laboratory), uses a large number of self- visual characteristics, such as transparency organizing micro-helicopters that contain or color, based on the amount of electrical small LEDs and act as smart pixels. current to which they are exposed. The helicopters are controlled to create Furthermore, change may be evoked through synchronized motions, and form elastic digital screens embedded in architectural display surfaces. This allows for the surfaces that deliver animated imagery to the transformation of any ordinary space into subjects inhabiting the space. This is the case a highly immersive and interactive display for the CLOUD display system. The patterns environment. The proposed mechanism of its animated, spherical skins offer a explores the possibility of a free-form spatial

394 Figure 6. Flyfire, 2010 (Top: Raster Image Display, Bottom: Vector Image Display). SENSEable City Lab: Carlo Ratti, Director; Assaf Biderman, Assoc. Director; Carnaven Chiu, Team Lead & Visuals; E. Roon Kang, Team Lead (2nd Phase); Caitlin Zacharias, Shaocong Zhou. ARES Lab: Emilio Frazzoli, Director; Erich Mueller, Engineering

display that consists of a swarm of pixels by embedded, scent-emitting actuators that that self-organize in real-time to adapt to the disperse patterns of odorous gases and display requirements of any given scenario. liquids. In the extreme case, embedded liquid Space can also be suggestively or gas dispensers will allow the designer to manipulated in terms of thermo-ception. envision architectural settings that are of a Actuators can provoke change in the less substantive or material nature, which is environment through heating and cooling, or the case for the Digital Water Pavilion project. humidifying and dehumidifying mechanisms. Yet, manipulating space through Thermo-ceptory aspects of space can be embedded actuators is not the only possible conditioned using actuators such as fans means of spatially regulating cybernetic that manipulate the pattern and intensity urban systems. The inhabitants of the cities of air-flow through the space. Alternately, themselves can be considered possible change can be expressed in olfactory terms agents of regulation and actuation. From

Carlo Ratti and Nashid Nabian 395 Figure 7. Digital Water Pavilion, 2008. Architectural design: Carlorattiassociati. Landscape architecture: Agence Ter. Graphic design: Studio FM Milano. Engineering: Arup. Interactive water wall engineering: Lumiartecnia International. Lead contractor: Siemens. Site supervision: Typsa. Expo gateway preliminary design: MIT Senseable City Lab. Digital Mile design: MIT Department of Urban Studies and Planning / City Design and Development Group. Interactive water wall concept: MIT Media Laboratory / Smart Cities Group

this point of view, the space of the city is This is what we see as the most promising envisioned as the provider of real-time characteristic of the city of the future: the fact access to information for a body that that it is made “smart” by the collaborative corporeally inhabits it. Hence, spatial design activity of its citizens. The citizens have does not limit itself to the allocation of the potential to function as sentient, self- material resources, but takes into account reporting agents, contributing to monitoring the temporal allocation of information the city as a cybernetic organism. On the relevant to the specific location or context other hand, they can be actuated and their of those occupying it. The new analytical actions can be self-regulated based on understanding of the spatial dynamics real-time knowledge of the city dynamics, offered by the delivery of real-time and conveyed on information-delivery platforms. geographically situated information can Such a city will be a desirable place in be fed back to the individuals inhabiting which to live and work, in that it offers a these landscapes, to help them make well- platform for reinforcing identity and culture informed decisions. An example of this through collaboration. Collaboration in approach is the real-time, context-sensitive defining and re-defining the ephemeral service offered by cellular networks that dimension of the city can be viewed as one way assess crowd density based on cellphone of making it more engaging, and making its usage in an area, and deliver this information citizens more invested in it. A city that is open to city residents who wish to identify popular to individual modifications enables people “hot spots.” In such scenarios, not the space to imprint intentional traces of themselves but the inhabitants of the space are actuated, upon it. In this way, the city itself becomes a and efficient regulation of spatial dynamics is limitless canvas of collaboration, resulting in a based on their decisions. constant feeding of human input.

396 A city whose inhabitants become sensors, References and which is actuated by the results of the Ah m e d Ob a i d , T. (2010), “Peering into the Dawn of an Urban real-time information provided to them about Millennium”, State of World Population 2007 (New York, NY: United Nations Population Fund, 2007), http://www.unfpa.org/swp/2007/ its internal dynamics, will be more responsive presskit/pdf/sowp2007_eng.pdf (last accessed April 12, 2010). Ca l a b r e s e , F., M. Co l o n n a , P. Lo v i s o l o , P. D. Pa r a t a and C. Rat t i to concerns about adaptability, efficiency, (2010), “Real-Time Urban Monitoring Using Cellular Phones: a Case-Study in Rome”, IEEE Transactions on Intelligent and optimal operation. Therefore, although Transportation Systems (2010). augmented cities respond to concerns about Is h i i , H. and B. Ul l m e r (1997), “Tangible Bits: Towards Seamless Interfaces Between People, Bits and Atoms”, in S. Pemberton function, structural durability, and aesthetic (ed.) Proceedings of the ACM CHI 97 Human Factors in Computing Systems Conference, New York, NY: ACM, 1997, pp. 234-241. desirability, the focus of designing such Mo s c o , V. (2004), The Digital Sublime: Myth, Power, and Cyberspace, Cambridge, MA: The MIT Press. spaces will inevitably shift to the issue of Ne g r o p o n t e , N. (1995), Being Digital, New York: Knopf. performance. After all, any space capable of Pa s k , Gordon (1969), “The Architectural Relevance of Cybernetics”, Architectural Design 39, pp. 494-496. self-adapting to new conditions is not there Pe r e i r a , F. C., A. Va c c a r i , F. Giardin, C. Ch i u and C. Rat t i , “Crowdsensing in (a?) Web: Analyzing the Citizens’ Experience in to merely endure, but to “perform” with the Urban Space,” SENSEable City Lab, MIT, USA. Pe t e r s , T., and G. Gi l d e r (1995), “City vs. Country: Tom Peters & efficiency. In the end, digitally augmented George Gilder Debate the Impact of Technology on Location”, cities are performing cities, and given the Forbes ASAP Technology Issue, February 27, 1995, p. 56. Tu r k l e , S. (1997), Life on the Screen: Identity in the Age of the Internet, right technology, the limit to how well they New York: Simon & Schuster. We b e r , A. (1912), History of Philosophy, trans. Frank Thilly, New York: can perform is the limit of the imagination Charles Scribners Sons, pp. 399-403. and the desire of those who design and We i s e r , M. “The Computer for the Twenty-First Century,” Scientific American, September 1991, pp. 94-100. inhabit them. To this effect, the cybernetic city will function as a medium through which subjects within the space communicate amongst themselves, transforming them from passive inhabitants to active participants in, or actuators of spatial scenarios. Hence, we end our consideration of the city of the future with the terms “user-participant- inhabitants” or “sensor-actuator citizens” to refer to the people who are its citizens, and who, we imagine, will be ultimately responsible for the cybernetic organism they inhabit.

Carlo Ratti and Nashid Nabian 397

Future Opera for Robots and People Too

Tod Machover We all love music deeply; opera adds every we were working on in the early 1990s. MIT Media Lab other conceivable form to augment and unify The good news about Guitar Hero and Rock the senses around music. Music and opera Band is that they clearly demonstrate the are capable of entertaining, stimulating, public’s willingness to dive in and immerse moving and transforming us as few other themselves in music-making, given the activities are. In fact, there is increasing right environment. The bad news is that research on the how and why of music’s neither platform is truly musical, nor do they power, some of it—like the much-hyped encourage learning, expression or creativity. ‘Mozart Effect’—suggesting that merely What would happen if we could listening to music on your iPod while driving, combine the excitement and ‘stickiness’ reading, sleeping or perhaps even playing (bordering on addiction) of Guitar Hero with music to your baby in the womb is enough to a more sustaining, personal and open- let music work its full magic. ended musical experience? How could Unfortunately, that isn’t quite true. we embed such a new type of activity in a Music exerts its power when we are actively more integrated musical ecology, where engaged, not when we listen subliminally. the current exaggerated distinctions For this reason, I have been working with between celebrities and amateurs would my group at the MIT Media Lab to create be diminished and the level of musical musical tools—often with specially designed sophistication, excellence and, hence, technologies—that enable everyone to enjoyment would be raised for all? participate directly in music-making The research projects that I direct at the regardless of background. MIT Media Lab and many of the musical This field has undergone a revolution projects I undertake are attempting to nudge in the past several years through the huge the field in these directions. We started by public success of the Guitar Hero and Rock developing Hyperinstruments for some of Band videogames. Alex Rigopulos and Eran the world’s greatest performers, including Egozy, students of mine from the MIT Media Yo-Yo Ma and Prince, as well as orchestras, Lab, developed them based on ideas that chamber music ensembles and rock bands.

Tod Machover 399 All kinds of sensors are built into the Tod Machover and Yo‑Yo Ma playing the Hypercello Hyperinstrument so it knows how it is being played. By changing the interpretation and feeling during performance, a cello—for instance—can be morphed into a voice or a whole orchestra or something that nobody has heard before. As these virtuosic Hyperinstruments developed, we started imagining that we could use similar technologies and interpretation strategies to produce instruments and interfaces for music-lovers who weren’t highly trained virtuosi. We have designed a series of such instruments and interfaces. One of the largest collections was the Brain Opera that was launched at the first Lincoln Center Festival in New York in 1996, toured the world and is now permanently installed at the Haus der Musik in Vienna. We created a rather large orchestra of especially designed fantasy instruments (including Rhythm Trees, Harmonic Driving, with making music first and then demand to Gesture Walls and Melody Easels) so that learn more because of that love. We designed anybody could play them using natural skill. a set of new Music Toys, including the soft, You can play a video game, drive through a squeezable Music Shapers that manipulate piece of music, use gestures to control huge intensity and tone colour; Beatbugs, which masses of sound, touch a special surface capture rhythms that can be manipulated to make melodies and use your voice to and shared with friends; and a software- make a whole aura. We designed the Brain composing environment called Hyperscore Opera for adult concert-goers, but found that lets anyone compose original music that everywhere we went it was most easily by shaping lines and colours. Another goal understood and most creatively manipulated of Toy Symphony was to develop a project by the youngest (under 8) and oldest (over model—learning musical skills, creating new 70) visitors. This was perhaps due to lack music and then rehearsing and performing of inhibition and desire for social play and a concert—that would bring children and creativity among those ages. We therefore orchestras together. decided to concentrate on activities that Our results with Toy Symphony were might engage those groups more directly. encouraging enough to make us decide This led to our Toy Symphony project to bring this model to other populations (2002–2005), which attempts to reconsider where there might be clear impediments to how to introduce children to music in the personal expression and creativity, where most immersive, creative and enjoyable way music, made accessible through new musical possible. The goal is to have kids fall in love tools, might be an ideal medium. In 2004, we

400 Brain Opera at the Haus Der Musik in Viena

began concentrating on providing musical in marked and unexpected improvement in experiences and tools—based on ongoing a wide range of conditions, and inspiring research by colleagues at the MIT Media Lab a number of patients to themselves and increasingly around the world—to help mentor others in the uses of new tools improve health, diagnose illness and provide and environments for creative musical a medium of expression and communication expression. that would otherwise be lacking. This new A performance system designed for area of Music, Mind and Health has led to and with Dan Ellsey is an example of a research in using music for early detection new category of interfaces that we call of Alzheimer’s disease, for social and Personal Instruments. Even an instrument emotional adaptation for autistics, for aiding as sophisticated as the Hypercello we physical and mental rehabilitation and for designed for Yo-Yo Ma is a generalized a growing number of other areas. With my instrument. In other words, anyone familiar student Adam Boulanger, I started this with cello technique can play it, drawing work at Tewksbury Hospital near Boston, more from it according to one’s mastery where we were invited to work with a group and understanding. But Dan’s instrument of long-term residents with a wide range was designed for him and him only: it takes of severe physical and mental disabilities. account of his particular style and detail We organized composing workshops with of moving and the way that translates into Hyperscore that resulted in a series of public musical expression, and compensates for concerts featuring music by patients. This his particular physical limitations. Future process has become so successful that it instruments and interfaces can and must be has been replicated at many sites, resulting adaptable and tunable to each of our skills

Tod Machover 401 and limitations. For us, Dan’s performance Music Shaper of Toy Symphony system represents the first step in this direction. How did I come to undertake such unusual work? Through a desire to compose music, the activity that I love to do most. It is what best combines my various skills and interests—imagination, reflection, organization and the desire to communicate my thoughts and emotions to anyone who will listen. I also love solitude: I do my creative work in an 18th-century barn on our farm near Boston, where I can pursue my ideas without the need to explain or translate music after 1967 couldn’t actually be played until all is ripe and ready. So it may seem live. That’s when I started imagining a like a paradox that another large chunk of performance mode that would combine the my life is spent in one of the world’s most physicality and intimacy of solo cello and the futuristic, collaborative and intensive centers unhinged creativity of the recording studio. I of technological invention—the MIT Media was driven by the urge to bring this strange, Lab. But the attractions and complexities enticing and intricate music filling my head of merging these worlds are central to out through my arms and fingers and into the how and why I work, and grow from seeds world. planted when I was very young. My mother is This desire compelled me not only to a Juilliard-trained pianist and a remarkable compose the music I was imagining, but also pedagogue and my father is one of the to invent new instruments and new modes of pioneers of computer graphics, but it actually playing them, something that I never thought took me a while to start combining these as a kid that I’d end up doing. So along with fields. I grew up as a cellist, first playing my colleagues and students at the MIT Media solo Bach, then chamber music (I never Lab I designed the projects outlined above. particularly enjoyed playing in orchestras), Inventions like these have been part of a and then, by high school, original composed trend that has yielded amazing developments or improvised music using a wired and over the past 10 years. Technology has transformed rock cello that I created by democratized music in ways that are placing large headphones around the cello surprising even to me, revolutionizing for amplification, then sending the sound access to any music anytime with iPod and through tape recorder loops and analog iTunes, opening interactive music-making transformation processes. to amateurs with Guitar Hero and Rock Band, The appearance of the Beatles’ providing digital production and recording Sgt. Pepper’s Lonely Hearts Club Band had facilities on any laptop that surpass what the changed my life: it suggested a music that Beatles used at Abbey Road, and redefining ideally balanced complexity and directness. the performance ensemble with initiatives There was a downside, though: as a product like the Stanford University iPhone Orchestra of the recording studio, most of the Beatles’ and YouTube Symphony.

402 Hyperscore and “surrounds” us ever more, but still emphasizes the boom box aspect rather than the “still small voice.” And there isn’t yet a performance measurement system that could come close to interpreting the exuberance, range and immediacy of someone like conductor Gustavo Dudamel or truly enhancing the experience of an “unplugged” symphony orchestra. As a composer, I find that each new piece I undertake suggests exciting but daunting technological challenges; my imagination just seems to be wired that way. My current In fact, near the end of 2010 one project, the opera Death and the Powers, is wonders whether there is any more music one example. technology to invent, or whether our musical I had been invited to imagine a new imaginations and artistic cultures simply (and unusual) opera by the Opera of Monte need to catch up. The answer is both, and Carlo, and two fundamental impressions then some. came to mind early on. The first came For the first time in my career, I feel as if from thoughts about mortality and how there are enough tools on my laptop, enough difficult it is to sum up one’s life in a way brilliant and inventive playing chops amongst that can be shared and transmitted to the younger generation of performers, loved ones through generations, and how enough ooomph in the iPhone, and increasing music has a particularly powerful capacity openness and entrepreneurship in musical for collecting and concentrating multiple organizations both large and small to experiences, then burning them indelibly stimulate my imagination and allow for into our memories. And I started imagining the production and dissemination of my that this web of musical memories—the somewhat unusual creations. embodiment of an entire life—needed to But even though these evolving music transcend traditional notes and instruments, technologies are already very powerful and jump off the stage and physically envelope increasingly ubiquitous, we can also see the listener, both aurally and visually. their current limitations and potential risks. This turned into a mental impression of Guitar Hero is rhythmically exciting but not floating, undulating, palpable 3-D sounds yet expressive or creative enough—a “sticky” represented visually through slowly moving, but not “open-ended” experience that does morphing objects filling a stage—like not obviously lead to better musicality, Fantasia become physical (but with my listening or ensemble awareness. The music and without dancing elephants). iPhone is a remarkable little chameleon I felt the need to go beyond the flatness but lacks the touch and sensitivity of even and harshness of usual multimedia tools the simplest traditional instrument, better to create something that was at the same for selecting and switching than for subtly time transcendent and magical but also shaping. Amplified sound is loudly present completely human and down-to-earth.

Tod Machover 403 I then sought out collaborators—the poet and the gentlest breath into sounds, shapes Robert Pinsky and the playwright Randy and movements that convey personality and Weiner—to turn these initial impressions feeling without looking or sounding exactly into an opera, a form that has long attracted like a human being, although we end up me for its use of word and image to ground feeling extremely close to Simon. This whole music’s abstract qualities in concrete human infrastructure is a new kind of instrument, experience. Together we crafted a story and we indeed learned how to “play” it in about a man who longs to leave the world in time for the world premiere performances of order to pass to a higher level of existence, Death and the Powers in Monaco in September but wants everything about himself—his 2010. All of the unusual elements of this memories, his ability to influence others, his massive project—music, story, words, contact with those he loves, his legacy—to visuals, movement, robotics and more—came remain behind. together and appeared to be more than the This story evolved into a full opera libretto sum of their parts. An uneasy relationship in which the main character, named Simon was established—as desired—that invited Powers, switches on The System at the end audiences to question the boundary between of Scene 1: he becomes embodied more and humans and machines, and often established more in his surroundings, forcing those left an emotional connection with the chorus of behind to decide how to communicate with OperaBots. him or it, whether to follow, and what part These OperaBots frame the opera of his legacy to retain or reject. The stage by accepting to perform this inherited itself becomes the main character in the story, left to them in a future time when opera, taking over from—and extending—the there are no more humans on Earth. physical presence of the singer. Realizing Once the opera starts, the OperaBots are this vision was a daunting challenge, but almost always on stage, reacting to live happily, with the collaboration of the director performers, commenting on the action, Diane Paulus, the designer Alex McDowell, being the playthings or “pets” of Nicholas, the choreographer Karole Armitage and my Simon Powers’ assistant who built them group at the MIT Media Lab, we designed and being sort of intermediaries between sighing walls, morphing furniture, gliding the humans and The System. They are robots and even a resonating chandelier to not exactly individual characters, but they create The System on stage—and to make it do have individualized choreographies “sing.” and behaviors, gliding and twisting about, In helping to tell this story and to sonify flashing and modulating light and— the score, all aspects of this physical indeed—singing from time to time. The set translate and amplify Simon Powers’ OperaBots have “character”—they are fun, human presence, using our new technique interesting, engaged, energetic—but they of Disembodied Performance, challenging do not understand the kinds of questions the current limits of our ability to measure that give meaning and texture to human and interpret all the subtleties of a great lives: relationships, time, touch, sacrifice. performance. The techniques we developed They care about the actions of the human yield surprising results, turning elegantly characters, but they do not have the kind of refined gestures, barely perceptible touch, motivations that underlie Simon Powers’ final

404 The tenor Hal Cazalet in Death and the Powers; the Operabots in the background

confrontation with his daughter Miranda, and pulsating rhythms…with the help of a few where he pleads with her to enter The System robots. with him, and she must decide what she I believe that Death and the Powers is would gain or lose by doing so. innovative in quite a few ways. An underlying Works of art do not have one single point goal of this opera has been to create a form of or message. But two underlying inspirations live performance which goes well beyond the behind this project were, first, how to allow typical multimedia practice of contemporary technology to enhance human presence and performance as seen constantly in—for communication on stage, as opposed to the example—arena rock shows. The norm these huge distancing that happens more and more days is to create painfully overpowering in mega-spectacle rock concerts where ugly, sound to fill huge arenas, and gigantic video loud sound is pushed from the stage and displays that dwarf human performers (even performers look like ants against giant TV in U2’s most recent tours, for example) rather screens. than enhancing human presence. That is And I wanted to explore the possibility and why we have instead created a stage filled poignancy of what is easy and what is hard to with animated physical objects, from musical communicate between any two people—and robots to animatronic walls to the Musical especially across generations. I also wanted Chandelier. All translate sophisticated to create a journey where these questions technology into physical form (including one and feelings would come alive through of the most sophisticated sound systems ever memorable melodies, unusual sonic textures, used for live performance) with the goal of

Tod Machover 405 connecting audiences to the human beings on Elly Jessop and Tod Machover with the robot stage. In addition, we have pushed the boundaries of robotic performance, not just with our autonomous OperaBots, moving walls of The System, and Chandelier, but with furniture robots that imbue inanimate objects with believable human characteristics. The opera might definitely induce people to think much more broadly about the potential of robots, and the productive relationship between robots and humans. In order to control the unprecedented on the experience itself, on the ideas and complexity of robots, visuals and sounds, feelings, i.e. to make the “making” of the we have developed special software to allow performance—and in this case all the crazy intermedia, integrated design of all aspects technology—look simple and inevitable. This of the show, sophisticated enough for the is one of the most complex stage shows ever most demanding AI programmer to fine-tune, mounted, with numerous individual elements but intuitive enough for a non-tech director that must work with precision, delicacy, or choreographer to feel comfortable with. force and beauty, and—even more—function This same software allows for real-time truly as a “system” of interacting machines performance control of every aspect of the that must work together in the most show, with perfect event synchronization and unbelievable ways. It is a testament to the subtle inter-reaction between elements, so opera’s production team that for those who that everything on stage becomes part of a don’t know, it does look easy. For those of us single, integrated “system.” behind the scenes, it is quite another story of And we have developed new sensing course! and interpretation technologies so that Hopefully, these innovations will lead to a combination of the singer’s conscious new musical possibilities down the line that (voice and hand gestures) and unconscious I can’t predict right now, just as software (breathing, heartbeat, muscle tension, etc.) and hardware designed to measure Yo-Yo behavior can be translated to control all Ma’s bowing led—in a slightly zigzag way—to of the interconnected stage elements, so that Guitar Hero. I would not be surprised, for the stage and set itself truly feel as if they example, if the sophisticated infrastructure are alive, creating an uncannily believable that Simon Powers uses to construct and representation of the human being who communicate his legacy were eventually is no longer present. We believe that this to morph into a platform for everyone to technology could have significant impact on create and share musical stories—a kind the future of telepresence and expressive of Personal Opera—on your mobile phone, communication and collaboration over something on which we are already working distance. with several partners, including the Royal The goal of any live performance, of Opera House at Covent Garden (London). Just course, is to lead the audience to concentrate as Simon Powers builds his legacy through

406 Elly Jessop and James Maddalen and root out. It is deceptively challenging these days to apply technology to music in ways that explode our imaginations, deepen our personal insights, shake us out of boring routine and accepted belief, and pull us ever closer to one another. That’s what makes this kind of work worthwhile and inspires me. But it also leads to a paradox that I experience every single day: that the desire to shape the future is not perfectly compatible with the knowledge that musical experience—and its power to excite and transform us—is the interconnected elements onstage, fleeting, here and now, at this very moment. Personal Opera might provide a new form for And that we’d be extremely fortunate indeed preserving and communicating memories, to create new sounds and instruments and telling stories, and establishing continuity technologies that approach the compact, across generations. And we are designing this powerful perfection of playing, listening to environment to encourage the spontaneous or imagining Bach emanating from a solo accumulation of impressions and memories cello. from one’s personal databases, shaped by What new technology can add to this mix natural input such as vocalizing or gesturing, is the potential for establishing a new model rather than favoring the Sargent‑Pepper- for the interrelationship between experts and like studio production that inspired me so amateurs in musical listening, performance many years ago to find another route. We and creation. Some of the boundaries to believe that the result will be both liberating active engagement in music have eroded, but and surprising, and will bring together there is still much to be done to create a truly generations in story telling and listening, vibrant musical culture. and experts and amateurs in a beneficial In my view, a prime example of the kind mentoring environment. of new musical ‘ecology’ that we should seek I think that it is precisely this kind of is found in our culture’s relationship with surprising freshness that technology can cuisine. We all enjoy eating at three-star allow—through what can be precisely restaurants and admire the achievements customized for each project and through the of the world’s greatest chefs. At the same unexpected new discoveries that each project time, we do not hesitate to dive in ourselves seems to require or reveal—that remains one to prepare special meals of high quality on of its continuing attractions for me. special occasions. We also put together daily But we can’t take such freshness for meals for ourselves, improvising content that granted. Musical technology is so ever- reflects our personal styles. We enjoy eating present in our culture, and we are all so and even studying the most ‘expert’ cuisine very aware of it, that techno-clichés and we can find, but are not scared to make and techno-banalities are never far away and invent our own. In turn, the fact that we have become ever more difficult to identify constantly prepare food ourselves makes us

Tod Machover 407 better understand and appreciate other food that we encounter. Music—and most of the arts—have come very far from such a ‘healthy’ ecology, and it is this that we need to reinvent. Technology can help, as it can act as a bridge to each of us depending on our background and experience, taking advantage of our skills and compensating for our limitations. Even more importantly, we need to establish a fundamentally new partnership between all of the potential participants in our musical culture, including individual artists, all parts of the music business, technology, lifestyle, health and social organizations, music presenting and broadcasting entities, research institutions, artists-as-mentors and—last but not least—the music-loving public. Only in this way can we establish a culture that will allow music to reach its full potential in shaping and transforming our experience. Doing so will allow music to exert its most powerful possible influence on society at large. Surely we can imagine a world where music—and opera—is at least as nourishing as a three-star meal?

408

Biographies

Curtis R. Carlson, Ph.D. in Geophysical Editorial Board of the Academy of Management leg exoskeletons for walking load-carrying Fluid Dynamics, Rutgers University, is President Review, Global Strategy Journal, Industrial and augmentation. In the area of assistive and CEO of SRI International, Chairman of the Corporate Change, Research Policy, and Strategic technology, Professor Herr’s group has Sarnoff Corporation, and honorary Chairman of Management Journal. He publishes in several developed powered orthotic and prosthetic the Madrid Research Institute in Spain. international journals, including Industrial mechanisms for use as assistive interventions He is also a member of America’s National and Corporate Change, Journal of Industrial in the treatment of leg disabilities caused by Council for Innovation and Entrepreneurship; Economics, Management Science, Organization amputation, stroke, cerebral palsy, and multiple serves as co-chairman of the Scientific Advisory Science, Research Policy and Strategic sclerosis. Board of Singapore’s National Research Management Journal. He has also published Foundation; is a founding member of the books with leading international publishers, Hiroyuki Itami, Ph.D. in Industrial Innovation Leadership Council for the World particularly the Cambridge University Press, The Administration, Carnegie-Mellon University, Economic Forum; and served on President MIT Press, and Oxford University Press. His MIT is Professor of Management and Dean at the Obama’s task force for R&D. Press book Markets for Technology (with Ashish Graduate School of Management of Science Calrson has received honorary degrees Arora and Andrea Fosfuri) is widely cited. His and Technology, Tokyo University of Science. from the Technical University Malaysia, website is http://www.alfonsogambardella.it/ He has taught (for more than thirty years) at Worcester Polytechnic Institute, Stevens Hitotsubashi University in Tokyo - where he Institute of Technology, and Kettering University. Hugh Herr is Associate Professor within is Professor Emeritus - and also at Stanford He has served on numerous corporate and MIT’s Program of Media Arts and Sciences, and Graduate School of Business and INSEAD. He governmental boards. He is a member of The Harvard-MIT Division of Health Sciences has researched and published widely in various Sigma Xi and Tau Beta Pi. His many technical and Technology. Professor Herr is the founder fields including strategy, Japanese corporate publications include Innovation: The five and director of the Biomechatronics Resesarch systems, and corporate governance, and has Disciplines for Creating What Customers Want Group at the MIT Media Laboratory. His primary recently turned his attention to innovation and a (with William Wilmot, Random House, 2006). research objective is to apply principles of new paradigm of management. He has written He holds fundamental patents in the fields of biomechanics and neural control to guide the more than forty books and many articles, mainly image quality and computer vision and is sought designs of wearable robotic systems for human in Japanese but also in English, including after as a speaker on innovation and global rehabilitation and physical augmentation. In Mobilizing Invisible Assets, published by Harvard competitiveness. the area of human augmentation, Professor University Press. Herr has employed cross bridge models of Alfonso Gambardella (PhD, Stanford, skeletal muscle to the design and optimization Alice Lam, Ph.D., London School of Department of Economics, 1991) is Professor of a new class of human-powered mechanisms Economics, is Professor of Organization Studies of Corporate Management and Dean of the PhD that amplify endurance for cyclic anaerobic at the School of Management, Royal Holloway School of Bocconi University. He is Editor of the activities. He has also built elastic shoes that University of London. Her research has focused European Management Review and serves on the increase metabolic economy for running, and on the relationship between organizational

Biographies 409 forms, knowledge creation and societal Market Structure, and Systems of Education and and Health group at MIT to develop musical institutions. She also has a long-standing Training”, Cambridge Journal of Economics (with activities that significantly improve a variety of interest in the occupational roles and careers Bengt-Åake Lundvall, 2010). medical conditions and enhance lifelong mental of scientists and engineers. Her current work and physical acuity. Machover is particularly examines the innovative dynamics of network Francisco Louçã, Doctorate in Economics noted for his radically inventive operas, the organizations, and careers and knowledge and Professor of Economics, ISEG, Technical most recent of which – the robotic Death and the flows in university-industry collaboration. She University of Lisbon. His publications include Powers – premiered in Monaco in fall 2010 under has published widely in a range of academic As Time Goes By (with Chris Freeman, Oxford the honorary patronage of Prince Albert II and journals including Organization Studies, Journal University Press, 2002)-- a book on long waves will tour the US in spring 2011. of Management Studies, Human Resource of development and innovation in modern Management Journal and Industrial Relations. capitalism, Turbulence in Economics (Elgar, 1997) Ernesto Martinez-Villalpando is a Ph.D. and, recently, The Years of High Econometrics - Candidate at the Biomechatronics Research Robert E. Litan, Ph.D. Yale University is A Short History of the Generation that Changed Group at MIT’s Media Laboratory. He holds a Vice President for Research and Policy at the Economics (Routledge, 2007). Master of Science degree from MIT (2006) and a Kauffman Foundation in Kansas City and Senior Bachelor Science in Electrical Engineering from Fellow in the Economic Studies Program at the Bengt-Åke Lundvall, M.A. in Economics, Universidad Panamericana in Mexico (2002). Brookings Institution. He formerly served in a University of Gothenburg, is currently Professor His current area of research in rehabilitation number of high-level positions including former of Economics at the Department of Business robotics focuses on the development of novel Director of the Brookings Economic Studies Studies at Aalborg University and since October biomimetic lower limb prostheses to improve Department; Associate Director, Office of 1, 2007 special Invited Professor at Science Po, amputee locomotion. His research objective is to Management and Budget; and Deputy Assistant Paris. In 1992-1995 he was Deputy Director at use these biomedical technologies as platforms Attorney General, Antitrust Division, U.S. the Directorate for Science, Technology and to understand the principles of human-machine Department of Justice; as a practicing attorney; Industry, OECD. Lundvall has initiated and co- integration. At MIT Ernesto contributed to the and as a consultant on a variety of economic ordinated networks such as DRUID in Denmark, development of the world’s first powered ankle- and legal matters to public and private sector Cicalics in China and Globelics at the world level. foot prosthesis and is currently leading the work institutions. He is the author or co-author of He gives advice on innovation policy in China, to develop a novel active knee prosthesis. Prior over twenty books and more than two hundred France, Denmark, Finland, Sweden, Norway to his graduate work in assistive technologies articles on various economic subjects, although and the Netherlands as well as to international at MIT, he was as a researcher and engineering primarily on financial institutions and regulation, organizations such as UN-WIDER, UNCTAD, professor at Universidad Panamericana in in professional journals and popular magazines. UNESCO, UNIDO, World Bank, OECD and in 2009 Mexico, working in the area of mechatronics and to the European Commission. The EU nominated mobile robotics. Edward Lorenz, Ph.D. in Economics, him Ambassador for the European Year of University of Cambridge, is Professor of Creativity and Innovation. His most recent books Ian Miles is Professor of Technological Economics at the University of Nice-Sophia are: How Europe’s Economies Learn (with E. Innovation and Social Change at the Manchester Antipolis and a member of the CNRS research Lorenz, Oxford University Press, 2006), Handbook Institute of Innovation Research, Manchester Unit, GREDEG. He has held a number of on Innovation Systems in Developing Countries University Business School, and Co-Director associate and honorary research appointments (with C. Chaminade, K. J. Joseph and J. Vang of the Centre for Service Research. Previously including Assigned Professor at the University Lauridsen, Elgar, 2009), and National Systems he worked at the University of Sussex Science of Aalborg (2003-2008). His research focuses of Innovation: Towards a Theory of Innovation and Policy Research Unit. on the comparative analysis of business Interactive Learning (Anthem, 2010). Much of his work has focused on organisation, employment relations and innovation studies, knowledge-intensive innovation systems with an emphasis on the Tod Machover has been called “America’s business services and social aspects of European Union member nations. Professor Most Wired Composer” by the Los Angeles Times information technology. Another closely- Lorenz has co-edited several volumes including and is celebrated for creating music that breaks related area of activity is Social and Technology How Europe’s Economies Learn: Coordinating traditional artistic and cultural boundaries. He is Foresight. These studies and other work on Competing Models (with Bengt-Åake Lundvall, also celebrated for inventing new technologies research evaluation and social indicators are Oxford University Press, 2006); and Knowledge, for music, such as his Hyperinstruments which related to innovation policy-making and policy Learning and Routines (with Nathalie Lazaric, augment musical expression for everyone, from analysis. Edward Elgar Press, 2003). He has published virtuosi like Yo-Yo Ma and Prince to players of His publications include some twenty numerous journal articles and book chapters Guitar Hero, which grew out of his Lab. Machover authored and edited books and over two hundred including, most recently, “Accounting for is Professor of Music & Media and Director journal articles and book chapters. Creativity in the European Union: A Multi-Level of the Opera of the Future Group at the MIT Recent studies on services include work on Analysis of Individual Competence, Labour Media. He has recently launched a Music, Mind services’ links to Universities, R&D in services,

410 skill requirements of knowledge-intensive the National Bureau of Economic Research. Dr. Toronto’s Nuit Blanche Annual Event, New services and services’ productivity, as well as a Mowery taught at Carnegie-Mellon University, Orleans’ American Institute of Architects guide to evaluation of innovation programmes, was Study Director for the Panel on Technology DesCours Festival, and SEED Magazine. and scenario development in several foresight and Employment of the National Academy of Currently she is a post-doctoral fellow at studies. Sciences, served in the Office of the United MIT SENSEable City Lab and a lecturer in the States Trade Representative and was a Council Department of Architecture at Harvard Graduate Manuel Mira Godinho is Professor of on Foreign Relations International Affairs School of Design. Economics at ISEG, the Economics and Fellow. He has been a member of a number of Business School of the Technical University National Research Council panels, and in 2003- Alex ‘Sandy’ Pentland, Ph.D. MIT, directs of Lisbon. He has taught and carried out 2004 was the Marvin Bower Research Fellow MIT’s Human Dynamics Laboratory and the research in the areas of Science & Technology at the Harvard Business School. His research MIT Media Lab Entrepreneurship Program, Policy, Economics of Innovation, Catching Up deals with the economics of technological and advises the World Economic Forum, and Intellectual Property. He has coordinated innovation and the effects of public policies on Nissan Motor Corporation and a variety of several post-graduate programmes in these innovation; he has testified before Congressional start-up firms. He previously helped to create areas, namely the Globelics Ph.D. School on committees and served as an adviser for the and direct MIT’s Media Laboratory, the Media Innovation Systems and Development. He OECD, various federal agencies and industrial Lab Asia laboratories at the Indian Institutes has authored or been co-author of several firms. Dr. Mowery has published numerous of Technology, and Strong Hospital’s Center books, book chapters and scientific articles academic papers and has written or edited a for Future Health. Profiles of Sandy have published in journals such as Research Policy, number of books, including the Oxford Handbook appeared in many publications, including the Scientometrics, Research Evaluation and of Innovation; Innovation, Path Dependency and New York Times, Forbes, Harvard Business Economics of Innovation and New Technology. Policy; Innovation in Global Industries; Ivory Tower Review, Newsweek, Caring Magazine (Hospice), He was awarded a PhD by SPRU, University of and Industrial Innovation: University-Industry and Odyssey Magazine (Children). His most Sussex, in 1995 and an MSc by Imperial College, Technology Transfer Before and After the Bayh- recent book is Honest Signals, published University of London, in 1986. Dole Act; and Paths of Innovation: Technological by MIT Press. He is among the most-cited Change in 20th-Century America. His academic computational scientists in the world, and Frank Moss, B.S. in Aerospace and awards include the Raymond Vernon Prize a pioneer in computational social science, Mechanical Sciences, Princeton University, from the Association for Public Policy Analysis organizational engineering, mobile computing, M.S. and Ph.D. in Aeronautics and Astronautics, and Management, the Economic History image understanding, and modern biometrics. MIT. An entrepreneur and 30-year veteran of Association’s Fritz Redlich Prize, the Business His research has featured in Nature, Science, the software and computer industries, Frank History Review’s Newcomen Prize, and the Cheit the World Economic Forum, Harvard Business Moss joined the MIT Media Lab as director in Outstanding Teaching Award. Review, Newsweek, the New York Times, 2006, seeking to make a broader contribution Vogue, O Magazine, and the National Inquirer, to the world by using technology to address Nashid Nabian, MSc in Architectural as well as being the focus of dozens of TV pressing social issues. As head of the Lab’s New Engineering, Shahid Beheshti University; MA features including Nova and Scientific American Media Medicine research group, he focuses in Urban Design, University of Toronto where Frontiers. on integrating information technologies with she received the Toronto Association of Young health care to radically redefine health-care Architects award; Doctor of Design, Harvard Carlo Ratti, an architect and engineer by delivery and empower patients. Moss came to Graduate School of Design. She has been training, practices in Italy and teaches at the the Media Lab from Infinity Pharmaceuticals, partner at Tehran-based Arsh Design Studio Massachusetts Institute of Technology, where he Inc. where he was co-founder and serves on the since 2003. Nashid’s research focuses on directs the SENSEable City Lab. He graduated board of directors. Previously he was CEO and the digital augmentation of architecture and from the Politecnico di Torino and the École chairman of Tivoli Systems Inc., a pioneer in the constructed landscapes, particularly public Nationale des Ponts et Chaussées in Paris, and distributed systems management field, which spaces, and on how novel technologies can later earned his MPhil and PhD at the University he took public in 1995 and subsequently merged impact the spatial experience by soliciting the of Cambridge, UK. Ratti has co-authored over with IBM in 1996. Moss also serves on the Board needs and desires of inhabitants or users. 100 scientific papers and holds several patents. of Trustees of Princeton University. http://www. She has taught graduate seminar and design His work has been exhibited worldwide at media.mit.edu/people/fmoss studio courses at Toronto University, Rice venues such as the Venice Biennale, the Design University and the Massachusetts Institute of Museum Barcelona, the Science Museum David Mowery, Ph.D. in Economics, Stanford Technology. Her research has been showcased in London, GAFTA in San Francisco and The University, is the William A. and Betty H. Hasler in various venues, including the ACADIA, IEEE Museum of Modern Art in New York. His Digital Professor of New Enterprise Development at the Digital Ecosystems Conference; the UCMedia Water Pavilion at the 2008 World Expo was University of California, Berkeley Walter A. Haas Conference on User-Centric Media, the Mobile hailed by Time Magazine as one of the Best School of Business, and a Research Associate of Multimedia Communications Conference, Inventions of the Year. He has been included in

Biographies 411 Esquire Magazine’s Best and Brightest list and in Takanori Shibata, Ph.D. in Electronic and modeling. Since 1981, he has worked on Blueprint Magazine’s 25 People who will Change Mechanical Engineering, Nagoya University, applying Complex Systems Theory in various the World of Design. Ratti recently served as the is a Senior Research Scientist at the National ways in all these domains. From 1992 to 1999, inaugural Innovator in Residence in Queensland, Institute of Advanced Industrial Science and he coordinated a series of major research Australia. Technology in Japan, having been a research projects funded by the EU on (modern) socio- scientist at the Artificial Intelligence Lab., environmental problems in Southern Europe. Nathan Rosenberg, Ph.D. Wisconsin, MIT, and a visiting research scientist at the He is currently involved in applying Complex honorary doctoral degrees, Universities of Lund Artificial Intelligence Laboratory, University of Systems approaches to the study of invention and Bologna, is the Fairleigh S. Dickinson Jr., Zurich. He was Deputy Director for Information and innovation in the United States and Professor (Emeritus) of Public Policy in the and Communication Technology Policy at the Europe, funded by the Marion Ewing Kauffman Department of Economics at Stanford University. Japanese Government Bureau of Science, Foundation and DG ICT of the European He was educated at Rutgers University, Technology, and Innovation Policy from Commission University of Wisconsin and Oxford University. 2009 to 2010. His research interests include Since late 2003, he has been Professor of His books include The American System of human-robot interaction, robot therapy and Anthropology at Arizona State University, and Manufactures, Perspectives on Technology, Inside humanitarian de-mining. He was certified by the Director of the School of Human Evolution the Black Box, Technology and the Pursuit of Guinness World Records in 2002 as the inventor and Social Change. As of July 1, 2010, he Economic Growth (with David Mowery), How the of a seal robot named Paro, the World’s Most simultaneously fills the position of Dean of ASU’s West Grew Rich (with L. E. Birdzell, Jr.), Exploring Therapeutic Robot. His awards include the Robot School of Sustainability. the Black Box, The Emergence of Economic Ideas, of the Year award from the Japanese Ministry of Schumpeter and the Endogeneity of Technology: Economy, Trade and Industry, the Outstanding Joaquim Vilá, Ph.D. in Strategic Some American Perspectives, Paths of Innovation: Young Person in the World award from the Management, Wharton School, University Technological Change in 20th-Century America Junior Chamber International, and the Japanese of Pennsylvania, is Professor of Strategic (with David Mowery). Prime Minister’s Award. Management and Innovation, and Academic Nathan Rosenberg has served as chairman Director of Executive Programs on Innovation of the Stanford Economic Department. He Pascal Soboll, M.A. in Engineering (Product Management at IESE Business School. is a member of the Board of Directors of Design), Stanford. As a practice lead at IDEO’s Consultant in the implementation of systematic the National Bureau of Economic Research, Munich office, Pascal works with clients to find approaches to foster innovation in companies chairman of the advisory board of the UN and tap into opportunities for growth. He helps from different industries, both industrial and Institute for New Technology, and a fellow of the major enterprises, among them P&G, Daimler services. Member of Advisory Boards and Canadian Institute for Advanced Research. He and BBVA to shape strategies and then guide Councils Innovation in pioneering companies. is an Elected Fellow of the American Academy them through the concept stage and all the way Co-founder of three companies that offer of Arts and Sciences and the Swedish Royal to implementation. He is particularly interested services in various areas to promote innovation Academy of Engineering Sciences. in the areas of energy and mobility, where (Soft4CRIT-CRITflow, Estratègia i Organització, technology, human needs and sustainability and Total Business Innovation). Regular speaker Edward S. Rubin, Ph.D. Stanford, is a merge to open up new ways forward. Pascal on innovation in management training programs, professor in the Departments of Engineering worked for IDEO in the U.S. and the UK before in-company programs for advanced corporations & Public Policy and of Mechanical Engineering returning to his native Germany. Previous jobs and international forums. His publications at Carnegie Mellon University. He holds a chair include scientific research for Daimler and focus on management issues such as how to as The Alumni Professor of Environmental Stanford University and car design for GM/Opel. promote broad, robust and systematic innovation Engineering and Science, and was founding He holds a diploma in Theoretical Physics. (Business Innovation), the development of director of the university’s Center for Energy and A self-confessed car nut, his collection innovative competences in management Environmental Studies and the Environmental of project cars has recently shrunk in inverse teams, and how to make innovative strategies Institute. He is a Fellow Member of the ASME, proportion to his growing family. relevant to middle management to encourage a recipient of the AWMA Lyman A. Ripperton successful implementation. Award for outstanding achievements as an Sander E. van der Leeuw, Ph.D., University educator, and the Distinguished Professor of of Amsterdam, an archaeologist and historian Xavier Vives, PhD in Economics, University Engineering Award from Carnegie Mellon. He by training, has taught at Leyden, Amsterdam, of California, Berkeley, is a professor of serves on advisory committees to government Cambridge (UK) and Paris. economics and finance, holder of the Abertis agencies and was a coordinating lead author Van der Leeuw’s core research theme is Chair and academic director of the Public- of the 2005 Special Report on Carbon Dioxide the study of socio-environmental dynamics, but Private Research Centre at IESE Business Capture and Storage by the Intergovernmental he has also contributed to the reconstruction School. He has taught at the Institut d’Anàlisi Panel on Climate Change (IPCC), co-recipient of of ancient technologies, (ancient and modern) Económica (Spanish National Research Council- the 2007 Nobel Peace Prize. regional man-land relationships, GIS and CSIC), the Institució Catalana de Reserca i

412 Estudis Avançats (Universitat Pompeu Fabra), Dot awards, and numerous design and utility INSEAD, Harvard University, New York University patents. and the University of Pennsylvania. He is a fellow Harry West is a 16-year veteran of of the Econometric Society and the European Continuum and was named chief executive Economic Association, and a member of the officer in 2009. Prior to joining Continuum, Economic Advisory Group on Competition Policy Harry was associate professor of mechanical of the European Commission and the European engineering at The Massachusetts Institute of Economic Advisory Group at CESifo. He has also Technology (MIT) where he taught design and worked as director of the Industrial Organization control. Programme at the Centre for Economic Policy Research and editor of the Journal of the European Economic Association. He has published numerous articles in international journals and is the author of several books, the most recent being Information and Learning in Markets. He has received a number of distinctions in the course of his career, including the European Research Council Advanced Grant (2008).

Eric von Hippel, Ph.D. in Innovation, Carnegie-Mellon University, is T. Wilson Professor of Innovation Management and also Professor of Engineering Systems at MIT. He is known for his research into the sources of innovation. He finds that product development is rapidly shifting away from product manufacturers to product “lead users” in the Internet Age. The rapid growth of innovation by lead users requires major changes in company business models and government policymaking. Von Hippel’s new book, Democratizing Innovation (2005), explains user-centered innovation and how companies and nations can adapt and profit. This book is available free on the web at http:// mit.edu/evhippel/www/books.htm

Harry West, Ph.D. in Mechanical Engineering, MIT, guides the strategic direction and global growth of Continuum. He is an experienced innovation practitioner: engaging with clients, understanding global consumers, and designing innovation. He travels and learns constantly to stay connected with real needs in our rapidly changing world. Harry West has worked with a wide variety of brands in a broad range of industries, including American Express, Andersen Windows, AstraZeneca, BBVA, BMW, Fidelity, Master Lock, Procter & Gamble, and Sprint. For P&G he led teams that helped to create Swiffer® and ThermaCare®, and the new design language for Pampers diapers. Under his leadership, his teams have received IDEA, ID and Red

Biographies 413 We would like to thank the following people for their kind collaboration: Coloma Casaus; Eva Mendo; Galerie Chantal Crousel, Lara Blanchy; Galerie Urs Meile, Karin Seiz; Gladstone Gallery, Sascha Crasnow; Hauser & Wirth, Maria de Lamerens; IVAM Institut Valencià d’Art Modern, María Casanova, Mercedes Lerma; Kapoor Studio, Clare Chapman; Luise Kaunert; Joyce Lai, Marga Paz; Marian Goodman Gallery, Catherine Belloy, Carole Billy; MIT Museum, Claire Calcagno; Taller Fontcuberta, Mar Sorribas Roca; The Institute of Contemporary Art, Boston, Colette Randall; and Wingate Studio, Peter Pettengill. Publisher © of the publication, BBVA 2010 BBVA © of the texts, their respective authors, 2010 Project direction and coordination Of the text by Curtis R. Carlson, © SRI International 2010 Chairman’s Advisory, BBVA Communication and Brand, BBVA © of the images Jon McCormack 2010, cover image Texts Pipilotti Rist. Courtesy of the artist and Hauser & Wirth. Curtis R. Carlson, Alfonso Gambardella, Hugh Herr, Hiroyuki Photo: Stefan Altenburger Photography Zürich, p. 22 Itami, Alice Lam, Robert E. Litan, Edward Lorenz, Francisco Dennis Ashbaugh. Photo: Wingate Studio, p. 32 Louçã, Bengt-Åke Lundvall, Tod Machover, Ernesto Aetherbits.net (Mariela Cádiz/Kent Clelland), pp. 54-55 Martínez-Villalpando, Ian Miles, Manuel Mira Godinho, Daniel Canogar. VEGAP. Madrid 2010, pp. 70-71 and 82-83 Frank Moss, David Mowery, Nashid Nabian, Alex ‘Sandy’ Philip Beesley, pp. 104-105, 128 and 160-161 Pentland, Carlo Ratti, Nathan Rosenberg, Edward S. Rubin, Aetherbits.net (Mariela Cádiz/Kent Clelland/Denis Lelong), Takanori Shibata, Pascal Soboll, Sander E. van der Leeuw, Creative Commons 2010, pp. 178-179 Joaquim Vilá, Xavier Vives, Eric von Hippel and Harry West. Chico MacMurtrie/Amorphic Robot Works, New York. Photo: Luise Kaunert, Paris, pp. 198 and 208-209 Publishing coordination Ai Weiwei, 2010, p. 228 Tf Editores José Manuel Ballester, p. 240 Gabriel Orozco. Photo: Florian Kleinefenn. Courtesy of Graphic design Galerie Chantal Crousel, p. 254 Juan Antonio Moreno. Tf Media Pierre Huyghe. Courtesy of Marian Goodman Gallery, Paris/ New York, p. 268 Translations Harold E. Edgerton © MIT 2010. Courtesy of MIT Museum, Polisemia p. 304 Eduardo Kac. Photo: IVAM. Institut Valencià d’Art Modern, Text editing pp. 320-321 Ann Uldall Joan Fontcuberta. VEGAP. Madrid 2010, pp. 330-331 and 350 Daniel Palacios, pp. 364-366 Research Anish Kapoor. Courtesy of the city of Chicago and Gladstone Mercedes Abstengo Gallery, New York. Photo: Walter Mitchell, pp. 380-381 Jonathan Williams, pp. 398 and 405 Pre-printing Cromotex Cover: Eden (2004-2008) by Jon McCormack

Printing Tf Artes Gráficas D.L.: M-51581-2010 Printed in Spain Binding Ramos