Promoting sectoral innovation systems

I am receiving more requests for support to diagnose and improve innovation systems than ever before. It’s just been a few years since I have decided to focus all my attention at working with the upgrading of regions and industries from an innovation systems perspective and I am pleased that this decision is working out.

The most popular demand is for support to promote sectoral innovation systems. However, people confuse the “sectoral” with a classical sector driven approach. In a purely sector driven approach the focus is on a broad group of firms that falls within a broad industry classification. This may to some extent include some suppliers and key customers, but even a sector-based approach can still be too broad to tell us much about the patterns of innovation, how knowledge is used, and how institutions respond to the typical market failures in that sector.

A sectoral innovation system is more about how different groups that uses a common knowledge and technological domains work, how knowledge flows and how technology (which includes knowledge) evolves. To quote my own work (Cunningham, 2012)

“According to Malerba (2005), the emphasis of sectoral innovation systems is on a group of firms that develop and manufacture the products for a specific sector and that generate and utilize the technologies of that sector. The boundary of the system is drawn around a technological paradigm that is formed by a knowledge base, specific technologies and inputs, the different actors and networks that are systemically interacting, and the institutions supporting a specific industry. This is an important difference from value chain analysis, where the logic of the chain is determined by the system surrounding the conversion of a raw material into a product for a market. “

What I am trying to say is that instead of looking at the manufacturers based on similar inputs (raw materials, equipment, skills) and outputs (products and services), in an sectoral innovation system approach we look more at the common technological or knowledge domain that brings various firms and institutions together. This knowledge domain could spread over several industrial sectors, linking different value chain actors together. In fact, many industrial clusters often emerge around a particular group of complimentary knowledge bases. For example, aluminium die casters, aluminium casting equipment manufacturers, and their key customers in the automotive and aerospace industries would make in interesting sectoral innovation system to investigate. On the surface, automotive and aerospace companies don’t seem to belong together, but from a knowledge and technological domain around aluminum processing and its applications it makes sense.

The second part that people get wrong about a sectoral innovation system is that it goes way beyond innovation at the level of the firms. While the physical results of innovation is often easy to see at the levels of firms, this is just the tip of the iceberg. The innovation system describes how knowledge gets created, shared, forgotten and the dynamic relations between them. Furthermore, in any innovation system approach attention must be given to how policies and rules create incentives to innovate (or not to innovate).

Sectoral innovation systems researchers distinguish between high R&D-intensive sectors (such as electronics or drugs) and low R&D-intensive sectors (such as textiles or shoes). These systems change over time as the different elements co-evolve. This means that within a traditional economic sector like the foundry sector (using standard industrial classification schema) there could be areas that are more R & D intensive (such as aluminium) and other parts where the R & D is mainly done either by equipment suppliers or customers. Each of these different intensity R & D systems within the foundry sector would constitute the starting point of a sectoral innovation system. Another example is the machine tooling sector. In some knowledge domains, tooling is developed by the customer of the toolmaker that is developing a new product. In other knowledge domains, the toolmaker is responsible for assisting a customer to come up with a tooling design. Yet in another area, equipment manufacturers push toolmakers to adopt new ways of making tools. For me these are all different sectoral innovation systems. Lastly, these sectoral innovation systems can also be very different within a country like South Africa. Some regions may be dominated by downstream industries like packaging, while other regions might be influenced more by the availability of high quality infrastructure, market density and logistics.

Let me stop here to keep the post short. In conclusion, a sectoral innovation system approach is more about the knowledge and common technological domains than it is about standard classifications of industries and sub sectors. Within an economic sub sector (like tooling or foundries or food processing) there could be several sectoral innovation systems. To make matters more confusing, several different sectors or links in a value chain could be brought together within a particular sectoral innovation system around specific knowledge or technology domains.

I am looking forward to your questions and comments to this post.

 

Sources:

CUNNINGHAM, S. 2012. 2012.  The fundamentals of innovation system promotion for development practitioners. Leveraging a bottom up understanding for better systemic interventions in innovation systems. Mesopartner Monograph 5. Mesopartner.

MALERBA, F. 2005. Sectoral Systems. How and why innovation differs across sectors. In The Oxford handbook of innovation. Fagerberg, J., Mowery, D.C. & Nelson, R.R. (Eds.), Oxford ; New York: Oxford University Press.

 

Assisting firms to improve their Research and Development activities

In my daily work I deal with two kinds of manufacturers: those who have formal or informal research and development activities, and those who don’t. While there are certain tendencies for some industries to be more R & D intensive than others, I found some very innovative firms even in traditional sectors.

The first step to assist firms to improve firms to depend their R & D activities is to disconnect R & D from product development that responds to complaints, suggestions or requests from customers. While in some firms product development is the result of R & D, in most, product development is not purposeful, pro-active or inventive. I am always surprised to realize how dependent many firms are on their customers for specifications, product or ideas, especially in more traditional industries.

So if you disconnect R & D from responding to customers product demands then what do you connect it to?
From my experience, I found that establishing a cross functional team within the organization that has a mandate to question anything, any process, any routine, or that can investigate any problem is a good start. Thus I try to connect R & D firstly with reducing internal costs, solving internal products, mastering existing technology and knowledge domains. The key is to get very different people together, not based on their rank, but based on their curiosity and different expertise.

Next step is to then start thinking about the science behind current products, processes and core assumptions in the firm. Are therw substitute materials, solutions or processes for what is used now in the firm? Can we create some experiments, or can we explore alternative ways to achieve the same results? The purpose here is not to successfully develop new products, but rather to broaden the knowledge used within the firm not only about is core processes, but also about alternative markets, applications and production approaches. If you are lucky enough to have a great team together, then you can even play with questions such as “what else can we make with what we have?” or “if we partnered with a firm nearby, what crazy stuff could we make together?” But, I am sad to acknowledge, this does not happen often.

Only when we have a core team in the manufacturer curious about different ways of doing things, different ways solutions are used, alternative ways of creating solutions – only then do we look at new ways of pleasing current and existing customers with innovative new products. At this point the firm is inquisitive enough to value conducting research into new ways of doing things. We are ready to consider how a more formal Research and Development approach might look.

UNU-MERIT: How firms innovate: R&D, non-R&D, and technology adoption

You may be interested in the following paper from UNU-MERIT by C. Huang, A. Arundel & H. Hollanders

The official abstract is below.

Non-R&D innovation is a common economic phenomenon, though R&D has been the central focus of policy making and scholarly research in the field of innovation. An analysis of the third European Community Innovation
Survey (CIS-3) results for 15 countries finds that almost half of innovative European firms did not perform R&D in-house. Firms with weak in-house innovative capabilities and which source information from suppliers and competitors tend to innovate through non-R&D activities.
In contrast, firms that engage in product innovation, find clients, universities and research institutions an important information source for innovation, or apply for patents or use other appropriation methods are more likely to perform R&D. However, non-R&D performers do not form a consistent block, with several notable differences between firms that use three different methods of innovating without performing R&D. Many of these determinants also influence the share of total innovation expenditures that are spent on non-R&D innovation activities. Furthermore, an analysis of the determinants of the share of each firm’s total innovation expenditures for non-R&D activities shows that the
factors that influence how innovation expenditures are distributed is generally consistent across sectors and European countries.

What I find interesting is that these empirical findings are very similar to what I have found in my interviews with South African firms. Many firms do a lot of innovation without spending any money on R & D. A large number of firms use specialised product developers (or freelance experts) to do research on their behalf. Or they depend on universities or technology stations for research. Amazingly, the majority of the firms doing product development (as their area of specialisation) are small firms.

I wish we had this kind of data in Africa…..


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