Innovation Networks

Networks deal with people, with firms and other institutions, and with their social and economic interaction. Economic and social networks are, of course, affected by physical networks like the Internet, telecommunication and traffic networks. Although important, the latter are not the subject of further discussion here. Social and economic networking is not a new phenomenon, but the basis of early trade which developed several thousand years ago, and, perhaps even more important, of urbanisation, the root of modern civilisation. In recent years, networking became an important subject in deductive and inductive theoretical disquisitions as well as in policy actions.

The concept of innovation "networks" has by and large been developed in social sciences other than economics. A whole number of quite different definitions of what a network is can be found in the literature (see the contribution of Knut Koschatzky in this volume for an overview). According to this heterogeneity of concepts and definitions, a considerable divergence of hypotheses concerning the main forces that govern such networks exist. In this contribution, I want to outline an economic approach to the analysis of innovation networks. That is, to show why it might be advantageous for the innovation activities of individual economic actors to be embedded in a network of relationships to other actors. My argument will focus on those kinds of networks that mainly consist of private sector firms. Pure policy networks are, therefore, excluded.

The expanding field of economic literature devoted to knowledge production and diffusion strongly emphasises that knowledge is increasingly becoming a crucial resource for growth. Moreover, the issues of knowledge and innovation appear as intimately inter-related, underlining their decisive influence for the competitiveness of firms and countries, but also for the development and prosperity of regions. In fact, and this is only a paradox at first glance, despite (and even to a certain extent, due to) its intangible nature knowledge is not ideas floating in a purely abstract vacuum but is rooted in the economic reality, and is thus, at least partially, linked to territories. This paper aims at highlighting the complex relations between knowledge, innovation and regions. In the first section, a brief theoretical overview provides the key conceptual elements which allow the mechanisms of knowledge creation and diffusion and their implications for innovation and regional development to be questioned. The second section of the paper offers an illustration of how knowledge exchanges between different categories of actors may take place. The proposed typology displays some stylised facts related notably to the spatial patterns of innovation interactions. Finally, the concluding part raises several issues which can be considered from the researcher’s as well as from the policy-maker’s points of view.

The knowledge-intensive service industry is one of the most dynamic components of the service sector in Europe and in most highly industrialised countries. This dynamic growth can be seen no longer as a simple outsourcing phenomenon. It is an reflection of deep changes in production and organisational structures and it shows the increasing linkages and networks between economic activities.

Institutions of Technological Infrastructure (ITI) are various forms of organisations that contribute to the actual or potential techno-economic development of the regions where they are located. Their types actually range from specific institutions created in order to fulfil the functions of technology transfer, R&D funding, consulting in innovative activities, etc., to various kinds of organisations like public research institutes and private firms which, while having other primary goals and rationale, play a role of ITI in their region to a certain extent and for a particular aspect of their activity. Starting from the now classical assumption that innovative development mainly results from interaction between several agents, and that proximity matters (more or less) in the building of such creative networks, ITIs as central actors of the "learning regions" are considered here.

Current discussions often describe young companies as innovative, expanding, and having a positive impact on employment. Their tendency to co-operate is strongly emphasised. Numerous regional-political measures on a local, national, and supranational level attempt the inter-connection of local actors, while the main interest is focused especially on young companies and research institutes. Theoretical arguments furnish many concepts such as the knowledge based economy, the learning economy or the learning region, network approaches, spill-over approaches, etc. (Florida 1995; Mansfield/Lee 1996; Charles/Goddard 1997; Malmberg/Maskell 1995; Tödtling 1994). In simple terms, the argumentation is the following: due to growing competitive pressure, industry, and in particular young companies are forced to bring innovative products onto the market. The increasing complexity of the innovation process leads to increased co-operation with innovation-relevant actors such as customers, suppliers, service companies in close co-operation with industry, competitors, and research institutions.

Since the beginning of the 1990s, most Central and Eastern European Countries (CEECs) have achieved considerable success in the transformation to an open and innovation-oriented market economy. Nevertheless, the transition period is not over. As governments are still under the threatening trade-off between stabilisation policy and structural transition, salient issues of the new economic order such as privatisation, reform of the social security system and deregulation are not pursued consistently. Furthermore, there is the need for a long-term strategy for technological development and economic growth. In this situation many initiatives of international co-operation aim at supporting these countries through Western expertise. One example is the bilateral techno-scientific co-operation between Germany and CEECs (Abel 1999).

At the beginning of the 1990s, due to the abolition of the socialist economic structure, the Central and Eastern European Countries (CEECs) were suddenly forced to thoroughly transform their political and economic order. This drastic situation is unique in history. With the transformation process, high expectations arose regarding policy, economy, and science. Due to the dissolution of the Yugoslavian Federation, Slovenian firms had to find new markets, and Slovenian research institutes had to alter their research priorities and intensify their contacts with industry (Walter/Bross 1997). Already in former Yugoslavia, Slovenia was the most industrialised region, which achieved 29% of the total of Yugoslavian exports with only 8% of the total population in 1990 (European Commission 1993: 5). Even after its independence in 1991¹the small country has remained primarily export-oriented with approximately 20% of higher-priced technology products (pharmaceutical products, goods from the electronic and electrical engineering industry), approximately 50% mid-tech and about 20% low-tech products. Due to the process of economic adaptation, a drop in production was noted in all branches. Economic collapse especially threatened traditional industrial sectors such as steel and heavy machine construction, the automobile industry, and the textile and furniture sector. Although the transition of the industrial sector is not yet complete, the number of business enterprises has obviously grown during the past years, especially in the areas of small enterprises and the service sector.

Although the number of industrial R&D staff has been consolidated and the competitiveness and profitability of external industrial research institutions improved in East Germany, obvious differences between the features of East and West German innovation activities still exist; in particular those of R&D. Innovation activities in East Germany are characterised by a high share of small and medium-sized companies which often show a lack of potential for complex R&D projects. Both the share of industrial R&D staff and the industrial share of economic activity are lower than in West Germany. Moreover, less funds are available for R&D staff (Meyer-Krahmer et al. 1998; Pleschak et al. 2000).

Since the beginning of the 1990s, venture capital financing has gained significance as an instrument of innovation policy used by the Federal Government and the Federal States of Germany. As a parallel development, partly stimulated by government measures, the private venture capital market has shown itself to be very dynamic since 1997 (cf. Lessat et al. 1999; Leopold/Frommann 1998.). Following a period of stagnation with new investments of barely DM 1 billion annually, a total new business amount of approximately DM 3.8 billion was invested in 1998. According to the figures for the first six months of 1999 reported by the non-profit making German Venture Capital Association, another high growth rate of DM 4.5 to 6 billion is expected for 1999.

In the light of globalisation, increasing industrial specialisation, and growing competitive pressure, innovative developments and processes have reached a level of primary importance. New products and processes, as well as organisational and societal innovations, contribute to firms’, regions’, and nations’ competitiveness. Considering innovative processes on a regional level provides insights into space-specific economic, historical, socio-political and cultural factors which form the background of industrial innovation processes. The region in which innovating firms are located represents their "home base" and here interactive relationships lead to the development of specific innovation patterns.

Today, the production factor "knowledge" has become the decisive driving force for economic structural change, with manifold ecological and social effects. The faster companies succeed in transforming new knowledge into novel or improved products or proceedings, and the faster they generate innovation, the more their competitiveness is strengthened in a sustained way. This is becoming more and more important due to the increased closeness of international markets and to shortened development cycles.

One of the priorities for the new generation of regional development programmes in the European Union for the period 2000–2006 is the promotion of innovation. This is clearly stated in the official Commission Guidelines adopted in June 1999 as the basis for the negotiation of the new generation of regional programmes which should channel to the European regions, less favoured in particular,¹ most of the 213 billion € of the Structural Funds for this period. These Guidelines² entitled “Economic and social cohesion: growth and competitiveness for employment” are based on two broad principles: i)—identification of integrated strategies for development and conversion and ii)—the creation of a decentralised, effective and broad partnership. They state that "Structural assistance should therefore give an increasing priority to promoting RTD and innovation capacities in an integrated manner in all fields of intervention of the Funds" though actions such as: i) Promoting innovation: new forms of financing (e.g. venture capital) to encourage startups, spin-outs/spin-offs, specialised business services, technology transfer, ii) interactions between firms and higher education/research institutes, iii) encourage small firms to carry out RTD for the first-time, iv) networking and industrial co-operation, NO developing human capabilities.