NIS IMPACT ON INNOVATION: A CRITICAL ANALYSIS
The present paper focuses on systemic complementarity versus compensatory trade-offs within as well as across innovation networks at many levels so as to possibly expand the Goffin’s ‘pentathlone’ (Goffin & Mitchell 2005). In particular, it will be shown how human capital formation or accumulation can be central to the innovative headway under any institutional design without necessarily keeping the latter immune to positive shocks.
National innovation systems (NIS) could loosely be referred to as whatever network type or multi-tier setups that facilitate transfer or spillover of information and knowledge while mapping it to appropriate uses. On the one hand, implied designs, whether treated as structures or mechanisms, need not to prove to be optimal from the outset and nor are they supposed to secure superior developmental equilibria or paths. On the other hand, a strong-form cut-off such as this one could be relaxed in a constructive manner by either showing in what ways the system could learn and converge to its own frontier, or otherwise tap an altogether new set of opportunities. Incidentally, the two scenarios build on very distinct layers or criteria pertaining to efficiency versus productivity. Quality of outcomes could be the third dimension targeted by the innovation system as one key deliverable.
Entrepreneurship versus Social Planning
When it comes to efficiency or a possibly optimum allocation of scarce resources along the lines of the organisation’s or economy’s core competencies and comparative advantages, one grand criterion could be the system’s ability to pick slacks or Pareto-optimise. In fact, it is as early as at this stage that inherent duality or meta-criterion could apply so that the system might be reaching a Pareto-optimum with no more slacks left over and without being Pareto-optimal. In other words, the best choices possible could be made under whatever design on hand without this arrangement qualifying as the best out there or sui generis.
For instance, China’s post-Maoist economy back in the late 1970s was not exactly the best place to invest in, yet this did not deny the entrepreneurial knack and the best effort to its players, which gradually cumulated into unprecedented GDP growth, as well as steady-state development. Better yet, not only did those entrepreneurs find themselves restrained by a particular institutional setup while filling in missing markets or bridging opportunity gaps, but they also increasingly learned in the way of adopting the best practices while making sense out of the questionable experiences elsewhere. By contrast, the US economy was by far the top place to keep money during the pre-2007 period or at any rate Buffett and his ilk would never have made that much money outside the stock market, which had probably been overheated and nearing its downturn in light of the fundamental gap. Supposedly well-trained and savvy players acting in a selfish and pragmatic manner had failed to compute their way through a major crash, seeing their prior earnings blown away.
This is one instance of free markets alone not necessarily sufficing to tap the right equilibrium if only because rationality does not reduce greed or brings short-term satisfaction. Nor does it boil down to what is known as ‘hyper-rationality’, drawing on the presumptions of perfect foresight, unconfined cognitive ability, and alleged irrelevance of cooperative or altruistic propensity. Although competitive markets are the convention for testing individual rationality as well as market efficiency, failure to see these as intertwined domains is what marks irrelevant hurdles early on. As it happens, players do benefit from cooperating beyond competitive and Pareto-improving trade or coalition formation and it is these cooperative equilibria that best build on positive spillover of knowledge and complementarity, agglomeration effects being not the least important.
Moreover, it is awkward to presume that the ability to see the big picture or an indeed aggregated one, as well as mid-level patterns secures inferior outcomes. Regardless of whether governments are poor project or investment managers, they can always hire knowledgeable experts and visionary CEOs on the market for competitive compensations so as to have them work on the national development strategy. More so, it holds in ‘fast-cycle’ sectors where top executives turn out to be the most forthcoming in terms of innovation (Galasso & Simcoe 2011).
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Put simply, social planning matters and cannot possibly be confined to macroeconomic policies or direct welfare giveaways. Although social justice and equity make a difference in terms of societal acceptance or ‘buy-in’ for whatever development design opted for, at the very least it secures aggregate demand with an eye on those less well-off likely to have higher marginal utilities and a propensity to consume, to put it in the Keynesian terms. More importantly, any national strategy has to embark on human capital formation with respect to augmenting creative or productive faculty or allocating and employing it along the best lines attainable. Improving opportunity sets is what amounts to social planning beyond macro policies seeking to just keep unemployment low and ensure job creation.
China’s social planners have shown to be very apt when it comes to human capital policies first and foremost even though this grand agenda could in no manner have been addressed as a full-blown programme from day one. A ‘small’ or non-diversified economy easily does not boast a portfolio of industries or scope of employment opportunities enough to retain, let alone employ extra skilled professionals. In a sense, any economy like the US printing enough money to lure the best experts will leave any other emerging market or LDC with a meagre chance of ever making it into a top-ten host, unless there is an aggressive and at times nationalistic agenda being raised of staying in and keeping on at it (Kennedy 2013). The early exports proceeds were re-allocated into superior schooling for the top performing students, thus turning the initial scale into an expanding scope.
However, securing Western-style education or exchange programs alone would never have sufficed in garnering a competitive advantage, which is why China has taken the pains of fusing a hybrid system while striking a careful balance between fundamental-research versus hands-on training. Apart from being able now to afford having top lecturers over for seminal workshops and college courses, China’s political as well as policy arrangement has facilitated early payoffs, with learn-as-you-go schooling immediately bearing fruit in terms of sustainable engineering designs and scholastic attainment. Again, regardless of whether a democratic standing measures up to any arbitrary priors, performance can readily be observed little short of setting model examples. In fact, China at large has for long been turning into an ultimate consultancy on the strength and speed of its achievements and, more importantly, these deliverables’ early convergence to its own objectives.
Complementarity and Shared Value
However enviable, China’s underlying NIS can hardly be mimicked or exported in a wholesale manner if only because the bulk of it rests on China’s particular human capital as well as institutions showing a dominant informal core. One other pillar of complementarity has to do with the fact that partial solutions cannot be franchised, either, as they have all been uniquely aligned with respect to each other. It is ironic that China has borrowed thus far in ways that deny reversal so that knowledge transfer has proceeded one-way for reasons other than protectionism or counter-espionage of any sort. Part of the rationale could trivially have to do with ambition and a competitive attitude that distinguishes this cultural setup from, say, the Japanese version of commitment to hard work or any Protestant underpinning a la Weber outside Hong Kong still hosting a strong UK legacy. In any event, the Chinese model suggests specificity that is too prohibitive for carrying over without the loss of continuity. Besides, one should keep in mind that complementarity takes a variety of forms that could be forgone when trying to unbundle the model or NIS.
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However, this design is inherently contingent on what amounts to ‘creating shared value’, the domain that is often overlooked in the Western tradition and only coming to be contemplated in the aftermath of the 2008 crisis that appeared to have shattered the capstone premises of capitalist ways. According to Porter and Kramer (2011), shared value earmarks the layer of deliverables that most inherently draws upon agency as well as relevance-driven entrepreneurial quest. In a well-defined sense, it is about sensing the best societal interests beyond myopic whims or reactive preferences and making sure the resources have first and foremost been allocated to these uses if they are to secure utmost return to be shared in. Fabrizio and Thomas (2012) may have provided confirmation for an overlap of the present paper’s theses, namely that knowledge of demand could be an important pillar of network support in its own right. For that matter, the notion of collaborative innovation as a superior third alternative to competition and firm alike, according to Hartley, Sørensen and Torfing (2013), could posit the innovation pillar of shared value. Bindroo, Mariadoss, and Pillai (2012) have referred to this social-media source of innovation as ‘customer clusters.’
One has to be careful to distinguish between posterior pecuniary gains as opposed to ultimate value created or jointly benefited from. It could take forms as diverse as public goods and lean management featuring joint projects rather than their standalone NPV and IRR and otherwise synergy beyond manipulative reporting. Although conventional markets are known to overlook social costs while failing to secure long-term or large-scale projects not subject to myopic ROI, shared value is not about externality per se or its internalisation. Such by-products or unintended impacts may or may not emerge down the road, yet shared value is always targeted and planned as the ultimate source of growth. Otherwise, the economy faring on fallacious value added amidst sheer waste of scarce and long-to-evolve resources amounts to just that – an unsustainable project nearing its collapse and revealing utter impotence of the underlying NIS.
Innovation & Change Management
Innovation can border on inertia and reluctance to learn as micro-level organisations and macro-institutions alike are manned by people whose risk aversion or conservatism, though not necessarily correlated with pessimism amid downside scenarios per se, could be embarking on lower-bound absolute or dissatisfying type of cut-off rather than incremental or marginal performance. In other words, as long as the incumbent setup works on the whole, it may not be challenged or changed even with an eye on clearly superior alternates out there until after major shocks have propagated into the system, thus making it prone to an all-out crisis and downsizing. Alexander (2012) points out uncertainty avoidance, suggesting a bias toward equitable alliances as productive innovation might be treated along the lines of equivalence between status-quo continuity and emotively perceived symmetry.
Crisis or risk management could be either about supplying smooth transition mechanisms of putting reform on wheels or otherwise about hedging and mitigation. Largely, the same goes for change management, which may vary anywhere in between minor evolution versus major turbulence and discontinuity. National development or NIS building can be subject to moral hazards in the event policymakers facing their cycles may reveal manipulative or rent-seeking propensity.
Likewise, on the micro or interim levels, organisations could be prone to delayed changes insofar as the inept CEO feels free to opt out anytime while still enjoying the exit pay, whereas the visionary one might have difficulty having the team or combined human capital and buy into the superior strategy. When it comes to teams, they could show ex-ante complementarity pertaining to functional delegation and cooperation, whereas some could prove to be posterior or implicit, be it in terms of downside response or sharing of the same information flows and knowledge system. Of course, teams can compete between as well as within themselves and at times unduly so. Regardless of whether or how well explicit rent-seeking, agency cost, or shirking are, human capital and creative entrepreneurship could be compromised by design or due to a cultural misfit.
Alignment versus Deviance
The latter may have to do with the controversial nature of ‘creative destruction’ as a characteristic of change management. For one thing, any genuinely creative exercise inevitably breaks up with convention, as well as its institutional or cultural underpinning that is deemed to amount to safety or immunity. In other words, genius is the last domain to embark on loyalty, much less when it comes to old-hat designs that deter the very creative propensity. In turn, entrepreneurial pursuit is largely about ‘standing on the shoulders’ of previous solutions or authors or at any rate about striking a clever trade-off between radical innovation and credit. Added value cannot be defined irrespective of prior hurdles or inputs and a shift cannot fully be ensured unless motivated vis-à-vis alternate or incumbent options.
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In fact, this is one other venue where the inter-relationship between scale and scope is difficult to gauge. Some corporate cultures could be over-innovative in terms of standard buzz words they embed in their MVV (mission, vision, and values) without showing their innovative differentiation or ‘value divergence.’ At the other extreme, there could be authoritative managers or charismatic CEOs expecting utmost commitment to their own vision without either indulging in creative diversity ex ante or respecting the subcontractor’s relative property rights ex post. Microsoft Corp. could serve as an infamous illustration along the latter lines, with its drop-out programmers rarely ever having full title to any of the work they did while on board. Someplace in the middle lies the coveted core of company cultures that cherish personal actualisation, while making full-fledged use of it. If Apple Computer is this type, one wonders how come it has not seen any major breakthroughs after the iPad and iPhone series in years. In fact, that might be the ironic instance of a standard setter being trapped inside its own winning solutions after having won in a battle-of-standards game.
It may well be that smaller-scale, micro-MNE, or SME setups are the ultimate format that is conducive to genuine creative self-actualisation for those valuing it. In a sense, this is consistent with Parrilli and Elola (2012) finding that, somewhat counter-intuitively, conceptual drivers outmatch apprenticeship for SMEs rather than corporations. Baldwin and von Hippel (2011) appear to be lending further support to the supremacy of individual creative contribution over the firm-staged one.
It is unfortunate that such companies could be the most subject to the inappropriability phenomenon, whereby the first mover or innovator finds it difficult or costly to reap all or reasonably large benefits from the creative contribution. Whereas in the network of scientific research entities, such concerns are partially dissolved via mechanisms of publishing priority, impact factor pertaining to referencing frequency, and the like intellectual property rights settlement channels that do need to be fully absorbed outside this academic domain. For instance, any outside coach or top selling popular writer might cash in just as handsomely on any closely cited researcher’s work without the latter ever making itself known en masse.
This issue has marred and plagued research and entrepreneurship alike. If anything, it is this layer of conflict that has to be resolved by the NIS for it to make a positive developmental impact.
Resilience and Sustainability
Generated knowledge could have ultimate value added as long as it fosters sustainable solutions, which reconcile the best interests of many stakeholders or align domains toward overlapping or cross-discipline findings as the ultimate source of advancement. Narrowly defined, sustainable solutions would have to be reasonably ‘green’ or environmentally friendly, as well as inter-generationally acceptable and less costly socially for that matter.
As it happens, innovations could be addressed with an eye on their own narrow connotation. For instance, ‘innovations’ are at times seen as major propagations into the system or adverse shocks it is supposed to stay invariant parametrically or robust to. Resilience of this sort or an ability to resume performance and recover the core characteristics might or might not be optimal, yet rarely it is deemed undesirable. However, one should distinguish between inputs and their ultimate counterparts as deliverables. Although both layers are subject to positive optimisation rather than arbitrary maximisation or minimisation, conventional econometric research has focused on weak and less meaningful ‘significance’ cut-off when it comes to measuring innovative impacts. In other words, the very system of criteria may have to be rethought with an eye toward system-specific values before the NIS at a particular level is to be fine-tuned and judged with respect to its posterior adequacy.
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Institutions and Spillover
Arguably, it is institutional matrices that could reveal the most resilience and immunity to outer shocks despite their network-like support, which may turn volatile or uncertain in this fast-cycle marketplace. Resilience would perhaps be long-term and asymptotic in nature and should younger generations within high-context Oriental societies get to prefer Western values at one point, they will likely revert to their own cultural dominants over the long haul anyway once their personal quest dust-settles around more consistent, contingency laden, or complementarity driven areas.
In this respect, it would be awkward to speculate of any major institutional ‘spillover’ per se. By contrast, institutions might well facilitate knowledge spillover and technology convergence in areas that are FDI intensive or alliance accommodative. Business practices may or may not travel well, depending on ethical codes or the selfsame informal institutions, yet it is these fringe pillars that might render formal reinforcement gaps less of an issue beyond corrupt loopholes as such. Just like personal pursuit of culture and values do not need to converge to anything drastically new despite prior openness, the same might hold for global convergence pertaining to innovation or NIS design. For one, all businesses or processes increasingly tap into the same information technologies whose share in the value added dominates that in the cost going down. That said, unless the same information inputs and technology beget an explosive variety of innovation outputs (or knowledge-based ‘functional differentiation’ as in Hage, Mote, & Jordan 2013), further trade based on differentiation and specialisation might not be applicable and neither would be substantive convergence. Cohen, Diether, and Malloy (2013) have observed that path dependence or inter-temporal production function could be the most profitable as well as divergent when backwards looking, which might in fact reconcile hereditary efficiency against instantaneous productivity.
Education and Research
It is education building heavily on research that accounts for the most human capital formation as well as the gap between innovative convergence and variety. Although looking into whichever of the three tiers of schooling would extend beyond the attempted scope, complementarity is best secured at higher levels as they converge with research. On the second thought, it is this level that could be at odds with practical-transfer complementarity as market may not always set right priorities for science in and of itself.
Notably, Kauko (2013) has found that higher education is most exposed to political cycles, as well as being a host of other propagations. It can therefore be inferred that there is a trade-off or ‘triality’ between complementarity, complexity, and contingency in addition to the aforementioned duality of the former two.
Case Study: UK NIS & Institutional Replicas
At this point, one should be in a position to zoom in on the UK research of NIS, which might come of lasting merit in accommodating its own as well as some emerging-market developmental models amidst global economic and partial institutional convergence. The latter is more implicit in nature, yet more ambient insofar as latent institutional impacts or spillovers mark most other products or expansion modalities indirectly or over the long haul.
When it comes to the Hong Kong economic strategy converging to the Chinese benchmark, Sharif (2010) has argued that its NIS, as revisited in 2004, was a matter of manipulative alignment of a more protectionist model of centralised innovation amid their fundamental orthogonality. Now, although the UK may not be exposed to reciprocal impacts and thus fare as less of an open system drawing upon feedback, its own model appears to be increasingly centralised and reveals some derivative socioeconomic parameters targeted (The World Bank 2015).
Teixeira (2014), in contrast, has pointed to some dually troubling evidence. Not only has the body of literature on NIS been poorly conceptualised or formalised beyond innovation economics, it is also dominated by core studies on the UK, US, and OECD at large. Among other things, it is not inconceivable that, as one meta-outcome, the UK case imposes a NIS model fostering irrelevant model spillovers as the dominant benchmark.
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Ganotakis and Love (2011) have studied export entry outcomes for a sample of new UK-based, technology-intensive producers with an eye on the implicitly revealed performance of whatever NIS model at work. In line with the efficiency-productivity trade-off, which is mitigated via internal R&D, less productive or innovative companies are less likely to succeed at market entry, yet are keener users of e-commerce vehicles. In fact, that could be suggestive of the aforementioned trade-off between inferior or lower-level knowledge products and higher value-added derivatives, there apparently being some ironic technology mediated crowding out.
Zhang (2013) has elaborated on a comparative NIS score system ranking a set of 39 countries based on innovation inputs (R&D spending entries) versus technological (patenting and publishing) and economic performance (share of knowledge products). The UK ranked 8 and 7 based in terms of these as compared to China only hitting places 33 and 37 respectively. Effective as of 2005, though, this breakdown may appear to be at odds with the Chinese statistical and business counselling entities having been more social media-active lately compared to the UK counterparts (Great Business n.d.).
Bearing in mind creative impact of the human capital, NIS appears to be but an add-on channel that can either concentrate and catalyse or dilute its actualisation and payoffs. Apart from complementarity within itself as well as vis-à-vis human capital, NIS poses some extra contingencies and complexity with the ultimate trade-off varying across institutional setups. For future research, it would be of interest to reconstruct how NIS can be endogenised from within as a notion and a mechanism alike, which acts to narrow an otherwise ill-defined aggregate of connotations down to a consistent and parsimonious scope.