1. Introduction
1.4. Analytical framework
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1.3. Research Questions
The main research questions of this research are the following:
1. Do the linkages with knowledge, production and consumption units influence the decision to innovate in the Peruvian manufacturing companies?
2. Do these linkages with Asia Pacific units (knowledge, production and customers units) foster the innovation of Peruvian manufactures companies?
1.4. Analytical Framework
The conceptual framework used in the analysis of the influence of the networks on the innovation of the manufacturing companies is originated in the writings related to the National Innovation System. This framework is selected because it provides an analytical way to analyse and understand the role of networks and other important factors that affect innovation. According to Edquist (2001, p. 4) "firms do normally not carry out innovations ‘in isolation' and that institutions are crucial for innovation processes. This has made the Innovation System approach central to the modern way of understanding innovations".
This idea behind the system provides a simplified description of the two main elements:
components and relations. In term of components, there are at least two categories to consider: organizations and institutions (Edquist, 2001). “Organizations are the player or actors such as companies (which can be suppliers, customers or competitors in relation to other companies), universities, venture capital organizations and public innovation policy agencies” (Edquist, 2001, p. 4). On the other hand, institutions are the “rule of the game”, “the set of habits, routines, established practices, rules or laws that regulate the relation of the components” (Edquist, 2001, p. 5).
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To improve understanding of the elements of the system, Lundvall (2007) proposes to differentiate between the core and the wider settings of the National Innovation System studies and determine the next four level of analysis:
1. The first step would be to analyse what takes place inside firms in terms of innovation and competence building.
2. The second step would be to analyse the interaction among firms including competition, cooperation and networking, and how firms interact with knowledge infrastructure.
3. A third step would be to explain international differences in these respects with a reference to the specificities of national education, labour markets, financial markets, welfare regimes and intellectual property regimes.
4. As a fourth step, firm organization and network positioning may be used to
‘‘explain’’ the specialization, competitiveness and growth performance of the innovation system.
The first two steps are the most important and they are the level of analysis related to the core of the National Innovation System analysis. The other two are the level of analysis related to the wider sets of the National Innovation System and it should be considered depending on the level of analysis. It is in the second step suggested by Lundvall (2007) where we analyse the networks between the firm and different organizations such as Universities, firms, and customer.
Finally, it is also necessary to define the type of innovation that is relevant to the study.
According to Heijs & Buesa (2016), the innovation refers to the introduction of novelties in the market. However, it is possible to find at least four classifications that are useful in our discussion of what innovation we will study. First, is the classification
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of innovation: (1) Product innovation, (2) Process innovation, (3) The opening of a new market, (4) The appearance of new sources of materials for production, (5) The emergence of new organizational forms in the industry that it does not imply only the destructive creation where the new inventions replace the old inventions, but also to the creation of new combinations of existing technologies. Thus, innovation does not only reference the creation of a new product, because the sense of novelty would be understandable in a wider sense.
Second, the classification related to the degree of innovation. In this line, it is possible to observe that innovation can still be classified according to the "impact" on technological advancements. Thus, it is possible to classify the innovation in (1) Radical innovation and (2) Incremental innovations. The former is totally new and not predictable. By contrast, the last one is an innovation that implies small successive improvements that are in a certain degree predictable (Heijs & Buesa, 2016).
Third, innovation has to be differentiated whether it is new in the industry or only in the firm. In the latter case, we can understand that the firm adopts an existing technology, and would lead to the concept of innovation adoption.
Fourth, the innovation related to the activities of R&D. This type of classification recognizes three types of activities: basic research applied research and experimental development. The basic research is the study that is designated to create new knowledge without the intention of giving them a specific use; it is typically diffused through publication in scientific journals. The applied research is the study destined to give specific practical use to new knowledge (created or not by them). The knowledge created here, it is usually patented but it can be maintained in secret. Finally, the experimental development consists of a set of works that take advantage of the research
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and practical experience to produce new materials, products or devices (Heijs & Buesa, 2016).
Thus, for the purpose of our analysis, the innovations that will be studied are those related to the product, process, organizational and commercialization innovation.
Finally, the innovation that is created and adopted will also be analyzed.
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CHAPTER 2
LITERATURE REVIEW
2.1. Innovation and Economic Development
There is no doubt about the importance of the economic development for the performance and complementing the goals of a society. However, this term was not static in time and the objectives and means to reach economic development has been constantly evolving. In this sense, it is necessary for a brief review of what we understand by economic development.
A review made by Dang and Pheng (2015) about the evolution of the theory of economic development emphasizes at least two important aspects: the goals of economic developments and the different theories that try to explain it. Thus, in the review of the goals, they appreciated that prior to 1970 the academy considered growth in the economy as a good proxy for development; however, this idea soon had critics because this understanding fosters the maximization of production, without considering environmental damage, increasing income inequality and tolerating poverty. In this scenario, during the 1970's, the evidence of the ambiguity founded by increasing income per capita and increasing income inequality and poverty made some scholars think about the necessity to set other goals in order to appreciate the development of a country. In this line of thought, in the 1990's economist like Sen, Stiglitz, and others contribute to shifting the economy goals to a wider set of goals such as education, health, and freedom. Also, the set of goals were needed to be established to consider not only the present but also the future of the next generation. Similarly, environmental economists incorporated the concept of sustainable development into economic theory.
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Thus, only a few years later, the Brundtland Commission defined sustainable development as “progress that meets the needs of the present without compromising the ability of future generations to meet their own needs” (World Commission on Environment and Development 1987, p. 8). In this sense, economic growth is still important, but a country must consider other dimensions of development, including the ability for future generations to satisfy their own needs.
Then, the review of what determines this development, especially with its most basic goal, growth, shows the evolution of the theories that study this issue. Thus, there are at least four classic theories and two contemporary theories of economic development.
The first of these classic theories focused on the role of the savings and investments in order to grow in the long run. In a similar way, these variables were considered in the second classic theory but with the main purpose to explain the movement from agriculture to the industrial sector and how this movement of resources to the last sector is crucial for development (at least in their conception). The third classic theory was the dependence theory and it tries to explain that developing countries were not developed for the unfavorable exchange of goods with more developed countries, so their suggestion to develop was to give the state more space in the decision of production.
The fourth theory was a counter attack to the third theory and proposes the deregulations and facilitating the free market in order to achieve economic development. However, these four theories were not supported by evidence and it was soon that theories emerged which emphasized the complementarities between market and state, and how the state can intervene and ensure the correction of market failures. Therefore, the theory of the new growth economy proposed by Romer in the 1990’s argued that the technological progress is not exogenous and that the knowledge is the main driver to technological change, due to its characteristic as a public good and the ability to
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facilitate the creation of economic scale. It was in that moment that innovation started to become central in the theory of growth, in the theory of economic development and important as a topic to include in the political agenda and strategies to lead the country to the development.
However, the concept of innovation and economic developing are still improving and becoming more interrelated. Thus, Kuntze, Meyer-Krahmer, and Walz (1998) highlight that innovation can also help to achieve a sustainable development for two reasons.
First, it would help to “solve the problems of the current unsustainable production methods and consumption patterns” (Kuntze, Meyer-Krahmer, & Walz, 1998, p. 4).
Second, it would be useful to “to develop and diffuse a wide range of environmental technologies” (Kuntze, Meyer-Krahmer, & Walz, 1998, p. 4).
For the achievement of millennial goals, it seems that innovation can have a main role.
For example, in term of poverty reduction, Majid (2004) highlights the importance of increasing productivity of rural agriculture in order to achieve this goal.
2.2 A brief history of Innovation Studies
After the study of Solow (1956), the Solow Swan model found a paradoxical result regarding the determinants of growth in production. Empirical studies show that technological change was the main of driver of economic growth production in the long run, but also it was an unexplained variable in its theory (an exogenous variable). This finding easily put in evidence the importance of technological change and raises the questions about its determinants.
On the other hand, curiously some non-mainstream economist had already generated arguments to explain this issue. For instance, Schumpeter (1911) had introduced the
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concept of innovation and analyzed how the process of creative destruction would lead to an industrial transformation (technological change) that shapes the economic structure from an old state to a new one (growth economy and development economy implicitly included). Although his works were not well recognized at that moment, his ideas served on the post-world war committee in charge of U.S. Science (Godin, 2008).
In this vein, according to Godin (2008), the famous linear model that suggests a direct relation between innovation and firm activities in Research and Development (R&D) was developed by Rupert Maclaurin that served as secretary to the committee on Science and Public Welfare.
Years later, a group of scholars in the OECD started to question the limitation of this approach, and a series of ideas started to suggest the necessity of a different view of the dynamic process related to learning and innovation (Lundvall, 2007). Thus, at the beginning of the 80’s, the works of Freeman (1982)and Lundvall (1985), introduced the term National Innovation System in order to develop an alternative framework to fill the gap in the narrow view of the mainstream economic theory at the moment to analyze and judge the importance of learning and innovation, explaining that there is a process of learning that is interactive between different units of the system that would foster innovation in the firm (Lundvall, 2007).
However, it was after the works of Freeman (1987) and Dosi, Freeman, Nelson, Silverger, and Soete (1988) that the framework of National Innovation System started to become famous and widely used (2007). Despite this broad diffusion and usage of terminology in several studies, different assessments have been made about the scientific validity and the political implications and current policies implementations of this framework.
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In term of the validity of this framework, there are some scholars that find a theoretical corpus that is not clearly delimited and it is associated with various kinds of ambiguous concepts. For instance, Edquist (2001)signaled that the definition of institution broadly used took two types of meaning: the organizations and the rules. Also, Edquist (1997) expresses his concern about the lack of formal operationalization and the misleading nature of this toward an undefined framework. Another interesting point is signaled by Vertova (2014), who indicates it is not clear if the National Innovation System is a descriptive or normative tool. On the other hand, Lundvall (2007), argued the importance of understanding the concept "theory" (I would include science) under the fact that is developed in the field of social science and that would implicate not looking for the attempt to formalize in the same level of natural science but generate a corpus of ideas (a focus devising in his words) that let us organize the knowledge and focus the analysis.
In term of political implications and current policies implementations of this framework, aligned with the criticism previously mentioned about the unclear boundaries of the concept, some scholars argued that the framework could be not useful due to the nature of include almost everything and at the same time not focusing on anything. In this sense, Lundvall (2007) recognized the necessity to include a new distinction related to categorize the setting of the system between the core and the wider settings. This solution would bring a better focus on the formulation of policies. Also, Lundvall (2007) recognized the positive effects and negative effects of the usage of this framework. For the side of the positive effect, the most relevant impact was the shift of innovation policy from linear thinking to more interactive thinking. However, crude interpretation of this interaction gave place to narrow studies and policies such as the expectation of innovative relation between the universities and the firms, forgetting in
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some cases other important roles that the university can fulfill such as being a source of skilled knowledge (2007).
2.3. Influencing factors of Innovation
In this section, it will be review the main factors that influence innovation. Despite several studies and possible factors that purport to determine the cause of innovation, we will focus on the most important factors.
2.3.1. Investment in R &D
The first theory that tried to explain innovation was the linear model of the firm that claims the existence of a positive relationship between the investment in the activities in Research and Development (R&D) and the performance of the firm in terms of innovation (Godin, 2008). In other words, this theory conceptualizes the innovation process as a sequence of activities made by the firm in order to get technological innovation (Godin, 2008).
2.3.2. Absorptive capacity
Another relevant concept related is the “Absorptive Capacity”. Thus, Cohen and Levinthal (1990, p. 128)recognize that "the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends is critical to its innovative capabilities". An interesting study with regard to this was made by Gold, Malhotra, and Seagars (2001).In this research, the authors analyze the importance of the “absorptive capacity” in the successful in the Knowledge management and argue that is necessary technological, structural and cultural infrastructure (element of the
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absorptive capacity) that facilitate and promote the communication between individuals within the firm that can contribute to the creation of new ideas (innovation creation).
2.3.3. External factors: networks
The network is the factor related to "the interaction among firms including competition, cooperation, and networking, and how firms interact with knowledge infrastructure"
(Lundvall, 2007, p. 102). With regard to the firms' interaction, it would be useful to separate the interaction between firms that are competitors and the interaction of firms that have vertical relations (supplier-firm and firm-matrix).
Thus, despite the obvious relation with a firm and its competitors is compete, there are two important aspects to comment in this part: first, the competition itself does not necessarily reduce the innovation and second, the relationship with a competitor is not necessarily only competition as we will see in the next paragraphs.
In terms of how competition affects innovation, there are many scholars that were concerned about this relation (e.g. Arrow (1962), Vives (2008) and other). According to Aghion, Bloom, Blundell, Griffith, and Howitt (2005), there is a contradiction between the theoretical predictions and the evidence. Thus, the standard theory of industrial organization predicts that innovation and competition are negatively related.
However, Aghion, Bloom, Blundell, Griffith, and Howitt (2005) realized that for "neck and neck" sectors, the competition would foster innovation due to an escape-competition effect that implies a scenario where firms with identical technologies and capabilities with also compete in innovation, so in the case of non-radical innovations, the firms would tend to make efforts in order to avoid being left behind.
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In terms of another type of relationship with competitors, some scholars have started to pay attention to the situation known as coopetition that implicates a situation when the firms compete and cooperate. According to Harbison and Pekar (1998), over 50% of collaborative relations are made between firms of the same sector. There are significant ideas around how and why cooperation becomes popular and worthy of many companies. For example, Brandenburger and Nalebuff (2001) claim “business is cooperation when it comes to creating a pie and competition when it comes to dividing it up”. In this sense, when the strategy leads to superior benefits, the idea to cooperate with the rival makes sense. A similar idea is developed by Gnyawali and Park (2011) who claim that the main explanation behind this strategy is the possibility to gain more than the cost that implicates cooperation (conflicts, interdependence, etc.). A different but important observation is made by Bengtsson and Kock (2000). Their research signal the possibility to collaborate in specific areas but compete in others. Despite this, Le Roy and Czakon (2016) adds the importance to consider that coopetition is a method to get a competitor’s resources giving the competitors our own resources, so if the gains are symmetric, it would be a win-win strategy. In the opposite case (asymmetric of learning) it would be a win-lose strategy due to the competitor having an advantage over the other firm.
With regards to the interaction between firms that have a vertical relation, scholars who researched this area use the terminology of vertical networks to express the linkage between the firm’s partners belong to a same chain of production (Gellynk & Kuhne, 2010). And the question of why a firm looks for a relationship with another firm in the same value chain in order to innovate is explained through the firm’s necessity to solve problems related to the innovation itself such “as the appropriability problem, imperfect price discrimination, imperfect information and the related problems of demand
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valuation and resale” (Harabi, 1998, p. 160). According to Harabi (1998), in the case of the appropriability problem, the innovative firm can create barrier to entry for competitors through cooperation with suppliers in which the appropriability of the critical assets would create a scenario where the competitors or potential competitors
valuation and resale” (Harabi, 1998, p. 160). According to Harabi (1998), in the case of the appropriability problem, the innovative firm can create barrier to entry for competitors through cooperation with suppliers in which the appropriability of the critical assets would create a scenario where the competitors or potential competitors