Digital ecosystems and regional

innovation systems as public

goods for economic development
Olga Memedovic
UNIDO, Private Sector Development Branch
Brussels, 7 November 2007

o.memedovic@unido.org
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Contemporary Globalization and its Drivers

Advances in ICT; organizational innovations; Liberal trade and investment regimes have
internationally accepted product standards created incentives for
and business process protocols

Outsourcing
Outsourcingof ofthe
thesegmented
segmentedactivities
activities
Modularization
Modularizationininall
allstages
stagesof
ofaa to specialized producers in different
to specialized producers in different
production
productionvalue
valuechain
chain locations
locationsaround
aroundworld
world

ICT
application
Functional reintegration of the geographically dispersed in transport,
fragmented activities into new border-spanning business supply chain
management
arrangements of global value chains (GVCs) and production
and logistics
networks; TNCs have a key role in organizing and coordinating
these new business formation of global value chains and
networks
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The effects: New concept of industry: from linear to interactive VC; Vertical specialization;
No clear division between manufacturing and services; Offshoring and outsourcing in
R&D: transition from an intra-firm knowledge base to an distributed intra-GVC/GPNs
knowledge base

Consumption, Disposal and

Consumption /after sales Recycling

Marketing and sales

Marketing and Sales
Outbound Logistics

Manufacturing

Manufacturing
Inbound Logistics
Design and product
development; in house
R&D
Design and Product
Development; R&D
offshoring
Source: Memedovic, 2002, 2005, UNIDO
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GVCs and GPNs GPN1

Keystone:
BMW, Fiat, Reno
GVC 1
Capital-
intensive
Manufact.

Logistics'
GPN2 VC

GVC 2
Branding
&
marketing

Keystone: : large buyers, retailers: Zara; H&M

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Implications
Pressures for specialization and increased interdependences
Modularisation leads to commoditization of technological knowledge ⇨ the way out is innovation ⇨ the company
concept changes into an continuous innovator as competition drivers change: from efficiency and effectiveness to
continuous innovation and learning

Ideas and how to commercialise them become key resources for the knowledge-based economy
Technological advances in activities must co-evolve and complement each other for the the system to function as a
whole ⇨ Many technologies are used to create a product

 Intra-GVC knowledge flows takes place between industries and countries/regions

with different degrees of R&D-intensity
Conceptual distinction between high- and low-tech industries is weakened
 Regional knowledge capabilities begin to determine business location: Countries compete based on their unique
regional competitive advantages: GE in Bangalore, Microsoft in Beijin.

Tendency for coordination of production processes without ownership

Production coordination is achieved through shared vision

 Innovation is becoming more expensive and complex ⇨ Increasing demand for undertaking more
complex tasks in production and in management and for higher rates of innovation and at lower prices ⇨shift to open
innovation model
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Traditional corporate laboratories increasingly closed or downsized: companies offshore and
outsource R&D functions (Pharmaceutical firms outsource 50% of their R&D)
Closed innovation model
 Firms select desired technologies
 Firms perform R&D in-house
 Firms put technologies in
products
 Product revenues fund additional
R&D
 Globalisation (1): adjusting
products to markets
After Cooke, 2006
Open innovation model
 Strategic R&D – integral to business
strategy
 Technology acquisition (licensing,
corporate venturing, alliances)
 Externalisation of R&D (outsourcing,
firms research institutes, university
centres of excellence)
 Knowledge management & collective
intelligence: central role of new ICT
technologies
 Globalisation (2): tapping global talent
pools
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GVC + GPNs = Business Ecosystems (BE)

Spreading of GVC and GPNs suggests complex economic organizational forms ⇨ also
described as ‘business ecosystems’ in the modern business thinking (ecosystem metaphor)
BE = a complex network of interdependent niches occupied by organizations that are open to all
potential contributors and creative participant (Moore, 2005).

Leading firms (keystones ecology metaphor), occupying certain niche, coordinate co-evolution and
integration of innovation across numerous contributors spread around different locations of the world;
Their impact on the BE community (+/_) may be very strong and is also context (industry) specific.

Every agent in the space is facing continuous challenge to keep up with others in the BE co-evolution
supported by keystones. Cooperation and competition is necessary for innovation and for creation of
complementary capabilities.

Key policy challenge is understanding:

 Structure and functioning of the specific BEs
Underlying mechanism of governance the BEs: concentration of power, barriers to participation,
interactions and functional significance of keystones and other agents ⇔
Importance of research and ICT for collecting and processing data for monitoring system functioning
(benchmarking innovation achievements, pricing and margins, competitive corporate strategies, etc.)
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Digital ecosystem (DE)

Self-organising system, providing a digital environment for networking
among organizations (SMEs) in BE. It supports cooperation, knowledge
sharing, and development of adaptive technologies and new business models.

Similarly to BE, DE can be context specific and can be tailored to the

specific local needs.

DE tools allow concerned stakeholders to contribute their knowledge to

achieve shared vision.

DE comprise:
Technical infrastructure: hardware devices
Services and formalized DE knowledge
Regulatory: laws and regulations, contracts, etc.
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Key opportunities for internalisation of EU

SMEs, arising from this setting
 Fragmentation in production ⇒ new market niches for products and services in which
SMEs can position themselves, utilizing their comparative advantages in achieving
flexibility, innovativeness, personalized contacts and quality of products.

 New opportunities for the international sourcing of specialized skills (scarce), which
SMEs’ poses

 SMEs can internationalize faster and cheaper through BE supported by DE

 SMEs can participate in different BEs/DEs (regional/global), hence securing their growth

 SMEs can follow on the strategy of the firms in the BEs and engage in outsourcing and
offshoring

 SMEs can learn and innovate in fast track manner through BE/DE
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Key challenges for SMEs

More and more demanding markets

Increasing number of standards and requirements set by leading players in BEs

Lack of understanding of the upgrading challenge in the particular BEs in which they
participate: understanding BE characteristics (structure, governance, geography).

Lack of awareness of their competitive strength

Insufficient access to information and training; limited managerial skills and financial
resources

Inadequate support for technological innovation and learning

Lack of direct contacts with customers: How to avoid captivity in BEs? How to protect their
IPRs?

How to reduce SME vulnerability and high mortality rate?

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BE and DE as public goods

The emerging DBE involve different types of externalities (positive and negative).
From externalities the specific domain of public goods emerges: information, new
knowledge and various kinds of innovations: organizational, institutional, commercial,
social and legal are arising from coordination and co-evolutionary exchanges in the
BE in interaction with DE

PG benefits can spread beyond the administratively defined borders, and can
become regional or even GPGs. Their benefits can also be inter-generational, resulting
in innovations that are of benefit for the future generations.

 The BE and DE organizational forms can also be considered as PGs in that they
facilitate collective provision of these PGs and these in turn reinforce collective action
and leads to increasing return to scale (e.g. their value to any participatory agents
increases as more innovative agents join in).
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BE and DE as public bads

Public bads result from negative externalities like environmental degradation;

monopolistic behavior, knowledge asymmetries, captivity for industrial upgrading; or
computer viruses, spamming, dissemination of undesirable materials (child
pornography).

Key policy challenge is to understand the PG nature of BE and DE and to provide

complementary PGs needed so that society can benefit from PGs and internalize
externalities (reward positive and penalize negative).

Complementary public goods: in the case of BE those are lows, regulations and their
enforcement, and monitoring systems to be able to correct for public bads.

In the case of DE, those include provision of technical infrastructure, laws and
regulations on norms and standards, and capacity building to process information.
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Public Goods
Public Goods INDUSTRIAL DEVELOPMENT Asymmetric Information
Structural and Framework Factors–
ORGANIZATION Incentive Systems
Public/Private Governance
GOVERNANCE Macroeconomic Policies
Externalities
RULE System
Political of LAW FINANCIAL STABILITY
Investment Microeconomic Policies
KNOWLEDGE /INFORMATION
And
Rule of law
ENVIRONMENT Competition
INFRASTRUCTURE
Institutional Support System Collective
CorrectiveActions:
action
Players
S, T&E System
Resources Government
PPP MMaarrkkeett
(Capital )
Resources &
and market failures
NGOs
HUMAN
Human capital Market failures
PPP Social capital
SOCIAL Innovation &
Innovation and Productivity
Productivity Quality
Quality growth growth
Technical
Technical change
Natural capital
NATURAL Change

Physical capital
PHYSICAL

Private sector
Private sector
(not for Private
Government
profit) sector
(for profit)

Asymmetric Information
Externalities Barriers to entry
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Public goods characteristics

They are non-excludable in their supply: there is no easy way of preventing someone from
having access to their consumption ⇒ it is not easy to limit the supply of PG only to those
who are willing to bear the costs of supplying them for society ⇒ free riding: potential
users may hide their preferences for the good and wait till they are supplied and then
consume the good for free.
 
They offer non-rival benefits: consumption by one agent does not diminish the availability
of the good’s benefit for others. ⇒ zero marginal costs of use ⇒ exclusion is inefficient ⇒
welfare is not maximized by exclusion
 
Externalities (positive/negative)
Agent actions have negative or positive consequences for others and these are not taken into
account in the decision process that generates those effects and are uncompensated.

( Samuelson, 1954)
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Provision of Public Goods

Characteristics of PGs (non-excludable and non-rival) and externalities ⇨ There are no market
incentives to make an optimal decisions ⇨ leaving their provision to the market means their
undersupply ⇨ the logic of individual interests results in a socially less than optimum response ⇨
resources are not efficiently used and prospects for economic development are affected.

Collective action (planned effort by two or more agents to act together to achieve result desirable
for all) becomes necessary to supply PGs, through coordination, cooperation or coercion.

When mutually beneficial goals are not sufficient to ensure the voluntary participation in a collective
action (“collective action failure”), institutional innovation to facilitate strategic interactions conducive
to cooperation among individual agents are called for.

At the country level, that response is directed through the available institutional framework, with
the nation state at the center. At the supranational level, the response has to be initiated through
various forms of institutional innovation and voluntary coordination and cooperation, generally
among countries.
 
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PGs Provision Principles

The subsidiarity principle = a match between the decision-making jurisdiction and the
spillover range of the public good: a national PG should be provided by a national
government, a supra-national regional PG by a supra national regional organization,
and global PG should be supported by an international organization.

The subsidiarity principle may be counterproductive when there is :

Economies of scale in PG production or distribution. Then, it is more efficient to

search for institutional solutions with a larger jurisdictional remit aiming to explore the
advantages derived from increasing returns from scale.
Economies of scope, unit costs decrease as more public goods are provided

Economies of scale and scope suggest that it might be advisable for the institutional
response to have a wider jurisdictional coverage
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Local, regional and global impacts
ORGANIZATION

Regional

Local
Regional

Global
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Institutional Innovation for PG provision

Supra national EU Instruments

level

Formal coordination System of Enforcement by

EU/ ECB Sanction:
Stability & Growth Pact

Voluntary coordination Guiding Rules: Luxemburg

and Cardiff Process
Lisbon strategy
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Globalization and Regional Innovation Systems (RIS)

Globalization proceeds through BEs linking nodes of economic power, which tend to concentrate in
certain regions or knowledge centers.

Region (administratively defined within a country) becomes the strategic level for innovations,
technological learning and upgrading.

Increasing interdependences between regions and nations ⇨ it is important to maintain core

competences/activities in the location/region and to upgrade this activity through RIS.

For acquiring technological competences interaction between local and global knowledge networks are
also needed, and this is best achieved at the regional/cluster level.

Key challenge for the region becomes: How to deal with asymmetric knowledge capabilities and with
imbalances between knowledge exploration and exploitation (commercialization)? EU Challenge: Is
Europe becoming an exploration Platform for US?

For policy: RIS, learning regions, industrial cities and clusters can guide public policies to support
firm upgrading, productivity and competitiveness and for achieving long-term, innovation-driven
development strategies.
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RIS/ SMEs/Clusters-BE linkages

Role of
multilateralism
& regionalism/
bilateralism
International
public goods

Global
Domain BE GVC

National
RIS:SMEs RIS:SMEs
Domain &Clusters
National BE/DE &Clusters

public
goods Regional/local VC

Role of
public and Business Environment
private
sector
Strategies, policies and programmes

Framework conditions
Memedovic, 2006,UNIDO
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What is Regional Innovation System (RIS)?

RIS consists of inter-linkages and interdependence between three subsystems (Cooke,
2006; Boschma, 2004):

a. Knowledge Generation Sub-system: university leaders, research institutes, etc.

b. Knowledge Utilization Sub-system or production system: SMEs/clusters

c. Intermediaries between a. and b.: knowledge transfer experts, innovation lawyers for
patents & IPR; investors (venture capital); business service providers, local government
agencies (development and innovation agencies); technology institutes
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Regional Innovation
- System Knowledge application &
exploitation subsystem
BE(SMEs/Clusters)
Customers SMEs/Clusters
Competitor horizontal &
Contractors s
Collaborators vertical

Intermediaries: ICT
Knowledge
transfer experts,
innovation
lawyers for
Flows of resources:
patents & IPR;
knowledge, finance
investors
& skills; Building
(venture
trust and
capitalists); DE confidence in
business
institutions and
service
their reliability
providers, local
politicians; Technology Market mediating Workforce
knowledge mediating organizations mediating
explorations and organizations organizations
testing institutes
Governance Public research Educational
system: organizations organizations
embedded
structure ICT
Knowledge generation &
Memedovic after Cooke 2006, diffusion subsystem
UNIDO
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What is National Innovation System (NIS)?

National Innovation System is a system of interconnected organizations and institutions to
create, store and transfer the knowledge, skills and artifacts which define new
technology” (Cooke, 2005, 2006).
NIS has broader institutional scale and has primary focus on new technology but not on
commercialization of new knowledge

NIS approach has been dominant in the past, now RIS is gaining in importance because
of the impact of globalization processes on local innovation and learning.
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How RIS emerge?

1. Institutional RIS: top down model
basically regionalized NIS. European RIS tend to be more institutional (dependent on
public intervention and funding). (e.g. Research linked to the needs of larger, state-
owned firms in or beyond the region.)

2. Entrepreneurial RIS: bottom-up interactive innovation model

generated and organized locally at town or district level. Financially supported and
generated locally, from family, community, local credit agency. Some Nordic
countries, US,etc.

3. Network RIS model: hybrid model, combining elements of 1. and 2.

Most efficient RIS model: related variety of regional clusters supported by a regional
supporting institutional infrastructure (Emilia-Romagna in Italy), Bavaria in
Germany, Styria in Austria).
Institutional support comes from local/regional, national and supranational levels.
Funding is guided by agreements among banks, gov. agencies and firms.
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Innovation system dimension in RIS:

Innovations are outcomes of a systemic relationships between various actors (a.b. & c.),
underpinned by an regionally embedded governance structures, and supported by regulatory
and institutional frameworks on the national level.

RIS acknowledges important role of:

 institutions: shared values, norms, attitudes and practices that are necessary to ensure
system coherence and that nurture the culture of innovation and processes of knowledge
transfer.
cooperation, competition, coordination.

Successful RIS integrates innovations, knowledge entrepreneurship, and talent formation

through purposive activity of society.
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Role of Regional Governance

Key to RIS success is in :
Multi-level governance approach: from national to regionally embedded, with the purpose
to facilitate interactive learning and innovation for commercialization of new knowledge
and to coordinate policies.

At the national level various institutions have the coordination role between national,
regional and local levels. Public like the National Innovation Agency, private like Industry
Association or Chambers of Commerce. ‘
At the regional level, there can be Regional Development Agencies, public organizations
such as universities, polytechnics and representatives from industry associations and
chambers of commerce

Role of local government in RIS is essentially in:

Supporting and augmenting the intra-linkages in the RIS and linkages with other RIS
through interaction in BE (GVC/GPNs).
Facilitating inclusion of private and public sectors and others.
Stimulating collective learning through network building, collective entrepreneurship,
utilizing of social capital advantages; regional financing and investment, labor market
adjustment services, etc.
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RIS as Public Goods

In line with new economic growth theory, RIS rest basically upon the public goods
provision knowledge, innovation, information, through collective action (public and
private sector participation).

RIS:
Utilize existing social capital advantages and build networks
Stimulate collective learning through network building
Provide innovation support services (public and private or combined)
Integrate various financing means for start ups (multilevel public and private investments
(venture capital) for seed funding.
Provide regional financing and labor market adjustment services ( talent and skill formation).
Encourage collective entrepreneurship
Provide necessary infrastructure (business incubator facilities, science parks, zones, )
Coordinate policy through multilevel formal governance structure with a meso-governmental
body having leading role.
Increases returns from agglomeration economies
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Clusters and RIS: conceptual differences

Clusters and RIS can coexist in the same territory. RIS can host several clusters but
cluster is not RIS. Cluster may have some kind of governance but this is more of informal
character (e.g. cluster association, etc. )

there is still lacking systemic explanation of

Relations between clusters and RIS in already established industries and how these are
formed ?

 What relations between clusters and RIS are needed to trigger the emergence of new
industries (clusters)?
Asheim and Lars, 2005

Recent research on SME policy and economic development points to the need for a more
systemic approach and for a more pro-active SME and entrepreneurship innovation-based
policy
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Specialization vs Diversification?

Cluster literature: implies specialization

Specialization is risky for economic development: exposure to external sector-

specific shock

‘Jane Jacobs’ models (1969): benefits of diversity in urban and regional economies
are driving forces of economic growth.

Many dynamic regions have a diverse portfolio of specializations (clusters):

unrelated variety and/or related variety of industries.

Unrelated variety produces portfolio effect: important for risk spreading

Related variety of industries: important for knowledge spillover effects and

innovation-driven growth
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Constructing Regional Comparative Advantages

Based on the idea that
Modern economies progress based on inter-related sectoral relations and knowledge
spillovers of 'related variety' of industries: there is swift adaptation of innovations to
nearby related industries and 'absorptive capacity' of related sector management is high.

A key carrier of innovation is entrepreneurship, particularly 'knowledge

entrepreneurship’.

A ‘related variety’ industry requires more than simply sector-specific policy support.

The policy challenge of this approach is in innovative policies to stimulate innovation,

entrepreneurship and industrial related variety.
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 The co-existence of many intra-regional clusters with various knowledge bases and
different relations to the RIS calls for more developed governance structures to
secure a planned and systematic co-ordination between industry and knowledge
creating and diffusing organisations.

 Provision of RIS as a public good requires an innovation system of a ‘triple-helix’

character (including university/ industry / government platforms) .
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Industry platform : exploring

related variety of industries

ICT Biotech Finance

National &
Regional
Constructed
Advantage

Stakeholders platform: pursuing a Policy platform:

planned and systematic cooperation
and interaction between:
Economy Skills Infrastructure

what type?
Universities Industry Government Analytical/symbolic/
synthetic
Thank you for your attention

o.memedovic@unido.org