CREATIVE DESTRUCTION: IDENTIFYING ITS GEOGRAPHIC ORIGINS Brett Anitra Gilbert Rutgers Business School Rutgers University 1 Washington Park, Rm 1032 Newark, NJ 07102 PH: 973.353.1621 FX: 973.353.1650
[email protected] Forthcoming in Research Policy
Electronic copy available at: http://ssrn.com/abstract=1972400
CREATIVE DESTRUCTION: IDENTIFYING ITS GEOGRAPHIC ORIGINS Abstract The fate of regions and industries are often intertwined. When industries thrive, regions and their constituents benefit. However, when industries decline, regions often require new paradigms to replace the old paradigms, and infuse new economic life into the region. This study enhances understanding of the regional characteristics that hinder or promote creative destruction. It enlightens the field on the geographic origins of creative destruction by theorizing about a region's structural (determined by industry clustering and regional knowledge), social demography and political economy attributes, and their influence on the region's capacity to incubate creative destruction. Keywords: Creative destruction, Technological Discontinuities, Geographic Clusters, Political Economy
2 Electronic copy available at: http://ssrn.com/abstract=1972400
CREATIVE DESTRUCTION: IDENTIFYING ITS GEOGRAPHIC ORIGINS 1. Introduction A nation's competitiveness is tied to the strength of its firms, industries, cities and regions (Porter, 1998; 2003). When firms and industries thrive they make significant contributions to the economic wealth within the cities and regions where they are located. Conversely, when firms and industries suffer, they often initiate adverse conditions to a region and its constituents. In fact, one would need look no further than the metro Detroit area, which experienced a dramatic downturn in the quality of life after the automotive industry to which it has been tied since industry beginnings (Klepper, 2002), endured a period of decline in the late 2000's. Industry problems create city and regional problems, which can trigger a need for the "creative destruction" of old industrial paradigms to revitalize industries and the regions where they operate. Creative destruction applies resources, knowledge and skills to existing or future problems in new ways. The process expands entrepreneurial opportunity by creating new forms of demand and supporting resources. For example, the introduction of the iPhone opened doors for application providers to offer products that meet the needs of iPhone customers. Android phones have similarly created new forms of supply and demand in the marketplace. Thus, creative destruction facilitates a transition from old, inefficient systems to new paradigms (Schumpeter, 1934), which Dosi (1988) defines as the needs a technology addresses and the materials it uses to satisfy the need. While the marketplace often benefits from the changes creative destruction brings, the process is sometimes slowed by the predominance of incumbent technologies within industries and regions, which "lock-in" a given technological paradigm and restrict the flow of new ideas into
3 Electronic copy available at: http://ssrn.com/abstract=1972400
the areas where they exist (Grabher, 1993). Scholars have long acknowledged the unlikelihood of creative destruction emerging from regions where an industry has clustered (Storper & Walker, 1989). In fact, cluster firms are generally described as being 'caught off-guard' when new paradigms emerged in the marketplace (Pouder & St. John, 1996; Sull, 2001). Yet despite general acknowledgement that paradigm-changing technologies tend to emerge from outside of industry cluster regions, we know very little about the geographic regions from which we can expect creative destruction to emerge. The objective of this research is to present a theoretical framework that enhances understanding of the geographic characteristics that promote or discourage creative destruction. In this study, creative destruction is conceptualized in terms of technological discontinuities, which are technological changes that incorporate new knowledge, resources or skills that destroy the value of incumbent systems and technologies in the marketplace (Anderson & Tushman, 1990; Daneels, 2004). The framework integrates the literature on geographic clusters, disruptive and discontinuous technologies, and technological and social change to isolate the geographic factors that influence creative destruction. It acknowledges that creative destruction occurs differently in regions depending on the structure of industry activity, the social demography and political economy. It is among the first studies that integrates disparate streams of research to propose a framework that enlightens understanding of where creative destruction may emerge. Therefore, this study makes several important contributions to the field. First, the framework helps entrepreneurs to understand the extent to which a region will have the capacity to incubate creative destruction. It also aids regional policy officials in their efforts to exercise strategic management over industrial activities in their regions.
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Second, as many cities have initiated activities to begin a transition to new sociotechnical paradigms (Hodson & Marvin, 2010), this research is well-timed to provide insights that aid those who are fostering the transitions. Last, to scholars of economic geography, entrepreneurship and strategic management, this framework adds new perspectives with respect to how to conceptualize and examine regions and their potential for creative destruction. 2. Forms of Creative Destruction Creative destruction emerges in different ways and affects a firm's operations at different levels. Competence-enhancing creative destruction generates technologies that build on the knowledge and competencies that incumbents already have and combines the current and emergent knowledge to improve the performance of existing technologies and systems (Anderson & Tushman, 1990). Historically, competence-enhancing technologies have been introduced by incumbents who were either already competing in the industry (Rothermael & Hill, 2005; Tripsas, 1997), or capable of leveraging their existing competencies when entering a new market (Mitchell, 1989). For example, Glasmeier (1991) describes three discontinuities that occurred in the Swiss watch industry. The innovations changed the internal operation of watches from mechanical - to electric - and then to quartz. In some cases, incumbents had difficulties adjusting to the new technologies. However, with each discontinuity except one, only the internal operation of the watch changed. Its functionality to customers was largely the same. While each discontinuity shifted the locus of power within the global industry to different
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nations, it was the incumbents in the nations who were often responsible for leading the technological change.1 Incumbent firms pursue competence-enhancing technologies because they invest considerable amounts of time, financial and research resources into strengthening their competencies in the incumbent technologies. Moreover, their ties to customers, suppliers and complementary product providers who are invested in the dominant design, motivates the focus of R&D activities towards identifying the next generation technologies for existing products (Christensen, 2003; Tripsas, 1997). This focus directs their attention toward solving the problems suppressing the performance of existing technologies, rather than searching for alternative solutions to the technologies (Cyert & March, 1963; Grant, 1996; Jenkins & Floyd, 2001). Ultimately, competence-enhancing technologies allow incumbents to retain some value in prior investments and reduce the extent of change for actors within the value chain. Competence-destroying technologies, on the other hand, are technologies that draw on fundamentally different knowledge and resources in their construction (Anderson & Tushman, 1990). In many cases, these technologies are introduced by new entrants to an industry, because these firms are unencumbered by the established practices and relationships with customers or suppliers that constrain incumbent firm's motivation to pursue radically different technologies (Christensen, 2003). Rothaermel and Hill (2005: 58) describe biotechnology as a competence-destroying technology because it represented a "'radically different scientific paradigm for discovering and 1 As Editor Kenney acknowledged, the industry is currently facing another disruption in the smartphone, which has the potential to completely eliminate the utility of the watch as a time device. 6
developing new drugs." Prior to its introduction, pharmaceutical firms used chemical screening to discover and produce drugs. However, biotechnology made it possible to achieve scale with these processes at significantly reduced costs. Competence-destroying technologies have also been introduced through partnerships between incumbents and new ventures (Anderson & Tushman, 1990; Rothaermel & Hill, 2005), but new ventures have remained important conduits in the process. New technological trajectories have changed products, firms and systems (Jenkins & Floyd, 2001). A product is comprised of components, which are a "physically distinct portion of the product that embodies a core design concept" (Henderson & Clark, 1990: 11). Examples of components in a product include the materials that are used to construct a product (Funk, 2008), and the competences that are required to utilize the resources in meaningful ways (Ehrnberg, 1995). Once a dominant design is established, components are often combined in unique ways into an architecture or system that links them together in a product. The products then stabilize, with little variation to the components or underlying concepts across models (Afuah & Utterback, 1997). Any changes to the component and system of a product necessitate changes to linkages that connect them (Henderson & Clark, 1990). The different materials used in the production of a given product also change the rate at which innovation occurs (Funk, 2008). Funk (2008) argued that different needs of customer markets change the product requirements and necessitate the use of different types of components to achieve those objectives. While changes in components initiate changes at the system and product levels (Bonaccorsi et al., 2005), creative destruction ultimately emerges when the system that connects the components are reconfigured to
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create new classes of products or new ways of doing existing tasks. Therefore, our theorizing conceptualizes creative destruction at the system level which opens new possibilities and ultimately drives changes at the product level, where new product classes are created and customers are affected. Moreover, as it is generally the emergence of a new product class that threatens incumbents through creative destruction (Christensen, 2003; Glasmeier, 1991), the focus here is on creative destruction that results in the substitution of an old product for a new class in an existing industry, or the creation of entirely new industries (Ehrnberg, 1995). 3. Regional Characteristics and Implications for Creative Destruction The regional characteristics that influence creative destruction largely depend on the characteristics of firms that operate within the region. Regional firms and their corresponding industries determine a region's technical capacity (Tallman et al., 2004). When high concentrations of firms from the same industry exist within a geographic region, the industry is considered clustered within the region. A geographic cluster is defined as the geographic concentration of a focal industry, its customers, suppliers and support agencies that support the industry (Porter, 1998). These regions have grown in prominence due to the innovative success of exemplars such as Silicon Valley in California, Route 128 in Boston and the Research Triangle connecting the Raleigh, Durham and Chapel Hill, NC areas. In fact, cluster regions are pervasive across the U.S and around the world (Bresnahan et al., 2001). Research shows that cluster firms have outperformed other firms (Klepper & Simons, 2000a), by introducing more novel (Audretsch, 1998) and new products to the market (Deeds et al., 1997). It has also shown that cluster firms tend to exhibit a
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commitment to advancing the technological frontier for their respective industries (Saxenian, 1990). However, once a region evolves into an established cluster for an industry, it develops resources that support the industry incumbents for the represented technologies. Cluster regions also host a large number of industry incumbents, who must ensure their innovations continue to meet the needs of existing constituents (St. John & Pouder, 2006). The level of resources committed to support a region's industry clusters has potential to limit the willingness of cluster actors to use fundamentally different resources for their technologies (Christensen, 2003). This effect may be particularly strong when the region has developed in prominence as a noted cluster for its industry. Thus, the higher innovative activity previously observed of firms in cluster regions (e.g. Deeds, et al., 1997; Gilbert et al., 2008), is potentially around innovations based on the paradigm that dominates the region, rather than for technologies that fundamentally change incumbent systems. Moreover, prior research theorizes (e.g. Pouder & St. John, 1996) or shows (e.g. Sull, 2001) that cluster regions are unlikely sources of new competence-destroying technological paradigms. New technologies are argued to emerge from beyond cluster boundaries because the formation of an industry cluster within a geographic region attracts the resources and technological competencies that support the industry's operations (Tallman et al., 2004). Regions also develop "regulations, infrastructure, user practices, [and] maintenance networks" to support the incumbent technology (Hodson & Marvin, 2010: 3), which can block entry of new paradigms. As the sites of unique technical, social, political and economic factors, regions can constrain firm motivation and ability to transition to new technological forms (Cowan, 1987; Hargadon & Douglas,
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2001). Despite these constraints, not all cluster regions have been limited in their ability to incubate creative destruction of incumbent paradigms. In fact, some have undertaken successful reinvention processes, which have enabled them to continue advancing the technological frontier in new ways (Saxenian, 1994), and yet it is unclear what distinguishes those cluster regions from others. To contribute to this understanding, the next sections make the connection between geography and innovation first by separating the industry cluster and innovation knowledge constructs in order to build understanding of their influence on competencedestroying creative destruction. Second, the sections review the social demography and political economy characteristics of the region, which are highlighted because of their influence on industry activity (Hagen, 1962; Storper & Walker, 1989), and their potential to discourage or promote the emergence of competence-destroying creative destruction. The overarching framework that is presented is depicted in Figure 1. ============== Insert Figure 1 About Here ============== 3.1 Regional Industry Clustering and Creative Destruction Industry clustering patterns vary widely by industry as well as region (Aharonson et al., 2008; Bell et al., 2009; Kenney & Patton, 2005), creating different regional capacities for creative destruction. Firms in these regions often establish an innovative milieu (Camagni, 1991; Maillat, 1991), which defines a collection of firms or the processes engaged for promoting innovation activities (St. John & Pouder, 2006). Jacobs and de Man (1996) identified six different dimensions that describe the possible
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organization of cluster regions and firms. These structural dimensions have great influence on the forms of innovation that occurs within regions. 3.2 Structural Dimensions of Clusters: Intra-Industry The horizontal dimension determines the extent to which a cluster is comprised of firms that compete directly in the same or related industries. In regions with horizontal firms, high levels of competition between firms necessitate innovativeness (Porter, 1998), and encourage exploration among firms as they work to outcompete their neighbors. In these regions, firms collocate near those that contribute positive externalities to the firms without creating competitiveness between them (Kalnins & Chung, 2004). For example, Kalnins and Chung (2004) found that independent hotels benefitted when they were situated in proximity to national hotel chains. Interestingly, when strong innovative milieus of competitors exist, some have found this characteristic to hinder the innovativeness of cluster firms (Ronde & Hussler, 2005). This observation suggests that firm rivalry within horizontal clusters is important for sustaining firm innovativeness (Malmberg & Power, 2005; Porter, 1998). Firms in horizontal clusters require strong differentiation along critical factors that matter to customers (Baum & Haveman, 1997), which can reinforce the need for firms in horizontal clusters to pursue continuous innovation at the component level to improve efficiency, but also at the system or product levels in order to diversify and sustain revenue streams (Prusa & Schmitz, 1994). Clusters with vertical dimensions have firms that occupy various positions within the industry value chain. For example, the automotive industry saw many parts and services suppliers emerge in the Detroit area to support auto manufacturer operations (Klepper, 2002). The connection between incumbents, suppliers, customers, and support
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agencies decreases motivation to transition to technologies of radically different forms (Christensen, 2003). Moreover, when incongruities between a supplier and buying firm's activities exist, they restrict the exchange of knowledge that flows between them, even in the business areas they share (Grant, 1996). In other words, a move away from shared business activities does not easily transfer knowledge between a supplier and buying firms. Therefore, in such regions, it is expected that incremental change will dominate. More radical changes that result in new classes of products, would largely occur through exogenous shocks to the industry and cluster. The cluster with a focal or dominant firm has a central entity (generally a firm but can also be a research center or educational institution) that shapes activity within the region. The software cluster in Seattle, WA, which formed around the Microsoft Corporation, is one example of a cluster region comprised of a focal or dominant firm (Gray et al., 1996; Markusen, 1996). The central entity attracts other firms to the region, but also connects the region to the innovation activities occurring in other locales (Gray et al., 1996). However, like a vertically integrated cluster, creative destruction may emerge more incrementally within a dominant firm cluster due to the connections between regional actors and the dominant firms that would be affected by radical changes in technology. Moreover, when firms or industries dominate a local economy, it can restrict that economy from including unrelated industrial firms (Chinitz, 1960; Gray et al., 1996), and constrain the diversity of knowledge within a region. As will be discussed in a subsequent section, this consequence affects the forms of innovation that emerge. These regions may also experience more innovation activity around improving efficiency and maintaining coordination between firms and suppliers (Grant, 1996), but to preserve
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existing relationships, their interconnectedness suggests that these changes will be incremental rather than radical in nature. 3.3 Structural Dimensions of Clusters: Inter-Industry The lateral dimension of a cluster captures the extent to which cluster firms share resources or capabilities with firms in other industries. For example, in the entertainment cluster in Los Angeles, firms benefit from an ample supply of musicians, actors, actresses, make-up artists, hair stylists, film directors, designers, photographers who live within the area, and either work their craft within their respective industry or work for other industry firms in the area (e.g. restaurants, salons, retail). Thus, in lateral clusters, firms in different industries make use of the same set of resources. Provided the resources in the area are munificent, the economies of scale benefit that derives from sharing resources across industries has potential to hinder an incumbent's willingness to migrate to different resources or capabilities, as such a change could drastically increase the costs incurred to acquire resources that are not available within the region. A strong lateral component to a cluster has potential to constrain the willingness of firms to adapt to new resources or capabilities. However, if the sharing of resources creates conditions of scarcity, the availability of resources to regional firms becomes limited (Audia & Rider, 2010), which may necessitate search behaviors to identify new resources that minimize dependence on those shared within the region. Therefore, when resource scarcity exists, regions that are moderately strong on the lateral dimension are expected to foster creative destruction at the component level, which overtime should also result in creative destruction at the system and eventually product levels to reduce dependence on scare resources. However, when resources are munificent, firms in
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regions with lateral characteristics are expected to have fewer incentives for radical innovations. A cluster's technological dimension reflects the extent to which firms are connected not by resources but by a core technology. For example, biotechnology clusters can be comprised of firms in pharmaceutical, analytical instrumentation or even agriculture as these industries represent a few of the many that rely on this important technology (St. John & Pouder, 2006). The linking of several unrelated industries by a core technology positions the firms promoting the technology as "technology brokers" and enables them to leverage knowledge of the solutions that are applied in one industry to the problems that affect another (Hargadon, 2003; Hargadon & Sutton, 1997). Andac (2009) argues that a high number of industries that leverage the same technology increases the breadth of knowledge within a cluster region and the opportunity for interfirm knowledge exchange, which ultimately increases a cluster's capacity for new innovations. This unique positioning can birth entirely new systems and facilitate the process of re-invention for industries and regions (St. John & Pouder, 2006). Therefore, cluster regions that are high on the technological dimension are expected to be unique sources of creative destruction at the component, product or system levels. 3.4 Structural Dimensions of Clusters: Firm Innovative Milieu The final dimension that Jacobs and de Man (1996) acknowledged is the quality of the network, which captures the inter-firm cooperation that exists between regional firms. Networks promote the transfer and exchange of knowledge and ideas between partners (Gulati, 1998). When networks are regionally based they facilitate the exchange even of tacit knowledge, which is generally difficult to transfer across geographic
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boundaries (Grant, 1996; Pavitt, 1987). Regional networks can also create strong ties between network actors that encourage cooperation and constrain opportunistic behaviors (Granovetter, 1973). However, strong ties can also suppress a firm's access to, its understanding of, and response to new knowledge. Therefore, while some network cohesion is important to achieve firm objectives, too much cohesion limits the novelty of information a firm receives and decreases its ability to pursue entrepreneurial opportunities (Yu et al., 2011). Strong networks may help firms improve existing technologies, but may not empower them to introduce radically new technologies. The potential for knowledge to be influenced by the industry concentration and networks in a region necessitates in-depth analysis of the role of regional knowledge in the creative destruction process. 4. Regional Knowledge and Creative Destruction The regional knowledge that accumulates to support industry cluster activity has the potential to create a shared mindset, sometimes referred to as a regional identity or macroculture, which is the extent to which firms "share understandings about the key features of industrial activity in a region (Romanelli & Khessina, 2005:347). As Bathelt, Malmberg and Maskell (2004: 37) expressed, "[t]he shared knowledge basis enables cluster firms to continuously combine and re-combine similar and non-similar resources to produce new knowledge and innovation....and results in the development of localized capabilities." In other words, firms within cluster regions build their competencies around the knowledge that is available within the region, but not necessarily being developed elsewhere. For example, in discussing the demise of the Akron tire cluster, Sull (2001) suggested that because the Akron firms shared technological ideologies, they were
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blindsided when Michelin, a French competitor, introduced a tire technology that differed dramatically from that used in the Akron cluster. There is strong potential for industry clustering to "lock-in" its firms to a given technological path (Grabher, 1993), or create path-dependence (Bell et al., 2009), which in turn can lead them to resist if not outright reject the new knowledge that would foster radically different technologies. Moreover, regional identities can slow firm technological development because in the same manner that firms develop specialized resources and routines in the construction of architectural knowledge (Abernathy & Clark, 1985), regions develop a variety of specialized resources and service providers to support regional firm technologies (Porter, 1998). The stronger an industry's concentration in a focal region, the more important it is to the local economy and the more difficult it becomes to initiate changes that creatively destroy regional competences and capabilities (Romanelli & Khessina, 2005). The accumulated regional knowledge with respect to the dominant technological paradigm increases the difficulties in changing those paradigms due to the impact those changes may have on other actors in the system (Spender, 1996). Therefore, in addition to the six aforementioned structural dimensions, if a region will host firms that generate competence-destroying technologies, the region must hold knowledge creating entities with the potential to change - even destroy - the value proposition of incumbent technologies (Daneels, 2004). New knowledge is often commercialized through startups, which are commonly either spinouts from other companies (Audretsch & Keilbach, 2007) that serve as important suppliers of potential new entrants (Buenstorf & Klepper, 2005), or the result of researchers/inventors leveraging idiosyncratic resources that combine scientific knowledge into new
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formulations (St. John & Pouder, 2006). For example, Intel's Ted Hoff recognized the inefficiencies associated with using individual chips for logic functions on calculators, and was motivated to create a single chip to perform multiple functions, which resulted in the creation of the microprocessor industry (Wade, 1996). In their research on the innovative product design firm, IDEO, Hargadon and Sutton (1997) showed that technological solutions can be taken from one industry and used to create innovations that solve problems in other industries. In fact, Gelijns and Rosenberg (1999) noted that several of the five medical device technologies in their study were designed using knowledge from outside of the medical field. Similarly, Klepper and Simons (2000b) found that radio firms were often new entrants into the emergent television industry, because the competencies utilized for radio production were comparable to the competencies required for television production. Inter-industry knowledge has been an important catalyst for creative destruction in a focal industry, and especially for industries that rely on complex subsystems (Bergek et al., 2008), because it generally brings new insights with respect to how other industries resolve similar problems. Knowledge is foundational to the competitive advantage of a firm (Grant, 1996; Spender, 1996), and a primary reason why lateral and technological dimensions of clusters are important for creative destruction. Therefore, the strength of knowledgecreators within a region and their commitments to R&D, can contribute to competencedestroying knowledge for a given industry by applying their insights to industries that face the same problem. Consequently, a region's knowledge production capacity has important implications for whether creative destruction will emerge.
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4.1 Regional Knowledge Production and Creative Destruction R&D intensive industries, universities and federal labs are critically important actors with the potential to develop knowledge that creatively destroys an industry's technology paradigm (Basalla, 1988). A university's emphasis on basic research commonly results in substantial knowledge creation and dissemination that can lead to startup activity within a region (Zucker et al., 1998). The basic research activities in which university scientists engage often apply principles from science without connections to or constraints from incumbent industry paradigms. Moreover, university scientists are in fact empowered to "change the nature of the problem they pursue, the material technology employed, and/or the heuristics used to approach the problem (Nicholls-Nixon, 1995:5). The freedom afforded to scientists and government agencies to conduct research without constraint can foster a myriad of approaches that are used to solve existing problems (Lynn et al., 1996). Consequently, university scientists generate and apply knowledge to increase understanding of processes rather than to improve technological applications (Dosi, 1988; Rafferty, 2008), and are often the sources behind changes in technological paradigms (Nicholls-Nixon, 2005). In fact, Aharonson et al. (2008:1123) found that while the most inventive biotechnology cluster regions in Vancouver varied in characteristics, the distinctive advantage of inventive neighborhoods over uninventive neighborhoods was a composition: "comprised of younger firms, a larger proportion of university spin-offs, [and] more likely to contain a university..." Ronde and Hussler (2005) similarly corroborated the importance of universities for regional innovation. Universities are also important developers of the human capital that will possess the skillset needed to develop
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an emerging industry (Bramwell & Wolfe, 2008). Therefore, the strength of the underlying research base in a region is an important influence on the innovations that emerge from within it (Kenney & Patton, 2005; Ronde & Hussler, 2005), which makes a strong research university or other organization that provides research as a public good, an important source of knowledge production with the potential to generate competencedestroying creative destruction. Further, Ronde and Hussler (2005) showed that when neighboring industries interact with universities, it has strong potential to increase innovative output even for unrelated industries. Thus, the cross-pollination of innovations from related or complementary industries can be important for advancing creative destruction in other industries (Bergek et al., 2008). The industry composition in the region can influence the knowledge that is created, and enable a firm's innovative milieu to tap into other industries. Taken together, these arguments suggest that creative destruction occurs when firm innovative milieus are influenced by other industries. Collocation increases the potential for new knowledge to flow between unrelated firms and provide insights into other industry's solutions for given problems (Hargadon & Sutton, 1997). Some have also found that firms in different geographic regions often combined efforts to generate breakthrough technologies (Phene et al., 2006). Therefore, broadening the innovative milieu to be inclusive of firms in other industries and regions creates opportunities for knowledge collaborations with the potential to lead to competence-destroying creative destruction (Jacos & de Man, 1996). For example, as automotive manufacturers have worked to electrify the vehicle using fuel cell technology, which would essentially displace the gasoline-based fuel
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system in vehicles, they have established collaborations with different types of companies (Solomon & Banerjee, 2006). Detroit-based General Motors (GM) collaborated with Freeport, TX based Dow Chemical Company on the development of their fuel cell vehicle. Detroit-based Ford Motor Company, on the other hand, collaborated with Canadian-based fuel cell manufacturer, Ballard. Inter-industry and inter-region relationships yield new knowledge, which can be particularly important for enhancing the competitive advantage of cluster firms (Andac, 2009; Giuliani & Bell, 2005). In fact, Malmberg and Power (2005) argued that inter-regional knowledge may even be more important than intra-cluster knowledge. Therefore, the extent to which regional firms are part of innovative milieu that include firms in other industries and also other regions, determines the extent to which the region has the potential to incubate creative destruction. 5. Regional Social Demography and Creative Destruction Regional demand influences the industries that form to address the needs of local constituents. Characteristics of the local market influence the technologies that are determined best suited for meeting the needs of the market, and strongly influence the forms of technologies that emerge (Bresnahan & Malerba, 1999; Langlois & Steinmueller, 1999; Mazzoleni, 1999). For example, Basalla (1988) argued that one reason why the gasoline car thrived in the Midwest was the rural nature of the area combined with the need for people to navigate it more efficiently, made transportation technology more feasible in the Midwest than on the East coast where the region was smaller and more easily navigated. Mowery and Nelson (1999) concluded that the demand profile for an industry influences its evolution. Therefore, as regions change in
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demography, change simultaneously occurs in the social core of the region and generates new forms of demand (Hagen, 1962). Consequently, the success of innovations will differ depending on the demography of regions where they are introduced, and the more dynamic a region's social changes, the greater the potential for new technologies to emerge to satisfy the demand. The influx of residents into a given region creates dynamism within the population as new residents bring new resources, competences, characteristics and demand characteristics. In fact, (Kerr, 2009) shows that breakthrough innovations are often associated with and emerge from regions where immigrants have migrated. Regions also differ in size, therefore, new technologies may thrive in local markets where they meet the needs of a changing populace and where they can more easily obtain the support of local stakeholders (Basalla, 1988). Knowledge-producing firms with sensitivity to local market needs have the potential to create technologies that sufficiently serve the local market (Storper & Walker, 1989). Because competence-destroying technologies often require behavioral changes (Walsh et al., 2002), regions with greater social needs and more rapid and dynamic demographic changes, should show strong capacity to yield creative destruction. New technologies also require the support of social and organizational processes (Tushman & Rosenkopf, 1992; Wade, 1996). Because competence-destroying technologies draw on fundamentally new resources, skills and competencies (Anderson & Tushman, 1990), they necessitate the formation of an industry to support the development and growth of the technology (Lange et al., 2009). Moreover, as new innovations must often cross professional and organizational boundaries before they will
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achieve adoption in the market (Ferlie et al., 2005), a geographic cluster can be important for fostering this process for emerging technologies. Clusters are important collectives of social norms between regional actors (Maskell, 2001). In fact, Malmberg and Power (2005: 425) concluded that the strength of industry clusters is not in their identity as "localized systems of interrelated firms bound together..." but rather as "sites of informal social interaction and as arenas for flexible and well-functioning markets for specialized and skilled labor." Therefore, if creative destruction will emerge from a region it is important that a cluster forms around the new technological paradigm to support its emergence (Lawton-Smith, 2003). Geographic proximity also facilitates the knowledge transfer process (Audretsch & Feldman, 1996; Jaffe et al., 1993), by providing the setting in which knowledge moves between regional actors and through which entrepreneurs gain insights about how technologies and systems work (Almeida & Kogut, 1999; Tallman et al., 2004). Further, it establishes the nearest institutional boundaries that firms and stakeholders uphold (Hargadon & Douglas, 2001). Therefore, a given technology may achieve more rapid widespread adoption if it emerges from a region where an industry cluster is poised to form around it. The regions where actors are positioned to enact the social structures and norms that a new industry requires will effectively permit technologies that drive creative destruction to emerge. 6. Regional Political Economy and Creative Destruction A region's social demography influences the policies that affect its constituents (Gelijns & Rosenberg, 1999). Policy exists to protect current economic interests, generate societal benefits and enhance conditions for all (Collantes, 2008), but also often supports
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a given organizational form (Sine et al., 2005). Sometimes policy creates the environment that drives demand for new technologies (Langlois & Steinmueller, 1989). However, in other cases, existing policy has suppressed the ability for creative destruction to emerge (Hargadon & Douglas, 2001). In fact, Nemet (2009) showed that the presence of demandpull policies rather than technology push policies may have hindered efforts to bring wind technology into the marketplace. Unless existing policies are altered to allow a technology to emerge in the market, technologies can be kept out of the market. A favorable regulatory environment has allowed many technologies to flourish in the U.S. that would not have flourished elsewhere due to political structures (Gelijns & Rosenberg, 1999; Henderson et al., 1999). In fact, the government has enacted policies that encourage creative destruction (Gilbert et al, 2004; McGrath, 1998; Nemet, 2009) and supported the research from which it emerged (Hall & Kerr, 2003). Historically, such exogenous political pressures have driven technological development in several industries (Basalla, 1998). For example, the state of California is attributed with initiating legislation that sparked the current push for "zero-emission" non-gasoline based vehicles (McGrath, 1998), which provided significant momentum to the eco-friendly vehicle movement. Policies that open regions to become "test beds" for new technologies has potential to become significant stimuli for the emergence of creative destruction within regions, as it has done for industries as diverse as biotechnology (Henderson et al., 1999), computers (Bresnahan & Malerba, 1999), medical devices (Gelijns & Rosenberg, 1999), and software (Mowery, 1999). Emergent technologies often necessitate changes to the existing infrastructure to permit the new technology to compete against incumbents (Aldrich, 1999). The extent to
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which the incumbent system is embedded within the local economy, and supported with policies, subsidies or incentives will determine whether a region's political economy will permit competence-destroying technologies to emerge. The strength of incumbent technologies in a local economy can render emergent technologies uncompetitive on costs. The risks inherent in new technologies and an emergent sector necessitate institutional changes that influence "the costs, benefits, and risks associated with such activity," in order to encourage pioneers of new technologies to bring those technologies to market (Sine et al., 2005: 206). The costs for introducing technologies that bring competence-destroying creative destruction are generally higher than the costs involved in introducing competenceenhancing technologies (McGrath, 1998). Market disruption is predicated on achieving high volume, which generally demands that a low price is achieved (Adner & Zemsky, 2005). Therefore, for entrepreneurs to bring to market technologies that disrupt the demand for incumbent technologies, there must be favorable economics behind their chosen technology (Sine et al, 2005). Without favorable economics, competencedestroying technologies are not only unattractive to the technology’s potential buyers, but also to the prospective entrepreneurs (Adner, 2002; Vasudeva, 2009). Consequently, competence-destroying technologies require entrepreneurs to lobby against policies that favor the economic interests of powerful incumbents (Spath & Rohracher, 2010), and advocate for incentives that reduce the disproportionately high costs of competencedestroying technologies relative to competence-enhancing and other incremental technology advancements. Policies in the forms of codes, standards and regulations provide the legitimacy that tells firms and stakeholders it is acceptable to engage with an
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emergent technology (Aldrich, 1999), while the availability of incentives increases overall motivation to do so (Sine et al. 2007). Therefore, the political economy within a region influences the emergence of creative destruction by structuring the policies and interventions that address the needs of local market (Bresnahan & Malerba, 1999). 7. Advancing Creative Destruction As industries, cities, regions and nations require economic stability and profitability, transitions to new technological paradigms may soon be required. This research, sought to illuminate the geographic conditions that constrain or foster the emergence of new paradigms in the form of competence-destroying creative destruction. The conclusions drawn in this study yield important insights for academics, entrepreneurs and policy makers concerned with matters of technological, regional and national competitiveness. 7.1 Advancing Academic Research on Creative Destruction This theoretical framework highlights the underlying structural dimensions (clustering, regional knowledge), social demography and political economy factors that influence the emergence of creative destruction within regions. It discusses how a region’s horizontal, technological, vertical, lateral, focal firm and network dimensions encourage or suppress creative destruction. The arguments call for research that examines the structural dimensions of regions in terms of the industry concentration that exists, the knowledge-producing entities in a region, and the interactions of these factors with a region’s social demography and political economy. With specific attention given to the mechanisms through which these factors interact to permit or constrain creative destruction, future research would enhance our ability to provide important insights to
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both practice and the scholastic field. Figure 1 shows the expectation that it is the overlap of characteristics in each of the areas that drives the emergence of creative destruction. However, it is possible that creative destruction emerges from varying combinations of structural with either social or political characteristics. Future research that examines these possible configurations would provide great insights to the field. An interesting starting point for this research may be to examine regions that have or are currently undergoing transformation so as to understand the forces that are permitting creative destruction to occur. In general, continued research on clusters at the beginning stages of an industry cluster would not only enhance understanding of the social, political and economic factors in place that drove creation and stabilization of the cluster, but will also enhance understanding of the paths through which the underlying cluster dimensions form. Taken together, these factors suggest there are multiple perspectives that must be considered when pursuing understanding of the emergence of creative destruction, and calls for research along the lines of Jenkins and Floyd (2001) who studied the effects of technological trajectories at multiple levels. With a large number of regions that would benefit from strengthened economic competitiveness, deeper understanding of the characteristics that hinder or promote creative destruction of ineffective paradigms is an area that is especially prime for research. There is also a need for research that isolates the levels at which the predicted effects emerge or dissipate. Multi-level or regional configuration approaches to the study of creative destruction would enhance understanding of how industries or regions transition to new paradigms (Genus & Coles, 2008). The study of the geographic origins
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of creative destruction may also benefit from historical analyses that track the geographic origins of specific technologies that brought creative destruction to markets. 7.2 Advancing Policy for Creative Destruction The industrial fiber of a region is important for the economic vitality of residents and the overall region. Some industry concentration within regions is inevitable, however, the concentration that ultimately benefits a region is one that diversifies the region along horizontal, vertical, lateral and technological dimensions. Achieving diversity along these dimensions necessitates strong understanding of the industry activity within the region, the progress and setbacks being experienced, and how each industry affects the region in the present, intermediate and long term. This form of monitoring may require regional industry "brokers" who scan the environment to make connections between what is happening to regional firms and regional growth. Through aggressive monitoring of regional industry dynamism, policy officials can manage industry activity and potentially identify early clusters that are emerging within the region (St. John & Pouder, 2006). Early identification provides time to determine the level of institutional support that an emerging industry will require. This strategy would enable regional officials to begin building the knowledge base needed and also to identify and transplant individuals who can assist with the development of new emerging paradigms. This tactic has proven significant to the development of clusters in other nations (Bresnahan et al., 2001). 8. Conclusion Creative destruction is an important force that changes the industrial landscape, and is perhaps critical for reshaping regional and national competitiveness. Understanding from where creative destruction emerges is an important step towards
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explicating the potential geographic sources of new technologies. Using this framework, entrepreneurs can identify the attributes of locations in which to incubate creative destruction. Likewise, policy officials can use the framework to estimate their region's capacity for creative destruction. Industry incumbents can use it to identify potential regions where competing technologies may be likely to emerge. With this knowledge, industry incumbents would know where they should look to broaden their innovative milieu to be inclusive of firms or knowledge producers in regions where new knowledge paradigms are emerging. Broadening their reach could ensure that firms, industries and regions remain well positioned for competitiveness into the future. Acknowledgements This research was sponsored in part by a grant from the Ewing Marion Kauffman Foundation. The author gratefully acknowledges helpful comments from Editor Kenney, two anonymous reviewers and the participants in the EGOS 25th Symposium, but assumes full responsibility for any errors in the ideas presented in this manuscript.
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1 2
FIGURE 1 - REGIONAL INFLUENCES ON CREATIVE DESTRUCTION
CONDITIONS FOR CREATIVE DESTRUCTION
STRUCTURAL Industry Clustering Intra-Industry Clustering Inter-Industry Clustering Firm Innovative Milieu Knowledge Production
SOCIAL Demand Demography Ability to Cluster
POLITICAL Policy Economics
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