Symposium 2001 “The University in the New Corporate World” Wednesday, July 18th, Adelaide
Universities and Collaboration within Complex, Uncertain Knowledge-Based Economies James Juniper Lecturer Division of Business and Enterprise University of South Australia
Contact author for all inquiries Phone: 8302 0743 (International +61 8302 0743) Facsimile: +61 (0)8 8302 0512 E-mail:
[email protected]
Keywords: Uncertainty, Innovation, Technology Diffusion, Virtual University, Evolutionary Economics, Transaction Cost Theory, New Growth Theory, Regional Competencies, Clusters.
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Abstract
I suggest that outstanding scholarship, within the university sector, will continue to rely on smooth integration between teaching, industry collaboration and research. As such, I question the likelihood of a wholesale change in the nature of the University due to the well-known pressures emanating from innovations in the information and communications technology sector. In the critical accounting literature, research into the implications for accounting practice of market and technology uncertainty is increasingly prominent. One effect of this uncertainty is to draw marketing and innovation activities together more closely, in a strictly spatial sense. To identify this and other sources of “proximity effects” in the innovation process, I examine three contrasting theoretical perspectives: evolutionary economics, the new growth theory and transaction cost theory. In addition, I review Keynesian perspectives on uncertainty and innovation and draw on two Marshallian notions: on one hand, the significance of economies that are external to the firm but internal to the industry; and on the other hand, the importance of the industrial milieu in reducing uncertainty. At the same time, I demonstrate that all of the above schools of thought describe powerful transformative forces that are working to promote cluster formation, networking and inter-firm collaboration. I link findings in this literature to my arguments about the future of university, arguing that university research and industrial collaboration will inevitably continue to exhibit a strong regional and site-specific dependency.
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Contents 1.0 Introduction: ____________________________________________________________ 1 2.0 Three Economic Models of Knowledge Production _____________________________ 5 2.1 Romer’s Version of the New Growth Theory __________________________________ 5 2.2 Evolutionary economics __________________________________________________ 6 2.3 Transactions Cost Theory _________________________________________________ 7 3.0 Keynesian Perspectives on Uncertainty and Innovation _________________________ 7 3.1. Keynesian versus Austrian notions of Uncertainty and the Role of the Market ________ 8 3.2 Effective Demand and Innovation __________________________________________ 10 4.0 Regional competencies ___________________________________________________ 11 4.1 From core- to regional-competencies _______________________________________ 11 4.2 A Regional Extension of Coasian Theory ____________________________________ 11 4.3 The Notion of Industrial Districts __________________________________________ 12 5.0 Uncertainty and Other Sources of Proximity Effects___________________________ 13 6.0 Conclusion: Implications for the Virtual University ___________________________ 14 6.1 Implications of the Overlap between Evolutionary Economic notions and New Growth Theory __________________________________________________________________ 15 6.2 Implications of the Overlap between New Growth Theory and Transactions cost theory15 6.3 Implications of the Overlap between Evolutionary Economics and Transaction cost theory ___________________________________________________________________ 15 Bibliography_______________________________________________________________ 17
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1.0 Introduction Information and communication technologies have compressed space and time giving the appearance of the potential to free industrial activity from geographical constraints. At the same time, these technologies afford the opportunity for an unparalleled increase in the sharing, diffusion and transfer of information and knowledge across enterprise, regional and national boundaries. In the managerial and business literature there is much talk about the “cobweb” or network firm and the creation of “virtual communities”. The same jargon is increasingly directed at universities. The prospects for the creation of a “virtual university”, largely detached from material and spatial constraints—other than the need for a well-serviced website—is no longer a mere fantasy. In fact, successful models for this kind of teaching institution already exist. However, most academics and university managers would acknowledge the importance of an effective integration between the various activities of teaching, consulting and collaborative research—the latter increasingly conducted with industry partners. In Business Studies, the Harvard case-study approach springs to mind. In this model, one adopted in many MBA-style programmes, case studies derived from contract research and consulting are written-up in leading international journals and subsequently incorporated into course content and teaching materials1. Rather than focus solely on teaching practices considered in isolation from these industry-related activities, I have chosen to highlight this process of collaborative research and consulting between universities and industry. My conjectures are necessarily abstract and speculative, but I hope, no less informative for the reader. Despite all the rhetoric about virtual firms, the most rigorous empirical analysis of patenting data and business expenditure on research and development within advanced industrial economies leads to very different conclusions about the nature of technology transfer and diffusion (Pavitt and Patel,1998; Patel and Varga, 1997). According to this evidence, trajectories of diffusion are increasingly circumscribed and spatially confined and technology transfer, to the extent that it does occur, is often very costly both for recipient firms and for nations as a whole. In fact, knowledge-based industries, defined in accordance with the intensity of R&D activity relative to turnover, are highly clustered in geographical terms and both the magnitude and quality of R&D expenditure can vary dramatically from one nation to the next. Drawing together the literature on knowledge-management with new research on corporate strategy within transnational corporations (TNC’s), Zanfei (2000) has questioned the conventional model of centralised development under which core innovations by the parent company are then exported to subsidiaries. Instead, he identifies a strong complementarity between internal organisational networks and externally located knowledge-networks. Within the former network, TNCs manage an increasingly large pool of generic know-how that would be difficult to commercialise without timely access to the more contextualized and commercially-attuned knowledgebase available in the external network. In his paper, Zanfei examines the two-way process involving decontextualization of local knowledge and transfer across national boundaries 1 The paradigm example of this kind of collaborative research is that conducted by Kaplan and Norton (1992) on the balanced-score card.
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and contextualization and local exploitation of generic knowledge. Shared organisational values support the first process while the relatively autonomous differentiation of formal structures to fit local contexts facilitates the second process. At first sight, these two strands of research seem to approach the issue of technology transfer within TNCs from opposite directions—one optimistic and the other increasingly pessimistic. However, our paper provides a synthesis of both positions, arguing that for one the “glass is half full”, while for the other “the glass is half empty”! The same characteristics that explain “proximity effects” (Pavitt and Steinmüller, 1999)—the importance of tacit skills, learning-by interaction, the social embeddedness of technology, uncertainty associated with linking market and technology opportunities together, and limits to outsourcing of R&D—also explain how TNCs can better exploit complementarity between internal and external networks. In this paper I examine three contrasting perspectives on the process of innovation to provide some insight into what is revealed by this empirical evidence before looking at its implications for tertiary institutions. While fairly well known to economists of various persuasions, some of this theoretical material is less known to generalist academics, management accountants or accounting practitioners. I shall therefore begin by reviewing relevant aspects of the new growth theory, evolutionary economic theory, (and its derivatives: resource-based value theory, core-competency-theory), and transaction cost theory to more precisely analyze the different forms of cooperation and rivalry that arise in the exchange of know-how. For reasons that will become obvious, I shall also review debates between Keynesian and neo-Austrian economists about the nature of uncertainty and the associated role of the market. In common with much of the extant economics literature I emphasize the importance of market and technology uncertainty, tacit skills, increasing returns, forms of interactive, collective learning that operate across firm boundaries, the role of learning-to-learn economies, the social and organizational embeddedness of technology, and the changing nature of innovation and product development within the modern enterprise. I also make use of two Marshallian notions: first, the significance of economies that are external to the individual firm but internal to the industry, region or network; and second, the importance of the industrial milieu in reducing economic uncertainty. The notion of uncertainty has also come to the fore in recent articles on aspects of management accounting. I have chosen three recent and representative studies to emphasize the diversity of research in this vein. Frank Hartmann (2000), one of the contributors to the literature on Reliance on Accounting Measures of Performance (RAPM) focuses on uncertainty in a contingency theory context. While noting (p. 469) that weaknesses in statistical methodology can, to some extent, be overcome through improved sampling techniques and controlled replication, Hartmann draws on Chapman’s (1997) notion of organizational uncertainty to investigate the feasibility of accounting performance measures (AMPs). Chapman, in turn, utilizes Galbraith’s (1973, 1977) definition of uncertainty as an information deficit (the amount of information needed to perform a task relative to the amount of information possessed). Hartmann (p. 470)
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succinctly reviews early contributions to contingency theory that examine the fit between organizational characteristics (the variety and routine nature of task technology) and the environment (in terms of its dynamism, heterogeneity, predictability, complexity and variability). He argues that over the 60s and 70s, uncertainty was always a core concept in both theoretical work and empirical studies. Furthermore, Hartmann contends that that in many of the RAPM studies over the 1980s, uncertainty was still seen to be an important, though often, implicit factor influencing the attitudes of subordinates in regard to the apparent controllability, completeness of information, and the relevance of performance measures. Nevertheless, many empirical studies fail to establish a negative relationship between uncertainty and the appropriateness of RAPM: a finding that Hartmann (p. 472) labels the “uncertainty paradox”. When they are most needed, and most utilized—in conditions of extreme complexity and interdependence—formal organizational controls apparently suffer from the greatest of limitations. Hartmann concludes his review of the RAPM literature by recommending that future research actively embrace the implications of this uncertainty paradox. In particular, researchers should recognize that accounting systems that provide simple monitoring, diagnostic and recording functions in low-uncertainty environments, can perform interactive problemsolving and learning functions in high-uncertainty environments. In the latter case, Hartmann (p. 474) suggests that one of the great advantages in using APMs may be the setting of relatively clear and specific goals and objectives. In addition, Hartmann (pp. 474-477) argues that more research should be conducted into: the way that the perceived “fairness” and “equity” of performance evaluations affects levels of trust in organizations; the contextual appropriateness of supervisor choice of performance measures; the effects on RAPMs of different types of uncertainty or complexity; the attitudes of subordinate managers towards uncertainty; and the usefulness of having multiple performance indicators (both financial and non-financial). In a similar vein, Tony Davila’s (2000) contingency-based study of management control systems uses Galbraith’s (1973) notion of uncertainty as a latent variable to explore the link between project uncertainty, product strategy and management control systems (both financial and non-financial). Davila (p. 384) deliberately focuses on the product development project as the unit of analysis, rather than the R&D project, to reduce heterogeneity. Davila seems to have embraced a research strategy closely allied to that proposed by Hartmann (2000). He assesses the management control system design in relation to the frequency of updating of information (relating to customers, product design, product schedules, product cost, product resources, and profitability); the detail of information; and the use to which the information is put. Variables of interest appearing in Davila’s analysis of project characteristics include: product strategy (the importance of cost to the product’s success, the importance of project timeliness, customer demand for functionality); project uncertainty (technology uncertainty, market uncertainty, the percentage of new parts, the number of people involved in the project); organizational structure (the level of cross-functional integration, the hierarchical level of the project manager’s supervisor, and the project manager’s authority over marketing decisions). In a marked departure from more conventional studies, his research emphasizes uncertainty reduction and clan control, rather than the minimization of goal divergence. He finds that project managers rely more heavily on non-financial rather than financial performance
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measures, and uncertainty and product strategy are closely related to the design and use of management control systems. While cost and design information appears to exert a positive influence over self-reported levels of performance, Davila notes that time information seems to hinder performance. Finally, although the adoption of detailed project objectives enhances overall performance, Davila acknowledges that the actual planning of the product development process is poorly understood. Rather than examining RAPM or project management control systems Tom Mouck (2000) focuses on capital budgeting theory (CBT). He questions the relevance of algorithmic approaches to capital budgeting in a world better described using models drawn from complex, adaptive systems theory where innovation is an emergent interactive process in which the very identities of agents, the characteristics of technology artifacts and possibilities for action are in a state of constant flux. He suggests, in particular, that knowledge-based sectors produce outcomes that are too unpredictable to be captured by traditional capital budgeting techniques. Mouck (pp. 263-266) points to the literature on real options theory (Buckley, 1996, Chapter 3), value-chain analysis (Shank and Govindarajan, 1992), theories of competitive advantage (Porter, 1985), Japanese systems of target costing and value engineering (Kato, 1993), and the emerging research on “capabilities-based competition” (Stalk, Evans and Shulman, 1992) as an alternative to traditional project evaluation. He concludes (Mouck, 2000, p. 281) his study by acknowledging a role for DCF and NPV techniques within relatively stable environments recommending that, in more complex environments, they be embedded within richer forms of value-chain or real-options-based strategic analysis. In this paper I suggest that what seems to be increasingly true for knowledge-based private-sector organizations is no less true for the University. In particular, I draw on evolutionary economic research that interrogates the regional dimension of transaction costs and core-competencies. This material provides the grounds for questioning the notion that universities are likely to become mere centers for course development, contract brokerage and the primarily distant delivery of teaching and learning. In Section 2, I introduce three different frameworks for thinking about regional economic development and collaboration: the new growth theory, transaction cost theory, and evolutionary economics. I examine Keynesian notions of uncertainty and the link between effective demand and innovation in Section 3. In Section 4 I review the literature on regional competencies, industrial districts. I investigate sources of costly and localized technology diffusion in Section 5, drawing on research by members of the influential Science Policy Research Unit at Sussex University. I reach conclusions about the likely characteristics of the collaborative university in section 6, focusing on contributions from each of the strands of theory that I have reviewed in the paper.
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2.0 Three Economic Models of Knowledge Production At the heart of my investigation into the collaborative university is the notion that at least three rival approaches can be taken to the analysis of technology and innovation: technology as a blueprint, as a mechanism for safeguarding transactions against guileful opportunism in the presence of asymmetric information and incomplete markets, and as a set of routines. 2.1 Romer’s Version of the New Growth Theory Conventional neoclassical economics conceives of technology as a formal relationship between inputs of factors or resources and the maximum achievable outputs. In the New Growth Theory literature, this conception is enriched by the notion that diminishing marginal returns to physical capital can be avoided if additions to the stock of plant, equipment, and buildings are supplemented by complementary investments in human capital, public infrastructure, R&D or, as in some classes of model, by expanding the diversity of available intermediate inputs2. New Growth theorists argue that transactions in the various forms of capital are typically characterized by market failure in the form of public good effects, externalities, imperfect competition and missing markets. The presence of market failure implies that better economic outcomes can be achieved through some form of optimal social planning than through the operation of market forces, alone. Paul Romer views technology as a “blueprint” in the sense of a detailed record of operating procedures, plans, sequences of construction, processes of service delivery, and methods of assembly that can either come from the careful examination of existing artifacts (i.e. via inverse engineering), or extricated from the study of patents and other documentation. Clearly, externalities and public good effects associated, respectively, with the non-rivalry and non-excludability characteristics and spillover benefits can be seen as associated with the information contained in technology “blueprints”. In other words, free riders or agents who have not directly participated in relevant contractual relationships with the providers of specific goods and services can nevertheless gain advantage from access to these “blueprints”. Evolutionary theorists complain that the market failure approach to innovation explains too little with too much (Metcalfe, 1995). According to this argument innovation is intrrinsically a form of information asymmetry, intrrinsically a type of missing market, and intrrinsically a kind of incomplete or imperfect market. However, in Romer’s early work there is no recognition of any regional factors that may operate as a basis for competitive advantage. For such insights we would have to turn to the specialized New Growth Theory Literature (Matsuyama, 1991, 1995) that investigates regional agglomeration effects and regional sources of cumulative causation. Matsuyama’s models are predicated on exploiting the trade-off between economies of diversity and specialization and economies of scale in the production of intermediate 2
In technical terms, once other complementary forms of capital are taken into account, the conventional Inada conditions that determine the concavity of the function relating output to capital intensity (the ratio of physical capital to labour) are violated,
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inputs and components. Through the regional pooling of resources, a rudimentary process of “cumulative causation” can be initiated whereby gains from regional economies of scale, in turn, lower the start-up costs for firms wanting to invest in specialized capacity. 2.2 Evolutionary economics Evolutionary economists design policy instruments to influence patterns of national and regional innovation. Their theoretical framework builds on the work of Joseph Schumpeter and adopts a threefold conceptual model based on the notion, also found in biological theories of evolution, that mechanisms generating variety, processes of selection, and mechanisms of inheritance are the essential determinants of economic evolution. However, the target of the evolutionary process, rather than being genetic material, is the set of routines governing social praxis, cognition and organizational genesis. As such, these routines extend beyond standard operating procedures to include procedures governing accumulation, search, communication, and even “rules of game” and social convention. Nevertheless, economic evolution is seen to depart from its biological counterpart in other fundamental ways. For one thing, hybrid offspring can be remarkably productive and creative rather than sterile; for another, mechanisms of selection or those responsible for generating variety are never simply random in nature, but are imbued with forethought and intentionality. Feedback also occurs between the internal and external environment and between selection and variety generating mechanisms. Theoretical emphasis is placed on resource heterogeneity and immobility, institutional evolution, the role of cumulative capabilities and, accordingly, the path-dependent character of technological innovation. This notion of path-dependency is also manifest in the technology hurdles confronting would-be innovators and the inertia associated with technological inter-relatedness and the burden of inherited technological legacies. While accepting an overall interventionist approach, evolutionary theorists claim that the traditional market-failure perspective tries to explain too much with too little (Metcalfe, 1995). They contend that innovation, in its very essence, is a barrier to entry, is a process of product differentiation, and is a form of information asymmetry. Inevitably, these elements enable well managed firms to wield significant market leverage over both suppliers and customers. From a welfare perspective, however, the otherwise adverse consequences of firms exercising their market power may well be offset markedly by the beneficial effects of social improvements in the productivity of labour (Barney, 1991). This questioning of orthodox economics is mirrored in the arguments of core-competency theorists like Prahaled and Hamel (199) and resource-based value theorists like Barney (1991), who stress the non-neoclassical characteristics of corporate resources: heterogeneity and immobility. I shall examine these “capabilities-based competition” approaches in further detail below, where I attend to the regional dimension of competencies. One of the burgeoning applications of evolutionary economic is to policy-debates over National Innovation Systems of (OECD, 1998). This school of thought has influenced science and technology policy in a wide variety of nations by focusing on the necessity
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for governments to: build effective bridges between the science sector and industry, link together users and producers of technology (Fagerberg, 1995); encourage mutually beneficial collaboration between public business enterprises and industry; foster and influence the outcome of international R&D programs (Fransman, 1995); and manipulate net inflows of skilled personnel from other countries. From a perspective informed by economic geography, Michael Storper has also focused on the need for governments to strengthen the linkages between break-through and follow-through R&D (Storper, 1995). 2.3 Transactions Cost Theory A competing notion of technology is afforded by Post-Coasian theory. This theoretical tradition includes the Property Rights School, Principle-agent theory and Transactions cost theory. I feel most at home in dealing with the last of these theoretical strands, associated with the work of Oliver Williamson, not least because it shares at least two heterodox features in common with evolutionary economics: first, it places great emphasis on the prevalence of environmental uncertainty; and second, it adopts Herbert Simon’s notion of bounded rationality. The latter notion provides an explanation for the existence of incomplete markets and, therefore, a rationale for a variety of screening mechanisms, processes of adaptation, institutions to promote settlement of disputes, penalties for agents who prematurely terminate contractual relations, and instruments for signaling on-going commitment to an economic relationship. The agency problem illuminated by theories of transactions cost is one of the dominant frameworks utilized in the literature on corporate governance. Below, I follow Belussi and Arcangeli (1999) in arguing for the extension of the transactions technology framework to encompass more diverse kinds of inter-firm relationship such as networking and collaboration within industrial districts. One means of achieving this aim involves a deeper analysis of the cognitive dimension of transactions. In addition, I argue the need for a broader perspective on sources of incumbency and first mover advantage that are the source of the small numbers problem: one that embraces learning-to-learn economies and tacit skills. 3.0 Keynesian Perspectives on Uncertainty and Innovation Amongst neoclassical theorists, a commonly held and fundamental principle is the notion that market-related mechanisms operate to bring rational, but subjectively-based, assessments about economic outcomes into alignment with their real counterparts (ie, the actual objective probability distributions relating time to states of nature and payoffs). Keynes, particularly in his 1937 papers, emphatically rejected the notion that the probability calculus could be utilized to adequately deal with uncertainty in regard to long-term decisions about investment and asset accumulation. One of the core evolutionary economic concepts is that of uncertainty. In this, evolutionary theorists mirror the research of both the Austrian economists and also Keynes and the postKeynesians Furthermore, I would include J. K. Galbraith within the latter group of economists. However, I must initially distinguish Keynesian notions of uncertainty from their neo-Austrian counterparts, if only because evolutionary economics has come under
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the sway of Austrian economic thinking: notably via the intellectual milieu that influenced Joseph Schumpeter’s thinking before his immigration to the US. After that, I investigate the causal relationship between innovation and macro-level conditions (effective demand). I leave the microeconomic question of how uncertainty relates to innovation at the enterprise level to section 4. 3.1. Keynesian versus Austrian notions of Uncertainty and the Role of the Market Butos and Koppl (1997), authors allied to the neo-Austrian School, have drawn upon Ferdinand von Hayek’s “anti-Cartesian” theory of mind to criticize both neoclassical and Keynesian epistemologies. In particular, they argue that Keynesian approaches to uncertainty are encompassed by and, hence, determined as a special case of Hayek’s more general evolutionary notion of knowledge as a social practice. Butos and Koppl follow Hayek in viewing social practice as determined by rule-governed procedures of classification, pre-cognitive or tacit patterns of action, and the unstable interplay between sensual perception and conceptual presupposition. Their Hayekian notion of knowledge could be interpreted in Kantian terms as one based upon a “synthetic a-priori” of forms constituting practical action, except for the fact that these forms are not conceived to be either biologically given or deliberately and collectively constructed. Instead, they are seen to have evolved culturally in the direction of ever-greater complexity, efficaciousness, and goodness-of-fit, through a Lamarckian process of learning and openended creativity. For Hayek, the evolutionary principle of inheritance is the cooperative, cultural tradition, which preserves successful rules of action; whereas the prima-facie principle of selection in a capitalist economy is the market mechanism: arguably the most recent and historically contingent expression of a more generic process of “group selection”. The market is viewed as an immaculate mechanism operating without favour or discrimination to reward those who tacitly, if not unintentionally, apply increasingly appropriate, and hence increasingly successful, techniques and practices to the projection of prospective returns, the allocation of resources, and the creation and preservation of value. Nevertheless, Butos and Koppl stress the fact that this market-based evolutionary process can only operate successfully in achieving the coordination of individual plans, expectations, discretionary actions, and realisations if competitive forces are strong. Otherwise, …when the context facing individuals is dominated by “Big Players”—in other words, participants whose discretionary actions have a disproportionate effect on the market—individual’s expectations are more likely to generate perverse and incoherent outcomes [see Koppl and Yeagher 1996] (Butos and Koppl, 1997). On such a view, any Keynesian doubts that unbounded rationality could ever hold sway over the formation of long-term expectations must therefore be abandoned. Or at the very
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least, it must be confined to a small region of activity within less competitive markets, which through their very imperfections, preclude the evolution of more successful coordination mechanisms. In contrast, Butos and Koppl contend that the problem of bounded rationality can be overcome through the gradual accumulation, refinement and perfection of a tacit web of corporate and managerial practices which are, perhaps, intuitively grasped but never fully comprehended as to their logic or underlying rationale. Understandably, the Hayekian view of policy confines government to a merely shepherding role, which, in preserving the healthy and vigorous forces of market competition, allows these collective, largely unthought, and often unintended evolutionary mechanisms of inheritance, variety generation, and selection to operate, unimpeded in their beneficial effects. I would argue that there are fundamental flaws in such a conception. First, it should be noted that even for the Hayekians, extra-market interventions are still warranted to ensure that the market mechanism itself, and its evolutionary systems of reward and incentive, works smoothly. Processes of evolution are predicated on the existence of a diverse range of mechanisms promoting variety, selection and inheritance. This range of mechanisms extends far beyond the market alone, conceived as a regulated site for the fair and equitable display, auction and exchange of title to goods, services or financial obligations. It would include institutions of government and commercial regulation, organizational practices, and academic centers of research and teaching. Second, and more significantly, to the extent that Keynesian uncertainty is deemed to be objective, as well as subjective in nature, it must be acknowledged that no conceivable set of rule-governed actions (tacit or otherwise) can tame this ontological wilderness. I would argue that practices and procedures must openly recognise our relative ignorance and insecurity, and on this basis operate to constrain speculation; promote long-term stability, trust and orderliness within market exchange; institute buffers against excessive volatility and hysteresis; and enable the development and implementation of sound monetary and fiscal policies. Only in this way can policies adequately deal with the adverse consequences of fluctuations in uncertainty aversion and resulting financial instability. Needless to say, the aims and objectives of such a diverse range of policies cannot be reduced, as Butos and Koppl would have it, to the mere promotion of competition. Rather, they would come under the umbrella of instruments that condition the actual workings of the market and of the evolutionary process itself. Hence, to the extent that they condition the evolutionary process, they cannot be selected in regard to their fitness by the evolutionary process, itself3!
3 A similar weak-form notion of environmental selection is to be found in the transaction cost literature, where successful transaction technologies will make firms more profitable, thereby increasing the likelihood of take-up and imitation by other firms. Here, in a paradoxical manner, the “market” is seen to apply selection pressures over the extent to which firms resort to market mechanisms (i.e. contract) or non-market mechanisms (i.e. governance). How then are we to judge policy interventions that reduce uncertainty and promote collaboration to the benefit of all enterprises within a particular nation or region? Now we must call on the global market as selector. And what about international reforms to the finance system (e.g. like the Tobin tax or a new kind of Bretton-Woods monetary system)?
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3.2 Effective Demand and Innovation In a recently published article on uncertainty, Paul Davidson distinguishes between what he calls the Keynes productive efficiency gain which is achieved through the maintenance of effective demand, and the Schumpeter “creative destruction” efficiency gain. The latter is realised through the pressure exerted on employers by sustained full employment, which provides a strong incentive for them to search for innovative means to raise productivity and performance (Davidson, 1994)4. Although there is much discussion in the economics literature about the linkage between growth in aggregate demand and innovation, few time-series studies have been conducted. Brouwer and Kleinecht (1999) present the findings of an econometric study that draws on two databases: the 1988 SEO Survey on R&D and Innovation in Dutch manufacturing and services and the Netherlands1992 Community Innovation Survey. The authors were able to exploit information on firms that spanned the four year gap between each survey to determine the effects of changing levels of demand on overall R&D person years. Dummy variables were included for firms operating in sectors with high or low technology opportunities, those participating in EU R&D programs in 1991 or 1992, and those firms with R&D departments. Additional explanatory variables were the firm’s employment size and demand growth in the firm’s sector of principal activity. Estimated coefficients and tvalues are shown below:
Exogenous variables Coefficients t-values -0.47 -1.39 Intercept 0.83 3.25++ Low tech. Opportunity dummy 0.18 2.12++ High tech. Opportunity dummy 0.38 1.93+ Participation in EC R&D dummy -0.23 -2.71++ R&D department dummy 2.74++ Demand growth in firm’s principal 0.68 sector -0.05 -1.54 Firms size (no. of workers) Source: Table 2, Brouwer and Kleinknecht (1999), p. 388, ++ = significance at 95% level; + = significance at 90% level, R2 = 0.05. There appears to be no significant difference in changes to R&D intensity for small or large firms. However, demand growth does appear to stimulate research activity5.
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The argument that high levels of effective demand are instrumental in promoting innovation is a feature of the literature on industrial competitiveness (see Williams et al. , 1991; Williams et al. 1992 ). This is because high and stable demand is seen to assist innovation by spreading the costs of retooling, engineering changes and process improvement over a large volume of sales. 5 The authors observe that the low R2 can be explained by the fact that firm-level R&D effort changes little over the short to medium run. Similarly, many variables that appear to effect research activity in cross-sectional regressions have less influence in time-series regressions because they barely change over the short run. They also caution that the findings are subject to one qualification. The data cannot discriminate between R&D conducted within the existing paradigm and the smaller number of basic technology-push innovations that go beyond the existing paradigm. However, the latter type of innovation would be expected to exercise more influence over long-term growth.
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4.0 Regional competencies 4.1 From core- to regional-competencies As we have seen, the evolutionary approach developed by researchers such as Nelson and Winter (1982) and Giovani Dosi (see Dosi et al, 1988) is predicated on the notion that the medium of social evolution is the set of routines governing ways of doing things, search, accumulation, communication, rule of conduct and reproduction. Government policy to promote innovation and to influence the pattern of technological development and diffusion, itself, becomes part of the social mechanism for generating new varieties of routines and new forms of selection and inheritance. In this section of the paper I wish to focus on regional aspects of the evolutionary economic perspective that have come to the fore in efforts to explain the growth of networks and clusters within industrial districts such as Silicon Valley, the Boston Ring, Emilia-Romagna, Baden-Würtemberg, and the UK Green Corridor (see Porter, 1998). Researchers in the core competencies tradition (Prahalad and Hamel, 1990) view these competencies as spanning both specific constellations of business activities and also particular groupings of products within a corporation by: acting as a locus of competitiveness, exercising temporal dominance (products are merely the momentary expression of a corporation’s core competencies, which are more stable than, evolve more slowly than, and span a variety of products); operating as a basis for learning by doing (core competencies are an expression of collective learning in the organisation and are enhanced through application and shared utilisation. They include the coordination of diverse production skills, integration across constellations of technologies), and providing a competitive locus (competition in product markets is therefore the surface expression of a deeper competition between firms over their portfolios of competencies (Rumelt, 1994, p. xvi, cited in Lawson, 1999, p. 154). Lawson argues that competencies can span corporations within a region (so that although firms come and go, regional competitiveness can be maintained). Moreover, in reference to temporal dominance, he observes that firms can be a temporary expression of regional competencies (although regional competencies may also be a temporary manifestation of firm competencies). Similarly, learning-by-doing can be enhanced through interaction with other firms within the region). 4.2 A Regional Extension of Coasian Theory From a transaction costs perspective Richardson (1972) posits “…a continuum of interfirm relations in between the two extremes of pure (spot) transactions in organised markets, and full cooperation in complex clusters and alliances, close to integration” . This key point has been taken up by Belussi and Arcangeli (1998, p416), who criticize Coasian “nexus-of-contract” theorists for their neglect of what happens ‘outside’ the firm. Instead, like Richardson, they favor extending the traditional ‘make-or-buy’ decision to encompass the more realistic ‘make/subcontract/cooperate-strictly/cooperate-loosely/buy’ decision. Moreover, they urge transactions cost researchers to extend their inquiries into vertical integration and governance structures into the domain of the cognitive division of labour to focus, in particular, on the management of network architectures and the
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learning processes that go on within them In addition, they recommend that those working in the tradition of incomplete and implicit contracts should better understand regulatory procedures that reduce information distortion within networks, enforce network loyalty and discipline, or promote rapid innovation and cooperative building of capabilities. 4.3 The Notion of Industrial Districts The study of industrial districts goes all the way back to the writings of Lord Alfred Marshall. A more recent body of literature continues this Marshallian concern for economies of scale and differentiation that are external to firm but internal to the industry or region as a whole (Brusco and Sabel, 1981; Becattini, 1990). Researchers in this tradition emphasize the importance of collaboration between firms, “…in sequential stages in supply chains: frequent sharing of equipment, the possibility of jointly taking on large orders, large pools of appropriately skilled labour, etc” (Lawson, 1999, pp. 158-9). Additional forms of cooperation through “…the sharing of technical information and subcontracting to other (often less successful) competitors, [and] refraining from wage competition and labour poaching” (p. 159). Research by members of the GREMI group, while acknowledging the importance of shared knowledge and collective learning, also highlights the role of institutions in reducing dynamic uncertainty. Lawson identifies three different forms of dynamic uncertainty at play in this work: search uncertainty associated with information complexity, screening uncertainty associated with such activities as inspection and quality assurance, and transcoding uncertainty associated with information processing and the assessment of economic outcomes derived from one’s own actions and those of others (Lawson, 1999, p. 159). Lawson discusses two other strands of literature that emphasize the importance to knowledge-based competition of what might be termed the commercial atmosphere or milieu. Researchers from the Californian school of urban geography (e.g. Storper, 1995) focus on the untraded interdependencies that are typically associated with the conventions, rules and discourses required for developing, communicating and interpreting knowledge: therefore underpinning technological spillovers and processes of diffusion (Lawson, p. 158)6. As noted in the introduction, some aspects of the innovation process, especially the importance of uncertainty, have come to the fore in recent management accounting papers. Tomkins (2001) specifically focuses on relationships, alliances and networks. He cites case-studies (p. 162) in which firms experience difficulties associated with the implementation of target costing procedures and the conduct of quality-related exercises across organizational boundaries. He notes that continuous improvement activities may realize gains at different sites within the network. Moreover, collaborative budgeting may be required to adequately trace costs and revenues across the network organization. Tomkins addresses several other management accounting procedures that would have to 6 Lawson notes that earlier research by members of this school focused more on the interaction between transactions costs, agglomeration advantages and gains from specialization and the division of labour (1999, p. 158).
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be modified to support network activities including de-bottlenecking activities relating to the “Theory of Constraints”, negotiating transfer pricing and related profit-sharing agreements, and financial risk-management and investment appraisal. He emphasizes the point (p. 163) that no new techniques will be required for such purposes, rather that existing techniques will require minor modifications to accommodate the new network environment7. 5.0 Uncertainty and Other Sources of Proximity Effects Having identified the regional aspects of innovation and technology diffusion, in this section of the paper I wish to specifically examine those aspects of evolutionary theory that explain the “proximity effects” which seem to be responsible for the localized and costly aspects of the diffusion process. Patel and Pavitt (1999) examine the threat of such “proximity effects” on national systems of innovation. From a policy perspective this threat is most notably manifest in the fact that multinational corporations perform most of their core R&D in the home nation rather in host nations. To the extent that R&D is performed in host nations it tends to involve continuous improvement of machine processes or minor engineering changes to meet local product specifications and particular regional tastes. Pavitt and Steinmüller (1998) at various places emphasize: • • • • •
Tacit skills (the fact that workers “know more than they can say” or communicate through formal means or via “long-distance” devices) Learning-through-interaction and learning-to-learn economies (which are required to transfer tacit knowledge from one group of workers to another) The social embeddedness of technology (the political reality that different functional and vocationally-based parts of an organization may alternatively promote or resist and actively oppose change) Uncertainty associated with linking market opportunities with technology opportunities (and the fact that technological change is often unpredictable and that know-how frequently emerges through a process of “muddling through”) The Chain-link model of innovation (associated with the simultaneous development of a succession of new products, and which views marketing activities as providing information and feedback at every stage of the product development cycle through customer liaison, surveys, and focus group studies)
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Much of Tomkin’s paper is devoted to the linkage between trust and information needs. He distinguishes between the information needed to establish control over events (information type 1) and the information needed to build trust (information type 2): distinguishing between both trusting personal partner relationships and trusting business relationships. He provides a useful taxonomy in table 3 (p. 180) of the paper that identifies information needs that arise at each stage in the evolution of alliances. His useful taxonomy identifies a number of different kinds of alliance relationship including favoured sub-contracts, technology licensing, strategic alliances, research consortia, and joint ventures. In addition, he examines networks, which he categorizes as a higher level “configuration of alliances” amongst respective member organizations.
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•
Limits to the Outsourcing of R&D (specialized contract R&D is limited because it is less a question of minimizing transactions costs and developing complimentary assets and more a question of the need to coordinate systems, integration various aspects of component production, and better assimilate external know-how where it does exist).
It might be thought that, with falling transactions costs and increasing specialization in production and service delivery, stand-alone, new technology-based firms (NTBF) might have come into prominence offering R&D services to any companies willing to pay the going market rate. The extent to which this would be likely to occur would seem to depend on industry-specific tradeoffs between economies of scale in integrated in-house development versus gains from outsourcing of R&D to highly specialized new technology based firms (NTBF). Supporting this view is Pavitt and Steinmüller’s (1999) argument that research activities in industrial R&D laboratories tend to promote incrementalism over radical change due to the inertia associated with accumulated investments in other technologically-related parts of the organization (including those of an intangible nature such as distribution channels, goodwill, branding and skills formation). Although R&D laboratories tend to be good at invention and prototype demonstration, Pavitt and Steinmüller also observe that they are often poor at the coordination and the resource mobilization tasks required for successful production and distribution. These features are emphasized in the “chain-link” model of innovation, discussed above, which views customer and supplier liaison as a counterpart to new product development right from the very beginning of the innovation cycle. At the same time, Pavitt and Steinmüller (1999) note that the Industrial districts model, characterized by networking and projectrelated strategic alliances amongst closely located firms, is one of the hardest of models to implement without a substantial pre-existing level of appropriate academic resources. In addition, although transactions costs have fallen, a growing emphasis on quality assurance and just-in-time delivery has promoted technological diffusion within supply chains that has been enhanced by the harmonization of industrial protocols, standardization of product and service specifications: a process that mitigates against the further outsourcing of technological capabilities. In addition, they contend that there is an on-going need for system coordination and integration that is difficult to attain through outsourcing. These observations are germane to the issue of how universities are going to collaborate with industry in the future. Pavitt and Steinmüller’s research suggests that collaboration with in-house R&D divisions is the more likely mechanism. 6.0 Conclusion: Implications for the Virtual University For expository purposes, I have oriented my discussion around the three economic frameworks introduced in section 2.0 of the paper. In this section, I want to draw some clear conclusions that will, necessarily, be fairly general and abstract but, hopefully, no less useful for the reader. To stimulate my thinking I have examined the inter-related implications of particular insights drawn from each of the three perspectives.
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6.1 Implications of the New Growth Theory for University Collaboration In the New Growth Theory writing on R&D, the existence of “blueprints” limits the return to intellectual property because know-how “leaks” to third-parties and free-riders. This justifies government intervention. The collaborative organization would have to guard against the theft of codifiable knowledge but, to a certain extent, externality and public good effects are unavoidable. Patent documentation and the very existence of a product can benefit other agents. The Marshallian literature identifies economies that are external to the individual firm but internal to the market (including those that can be internalized within regional clusters and networks). Increasingly, the collaborative university will become an active player within the organic ecology of an industrial district and its associated networks. Tomkin’s (20001) analysis reveals that it would be an obvious advantage to develop a rigorous, but nevertheless straightforward, framework for negotiating complex intellectual property agreements, managing budgets, engaging in continuous improvement and target costing exercises, and eliminating bottlenecks within collaborative alliances and networks. But first, key players have to recognize these activities as worthy of support and development. 6.2 Implications of Transaction cost theory Williamson’s transaction cost theory views tacitness as a source of asset-specificity with the potential to undermine contractual relationships within organizations. Belussi and Arcangeli’s recognition of the cognitive division of labour suggests that tacitness and learning-to-learn economies operate as a major source of first-mover and incumbency advantage within more extensive networks and clusters. In addition, from a broader market failure perspective, transaction costs operate as barriers to the internalization of externalities derived from, and the resolution of free-rider problems associated with innovation. The collaborative university can deal with these problems in two ways. First, strategies can be put in place to reduce the uncertainties associated with search, communication, quality assurance, and monitoring activities. Second, at a regional level, robust and trustworthy alliances can be established with key enterprises and local networks. In my own state, considerable opportunities exist to collaborate with cluster groups set up under the Business Vision 2010 Project. 6.3 Implications of Evolutionary Economics As we have seen, opportunities for learning through interaction often require close physical proximity with other researchers, easy access to transaction-specific resources, and proximity to the market place. At the same time, Pavitt and Steinmüller’s research highlights the likely constraints over the growth of NTBFs. For this reason local embeddedness of universities will continue to define the character of their capabilities and opportunities. From an Evolutionary Economic perspective, tacitness acts as both a source of competitive advantage and a natural barrier to diffusion or “leakage” either through imitation or displacement and substitution. Nevertheless, tacit competencies can be captured through poaching or direct takeover of firms. For this reason, the collaborative organization will have to actively manage the transfer of tacit knowledge. In addition it will have to bestow a high value on its key researchers and consultants.
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In her analysis of innovation and corporate governance O’Sullivan identifies three characteristics of the innovation process that, she suggests, render it immune to neoclassical understanding: development, organization and strategy. In her reading, development means the irreversible commitment of resources over an unknown period of time for uncertain returns. She emphasizes the exploratory nature of the innovation process, its dependence on learning of skills that may quickly become obsolete, the productive uncertainties associated with the building of capabilities, and the competitive uncertainty associated with rivalry. As such, in terms that should now be very familiar to the reader of this paper, she suggests that states of the world are not so much defined as discovered. O’Sullivan interprets organization as referring to a cumulative process of collective learning: integrative capabilities are developed around problem definition and shaping, the transmission and transformation of know-how, and the sharing of experience or complementary skills (p. 408). This collective process is therefore difficult to replicate although, infrequently, it can be rendered completely obsolete. Moreover, it is difficult if not impossible to isolate the contribution made by individuals to the overall outcome. Finally, she interprets strategy as referring to the development of new means-ends structures as a response to learning and the unfolding of new insight (p. 409). Associated with this set of characteristics she distinguishes three conditions of corporate governance, namely: financial commitment, organizational integration and insider control (p. 410-411). Financial commitment refers to the need for on-going commitment of resources to irreversible forms of investment that yield uncertain returns. Organizational integration refers to the need to integrate human and physical resources and provide incentives for the development and effective utilization of technology. Finally, insider control refers to the need to vest strategic control in the hands of those with the ability and incentive to allocate resources for learning and innovation. From such a perspective, it would appear reasonable to conclude that as universities progress in their abandonment of the collegiate system and increasingly come to embrace often-simplistic corporate models of management, they are in danger of ignoring these more subtle aspects of innovation management. Ironically, the kinds of insider control that O’Sullivan endorses are often the first victims in the headlong rush toward asserting managerial prerogative. Assisted by government infrastructure and recently expanded research funding programmes, Australian universities have, perhaps, acquiesced in addressing the requirement for patient finance. But, with some notable exceptions, policies of organizational integration often rely too strongly on recruitment rather than staff development. In an uncertain and rapidly changing collaborative environment, organizational integration is an exceedingly difficult to achieve. In this regard, academics who continue to cling to outmoded disciplinary boundaries are often as much to blame. Centers of excellence within the university system must closely match local industry capability. Significant investment of resources and energy must go into relationship building and collaboration.
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