Innovation, collaboration, and learning in regional ...

Environment and Planning A 2003, volume 35, pages 1689 ^ 1706

DOI:10.1068/a35259

Innovation, collaboration, and learning in regional clusters: a study of SMEs in the Aberdeen oil complex Andrew Cumbers

Department of Geography and Topographic Science, University of Glasgow, Glasgow G12 8QQ, Scotland; e-mail: [email protected]

Danny Mackinnon, Keith Chapman

Department of Geography and Environment, University of Aberdeen, Elphinstone Road, Aberdeen AB24 3UF, Scotland; e-mail: [email protected], [email protected] Received 28 September 2002; in revised form 22 February 2003

Abstract. Issues of regional innovation and learning have attracted growing interest from economic geographers and related specialists in recent years. The advantages to be gained from localised networks and learning are claimed to be particularly important for small and medium-sized enterprises (SMEs) in helping offset the size-related advantages of larger firms. Such claims are part of a wider rediscovery of the benefits of clustering and agglomeration in economic geography. Yet, to date, theoretical speculation about the renewed importance of geographical clustering for SMEs has run ahead of detailed empirical research. Beyond a few well-known case studies of high-technology clusters, there have been few attempts systematically to `test' assertions made about the links between innovation, collaboration, and learning. The authors' purpose in this paper is to contribute new empirical evidence to this debate through a case study of SMEs in the Aberdeen oil complex. Although they find some evidence to support the role of localised forms of collaboration among the most innovative SMEs, the authors' results also indicate the importance of extralocal networks of knowledge transfer and the unequal power relations that underpin interfirm relations. These findings reinforce recent calls for a shift of focus from `regions' to `networks', raising some fundamental questions about the substantive basis of clusters policy.

1 Introduction Issues of regional innovation and learning have attracted growing interest from economic geographers and related specialists in recent years (for example, Braczyk et al, 1998; Capello, 1999; Cooke and Morgan, 1998; Keeble et al, 1999). Amidst discussions of the heightened importance of knowledge as a source of competitive advantage in an increasingly integrated world economy, the most successful regions are perceived to be those whose firms display innovative capacity in adapting to a rapidly changing marketplace and staying one step ahead of the competition (Lundvall and Johnson, 1994). Innovation here is widely defined, extending beyond research and development (R&D) to include more incremental developments such as product adaptation and modification (Freeman, 1995). Alongside the increased focus upon innovation, a number of influential commentators have emphasised the renewed importance of geographical clustering and agglomeration for firms in achieving competitive advantage (Cooke and Morgan, 1998; Storper, 1997). Following the seminal work of Porter (1990; 1998), policymakers at regional, national, and international scales have become particularly concerned with the promotion of business clusters (for example, see DTI, 1998), defined as ``geographic concentrations of interconnected companies, specialised suppliers, service providers, firms in related industries and associated institutions'' (Porter, 1998, page 78). In this context, attention has focused upon innovation as an interactive process, involving the sharing and exchanging of different forms of knowledge between actors (Camagni, 1991; Morgan, 1997; Nonaka and Takeuchi, 1995). The collaborative

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nature of innovation processes has, it is argued, reinforced tendencies towards geographical clustering because of the advantages to be gained from proximity to other firms in specialist and related industries (Storper, 1995; 1997). Although innovation has conventionally been associated with large firms, a number of empirical studies conducted since the early 1980s have indicated that small and medium-sized enterprises (SMEs) are important sources of innovation and economic growth (Keeble, 1997; Pavitt et al, 1987; Piore and Sabel, 1984). This work has focused attention on the role of local networks in enabling SMEs to access information and support regarding knowledge creation, helping to offset size-related disadvantages vis-a©vis larger firms (Smallbone et al, 2000). Some authors have suggested that interfirm relations within local business networks might provide better conditions for innovation than hierarchical relationships within larger firms, because interfirm relations tend to remain more open and flexible (Cooke and Morgan, 1993; Powell, 1990; Saxenian, 1994). Against this background, we provide an empirical examination of key assertions about the relationships between innovation, collaboration, and learning in regional clusters through a study of SMEs in the Aberdeen oil complex (SMEs are defined as independent enterprises with fewer than 500 employees). Our aim is to extend the empirical scope of research beyond the standard prototypes of successful growth regions covered in the literature. Although the development of the North Sea oil industry has brought considerable prosperity to Aberdeen since the early 1970s (Cumbers, 2000), oil development has been dominated by externally controlled transnational corporations (TNCs), prompting concern about the long-term prospects of the local economy. Our research points to a considerable volume of innovation amongst oil-related SMEs, although collaborative relationships tend to be limited in depth and scope. In the context of wider debates about innovation and regional development, this indicates that spatial proximity is not necessarily translated into effective collaboration and learning between firms. We begin, in section 2, by reviewing recent work on the links between innovation, collaboration, and learning. In section 3, we outline the research methods adopted. In sections 4 ^ 6 we present the empirical results from our study of SMEs, focusing on levels of innovation, processes of interfirm collaboration and the importance of spatial proximity, respectively. Finally, in the conclusions (section 7) we consider the implications of our findings in relation to wider debates on innovation and regional clusters. 2 Innovation, networking, and learning amongst SMEs In moving beyond the conventional model of innovation as a linear process focused upon large firms and advanced technologies, interactive theories emphasise the connections and linkages that relay information and knowledge within firms and between firms (including links to business support agencies, consultants) and so on; (Cooke and Morgan, 1998). Rather than being divided up into a series of discrete, well-defined stages from research laboratory to the production line and sales outlet, innovation should be viewed as a complex, circular process (Freeman, 1994). In this context, innovation can be defined as attempts ``to create competitive advantage by perceiving or discovering new and improved ways of competing in an industry and bringing them to market'' (Porter, 1990, page 45). This broad conception extends beyond the formal, codified knowledge of the R&D laboratory to the more practical or tacit knowledge that supports everyday production processes (Freeman, 1994; Lundvall, 1992). As such, it has focused attention on incremental and mundane forms of innovation involving small adaptations to products and processes (Freeman, 1995; Lundvall and Johnson, 1994; Smallbone et al, 2000).

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The increased focus on tacit knowledge and interactive innovation has prompted renewed speculation about the advantages of geographical proximity between firms in related and specialist industries (Maskell et al, 1998; Morgan, 1997; Storper 1997). These advantages involve access to new industry-specific ideas and developmentsöin other words, they are agglomeration advantages based upon knowledge rather than traditional Marshallian material advantages. Whereas codified forms of knowledge can be adopted or replicated by potential competitors elsewhere (Maskell et al, 1998), tacit knowledge is much `stickier', being embedded in routine production practices and the `know-how' of firms and workers in particular places. As such, it is difficult to disentangle and extract from its social context. The key claim here is that the growing significance of tacit knowledge makes spatial proximity between associated producers more important, because this form of noncodified knowledge is best transmitted and developed through close interpersonal and interfirm relations (Cooke and Morgan, 1998; Morgan, 1997; Storper, 1997). In order for interfirm relations to be sustained over long periods, they must be underpinned by high levels of trust (Lorenz, 1992; Maskell et al, 1998), allowing a relatively open exchange of ideas and information. Firms within high-trust business networks benefit from the reciprocal exchange of information and knowledge, remaining bound by `strong ties' of obligation which regulate behaviour and prevent `malfeasance' (Granovetter, 1985). The profusion of terms, such as innovative networks, learning, and clusters, as outlined above, reflects widespread academic and policy interest (Cooke and Morgan, 1998; DTI, 1998; Porter, 1998). Such theoretical speculation has tended to outweigh empirical research, however, providing only a limited understanding of the specific processes at work (Kalantaridis and Pheby, 1999; Malmberg and Maskell, 2002). Much of the available empirical work has focused upon the experiences of certain high-technology clusters and dynamic growth regions (Henry and Pinch, 2000; Keeble et al, 1999; Saxenian, 1994), although the concern with incremental innovation suggests that less-favoured regions will also be repositories of significant forms of tacit knowledge that can generate competitive advantage (Florida, 1995; Maskell et al, 1998; Morgan, 1997). This reliance on a limited range of exemplar regions raises a number of unresolved issues, which we address in the remainder of the paper. The first issue concerns the identification of different levels and types of innovation. Here, a survey of SMEs across different types of area in Britain found that a substantial number of firms introduced product innovations (48% to 54%) and process innovations (40% to 51%) (Keeble, 1997, page 287). Interestingly, however, the number of firms introducing original products was considerably lower, suggesting that much of the reported innovation was relatively incremental in nature. Results from a large-scale European project on SMEs and regional innovation policy (SMEPOL) provide further support for this view, indicating that most SME innovation tends to be reactive and defensive in character, with limited research activity (Todtling and Kaufman, 2001). The implications of such findings are potentially far-reaching given the prevailing emphasis on the benefits of tacit knowledge and continuous innovation. The second issue concerns the importance of interfirm networks in structuring innovation amongst SMEs. Interactive theories of innovation emphasise the importance of collaboration with other firms and organisations, but empirical studies have been rather less conclusive (Todtling and Kaufman, 2001). In general, research on innovation in SMEs outside the celebrated high-technology clusters does not lend support to the notion that innovation is embedded within collaborative networks (Collinson, 2000; Freel, 2000). The results of the SMEPOL project, for instance, indicate that SME innovation tends to occur through `vertical' rather than `horizontal' networks, focusing on key customers and suppliers (Todtling and Kaufman, 2001).

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This finding highlights the role of unequal power relations between firms, an issue that has been neglected in much of the literature on interactive forms of innovation (Pratt, 1997; Taylor, 2000; Whittam and Danson, 2001). The third issue concerns the role of geographical proximity. It is unclear whether claims about the importance of geographical proximity in facilitating processes of interactive learning and innovation (Maskell et al, 1998; Morgan, 1997; Storper, 1997) can be substantiated in the context of noncore regions. The assumption of strong local linkages is a key theme linking work on industrial districts, clusters, and learning regions (Cooke and Morgan, 1998; Storper, 1997). This common `topological presupposition' of the bounded region (Thrift and Olds, 1996) has meant that the role of extralocal networks has been underplayed (Bunnell and Coe, 2001). More recently, however, a number of authors have pointed to the importance of these in supporting innovation amongst SMEs (Freel, 2000; Kaufman and Todtling, 2000; North and Smallbone 2000; Sternberg and Arndt, 2001), and theoretical debates have focused on relational networks that stretch across different spatial scales (Amin, 2002; Bunnell and Coe, 2001; Gertler, 2001). In this context, then, there is a need for more empirically grounded research that assesses the respective contributions of local and extralocal networks in supplying firms with information, ideas, and contacts (see Simmie, 2002). In the remainder of this paper, we present the empirical results from our study of the Aberdeen oil complex, addressing the main issues identified above. As a result of oil-related development in the 1970s and 1980s, Aberdeen was transformed from a locally controlled economy based upon traditional industries to a heavily specialised, externally controlled agglomeration (Hallwood, 1988). By the early 1990s, however, there were indications that the oil cluster had undergone considerable change. Although external TNCs retained control of oil developments, a significant SME sector had developed, as locally based firms established themselves in the supply chain, extending beyond basic servicing functions to more technically advanced activities. In recent years, the increasing maturity and high-cost nature of the North Sea relative to overseas oil provinces has focused attention on the need for increased innovation and diversification. Given that SMEs are generally less mobile than are the large oil operators and contractors, their ability to innovate and adapt to changing market circumstances will be crucial in shaping the future development of the Aberdeen area. 3 Research design and methods Interactive theories of innovation raise two interlinked methodological issues for researchers seeking to operationalise the term. First, there is difficulty in specifying and understanding the informal and intangible relationships that support innovation (see MacKinnon et al, 2000). Second, there is the danger of overextending the concept of innovation so that it becomes too broad and general, making it difficult for one to identify and assess different levels and types of innovation (see Holbrook and Hughes, 2001; OECD, 1996). In view of these issues, a combination of a telephone survey and semistructured interviews seemed appropriate, offering complementary forms of data that could be brought together productively (see Martin, 2001). The survey was used to assess levels of innovation and contact with other firms and organisations, and the interviews enabled us to explore the process of innovation in greater depth in terms of its nature and significance (incremental ^ radical), the role of interfirm networks, and the influence of the regional context. The sampling frame for our survey was constructed from listings of firms in various industry and local business directories. After the removal of large firms that employed more than 500 staff, a systematic sample was conducted by selecting every third firm from the sampling frame. Rather than stratifying the sample according to


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business activity (see table 1) from the outset, we monitored and adjusted the sample as the survey progressed to make it representative. A total of 192 firms completed the questionnaire in the period May ^ June 2000, a response rate of 54.5% after adjusting for firms that were defunct, not oil-related, or in sectors that were already overrepresented. Information derived from the telephone survey was used to identify 34 firms for face-toface interviews (conducted over the period August ^ November 2000). Surveyed firms were grouped into four categories according to their responses to questions on innovation and diversification (also a main focus of the study, see Chapman et al, 2002), and a proportional number were selected from each category for interview. Individual firms within the categories were then identified by survey responses covering key aspects of their operations and networking patterns. In table 1 we show some basic characteristics of the surveyed firms. Although our definition of SMEs included all firms with fewer than 500 employees, most of the surveyed firms can be described as small firms (42%) or microfirms (33.7%).(1) The smaller interview sample broadly reflected this distribution, although microfirms were slightly underrepresented (29.4%) and small and medium-sized firms overrepresented (44.1% and 26.5%, respectively). It can be seen from table 1 that more than half the survey firms operate only in Aberdeen. One of the key characteristics of the sample concerns its diversity in terms of the firms' main business activities (business services and manufacturing are the two most important categories) (2), incorporating the full range of products and services supplied to the oil industry. The interview sample also spans the range of business activities, although sectors relating to business services Table 1. Characteristics of the sample (source: authors' survey). Characteristic Year firm established, N 192 pre-1975 1975 ± 84 1985 ± 94 1995 or later Size of firm (all locations), N 181 1 ± 9 employees 10 ± 49 employees 50 ± 499 employees Spatial pattern of operations, N 184 Aberdeen only expanded into other locations moved into Aberdeen Principal business activity, N 192 oil exploration and production structural engineering and/or construction manufacturing rental and/or supply of equipment engineering services, including subsea services transport, storage and communications business services other business activities

Frequency

Percentage

21 48 92 31

10.9 25.0 47.9 16.1

61 76 44

33.7 42.0 24.3

97 43 44

52.7 23.4 23.9

17 4 49 29 36 6 50 1

8.9 2.1 25.5 15.1 18.8 3.1 26 0.5

(1) Small firms are defined as those with 10 ^ 49 employees; microfirms are defined as those with 1 ^ 9 employees. (2) There are a limited number of firms in the first two categories because these activities are dominated by large TNCs.

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(35.3%) and the rental or supply of equipment (26.5%) are somewhat overrepresented, and manufacturing (14.7%) is underrepresented 4 Levels of innovation Our operational definition of innovation included changes to products or services, processes, management systems, relationships with suppliers, and recruitment and training operations (table 2). The fact that over 77% of firms claimed to have developed either new products or services over the past five years is striking compared with the findings in other studies, which generally show significantly lower levels of innovation amongst SMEs (for example, Keeble, 1997). The number of firms reporting the introduction of other forms of innovation was considerably lower, with 38.5% and 35.4% of survey respondents stating that they had introduced new process technologies or methods and new management systems, respectively. At the same time, 40% of firms claimed to be undertaking R&D functions in Aberdeen, a figure that again seems relatively high. Although the figure for the introduction of new products and services could be used to paint a positive picture of a dynamic cluster of innovative firms, it is important to stress that the data in table 2 are based on simple measures of the presence or absence of certain types of innovation (broadly defined). As such, it tells us little about the originality and significance of innovation across the surveyed firms (Holbrook and Hughes, 2001; Keeble, 1997; OECD, 1996). Table 2. Percentage of firms introducing different forms of innovation in the past five years (source: authors' survey). Type of innovation

Products or services Process technologies or methods Management Supply management Recruitment or training Other

Firms (N 192) number

%

148 74 68 39 52 8

77.1 38.5 35.4 20.3 27.1 4.2

Note: multiple responses were possible.

In view of such limitations, we sought to construct a typology of innovation from our interview material, moving beyond the simple binary distinctions between ìnnovative' and `noninnovative' (table 2) that are found within the small firms and regional development literature (for example, Freel, 2000; Keeble, 1997). Building upon the survey data, we used the interviews to try to unpack the processes of innovation at work amongst the 34 firms that were selected. In particular, there is a need to differentiate between the 77% of firms reporting the introduction of new products and services over the last five years in terms of the degree to which such firms can meaningfully be described as ìnnovative' (see Holbrook and Hughes, 2001; OECD, 1996). The typology involved a detailed consideration of the process of innovation through the accounts provided by SME representatives, providing a more grounded understanding of innovation than survey results derived from `simple, variable-centred research' (Blackburn et al, 1991; compare Kalantaridis and Pheby, 1999). In constructing the typology we emphasised the following factors: (1) the presence and extent of product or service innovation; (2) the presence and extent of R&D (if appropriate); (3) the presence and extent of process innovation;


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(4) the nature and level of the knowledge base; and (5) whether the firm was proactive or reactive in identifying information, opportunities, links, and so on Although this listing may appear overly hierarchical in view of interactive theories of innovation, our primary concern here is with the operationalisation of the term in empirical research (Holbrook and Hughes, 2001). As such, it was particularly important to distinguish different levels of innovation across the SME population (`radical', ìncremental', and so on). Important indicators of this are the extent to which new products and services were introduced and the nature of the underlying knowledge base. In view of the highly internationalised nature of the oil industry and the concentration of North Sea support and servicing in the Aberdeen area, we find the OECD's distinction between new to the `firm', `nation', and `world' somewhat artificial (OECD, 1996), preferring to assess the significance of innovation within firms' immediate competitive environment (the market; see Holbrook and Hughes, 2001). These factors were used to identify four types of firm (table 3): highly innovative, knowledge-based firms (type 1); firms displaying considerable innovation in the development of new products and services (type 2); those firms that were innovative only in terms of market-led adjustment and customisation of products and services (type 3); and firms that could be regarded as sales-oriented branch plants displaying only very limited innovation (type 4). As such, the majority of the interviewed firms (52.9%) can be described as innovative (types 1 and 2). Analysis showed that there is no relationship between these innovation types and firm size, partly reflecting the fact that most of the medium-sized firms (50 ^ 499 employees) are larger operations with a branch in Aberdeen that concentrates on sales and basic services. Although based on a smaller number of firms, this typology provides more meaningful distinctions between different levels of innovation than does the original survey measure. The proportion of interviewed firms that stated that they had introduced new products or services in the survey (76.5%; 26 firms out of the sample of 34 firms) is equivalent to the proportion of all firms stating this in the larger survey (77% of the 192 firms surveyed). In this sense, the representativeness of the interviewed firms enables us to infer what proportion of the 77% of survey respondents could be described as highly innovative according to the criteria used in the interview-based typology. Of the 26 interviewed firms that reported the development of new products or services in the survey, 6 (23.1%) were identified as highly innovative (type-1 characteristics)(3) and a further 10 (38.4%) as innovative (type-2 characteristics). On this basis, we estimate that 23% of the original 77% of the survey firms could be described as highly innovative and knowledge-based and 61.5% as innovative. These figures correspond Table 3. Typology of innovative firms (source: authors' survey). Type of firm

1. Highly innovative, knowledge-based 2. Considerably innovative, but less `cutting-edge' than type-1 firms 3. Exhibiting limited innovation, involving mainly adjustment and customisation of products and services 4. Sales-oriented operations displaying limited innovation (3)

Firms (N 34) number

%

8 10

23.5 29.4

9

26.5

7

20.6

This figure is slightly different from the percentage of highly innovative firms in table 3 (23.5%) (n 34), referring to the subset of interviewed firms that undertook product/service innovation according to the survey (n 26).

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to 17.7% and 47.4%, respectively, of the total survey responses (N 192). Although this inferential method means that the figures need to be interpreted with a degree of caution, they seem more realistic and meaningful than the original 77% figure derived from the survey (see Freel, 2000; Kalantaridis and Pheby, 1999; Keeble 1997; North and Smallbone, 2000). What distinguished type-1 firms was the development and application of an advanced knowledge base incorporating formal qualifications, long-standing industry experience, and tacit knowledge related to the particular product or service provided. This emphasis on knowledge and experience means innovation is not the preserve of firms working in manufacturing or information-technology-related (IT-related) industries, but extends into a number of service-based activities that are not normally thought of as `cutting-edge', such as recruitment services and training. As one respondent put it: `Ìnnovation's about changing the rules ... I think when one looks at conventional methodologies, processes, concepts, competitive advantage comes from doing something differently'' (SME manager, August 2000, authors' interviews). Type-1 firms can be regarded as market leaders in relation to their specific business activities in Aberdeen. Although some particular innovations could be regarded as `new to the world' (OECD, 1996), most were `new to the market' in terms of the competitive environment within which firms operate (Holbrook and Hughes, 2001). Type-1 firms displayed a strategic approach to business development and the external market environment, identifying new opportunities from market trends and developing new solutions. As such, they tended to be more proactive within industry networks. For example, the management of a small drilling-services firm, active in twenty-five countries, from a base in Aberdeen had written an industry textbook, delivered papers at international conferences, and provided specialist training for other individuals and firms (SME manager, October 2000). Although also being involved in a considerable amount of innovation, type-2 firms were less knowledge intensive than were type-1 firms. Innovation was about seeking to develop new products in a very specific area of activity or refining existing ones to maintain a competitive edge. One respondent expressed this in terms of seeking ``to work lower down the food chain of innovation'' instead of trying to take ``giant innovative leaps forward'' (SME owner-manager, November 2000). Innovation was less `cutting edge' than that of type-1 firms, but the new products and services introduced were significant within particular segments of the North Sea market. Type-2 firms tended to be specialised and fairly technically advanced, introducing products and services that had their own design element. Although type-2 firms lacked the level of graduate qualifications found in type-1 firms, they also possessed highly skilled work forces (authors' interviews). Although less proactive than type-1 firms, type-2 firms still displayed considerable initiative in identifying new market opportunities. Type-3 firms were those where the knowledge base was less well developed. Innovation was largely demand-driven through the needs of particular customers: ``we're kind of market led a little bit, we can see an opportunity, we'll sound somebody [a customer] out, if they think it's worth doing, we'll do it'' (SME manager, November 2000, authors' interviews). In this sense, innovation for type-3 firms tended to be incremental, aimed at making relatively small improvements in products or in service provision that arose out of routine operational problems (see Todtling and Kaufman, 2001). It was typically undertaken by the owner or manager on a part-time, ad hoc basis, when resources allowed. Nevertheless, type-3 firms did have some specialist expertise and proactive capability within their specific market niches, which distinguished them from type-4 firms.


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Type-4 firms could be characterised as sales-oriented, branch-plant firms that were locked into dependent relationships (most were part of larger organisations). The limited kind of innovation that did take place involved firms responding to customer feedback relating to technical problems and quality control (authors interviews). This low-level innovation occurred through the kind of `learning-by-doing' and `learning-by-using' activities that have attracted interest in the literature (Morgan, 1997; Schoenberger, 1999). Dependent relationships between such SMEs and their main customers, however, make it difficult to translate these routine contacts into the development of innovative products or services and processes. Type-3 and type-4 SMEs rarely have the capacity or resources to put ideas into practice, and financial support from corporate clients is rarely available (see section 5). Our typology functions as an analytical device for unpacking innovation processes, allowing us to assess the `depth' and significance of innovation within the interview sample. Although only a minority of firms (type-1 firms) were characterised by market leadership and the development of an advanced knowledge base, type-2 firms could also be described as innovative in terms of introducing products and services that gave them a competitive edge and forced other firms to respond within their immediate market (Holbrook and Hughes, 2001). For many firms in the type-3 and type-4 categories, by contrast, innovation was a low-level and part-time activity carried out when resources allowed. Overall, the level of innovation amongst SMEs identified here certainly supports the notion that the Aberdeen economy has moved beyond the definition of a branch-plant economy (Cumbers, 2000), although it remains some way short of the levels of knowledge-intensive growth and entrepreneurialism characteristic of the most dynamic local and regional economies (Henry and Pinch, 2000; Keeble et al, 1999; Saxenian, 1994; Storper, 1997). 5 Innovation and interfirm collaboration In addressing the issue of collaborative innovation, we asked SMEs in the telephone survey: `Which of the following have been important in encouraging innovation?' (see table 4). In total, 64.3% of firms that saw themselves as innovative according to the categories listed in table 2 reported some involvement in collaborative relationships. Oil operators and the major service contractors were the most important partners (table 4), indicating that for most firms collaborative innovation occurred within `demand-related networks' (see Bryson et al, 1993) centred on key customers rather than the broader supply-based networks emphasised in the literature on interactive innovation (Todtling and Kaufman, 2001). Such collaboration tended to take place mainly within Aberdeen, with approximately twice as many firms citing Aberdeen than èlsewhere' for collaboration with òil companies' and `major contractors'. At the same time, it is important to appreciate that a significant number of firms reported Table 4. Sources of support for innovation by groups of firms or organisations (source: authors' survey). Type of collaborator

Oil companies Major contractors Other small or medium-sized enterprises Universities and research institutes Other Note: multiple responses were possible.


%

58 61 37 28 11

53.7 57.0 34.6 26.2 10.3

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links with other SMEs and with universities and research institutes (table 4). The 26.2% that had links with ùniversities and research institutes' corresponds to 14.6% of all firms (N 192), and more of these links were local (64%, N 28) than non-local (39.3%). This level of interaction appears to be relatively high in the context of research undertaken on other United Kingdom and noncore European regions, an impression that is reinforced by our focus on `support' for innovation (see above), as this term is closer to full `collaboration' than mere `contact' (Simmie, 2002; Todtling and Kaufman, 2001). It seems to reflect the relatively sophisticated technological needs (given the difficulties presented by North Sea operating conditions) of a spatially concentrated industry, the efforts of local universities to respond to this demand, and, in some cases, the development of links with certain national and international institutions. Further exploration of collaborative linkages based upon a combination of survey and interview material suggests that the depth of collaboration is fairly limited, both in terms of the number of collaborative partners and in terms of the frequency of contact. In relation to the first point, the survey responses reveal that the percentage of firms engaged in collaboration with `multiple' sources of support (more than two) is very low: less than 10% of innovative firms. Returning to our typology, it tends to be the more knowledge-intensive type-1, firms that are engaged in extensive collaborative relationships: `Ìn our core business of corrosion and materials we've been very much involved in the development of test protocols, the development of monitoring equipment over the years. We are still actively involved in that area and much of that's through joint-industry sponsored projects where we identify a particular problem or the need to understand a problem ... and work with one or more interested parties, usually 4, 6, more than that, depending on the issue, ... to try and identify a better way of doing it'' (SME manager, November 2000, authors' interviews). In a small number of cases such as this, innovation was genuinely interactive and on-going, founded upon a more open and equal exchange of knowledge and information. These firms were embedded within wider knowledge communities that involved other SMEs, larger firms, universities, and development agencies. These networks were also important in generating funding for innovation. Two firms in our study, for example, both technical consultancies, had obtained EU research funding in collaboration with other SMEs and university researchers. Such relationships can be seen as forms of collective learning, although they are not necessarily locally embedded, but often involve extralocal linkages (see section 6). As noted, however, for the majority of firms, innovation networks tended to be demand-related, centred upon key customers (see Bryson et al, 1993; Todtling and Kaufman, 2001). Interview analysis offers further insights here, indicating that only around 8 firms out of 34 (all either type-1 or type-2 firms) were engaged in regular collaborative innovation with firms or organisations that were not customers (predominantly other SMEs or universities). For some type-1 firms, the possession of more specialist knowledge and skills allowed them to develop a more balanced relationship with customers, typically through having an input into the design of projects and in some cases resulting in the SME becoming involved in joint-venture arrangements. One respondent, for example, described a ``major collaborative development with a well-known Aberdeen contracting company'' which was targeted at `à very small niche marketplace ... one where ourselves and the contractor are well respected'' (SME owner-manager, November 2000, authors' interviews). Our interviews suggest that trust can play an important role in underpinning collaborative innovation between SMEs and customers (MacKinnon et al, 2003). For example, one respondent emphasised how a personal relationship, built up over time


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with an Aberdeen-based manager of a US-owned firm, enabled the exchange of ideas that led to the development of new products: ``We've worked together and we've got to know each other and I think there's a good level of trust as well. I trust him enough to give him my ideas; and he trusts me enough to give me his ideas'' (SME ownermanager, authors' interviews, September 2000). Outside of a small number of firms involved in regular collaboration, however, this is generally not the kind of higher level `goodwill' trust (Sako, 1998) that is said to characterise many successful industrial districts and learning regions (for example, Maskell et al, 1998; Storper 1997). Instead, trust tends to be based upon performance and reliability within a specific marketplace, with a number of firms stressing the need to build trust through performance, particularly in terms of being flexible and responsive to customers' demands. The costs of failure in this respect were perceived to be high. `Ìn this business, if you let someone down once, you'll be just scrubbed-off the face of the earth as far as they are concerned'' (SME manager, December 2000, authors' interviews). In this sense, SME concern with economic performance and reliability resembles what Wolfe and Gertler (2001) have referred to as a North American view of trust, rather than the Èuropean' industrial district-based concept underpinned by social ties and obligations (Maskell et al, 1998; Storper, 1997). Such relationships appear relatively one-sided, with the onus falling upon SMEs to prove their reliability, with larger contractors and operators having few incentives to build high-trust relationships. Although personal relationships based upon trust can be important in facilitating and sustaining innovation at the microlevel (Oinas, 1997), the macroeffects of these relationships should not be overstated. In this respect, informal relationships between individuals that facilitate the exchange of information and knowledge need to be distinguished from contractual relationships between customers and suppliers involving the flow of material resources. In terms of collaborative innovation, there is little evidence from our interviews of clients providing financial backing or technical assistance. As one SME owner noted, ``We have just launched a project with BP where they've picked up half the cost of the design project, but that is fairly rare. They expect us to do all the R&D'' (SME manager, November 2000, authors' interviews). Another firm commented that: customers are ``not prepared to absorb costs. They'll absorb the cost if the technology works. They like to see it tried and proved and tested within their own marketplace'' (SME manager, September 2000, authors' interviews). Where support is provided it tends to be in situations where the supplier has been able to convince the customer that there are immediate cost-driven benefits from the proposed innovation (authors' interviews). SMEs have particular difficulty persuading customers to back long-term product development and research that might provide spinoff opportunities for the SMEs themselves in terms of new products and markets. The barriers to collaborative innovation seem to have been reinforced by recent processes of industry restructuring. An important development has been the reorganisation of the supply chain, involving increased vertical disintegration through the outsourcing of work by oil companies to larger integrated contractors. Joint industry ^ government initiatives such as CRINE and its successor, LOGIC, appear to have encouraged this process.(4) One of the key effects of outsourcing for SMEs has been reduced contact with the oil operators: (4)

CRINE (Cost Reduction in the New Era) was an attempt to reduce operating costs in the North Sea by up to 30% in the period 1993 ^ 98. LOGIC (Leading Oil and Gas Industry Competitiveness), was set up following the Oil and Gas Industry Taskforce in 1999 in order to ``work with companies throughout the industry to stimulate collaboration and radically improve competitiveness'' (http:// www.logic-oil.com/).

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`Ìf you go back [to] 1986 100% of our work and contracts came from the oil companies direct. In the year 2000, we've probably got about 10% from the oil companies direct ... . Our total business portfolio has changed dramatically ... . The ultimate client is the oil company ... but our direct clients are quite often the major, larger contracting companies ... . A lot of oil companies outsourced so you then had to build up new relationships'' (SME manager, September 2000, authors' interviews). The main problem here, from the SMEs' perspective, is the increasing social distance between them and the main operators. As a consequence, we heard, some SME representatives felt that ``the door has been closed'' in terms of the opportunities for exchanging ideas with operators, a process which was believed to have led to the development of innovative solutions in the past. Allied to this, rationalisation within oil companies has led to the reduction of R&D budgets (5) and an accompanying reduction in technology-centred personnel, further limiting opportunities for knowledge-based collaboration. In this sense, one of the effects of restructuring appears to be that the `technology champion' inside oil companies has disappeared from the equation for many SMEs. They are increasingly forced to deal with contractor staff, driven by short-term commercial pressures, with less technical understanding than oil company personnel. Compounding these problems, recent attempts to formalise supply chain relationships by setting up lists of approved suppliers are also creating problems for SMEs. In particular, the informal channels of communication with oil company staff that were a spur to innovation in the past are increasingly being closed off through a new system of contracting arrangements and procedures, framed in a new discourse of managerialist `best practice' (Johannisson, 2000). 6 Proximity, learning, and innovation In this penultimate section, we assess the relative importance of localised as opposed to extralocal forms of learning for supporting collaborative forms of learning amongst the SME population in Aberdeen. In the survey, we addressed this question by asking firms whether groups of companies or organisations providing support (see table 4) for innovation were located in Aberdeen or elsewhere (see table 5). Although such a separation might appear rather crude, this kind of `local ^ global' distinction was relatively meaningful to respondents in terms of their immediate market environment, whereas categories such as local, regional, national, and global would have seemed abstract and artificial in this empirical context. At the same time, our categories are consistent with relational conceptions of space in which the local and global are viewed Table 5. Location of support for innovation (source: authors' survey). Categories


Aberdeen Elsewhere Both Aberdeen and elsewhere Location unspecified Total a

41 15 44 7 107

% 38.3 14.0 41.1 6.5 100a

Percentages do not add up to exactly 100.0 owing to rounding errors.

(5) BP's R&D budget was reduced from »329 million to »127 million between 1990 and 1996, and the merged company BP Amoco cut its budget from »412 million to »310 million over the period 1998 ^ 99 (Cumbers, 2001). Shell reduced its R&D expenditure from US$701 million to US$389 million in the period 1996 ^ 2001 (Annual Reports).


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as mutually constituted, as the question allowed multiple responses and firms were able to indicate both locations. Table 5 shows that 38.3% of firms involved in collaborative innovation reported that this took place in Aberdeen, against 14.0% that indicated èlsewhere', and 41.1% `both Aberdeen and elsewhere'. In total, across the five categories of firms and organisations listed in table 4, Aberdeen received 159 responses, compared with 99 for èlsewhere', resulting in ratios of responses to total firms involved in collaborative innovation in each location (N 107) of 1.49 and 0.93, respectively. These figures provide some measure of the extent of collaborative innovation taking place in Aberdeen and èlsewhere' across the categories listed in table 4, as opposed to the data in table 5, which simply express the simple presence or absence of such innovation in each location or both locations. The interviews provided further insight here, highlighting the importance of the local milieu in supporting the exchange and circulation of product-related and service-related knowledge. Again, personal relationships within the industry were important sources of new ideas and information about developments in particular markets. Such knowledge was communicated through contacts with representatives of firms' major customers (demand-related) and the operation of wider informal industry-related networks in a broader sense (supply-related). As one of our respondents suggested, spending a night in a pub in Aberdeen is more likely to result in `ùseful information changing hands'' than the attendance of formal èvents' (SME owner-manager, September 2000, authors' interviews). In this context, Aberdeen has often been described as an ìndustrial village', operating as `à very parochial market'' where `èverybody knows everybody else'' (SME owner-manager, September 2000, authors' interviews). At the same time, some respondents regarded attendance at more formal industry events and seminars as advantageous in terms of developing and maintaining a visible presence within the Aberdeen oil industry, making contact with potential customers and suppliers and providing opportunities to learn from the experience of other firms (authors' interviews). Although the above figures show that Aberdeen is the most important location for innovation support, extralocal links seem relatively high, with a majority of responding firms (55.1%) connected to external `sources' of support (table 5). Similarly, in response to a survey question about the role of informal forms of communication in providing ideas for business development, a majority of responding firms (53.6%, N 166) indicated that these took place on a wider geographical basis (mostly global) than just Aberdeen. These findings point to the importance of extralocal networks in providing links to wider sources of knowledge and expertise. This seems to reflect the global nature of the oil industry, with information transmitted between oil provinces and markets through mobile personnel and a range of industry publications and journals. In the context of recent empirical research stressing the role of extralocal linkages (Simmie, 2002; Sternberg and Arndt, 2001), our results call into question the long-standing emphasis on local networks within the literature on industrial districts, clusters, and learning regions. The interviews enable us to relate this general finding to the activities of specific SMEs, providing examples of innovative firms that have links to national and international sources of learning. In general, type-1 firms seem to be more engaged in nonlocalised networking activities than are those firms in other categories. Of the eight firms in this category: three could be described as operating within oil business networks that had a predominantly global orientation; two firms were involved in knowledge-intensive networks involving business and other actors (universities, government departments, and development agencies) that tended to be largely national (United Kingdom) in their orientation; and three others could not be said to be that

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extensively involved in wider networks at all. Type-2 firms typically had external links with regionally based enterprise support agencies such as Scottish Enterprise and Scottish Trade International but lacked the wider geographical networks of type-1 firms, whereas type-3 and type-4 firms were less involved in extrafirm networks per se. External linkages might be expected to be particularly important for small, innovative firms in the North Sea oil industry as key R&D activities tend to be located elsewhere, in prestigious universities and technical institutes or in corporate research facilities located in the southeast of England. The University of Aberdeen was mentioned twice by our interview respondents, although only in one of these cases was innovation in the form of new product development involved. In comparison, external R&D linkages mentioned by our interview respondents consisted of the University of Manchester Institute of Science and Technology (UMIST; twice), the Norwegian technical university SINTEF in Trondheim (also twice), Strathclyde University, University College London, and Cardiff University. It is useful, at this stage, to relax our analytical distinction between local and extralocal relationships in order to stress the point that Aberdeen can be seen as an important node within wider oil industry networks, linking up locally specific knowledge to wider information flows. In this context, one of our respondents viewed Aberdeen as a ``hub of knowledge'', whereas a representative of another export-orientated firm emphasised the continuing importance of Aberdeen as a centre of industry `ìntelligence''. Our interview material suggests that Aberdeen operates as a centre for tapping into new developments in the North Sea that might have applications elsewhere, and at the same time its international connections transmit global information to locally based firms (MacKinnon et al, 2003). As such, one representative of a type-1 firm stressed the importance of being ìnternational' in the sense of having contacts and sources of information in different oil regions, something that was often linked to previous employment within international oil companies and contractors (SME ownermanager, September 2000, authors' interviews). In broad terms, our research suggests that the most innovative firms tend to be those that draw information and support from the local milieu and from wider industry and knowledge networks operating across a diverse range of geographical scales (Amin and Cohendet, 1999). Rather than prioritising localised assets, then, work on innovation and learning should perhaps focus on the ability of innovative firms to combine localised forms of knowledge with extralocal sources (see Asheim and Isaksen, 2000). 7 Conclusions A number of findings from our empirical research provide useful insights for further research on processes of innovation and learning in local and regional clusters. Although the initial survey results pointed to fairly high levels of innovation amongst SMEs, further analysis based on interview material suggested that 17.7% of surveyed firms could be described as highly innovative and knowledge intensive, with a further 29.7% characterised as ìnnovative'. As such, there are a significant number of innovative SMEs within the Aberdeen oil complex. These firms have developed products or services that are new to their markets, supported by an advanced knowledge base and participation in supply-related networks that often include universities and research institutes. For the remainder of firms, however, innovation tends to involve fairly lowlevel adjustment and customisation of products and services in response to customer demand. Collaborative innovation is limited in scale and scope, with the majority of firms operating within bilateral, demand-led relationships with key customers. This is consistent with other recent studies which have found that much SME innovation in European regions tends to be incremental and reactive in nature (Sternberg, 2000;


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Todtling and Kaufman, 2001). In general terms, though, the level of innovation amongst SMEs is sufficient to confirm that the Aberdeen oil cluster has moved beyond a stereotypical branch-plant economy (Cumbers, 2000; Hallwood, 1988; Harris et al, 1988), although large externally owned TNCs still exert considerable influence. The emphasis on demand-related networks focused upon key customers draws attention to the unequal power relations between groups of firms. Although the research project was not explicitly focused upon questions of power (see Taylor, 2000), this concern has emerged from the empirical analysis, reflecting the economic climate in which the study was conducted. In particular, the operators' government-supported efforts to reduce costs through rationalisation and outsourcing has transformed the environment in which SMEs operate. Whereas the seminal work of Scott (1988) and others on flexible production complexes suggests that increased vertical disintegration spurs innovation (see Storper, 1995), our study indicates that cost pressures and the control of the integrated contractors are making the development of more innovative solutions by SMEs increasingly difficult, although a limited number of firms have adapted successfully. In this sense, the efforts of the oil TNCs and the UK government to deliver a more cost-efficient and streamlined national oil production system may be working against the reproduction of a dynamic and entrepreneurial local economy (Johannisson, 2000). The divergence between this conclusion and the arguments of Scott (1988) points to the importance of the different industry and spatial contexts in which research is conducted. In the Aberdeen oil complexöin contrast to the Californian film industry öit is the emphasis on cost reduction and rationalisation in an industry made up of large oil operators and contractors, on the one hand, and a large SME sector, on the other, that seems to be constraining innovation, not the process of vertical disintegration itself. Although critics might argue that we have presented a rather one-sided view derived from SMEs, we would argue that this offers a useful corrective to the hegemonic narrative, produced by representatives of the operators, contractors, and government, of industry restructuring as a mutually beneficial process of `supply-chain management' and `knowledge transfer' (for example, see OGITF, 1999). The wider point to be drawn from this concerns the need for more analysis of power regarding innovative networks and clusters (Taylor, 2000; Whittam and Danson, 2001). In this context, we would advocate a conception of power as a differential capacity that is activated and realised within industry networks, thus combining elements of the `power-over' and `power-to' models (see Allen, 1997; Taylor, 2000). One important avenue for empirical examination is to identify different types of networks in terms of the balance between processes of co-operation ^ collaboration and competition ^ rivalry and to assess the specific ways in which these networks enable or constrain innovation. In this paper we have offered further evidence for the argument that regional networks are important in providing support for innovation (Keeble et al, 1999; Todtling and Kaufman, 2001), with the more innovative SMEs making greater use of external networks than less innovative firms. The key finding here, however, concerns the importance of extralocal relationships alongside local linkages (Sternberg and Arndt, 2001). What seems to mark out the more successful SMEs is the ability to draw upon localised assets yet simultaneously being plugged into wider networks. The local milieu remains important as a source of competitive advantage for firms; Aberdeen's role at the heart of North Sea operations means that it can be viewed as a key location where wider industry networks converge and intersect (MacKinnon et al, 2003). One way in which we have gone beyond other empirical work is by indicating that extralocal links are not only confined to market-related contacts with customers

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and clients (see Lawson et al, 1998; Simmie, 2002) but also involve the circulation of information and knowledge that support innovation. In broad terms, then, our key contribution in this paper is to reinforce recent calls for a reorientation of research away from `bounded regions' to `networks' (Bunnell and Coe, 2001), raising some fundamental questions about the substantive basis of cluster policy (see Amin, 2002; Martin and Sunley, 2003). Acknowledgements. The Economic and Social Research Council (ESRC) funded the research on which this paper is based under grant number R000223025. We are grateful to the SME representatives who participated in the study for sharing their time and knowledge. Earlier versions of the paper were presented at the Regional Studies Association Conference, `Regionalising the Knowledge Economy', London, 21 November 2001, and the Centre for Urban and Regional Development Studies (CURDS) Conference, `Cities and Regions in the 21st Century', University of Newcastle upon Tyne, 16 ^ 18 September 2002, and we thank participants for their comments. We would also like to thank Nigel Thrift and two anonymous referees for useful comments. We remain responsible for any remaining shortcomings or errors. References Allen J, 1997, `Èconomies of power and space'', in Geographies of Economies Eds R Lee, J Wills (Arnold, London) pp 59 ^ 70 Amin A, 2002, ``Spatialities of globalisation'' Environment and Planning A 34 385 ^ 399 Amin A, Cohendet P, 1999, ``Learning and adaptation in decentralised business networks'' Environment and Planning D: Society and Space 17 87 ^ 104 Asheim B, Isaksen A, 2000, ``Localised resources and localised learning: a competitive advantage?'', in The Networked Firm in a Global World Eds E Vatne, M Taylor (Ashgate, Aldershot, Hants) pp 163 ^ 198 Blackburn R A, Curran J, Jarvis R, 1991, ``Small firms and local networks: some theoretical and conceptual explorations'', in Towards the Twenty-first Century: The Challenge for Small Business Eds M Robertson, E Chell, C Mason (Nadamal Books, London) pp 105 ^ 122 Braczyk H J, Cooke P, Heidenreich M (Eds), 1998 Regional Innovation Systems (UCL Press, London) Bryson J, Wood P, Keeble D, 1993, ``Business networks, small firm flexibility and regional development in UK business services'' Entrepreneurship and Regional Development 5 265 ^ 277 Bunnell T G, Coe N M, 2001, ``Spaces and scales of innovation'' Progress in Human Geography 25 569 ^ 589 Camagni R, 1991, ``Local `milieu', uncertainty and innovation networks: towards a new dynamic theory of economic space'', in Innovation Networks: Spatial Perspectives Ed. R Camagni (Belhaven, London) pp 121 ^ 142 Capello R, 1999, ``Spatial transfer of knowledge in high technology milieux: learning versus collective learning processes'' Regional Studies 33 353 ^ 365 Chapman K, Cumbers A, MacKinnon D, 2002, ``Diversification and regional renewal: an assessment of SMEs in the Aberdeen oil complex'', Economic and Social Reasearch Council Research Project: Innovation, Networks and Learning, WP 6, Department of Geography and Environment, University of Aberdeen, Aberdeen, and Department of Geography and Topographic Science, University of Glasgow, Glasgow Collinson S, 2000, ``Knowledge networks for innovation in small Scottish software firms'' Entrepreneurship and Regional Development 12 217 ^ 244 Cooke P, Morgan K, 1993, ``The network paradigm: new departures in corporate and regional development'' Environment and Planning D, Society and Space 11 543 ^ 564 Cooke P, Morgan K, 1998 The Associational Economy: Firms, Regions, and Innovation (Oxford University Press, Oxford) Cumbers A, 2000, ``Globalisation, local economic development and the branch plant region: the case of the Aberdeen oil complex'' Regional Studies 34 371 ^ 382 Cumbers A, 2001, ``Remaking the case for public ownership: a critical review of privatisation and a strategy for democratic control of Scotland's energy sector'', discussion paper prepared for the Scottish Socialist Party, Department of Geography, University of Glasgow, Glasgow DTI, 1998 Our Competitive Future: Building the Knowledge Driven Economy Cm 4716, Department of Trade and Industry (The Stationery Office, London) Florida R, 1995, ``Towards the learning region'' Futures 27 527 ^ 536


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