Introduction

This chapter analyzes the pharmaceutical industry through the lens of a sectoral system of innovation. Intuitively, the pharmaceutical industry quite naturally lends itself to be analyzed as an SSI or as a network (see Galambos and Sewell, 1995; Chandler, 1990; Gambardella, Orsenigo and Pammolli, 2000; and McKelvey and Orsenigo, 2002). However, at the same time and precisely given the intuitive appeal of the notion of “system” and/or “network” for this industry, taking this approach forces the researcher to try to make this notion more precise and compelling and – above all – to clarify why and in what sense a “sectoral innovation system” approach is useful. This constitutes the general aim of this chapter.

Generically, the pharmaceutical industry can easily be considered as a system or a network because innovative activities involve, directly or indirectly, a large variety of actors, including: (different types of) firms; other research organizations, such as universities and other research centers; financial institutions; regulatory authorities; and consumers.

An innovation system or network is composed of actors, relationships among actors and other contextual features that affect the decisions of actors' behavior and the development of knowledge and economic competencies (Edquist and McKelvey, 2000). All the actors mentioned above are part of an SSI, and they are different in many senses. They know different things; they have different rules of action; they have different incentives and motivations, which may often conflict.

Introduction

The global software industry is young, large and very dynamic (Mowery, 1996). Markets for software as a commodity independent of computer systems have been established for little more than three decades, while a vast amount of software continues to be produced by firms to meet their own specialized information processing requirements. Revenues from software sales to European companies and individuals amounted to approximately €47.9 billion in 2000 and are expected to continue to grow at double-digit percentage rates in the near future (European Information Technology Observatory [EITO], 2001). At least 2 million European workers (1.35 percent of the European Union labor force) are directly engaged in the production of software as part of their direct job responsibilities.

Software is the collection of instructions that computers follow in executing the tasks of acquiring, storing and processing data and exchanging them with their human operators, as well as the guides and reference information that humans need to specify what can be, should be or is done in these processes. Like food, software can be pre-packaged, constructed from ingredients or served where it is consumed. When it is pre-packaged it is reasonable to think of it as a product, and when it is produced “to order” it may be thought of as a service. The nature of the market for software creation and exchange activities, and the technologies supporting these activities, are shaped by three fundamental issues: the nature of software as an economic commodity; the historical patterns of the division of labor involved in software creation; and distinctions in the design and use of software that define the nature of software markets.

Introduction

This chapter examines the remaking of innovation processes and boundaries in a traditional sector – the machine tool industry within the mechanical engineering segment of the economy. In the machine tool industry we observe both incremental and fundamental changes in recent years in the organization, scope and form of innovation. These offer useful insights into the driving factors of the development and disaggregation of sectoral systems of innovation. They also demonstrate the value of the concept of an SSI, complementing such parallel concepts as national systems of innovation and the idea of technological trajectories. At the same time, we argue that there is differentiation within and between SSIs that is context-sensitive, not only to broader national and international trends but also to the particular strategic orientations of constituent enterprises and regional technological infrastructures.

Our focus is the machine tool industry – a long-established sector in the regional industrial clusters of most advanced economies. We examine:

• The influence of the regional innovation system elements through reference to existing studies highlighting the regional aspects.

• The impact of the national innovation systems via comparison between countries for the same sector (Germany, Italy, the United States and Japan).

• Technological specificities by including an analysis of several characteristic technological developments in the sector.

We use these analyses to advance three principal hypotheses about sectoral innovation systems in machine tools.

1. The sectoral boundaries of the innovation system in machine tools have significantly shifted in recent years, in response to competitive and technological changes. […]

Introduction

This chapter provides an overview of findings and conceptual arguments with respect to services, and innovation in services, especially from an SI perspective. It draws especially on the work undertaken on innovation at airports, in healthcare and in retailing, but it will also be informed by wider considerations of services and their innovation activities. By “services,” we mean all sectors conventionally identified as services, although telecommunications and computer software – which are especially technological – are examined more fully and separately in other chapters of this book.

This study begins, in section 2, by outlining the economic significance of services and discussing what is meant by services. Section 3 concerns the SI perspective with regard to services, and summarizes the work undertaken on services within the ESSY project. Section 4 then draws on these studies to provide summary answers to the main questions raised by the SI perspective in relation to services. Finally, section 5 provides a new perspective on SIs that has evolved out of our work within ESSY.

The main points of the chapter are the following:

• Services are not (normally) engaged in the production of tangible products but cover a huge range of diverse activities, associated with various types of transformation (i.e. physical, spatial and temporal transformations, affecting people, things and information). The great diversity of service activities is not reflected in a comparable depth in the understanding of innovation in services, which has been neglected in favor of studies on manufacturing. […]

Introduction

The aim of this chapter is to analyze the chemical industry by using the theoretical framework of a sectoral system of innovation. The chapter describes the knowledge and technological base of the industry and explores the existence of complementarities among knowledge, technologies and products. It also examines the heterogeneity of the relevant agents in the industry, their learning processes and their competencies, the role of non-firm organizations and the characteristics of industry dynamics and (co)evolutionary processes (see chapter 1 in this book).

Previous studies describe the characteristics of the chemical industry and emphasize its heterogeneity (see, among others, Arora, Landau and Rosenberg, 1998). The chemical industry is composed of different subsectors, ranging from bulk chemicals to biotechnology. Each of them is characterized by specific features and is based on particular knowledge and technological bases. This heterogeneity, together with the century-long history of the industry, allows for a comprehensive study of the existence of evolutionary and coevolutionary processes in this sector.

The most relevant agents in the chemical industry are the established chemical companies, which emerged over time because of the importance of economies of scale at the level of the firm. These large companies could spread the fixed costs of plant setting and product development, and afford the big investments in production and marketing activities to reach geographically dispersed markets. Small and innovative chemical firms and public institutions interact with these large companies through cooperative and competitive relationships (Aftalion, 1999).

Introduction

This chapter aims to analyze the determinants of European industrial strength in a selected number of sectors vis-à-vis the United States and Japan. We take a comparative bottom-up approach, presenting a series of results from the analysis of the six sectors (pharmaceuticals and biotechnology, chemicals, telecommunications, software, machine tools and three subsectors in services) examined in this book.

Our starting point is that differences in firms' rates of innovation and countries' economic performance are greatly affected by the features of learning, the knowledge base, the types of actors and networks involved in innovation, and the institutional setting of innovative activities.

For the six sectors we enquire, where major differences in the structure and working of sectoral systems across countries are present, whether these differences affect the international performance of countries, and whether characteristics of the sectoral systems have been major factors for industrial leadership in each sector. Section 2 provides a link between the sectoral system approach and the analysis of the determinants of industrial leadership. The sectoral system approach suggests that, in the majority of cases, differences in technological expertise and their impact on sectoral performance cannot be understood in a vacuum or simply on the basis of investment strategies at the level of the firm; rather, that they need to be analyzed with respect to many other relevant dimensions that characterize a sector and its dynamics over time. Section 3 assesses the main relationships between the characteristics of the sectoral system and economic performance in sectors.

Introduction

This chapter focuses upon the “new” parts of the telecommunications sectoral system of innovation. This means that we concentrate on analyzing innovation in fixed data communications (including the Internet) and mobile telecommunications (including the mobile Internet). We largely disregard, for example, traditional telecommunications – i.e. equipment for fixed telecommunications systems and fixed telecommunications voice services. Rather, we concentrate on what is emerging and growing – i.e. how the SSI is currently changing and how previously independent systems are converging.

We address both equipment production (material goods) and the production (provision) of intangible service products. This is because innovations in manufacturing and in services are complementary – in both directions: service innovations are dependent upon manufacturing innovations and vice versa. It is hard to imagine a mobile phone call without a mobile handset, and vice versa. And the Internet is useless without content. Such a combined approach, addressing the production of goods and services alike, is unusual.

Equipment production includes routers and other kinds of exchanges for the Internet as well as base stations, exchanges and handsets for mobile telecommunications. It might be noted that such equipment is currently constituted not only by hardware but also by software, to a very large extent. Equipment producers such as Cisco and Ericsson employ thousands of software engineers and might therefore be labeled giant software firms.

The provision of Internet service products is often said to be accounted for by so-called Internet service providers (ISPs).

Introduction

Long ago it was recognized that, in economic life, “institutions matter.” Very influential schools of thought have been based entirely on this fundamental assumption. This is the case for the so-called “old institutionalism” promoted by Commons, Veblen and Mitchell, and this is the case too for the “new institutional economics” (NIE) school, associated with the names of Coase, Williamson and North. More recently Aoki, by defining a “comparative institutional analysis” research program, has explicitly put his name on the list. It is also the case that the French regulation approach (a research program defined in the mid-1970s) is based entirely on the idea that certain basic “structural” or “institutional” forms are the key elements underlying the dynamics of capitalist economies. In the same spirit the “varieties of capitalism” literature (see, for example, Hall and Soskice, 2001) has underscored the similarities and differences between economic and political institutions among countries, and their effects on economic behavior and performances.

In the more specific domain of the economics of innovation, the intuitions of the pioneering work by Freeman (1987) as regards the role of institutions has been completed and enlarged by Lundvall (1992), Nelson (1993) and, more recently, by Amable, Barré and Boyer (1997). All these national system of innovation or sectoral system of innovation approaches have brought the role played by institutions in the dynamics of innovation to the forefront.

Introduction

Innovation takes place in quite different sectoral environments, in terms of sources, actors and institutions. These differences are striking.

Let us take, for example, pharmaceuticals and biotechnology. Here science plays a major role, and several different types of firms are the protagonists of innovation, from large corporations to new biotechnology firms. Interaction between universities and venture capital is relevant. In this sector, regulation, intellectual property rights (IPR) and patents, national health systems and demand all play a major role in the innovation process. Quite a different set of actors, networks and institutions characterize innovation in telecommunications equipment and services, as a result of the convergence of previously separated sectors such as telecommunications, computers, the media and so on, and of the rapid growth of the Internet. In chemicals we see a different scenario: large innovators have shown great continuity in their innovativeness, and the scale of internal R&D has always been a major source of innovative advantage. In software, on the other hand, the context of application is relevant for innovation, and a vertical and horizontal division of labor among different actors has recently taken place. Finally, in machine tools incremental innovation is quite common, and R&D plays a less relevant role than in other sectors. Links with users and the on-the-job activity of skilled personnel is quite relevant. Differences in innovation across sectors also involve services, where products are closely related to processes, and knowledge embodied in equipment and in people is very important.

Introduction

This chapter aims to sum up and draw some conclusions about the sectoral systems studied in the book. The concept of the sectoral system has proven a useful tool in various respects:

• for a descriptive analysis of the differences and similarities in the structure, organization and boundaries of sectors;

• for a full understanding of the differences and similarities in the working, dynamics and transformation of sectors;

• for the identification of the factors affecting innovation and the commercial performance and international competitiveness of firms and countries in the different sectors;

• for the development of new public policy indications.

The chapter presents a brief characterization of the sectors examined in this book (section 1), followed by a discussion of the results concerning the role of the three building blocks – knowledge and technologies, actors and networks, and institutions (section 2) – and of the actual geographical boundaries (section 3) of sectoral systems in Europe. Then the main coevolutionary processes (section 4) are examined. Sectoral systems in services are different from those in manufacturing, and their differences are discussed in section 5. Finally, the international performance of Europe in the six sectors and the factors affecting it (section 6), the policy implications of a sectoral system approach (section 7) and the challenges ahead (section 8) are discussed.

As mentioned in the introduction, in the chapters of this book concerning specific SSIs sectors have been defined broadly: pharmaceuticals, chemicals, telecommunications, software and machine tools.

Introduction

It is generally accepted that governments have an important role to play in fostering the conditions supporting innovation and competitiveness. The economic and political discourse on these issues reflects existing political debates about the capacities of firms and the market mechanisms to deliver desired outcomes.

For about forty years, academic research, in the tradition of innovation studies and the economics of technological change, has attempted to sort out what has been learned from experience throughout the world. The record of experience that they have studied includes the ambit of current political discourse as well as the more extreme examples of state socialism and autocratic regimes.

From a policy viewpoint, the results of these investigations are somewhat disappointing. No simple and obvious formula for reliably achieving success in promoting or fostering innovation has emerged. Instances can be cited of both failure and success for the prescriptions suggested by each of the poles of the current political discourse. The results of academic discourse on innovation policy have been a series of frameworks for analysis and evaluation rather than success in formulating a universally applicable policy. The value of these frameworks is that they provide a tool kit for a structured analysis of policy objectives and instruments in relation to industrial conditions and behaviors.

The results of this book promise to lead to new insights into the conduct of innovation policy by national governments and by the European Commission.