Competing in an Innovation Intensive Environment

Competing in an Innovation Intensive Environment

How local infrastructure influences the ability to innovate.

Firms do not compete with each other in a vacuum. In particular, the way they are able to manage innovation will be influenced by the local environment in which they operate—their innovation system, and by their interactions with peers—their innovation networks, within their sector, their value chain, or based around specialized themes.

The characteristics of the socio-economic environment in which the firm operates strongly influence its ability and readiness to manage innovation, with regard to both the prevailing institutional arrangements and the local resource endowments.

The institutional arrangements relate first to the local regulatory and policy context. It concerns the management of property rights, in particular regarding IP but also investments and facilities, and how effectively these rights are defined and protected in practice. It also concerns local workplace and product regulations and norms, which might constrain how and where a firm is able to innovate. Finally, it conditions the firm's legitimacy and right to operate in its environment. Institutional arrangements also relate to prevailing technical standards and market mechanisms, which define how goods can be made, distributed, and sold. They can, in particular, strongly affect the rate of adoption of an innovation.

On the other hand, the local resource endowment relates to local or available suppliers, customers, investors, employees, and technologies. Local suppliers will influence input prices and available resources (for example, for raw materials or energy supply) while local customers' taste and needs will affect output prices. Locally active investors will influence both the risk profile and the funding of innovation projects, while the local human capacity will constrain the pool of competent human resources available. Finally, local technological sophistication will constrain the pool of available scientific and research competencies.

Taken together, these aspects will define the local innovation infrastructure that the firm can leverage or accommodate, and will affect the way it can develop knowledge, compete and create value. It is, for example, possible to rank countries according to their economic performance, government, and business efficiency as well as by the quality of their infrastructure; and to adjust the innovation strategy of the firm accordingly.

Adapting the way innovations are managed around these aspects is therefore critical, in particular for firms operating in environments with which they are not familiar, such as the subsidiaries of multinational companies active in emerging countries. While this is true for management processes and systems in general, it is particularly the case when considering innovation management and its social, cultural, technical, and regulatory dimensions. How this innovation infrastructure affects the emergence of innovations and how it can impact on economic development and wealth creation has led many policy-makers to intervene proactively to attempt to manage this infrastructure. There is therefore an ongoing debate about how much the state should intervene regarding innovation, beyond enforcing basic rules of law such as property rights, and providing basic services such as education or communication infrastructures.

But public authorities have sometimes had a bad track record regarding their ability to anticipate innovation, define in advance which technology path should be explored, and in particular to "pick winners." This can be linked in some cases to the complexity of the expertise required, but also to the tension between the intrinsic uncertainty and fast pace of innovation and the relatively slow pace of policy-making. By the time priorities are negotiated, agreed on, translated into legal frameworks and implemented, and all stakeholders involved have adjusted their strategy, new knowledge that questions the initial assumptions often emerges.

There is, however, a strong case that, rather than trying to pick winners, public authorities have an important policy role to play regarding the development of innovation. This strong case relates to the existence of market failures and positive network externalities linked with innovation. It motivates the implementation of public support to innovation at regional and international level. Market failures arise when dealing with innovation opportunities because innovation projects are not simply goods that can easily be traded. Innovation opportunities often involve the development of knowledge that is a public good and cannot be appropriated easily (hence the need for IP rights and confidentiality or exclusivity agreements). Innovation also typically involves high uncertainties and irreversible commitments to specific assets which generate risk aversion, agency costs, and information asymmetries. Finally attractive innovation opportunities can relate to non-solvent markets—for example, in the healthcare or environment sectors.

Those market failures imply that, without adequate public intervention, some attractive innovation opportunities would not be pursued by autonomous economic agents (investors or managers) and therefore could be lost.

On top of these market failures, innovation opportunities can also involve positive externalities. The emergence of innovation contributes to welfare, as problems are solved and new needs dealt with. Furthermore, independent innovation projects can benefit from economies of scope and network effects if they are coordinated or active on the same markets. Finally, the way an innovation is managed by one firm can have important positive spillovers for other firms, through, for example, the development of associated products and services or complementary assets.

Those positive externalities imply that some innovation opportunities that would have a positive socio-economic impact would not be pursued by autonomous economic agents, which are assumed to take into account only their own direct costs and benefits.

As a consequence, policy-makers have put in place a wide range of innovation support mechanisms, with varying levels of success in terms of take-up, effectiveness and positive impact. Those support mechanisms may be targeted at individuals, prospective entrepreneurs or specific social groups such as students, unemployed people or specific employment fields (engineers, scientists and so on). They may also be targeted at existing or emerging ventures, either high-potential small businesses such as start-ups, "gazelles" (fast-growing firms), spin-offs or more mature firms considering investment in innovation.

The innovation support mechanisms put in place by public authorities include financial support, either direct (such as grants, subsidies or loans) or indirect (such as market-making initiative or regulatory incentives). They also include logistics support, through the provision of infrastructure (such as science parks or research laboratories), expert services (in fields such as IP management or exports) or network-building initiatives (such as directories or special events and fairs). They can also involve targeted advice, information or training services, either online or through dedicated programs.

While those support services might involve significant search and administrative costs and match more or less the needs of a firm, it is important for innovation managers not only to know about and use them, but also to influence their design, development and management—for example, through direct contact with policy-makers or through professional associations.

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This excerpt from Developing Innovative Organizations: A Roadmap to Boost Your Innovation Potential, © Benoît Gailly 2011, is printed with the permission of the publisher, Palgrave Macmillan.


Benoît Gailly is Professor in Innovation Management and Strategy at the Centre of Research in Entrepreneurial Change and Innovative Strategies of the Louvain School of Management, Université Catholique de Louvain, Belgium. He has a Master's degree in Engineering, a PhD in Applied Mathematics, a Master's in Technology Studies and a Master's in Business Administration. His main research themes are innovation capabilities and innovation support systems, from both a policy and a business point of view. He also co-directs the University Executive Education Programme in Innovation Management. As a consultant, his clients include international corporations in the glass, chemicals, financial, petrochemicals, ICT, pharmaceuticals, raw materials, and electronics sectors and the European Commission, as well as numerous high-tech start-ups and academic spin-offs.