Analytical framework

A new stream of study in innovation, System of Innovation (SI), championed by Christopher Freeman, Bengt-Ake Lundvall and Richard Nelson evolved in the late ‘80s as a departure from mainstream study of innovation (Freeman, 1987; Freeman and Lundvall, 1988; Lundvall, 1985; Nelson and Winter, 1982). Freeman introduced the concept in his study of Japan (Freeman, 1987), Lundvall further developed it using historical-empirical study of Denmark (Lundvall, 1992) while Nelson consolidated the concept in an edited book detailing studies of National System of Innovation (NSI) (Nelson, 1993; Lundvall, 2011)

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System of Innovation (SI) is a framework distinguished by characterising innovation as interactive, emphasises the importance and complementarities of variants of innovation (i.e radical, incremental, technical, organizational or operational, etc) as well as reflecting cultural and developmental trajectories of each nation (Cassiolato et al, 2012).

Even though developed in the advanced countries, the approach is specifically relevant to developing countries concerning recent assumptions in development that link innovation with development. This thinking contends that, one, capabilities rather than resource endowment is now considered more important in driving development. Two, there is increasing focus on knowledge as a crucial element of development, especially with the world economy being knowledge-driven. Third, institution is now understood to be an important foundation for development (Johnson et al, 2003).

One of the distinguishing features of SI framework is its broader view and definition of innovation. It is conceptualized as continuous, cumulative and incremental diffusion, absorption and use of innovation. In addition, it identified interactive learning taking place in production, procurement and sales as important sources of innovation (Johnson et al, 2003). The theoretical framework defines innovation as ‘’ the process by which organization master and implement the design, management and production of goods and services that are new to them, irrespective of whether or not they are new to their competitors – domestic or foreign’’ (Lastres, 2003, 6)

System of Innovation is a concept used to describe the network of relationship, internal and external, that takes place before innovation come to being, implying that firms do not innovate in isolation but through constant interaction with the environment within which they operate. This framework contends that various activities spanning institutions, infrastructure finance and skills interact at external environment to make innovation possible. National system of innovation is used to denote interdependencies that take place within a spatial space (Lundvall, 1992, Nelson et al, 1993)

The interactions taking place include that with organization such as suppliers, customers, competitors or non firm bodies such as research institutions, government, laboratories. In addition, the institutional influence such as law, rules, norms and routine exacts considerable influence on innovation activities. The term was first used by Freeman who defined it as networks in relation to technology diffusion (Edquist, 2004). A more comprehensive

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definition is given by Edquist (1997, 14) as ‘’all important economic, social, political, organizational, institutional and other factors that influence the development, diffusion and use of innovation’’.

The acceptance of NSI was fast and rapid such that international organizations such as OECD, UNCTAD, UNIDO and National government (eg, Sweden) adopt substantially for policy measures to aid innovation (Edquist, 2004).

According to Edquist, (2004), the following constitute the strengths of the approach:

i) Emphasis on learning - innovation essentially entails producing new or combination of knowledge.

ii) Holistic and interdisciplinary approach – unlike mainstream innovation approach, it looks at wide arrays of organizations and institutions as well as social, economic and political contexts, which foster and promote innovation.

iii) Historical and evolutionary perspective – taking its origin from the work of Lundvall 1988 on Danish dairy farms, it is historical. In addition, it contends that there is no optimal system worthy of emulation since each system develops at its own pace and within its own context. However, even though there is no optimal as a model, there is a ‘’good’’ which can be used as a benchmark.

iv) Interdependence and non-linearity – the nature of the system entails interdependent and interrelated parts working harmoniously together toward achieving a unified goal. SI approach emphasises this much. In addition, it departs from belief that innovation takes place in a well defined sequential order but rather, through interaction with various other entities. v) Goes beyond only product and process - SI approach contends that there is more to innovation than product and process innovation. Thus, the approach beams searchlights on other less emphasised aspects of innovation.

vi) Importance of institution - this approach puts a strong emphasis on institution as a vehicle to promote innovation. The advanced countries of the West and Far East that caught up – Germany and Japan - all pay particular attention to the role institutions played in their technological advancement. Thus, institution is central to the notion of innovation unlike developmental economics that advocates for institutional intervention only when there is a so-called market failure.

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The major weakness of the approach, according to Edquist, (2004) concerns conceptual definition of some terms such as institution. This term could refer to institution such as organisations, government or it could mean rules, law, and regulation. To avoid the confusion, the latter is often referred to as hard and the former soft institution.

Another weakness of the approach is the difficulty in drawing boundary of NSI in view of boundary-spanning activities of big multinational firms in knowledge driven economy. In a globalised business world, multinational firms have value chain spanning several countries and, as such, it is difficult to limit the boundary to a nation. However, the systemic nature has been extended beyond national boundaries, in view of nature of knowledge economy, to include sectoral, technological or regional boundaries.

Jensen et al, 2007 identified two routes to innovation emphasising the fact that adopting both routes make a firm more innovative. They are science technology and innovation (STI) and doing, using and interacting (DUI) routes. The former puts a lot emphasis on scientific knowledge and codifications while the latter emphasises interaction with users.

In the advanced countries there is strong inclination to STI mode due to technological advancement and being knowledge economy while developing countries will necessarily be DUI mode. STI employ science and technical knowledge with most of its innovation evolving from laboratories, universities and research centres. On the other hand, DUI is mostly tacit knowledge which is gained by doing and interacting.

In application to innovation system narrow view equates innovation with science and technology while the broad view includes learning and competence building leading to innovation. With respect to developing countries, narrow and broad perspectives of IS can be likened to STI and DUI mode of innovation. The former emphasises science and technology while the latter broad interaction, learning and competence building taking place alongside production and distribution of goods and services. The DUI modes thus becomes more relevant to developing countries’ context since they perform less science oriented and R&D activities (Lundvall, Joseph, Chaminade and Vang, 2011).

However, some scholars have argued that developing countries lack a fully formed system consisting of network of interactions among several actors in a geographical location with active contribution of state(Lall, 1999; Viotti, 2002). This is the system in developed and advanced countries. Nevertheless, a perceptive look at developing countries will reveal

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absence of this fully formed system, suggestion that no system is really in existence prompting Lall (1992) to suggest that, it is technology system, rather than innovation system. Similarly, Arocena and Sutz,(2000) contend that there is no fully formed ‘’system’’ with respect to network of interaction in the developing countries. For instance, governmental agencies are created but they are not really effective in promoting innovation.