Innovation systems

Week 11

Learning objectives:

  • describe an innovation system
  • explain how innovation systems might emerge in ‘nature’
  • explain what governments might do to help or hinder innovation systems in a global economy
  • understand the connection between innovation systems and Smardon’s central critique of Canadian innovation policy
What is the Canadian experience of local, regional and national innovation systems?


“Today, against the background of intensifying world competition, initiatives are underway with the awareness not merely of increasing the quantity of research and development resources such as research expenditure and research personnel, but of correcting systematic defects that lower the relative efficiency of research and development efforts, interfere with the flow of knowledge and technology, and hamper the function of innovation systems. In engaging in such initiatives, it is necessary to incorporate the outstanding parts of the innovation systems of other countries, and establish national innovation systems best suited to the countries concerned.”

Any system consists of inputs, outputs, stocks, and flows, checks and balances, but a system is more than the sum of its parts, and you have to look beyond the structure of the parts to look at the rules of the game and the way that the system is manipulated by the players around it.  (Meadows, 2008). For example, a bathroom might include a bath tub, with taps to let the water in and a drain to let the water out.  The flow of water in from the tap and the flow of water out through the drain affect the stock of water in the tub.  An important part of the system is the person turning on the taps, jumping in the tub (displacing water) and letting water out the drain by lifting the plug. This is easy to understand, but systems can get very complex.


An innovation system is a way of thinking about innovative processes, but there are lots of ways to describe it.  We might describe the flow of ideas as inputs, reflected in new patents, and a stock of usable technology, which becomes an output in new production processes, resulting in more production and new employment possibilities. But beside this we might envision another system in which there is a stock of labour (population available for employment) and a flow of demand for labour (in) and supply of labour (out) affected by technology. Another system provides training and education: those without useful skills in, and those with employable skills out.


Various definitions of innovation systems are available online. You’ll notice that they include human capital, social capital (the network of trusted relationships), public and private sector institutions (rules, or ways of organizing social behaviour) incentive structures (what motivates people to action), and the concept of transaction costs. We’ll spend some time talking about these elements.


The idea of innovation systems in ‘nature’ is probably a fiction like the ‘social contract’.  One idea is that a concentration of creative people comes together in a location, faced with a need (necessity is the mother of invention) and great things emerge – Silicon valley is sometimes cited:

“The PC industry is leading our nation’s economy into the 21st century.. there isn’t an industry in America that is more creative, more alive and more competitive. And the amazing thing is all this happened without any government involvement.” Bill Gates, 1998. (Quoted by Weiss, 2014)

But as Weiss points out, there was actually a lot of government involvement at every stage. Even two micro examples of innovation – Haliburton forest in Ontario, or bitcoin currency innovations cannot exist independent of government frameworks of regulation, legislation, and in many instances, tax incentives and direct grants – although the general rule seems to be that larger players get more, and smaller players get less.


This makes national systems of innovation particularly important. Innovation systems inevitably involve government and governance, including the ‘policy marketplace’ we looked at in week 3. So what can governments do to help or inadvertently impede innovation? Smardon’s central criticism is that giving incentives to companies that are controlled abroad doesn’t work because patterns of dependent development allow any innovation to be absorbed and redistributed according to the interests of the parent corporation, frequently bypassing any national interest in benefitting from innovative production. Smardon’s findings suggest that national systems of innovation should focus on the larger pattern of dependent development, and the social relations that reinforce it. This is a tough political problem, for the reasons Smardon suggests. The Haliburton forest example, and the email I sent from Tampere, suggest alternatives: focus on nurturing small start-ups.


The diagram above from the Japanese Ministry of Education, Culture, Sports, Science, and Technology illustrates some of the key connections.  The photo I sent of Tampere University, adjacent to the technology and innovation centre, illustrates the close collaboration fostered between universities and commercial enterprises. The policy arrows in the layer below “knowledge base” illustrate the policies that can be tailored to support innovation:

  • economic policy (monetary, fiscal, trade, development);
  • development of social infrastructure
  • education policy
  • labour policy
  • science and technology policy
  • tax and financial policy


To these, you can add the other items in Bardach’s checklist of things government does.


Two major challenges confront government in Canada seeking to support networks of national or regional innovation.  The first is that small start-ups and local players, which can benefit most from these policies if government gets them right, and which are most likely to remain in Canada (at least while they remain small and local) have the least power to lobby or influence government policy. The second is that trade liberalization and removal of barriers to foreign ownership mean that as soon as a small company demonstrates significant innovation, or (worse) competition with major international players, they tend to be bought up along with intellectual property rights, patents, plant, and even human capital.  If you are a market enthusiast and believe that a rising tide lifts all boats, and wealth anywhere will eventually trickle down to benefit everyone, then the internationalization of systems of innovation (Freeman, 2002; Carlsson, 2006) will not dismay you.  However, if you are a government concerned with tax revenues, full employment, and increasing constraints on government action through trade liberalization, then your central concern will be the government role in the ‘triple helix’ of government-university-industry relations (Etkowitz and Leydesdorff, 2000).

Required Reading

Smardon, Chapter 1, National systems of Innovation theory – one of four explanations of technological development.

Optional Reading

  • Carlsson, B. (2006). Internationalization of innovation systems: A survey of the literature. Research policy, 35(1), 56-67.
  • Cooke, P., Uranga, M. G., & Etxebarria, G. (1997). Regional innovation systems: Institutional and organisational dimensions. Research policy, 26(4), 475-491.
  • Dartnell, L. (2014) The knowledge: How to Rebuild our World from Scratch. New York: Penguin.
  • Etzkowitz, H., & Leydesdorff, L. (2000). The dynamics of innovation: from National Systems and “Mode 2” to a Triple Helix of university–industry–government relations. Research policy, 29(2), 109-123.
  • Freeman, C. (2002). Continental, national and sub-national innovation systems: complementarity and economic growth. Research policy, 31(2), 191-211.
  • Lundvall, B. Å. (2007). National innovation systems—analytical concept and development tool. Industry and innovation, 14(1), 95-119.
  • Meadows, Donella (2008) Thinking in systems: a primer. White River Junction, VT: Chelsea Green.
  • Nelson, R. (1998). National innovation systems. Regional innovation, knowledge and global change, 11-26.
  • Nelson, R. R. (Ed.). (1993). National innovation systems: a comparative analysis. Oxford university press.
  • Niosi (2000) on Canada’s national system of innovation. Montreal: McGill-Queen’s University Press
  • North, D. C. (1990). Institutions, institutional change and economic performance. Cambridge university press.
  • Rogers, E. M. (2010). Diffusion of innovations. Simon and Schuster.
  • Weiss, L. (2014). America Inc.?: Innovation and Enterprise in the National Security State. Cornell University Press.
  • Hughes, Thomas () thomas edison’s electrification of europe, systems theory (1986) ?


Complete required reading and prepare for seminar.

Self-Assessment Questions

  • What is a national system of innovation?
  • What are the three theoretical sources crucial to the NSI perspective?
  • (1) Why is Schumpeter and change in the  ‘techno-economic paradigm’ important?
  • (2) How do different technological capabilities lead to different export capacities?
  • (3) How do firms learn from each other to enhance innovation? [If you want to pursue this further, consider Rogers, 2010, and North, 1990, for which he got a Nobel in economics]
  • What are local and regional systems of innovation (i.e. within national boundaries)?
  • Are local and regional systems of innovation possible in an era of trade liberalization and reduced boundaries to international capital flow?


Participation evaluation for week 11 Concepts will consist of:

  • 60s: Describe the essential elements of national systems of innovation
  • 60c: What are the major constraints on national systems of innovation
  • 5R: Faced with the increasing constraints of trade liberalization and the legacy of dependent development, what is the best approach for Canadian government to enhance innovation and to ensure that the benefits remain in Canada?  Discuss for 5 minutes. Present the results in 60s. There is an opportunity for a minority report as a 60c.


Questions and discussion