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Regional Differences in Innovation and Economic Performance

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My paper from the 2011 Atlantic Schools of Business conference:Innovation is a key mechanism for improving economic productivity. The literature suggests approaches to innovation are socially embedded, and protean industrial cultures outperform autarkic ones. This study reports on differences in innovation culture across Canada’s provincial ICT industries, and the impact of those differences on employment growth and decline.

Text of Regional Differences in Innovation and Economic Performance

  • 1. ASB 2011 Ryan MacNeilCharlottetown, Prince Edward Island Department of Business & Tourism Mount Saint Vincent University REGIONAL DIFFERENCES IN INNOVATION AND ECONOMIC PERFORMANCE IN CANADAS INFORMATION TECHNOLOGY INDUSTRIES1 Innovation is a key mechanism for improving economic productivity. The literature suggests approaches to innovation are socially embedded, and protean industrial cultures outperform autarkic ones. This study reports on differences in innovation culture across Canadas provincial ICT industries, and the impact of those differences on employment growth and decline. Innovation and Economic PerformanceNeoclassical Economic TheoryGovernment policy in Canada is often informed by neoclassical economic theory. As the theorygoes, regional output of a commodity (Q) is a function of the capital (k) and labour (L) employedin its production (see Equation 1). By modifying this function, it can be shown that an increase inproductivity (defined as output per unit of labour) is the result of an increase in the ratio of capitalto labour (see Equation 2). Therefore, increases in productivity can only be achieved two ways:labour must remain constant while capital increases, or capital must increase faster than labour.Unfortunately, this simplistic version of the theory suggests that technological progress has noqualitative effect on productivity. Technology can only manifest as additional capital inputs andreduced labour inputs. Q = f (k, L) (1) Q / L = f (k / L) (2)1 The author wishes to acknowledge Peter V. Hall, Simon Fraser University, for valuable feedback on anearlier approach to this topic.
  • 2. Endogenous Growth TheoryAcs and Varga (2002, p. 137) compare neo-classical and endogenous growth theories and explainthat the latter allows for the modeling of technological change as a result of profit-motivatedinvestments in knowledge creation by private economic agents. They argue that neo-classicaltheory is limited by its assumption of perfect competition and constant returns to scale. In fact,technology is not a purely public good since knowledge can be sticky (Bourgeois andLeBlanc, 2002) in time and space. Patents and tacit knowledge can create disparity intechnological diffusion. Firms and regions that can develop sticky innovations gain marketpower and fixed-term monopoly profits (Bourgeois and LeBlanc, 2002).Endogenous growth theory attributes productivity growth beyond a change in the capital-labourratio to innovations. These take the form of product or service innovations, process innovations,and/or organizational innovations (Morgan, 1997; Bourgeois and LeBlanc, 2002; and Betts,1998). Product or service innovations can be incremental changes to existing products or services,or entirely new ones. Process innovations can either reduce the costs or improve the quality ofproduction (for example, just-in-time inventory systems). Organizational innovations involvesome form of structural advantage, such as the way Walmart coordinates its distribution chainthrough computerized inventory systems. Morgan (1997) credits Marx and Schumpeter forintroducing the idea that innovation is the root of regional development in capitalist economies.Schumpeters seminal work (1943) on innovation and capitalism argues that economic growthrequires innovation. Even when experiencing equal capital and labour growth, the theory suggeststhat innovating firms will see growth in output over those which do not innovate. Thisrevelation has encouraged governments to divert some resources from expensive capital-mobilization strategies to innovation-catalyzing ones. However, encouraging innovation defiessimple government intervention.Not Simply Research and DevelopmentA typical government initiative might involve encouraging research and development. Whendiscussing the downfalls of typical job-creation strategies for declining regions, Hall (1984)suggests using an existing or deliberately implanted research and development tradition tocreate an entrepreneurial tradition. He is cautious, and notes, such bold strategies may succeed,but they are likely to take a long time to produce substantial resultsno single strategy, but rathera combination of different approaches, will be appropriate (p. 35). Despite this hesitation, andthe tradition of peer-juried awarding of university research grants, Hall concludes with a call forthe establishment of regional quotas to the Research Councils (in the UK, USA and Canada).Indeed, there is evidence that the Canadian governments university research grants neglectdisadvantaged regions. Over its first five years, the Canada Foundation for Innovation investedonly 3.2% of its total contributions in Atlantic Canada (Beaudin and Breau, 2001, p. 133). Butonly measuring innovation in terms of gross expenditures on research and development (GERD)is inappropriate. GERD is meant to reflect the degree of innovative effort and intent, not
  • 3. necessarily innovative potential and success (Bourgeois and LeBlanc, 2002, p. 170). Despite alow level of government R&D funding grants, Bourgeois and LeBlanc found that AtlanticCanadian firms in knowledge intensive industries (computer services, engineering consultantservices, and other scientific and computer services) have innovation rates near the nationalaverage (2002, p. 71). However, this innovation is much less likely to involve the introduction ofnew capital-intensive technologies than elsewhere in Canada because financial capital is lacking.They say that, studies in the last ten years are increasingly rejecting R&D as a master key thatunlocks a linear innovation process, seeing it instead as one of several pieces to the innovationpuzzle (p. 170).There is a myth that innovation is unique to technology industries and only happens in R&Dlaboratories. Bourgeois and LeBlanc, as well as Beaudin and Breau, note the importance ofinnovation to firms in the primary and service sectors. For example, in the Atlantic fishprocessing sector between 1988 and 1996, the number of labour-hours declined 40% but thevalue-added per hour rose 35% (Beaudin and Breau, 2001, p. 89). These industries acquire ideasnot from in-house R&D but by tapping into the knowledge and ingenuity of their workers,suppliers and customers by networking with research institutions, universities, competitors,governments, and other stakeholders (Bourgeois and LeBlanc, 2002, p. 18). Maskell andMalmberg (1999, p. 21) argue that knowledge-based competition is forcing firms to place a newpremium on establishing cooperative relations with firms and institutions with complementarycompetencies.There is a burgeoning volume of research on the social-embeddedness of innovation. Notedacademics argue that community networks encourage the free-flow of ideas and therefore fostercontinuous innovation. Morgan (1997, p. 493) says that, innovation is shaped by a variety ofinstitutional routines and social conventions. The Danish Aalborg group of economists goes sofar as to say that knowledge is the most strategic resource and learning the most importantprocess (Ibid.) for regional development. This connects with research on Japanese organizationalinnovations that recognizes tacit knowledge as highly personal and difficult to measure. Nelson(1993) is recognized as the pioneer of research on national innovation systems. 2 He attributes therise of Japanese leadership in automotive and consumer electronics production in part to interfirmlinkages (Nelson, 1999, p. 5). Japan is renowned for unique supplier-customer partnership chainsat the interfirm level. At the national level, Japan also has strong interfirm institutions (like tradeand professional associations). Meanwhile, at the intrafirm level, the Japanese kaizen3 approachresults in horizontal information flows and decentralized learning. Storper (1992, 1994, 1995) iscredited with relating these issues of learning, innovation and institutions to the study ofeconomic geography. His work outlines the importance of untraded interdependencies inorganizational learning.Feldman and Florida (1994, p. 211) conclude that a broad case study literature, encouragesscholars to shift focus from the firm-level to a consideration of innovation as a social process.They argue that innovation stems from an agglomeration of social and economic institutions2 Note that Nelson does not consider geography to be as important to innovation as the other authorsreferenced here. Nelson (1999, p. 8) says, it is the connections, not geographic proximity at all.3 continuous improvement through interactive learning and problem-solving (Morgan, 1997, p. 494)
  • 4. which form part of a broader social structure (Ibid., p. 220). Saxenians work contrastingMassachusetts Route 128 and Californias Silicon Valley supports a similar view. Shedescribes the innovation in these two regions as ecosystems, Silicon Valley is like the rainforest. Its a decentralized system with a complex and continually diversifying mix of species, flora

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