Promoting innovation systems as a response to the globalising learning economy

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1 Promoting innovation systems as a response to the globalising learning economy Second draft of Contribution to the project Local Productive Clusters and Innovations Systems in Brazil: New industrial and technological policies Björn Johnson and Bengt-Åke Lundvall, Aalborg University June 1, 2000 (Synopsis title: Policies to promote national systems of innovation in the knowledge economy) Introduction Taking the most recent World Development Reports as our starting points, we show how the task of designing and implementing development strategies has, become even more demanding and complex than it was 10 years ago. In spite of the apparent success of the new economy in the US and of the increasing predominance of finance capital at the global level, there is, according to these reports, no more a Washington consensus on one best-practise strategy for developing countries. It is increasingly realised that there is a new kind of competition where competence building and innovation has become important for all players in the global markets and this challenges both old forms of state intervention and neo-liberal dogma. In the new context institutional learning and social capital tend to become key elements in development strategies. At the same time, the globalisation process and the political discourse connected to it increase the pressure on low income countries to take the the ecological and social dimensions of national development strategies seriously. We propose that, in order to cope with this globalising learning economy where the transformation pressure is increasing while, at the same time, ambitions are broadened to take sustainability into account, the concept of innovation systems is helpful both as an analytical tool and as a guide for policy making. We point to the need to integrate different policies related to competence building and innovation both at the national and the regional level and to rethink them so that they promote sustainable systems of competence building and innovation. But even with well designed national policies the global context will impose instability and crises in the economy. We end up with discussing some of the 1

2 fundamental inherent contradictions in the globalising learning economy that call for institutional reform at the global level. A new and more complex agenda for economic development The end of Washington Consensus According to the most recent World Development Reports there is no longer a Washington Consensus on concrete development policies. The Washington Consensus was a highly market-oriented view on development, which emerged in the 1980's and was reflected in the policy recommendations of international organisations such as OECD, IMF and the World Bank. The emphasis was on macroeconomic balance and getting prices right. In the words of former World Bank chief economist Joseph Stiglitz, the advice was to " keep inflation to a moderate level, limit the size of the fiscal deficit, avoid introducing large distortions in the economy, open the economy to foreign competition " (Stiglitz, 1998, p.28). The Washington Consensus tried to define a "best practice" development strategy; a strategy with a supposedly very wide if not completely general - range of applicability. It has now been recognised that such a best practice does not exist. Macroeconomic balance is still regarded as a necessary part of an effective development strategy, but it is now emphasized that it has to be complemented with institutional innovations: "But an essential part of the new development strategies involves the creation of institutions and the changing of cultures the movement to a culture of change and science, where existing practices are questioned and alternatives constantly explored" (Stiglitz, 1998, p. 29). Since it is impossible to define an optimal institutional set-up, it also becomes futile to search for one best practice in development strategies. The more institutions and knowledge and the relations between them are emphasised, the more obvious it becomes that there are different development roads and that each country, at least to some extent, has to develop its own strategy. The focus is also increasingly put on how the different development factors interact and feed upon each other. Investment in physical capital, natural capital or knowledge capital can not alone explain development. And when it comes to policy making, it is no longer considered to be a good idea to concentrate exclusively on one key factor. There is an increasing recognition of a need to combine several different kinds of policy when formulating development strategies at the national level. The new emphasis on knowledge and institutions Another important basic assumption originating from standard economic models, now challenged, has been that information and knowledge float more or less freely between countries. That the costs in this connection are low and presently further reduced by information technologies and the internet is an idea, which still seems to have some 2

3 prevalence both among policy makers and in academia. This reflects the view among economists that it is legitimate to reduce knowledge to information. The learning economy is not a high technology economy One way of characterising the new context of intense competition and rapid change is to define it as a learning economy (Lundvall&Johnson, 1994; Lundvall, 1996). The main reason why learning has become more important is the dialectics between learning and change. Rapid change implies a need for rapid learning, and those involved in rapid learning impose change on the environment and on other people. Simply defined, a learning economy is an economy where the ability to learn is crucial for the economic success of individuals, firms, regions and national economies. Learning refers to building new competencies and establishing new skills and not just to getting access to information. (OECD 2000). It should be obvious, from what has been said so far, that the learning economy is not necessarily a Hitech economy. Learning is an activity which takes place in all parts of the economy, including so-called low-tech and traditional sectors. Low income countries and regions are as strongly affected by the learning economy and experience the need for competence building even more strongly than the metropoles. One alternative concept to 'the learning economy' is 'the knowledge-based economy' (OECD, 1996). The most fundamental reason for preferring 'the learning economy' as the key concept is that it emphasises the high rate of economic, social and technical change that continuously underlies the formation and destruction of specialised knowledge. It makes it clear that what really matters for economic performance is the ability to learn (and forget) rather than the stock of knowledge. Lately, however things have changed also in this respect. It is now increasingly recognized that both the role of knowledge and the problems of knowledge transfer have been underestimated in development theory and policy. This is reflected in the World Development Report from 1998/99: "This World Development Report proposes that we look at the problems of development in a new way from the perspective of knowledge" (The World Bank, 1999, p.1). The report underlines that it will not be easy to close the knowledge gaps ("tap global knowledge and create local knowledge") and that governments have to formulate national strategies including policies for acquiring, absorbing and communicating knowledge. Globalisation and sustainable development The economics of development strategies have tended to build upon a dynamic production function approach: Together with labor and capital, knowledge (technology) and nature (land) are regarded as factors of production. The factors of production deliver inputs to the production process, which in turn delivers outputs in the form of 3

4 private and public goods and services. If the form of the production function can be formulated, it is possible to analyse the contribution of increases in each of the factors of production and improvements in their efficiency to economic growth and development. Increasingly, however, this simplified perspective has been challenged. The 1999/2000 report (Entering the 21 st century) concentrates on the two combined phenomena globalization and localization and the message is that new institutional responses are needed. At the same time it points to the growing importance of social and natural capital. Globalization means that national government need to seek agreements with other governments and international organizations. Localization requires them to cooperate with cities, regions and local communities. In this connection the importance of social capital is emphasized: "- indeed it is hard to overemphasize the importance of networks of trust and association for sustainable development" (p. 18). The globalising learning economy The learning economy concept (Lundvall and Johnson 1994, Lundvall and Borràs 1999) is based upon the hypothesis that over the last decades an acceleration of both knowledge creation and knowledge destruction has taken place. Individuals and institutions need to renew their competencies more often than before, because the problems they face change more rapidly. And at the same time the segments of society that is affected by accelerating change has grown considerably. Therefore, in a wide set of economic activities what constitutes success is not so much having access to a stock of specialised knowledge. The key to success is, rather, rapid learning and forgetting (when old ways of doing things get in the way of learning new ways). On the other hand, we also refer to the so-called globalisation. In recent years the interconnections between geographically different part of the world have considerably increased and this has also multiplied the learning opportunities. But globalisation is an uneven and ongoing process. In some areas such as markets for financial assets it has developed very far while in others, more directly related to competence building and innovation, national borders still remain crucial (Iammarino and Archibugi, 2000). Neither does the globalising process provide advantages to all social groups and regions and it does not automatically reduce disparities. While some parts of the economy are at the core of the current trends, others have been marginalized. We have therefore preferred to refer to a globalising rather than to a global economy to stress that the current state of the world remains far from one characterised by a trully global economy and society. It is important to emphasise how the learning economy and the globalising economy are strictly connected. A process of cumulative causation has taken place. On the one hand, the development of an integrated world economy has allowed to acquire information, expertise and technology at a faster pace and often at lower costs than in the past. On the other hand, the current globalisation has been nurtured by a generation of new technologies. ICTs have in other words acted as the material devices to allow globalisation to occur (Archibugi and Lundvall 2000). 4

5 Furthermore, the report underlines that development does not trickle down from economic growth alone, but has to be pursued through a range of outcomes related to equality, education, health, the environment, culture, and social well-being (p. 20). It suggests that a range of complementary policies are needed. These include policies to meet environmental challenges, which in the report are regarded as a dimension of globalization. This is just one illustration of how globalisation and the growing international interdependence tends to impose an even more ambitious and complex agenda for the development of low income countries. Not only are these countries expected to enter on growth trajectories that make it possible for them to catch up with the OECD-countries. They are also expected to do so with respect for basic social and political rights and with some restraint when it comes to the negative environmental impact. 1 They are thus faced with the challenge of designing ways to increase international competitiveness, that are socially and ecologically sustainable. Another way to present the new and more ambitious agenda for development is to define four different kinds of capital that need to be accumulated, reproduced and combined in order to ensure sustainability. Diagram 1: Resources fundamental for economic growth combining the tangible and reproducible dimensions Easily resources reproducible Less easily reproducible resources Tangible resources 1. Production capital 2. Natural capital Intangible resources 3. Intellectual capital 4. Social capital The diagram illustrates that economic growth is faced with a double challenge in terms of sustainability and that there is an immanent risk of undermining not only the natural basis of material production. While the creation of tangible capital may be threatened by a neglect of environmental sustainability, the production and efficient use of intellectual capital is as fundamentally depending upon social capital. A development strategy that focuses only on production capital and intellectual capital is not sustainable. Innovation may have a positive role in bolstering sustainability. Technical innovation, for instance in terms of developing substitutes to naturally scarce raw products, may help to overcome the fact that natural capital cannot always be reproduced. In a similar vein social innovation and institutional redesign - for instance aiming at reducing corruption and increasing popular participation in the implementation of development programmes - may help to overcome a crisis where social capital is foundering. In both 1 In fact, it is assumed that growth trajectories are only economically viable if they. at the same time, are socially and environmentally sustainable. 5

6 cases it is important to note that the workings of unhampered market forces will erode the basis of economic growth. This perspective calls for a systemic approach and it indicates a broader and more interdisciplinary approach to economic growth than standard economics. It also differs in being more explicit in terms of the institutional assumptions made and especially in avoiding any assumption about factors being independent. This reflects the system's perspective with its emphasis on virtuous and vicious circles and on match and mismatch between elements and subsystems. Market or state The traditional ideological battle about the role of the market and the state has also to be reconsidered. Economic reform aiming at liberalisation has worked in some countries but not in others. Some of the most successful countries have been characterised by active government intervention, while other countries with interventionist states have had very little success with promoting economic development. According to the World Bank the question is no longer if it is the market or the state which should be the driving force in development, but how the market and the state may complement each other and interact (World Development Report, 1999/2000). The report from 1997 (The State in a Changing World) also focuses on the complementarities between state and market and on the importance of adjusting state functions and policies to the institutional capability, which, in turn, can only be improved over the long run. This implies that each country has to match its policies to its institutional capacity and to make a plan for the long run improvement of its institutional framework. Innovation system perspective - the logical consequence of the World Bank analysis The recent World Bank Reports thus give more justice to the complexity of the task of defining and implementing a national development strategy. The most extreme ideological positions have been surrendered. Simplistic single factor explanations of underdevelopment are explicitly criticized, while it is recognised that competence building, in the broad sense, has become a key factor in development. But the downside of this openness is that the reports may leave the reader with too little guidance on how to analyse the problem of development and especially on how to approach the task of designing development strategies in the new context. Given the analytical content of the reports it is remarkable that they give so little attention to the concept of innovation systems. If we take seriously that competence building is at the core of current development, that the interaction between factors matters and that integration of policies is needed, the innovation system concept 6

7 presents itself as a useful tool. In the next section, we will present different approaches to innovation systems and discuss their relevance for development strategies. One of the basic ideas behind this paper is that a systemic approach, where economic development explicitly makes use of the innovation system concept is one way to capture and cope with the new emphasis on knowledge in the recent World Bank reports as well as with the more complex objectives. Without an integrated strategy that combines technical, organizational and institutional innovations, it is not possible to integrate the economic, social and ecological aspects and to establish a sustainable development path. National systems and economic development Production, business and innovation systems One major problem with the traditional production function approach to economic growth is that it is based on the assumption that production factors operate independently in relation to economic growth. One way to take into account that factors interact and co-evolve in the process of economic development is to focus on national systems. Here we will briefly introduce and compare three different approaches to national systems: - National systems of production - National business systems - National systems of innovation Each of these concepts may be seen as referring to a different type of capital as defined above. The production system approach emphasises the formation of production capital. The business system approach is the one that gets closest to the concept of social capital. It focuses on the organisation of firms and markets and looks for how the cultural and institutional factors affect the economy in these respects. Finally, the innovation system approach is the one most strongly related to intellectual capital. 2 National systems of production In the 60s and 70s, French structuralist economists developed an analysis of national systems of production that was rooted in the Marxian reproduction schemes. They assumed that different sectors affect growth differently and that the most important sectors for economic growth were located upstream. This led them into ordering 2 Recently attempts have been made to broaden the innovation system approach so that it also includes sustainability and natural capital (see Olmann-Segura 1999) 7

8 national systems in a hierarchy. It was, for instance, assumed that countries such as the US and Germany had a stronger economy than France because their production systems were specialised in the production of machinery to produce machinery (machine tools), while France was specialised in the production of machinery for the production of semimanufactured goods (Gresi 1976). It also led them to recommend developing countries to establish, at an early stage, activities belonging to the sector producing machinery (Bernis 1966). This perspective was combined with a life cycle perspective on national systems by Esben Sloth Andersen (Andersen&Lundvall 1988; Andersen 1992). With this revision, the focus was now explicitly on the development of new technology in an interaction between user sectors and producer sectors. The quality of demand became an important element in the process. And, while the French structuralist approach with its emphasis on scale effects left small and developing countries very limited prospects in terms of growth and wealth (as does the new growth theory today see Fagerberg 1995), Andersen s revision, through emphasising the qualitative side of the home market pointed to a less gloomy future for these countries. Seen from a development policy perspective this model points to the importance of the specialisation of the economy and to the role of domestic demand. To establish advanced and ambitious domestic user sectors may be as important as stimulating the supply side. In this context, it is interesting to note that both qualitative and quantitative data point to the knowledge intensive business services as a new key sector for economic growth (Tomlinson 2000). To establish local competence in such sectors may be regarded as a specific and difficult challenge for less developed economies. National business systems The central concern of the business system approach (Whitley 1994a, 1994b, 1996) is to explain international differences in firm organisation and firm behaviour. The focus is on the co-ordination of economic activities and on governance issues. National differences in the organisation of firms and markets are explained by differences in culture and in formal institutions. Aspects of social capital (see box below) appear as important explanatory variables. One important implication of the analysis is that there is no single, best practice, mode of organisation of the firm. Another important point is that it is not true that anything goes, when different organisational traits are combined. Some combinations are easily established while others are implausible. Even if there is no best-practise the specific design of National Business Systems will have an impact on economic growth and economic development. Most scholars in this tradition, however, are business economists and they have been reluctant to go into this more macro-oriented policy debate. Other analyses of national governance systems go further in this respect (Freeman 1987). The Japanese success in specific production fields has, for instance, been explained by its governance form, emphasising the Japanese business system's predilection for long term commitments as opposed to 8

9 Anglo-Saxon short-termism. Others emphasise how the internal organisation of the Japanese firm has promoted rapid product innovation and high quality output in specific sectors (Clark and Fujimoto 1991, Fransman 1995). In this context it is important to note that what is best practise in the organisation of business differs between sectors and changes with time. For instance, it may be argued that the Japanese mode of learning and innovation, while superior in an earlier period, might have become to rigid in the context of a speed up of technical and organisational change. And, vice versa, that the US mode has become more successful in this new context (Ernst and Lundvall 1997). 9

10 Social capital and economic development A recent debate in economic and political sociology relates to social capital. The basic ideas behind this concept have their roots in classical sociology (Weber, Durkheim, Simmel and Marx) and is about the cohesion of social systems. In its modern form the most well-known contribution is the one by Putnam (1993) where he shows that the same formal political structure works much more efficiently in the North than in the South of Italy. The main explanation is the different presence of social capital as expressed in participation in civic organisations and networks. Most of the ensuing literature locates social capital in the civil society, i.e. in the relationships formed outside the formal political apparatus and the business sector. Social capital is assumed to be proportional to the density of relationships among citizens and special weight is given to the frequency of participation in organisations extending outside the border of the family. The relationship between the extension of the state and the stock of social capital as implanted in civil society has in several contributions been presented as a negative correlation. The extension of the welfare state has been assumed to undermine civil society networks (Fukuyama, 1995). Woolcock (1998) has criticised and elaborated the concept so that it can be used to analyse economic development. Woolcock introduces four different dinensions of social capital and demonstrates that getting too much of one and too little of another may undermine the development capability of the system. At the micro level, he points to the need to combine strong internal cohesion (integration) with openness to the outer world (linkage). A densely networked but closed community will soon experience limits for further development. At the macro level, he introduces the role of the state as a factor that can have either a positive or a negative role in relation to economic development. On the one hand, the state needs to have strong roots in the rest of society (synergy), otherwise it will not be able to mobilise resources and adapt policies to the new demands that will originate in the course of the development process. On the other hand, it is crucial that the state has an element of autonomy (organisational integrity) so that it does not become an instrument for partial interests and undermined by corruption. The insight that social capital is a key element in the learning economy has implications for development strategies in low income countries. Training government officials so that they become self-confident and incorruptible without becoming an isolated caste with little understanding for the problems of farmers, workers and businessmen may be fundamental for creating a developmental state. To encourage programmes where local collaboration is strengthened but at the same time linked to the wider community may be another key ingredient in innovation policy. 10

11 National innovation systems The most fundamental reason for scholars to begin to think in terms of innovation systems had to do with the fact that it was, increasingly, realized that innovation is an interactive process. 3 While production systems put the emphasis on the structural characteristics these are completely neglected in the business system approach. In the business system approach the focus is on cultural, social and institutional dimension of national economies. The concept of a national system of innovation is in a sense a synthesis of these two perspectives, since it puts at the centre of the analysis the co-evolution of economic structures and institutions and how this co-evolution affects the production and use of intellectual capital. Some authors from the US S&T-tradition, tend to regard the NSI-concept as a followup and an incremental broadening of earlier analyses of national science systems and national technology policies (see for instance the definition given in Mowery&Oxley, 1995, p.80). To them, the key issue is to map indicators of national specialisation and performance regarding innovation, R&D-efforts and S&T-organisations. The policy issues raised are typically related almost exclusively to science and technology policy. The approach developed by Cristopher Freeman (1987) and the 'Aalborg-version' of the national innovation system-approach (Lundvall 1985; Lundvall 1992) go further, however. Especially, it takes as its starting point the system of production and the fact that important parts of the knowledge base are tacit (Polanyi 1966) and emanate from routine-based learning-by-doing, -using and -interacting and not only from search activities related to science and technology. These differences reflect to a certain degree the national origin of the analysts. In small, as in developing, countries it is obvious that the competence base bolstering economic performance is not primarily formalised scientific knowledge. In a big country, such as the US, with dominating firms operating at the technological and scientific front, this is much less obvious. Most empirical studies of innovation systems show that national systems differ both in terms of specialisation patterns and in terms of the institutional set up. They also show that these characteristics have strong historical roots. The current specialisation of 3 The concept innovation system was introduced in a booklet on user-producer interaction in the middle of the 80s (Lundvall 1985:55) to capture the relationships and interactions between R&Dlaboratories and technological institutes, on the one hand, and the production system, on the other hand. The first widely diffused publication that used the concept of a national system of innovation was the analysis of Japan by Christopher Freeman (1987). The concept was definitely established in the innovation literature as a result of the collaboration between Freeman (1988), Nelson (1988) and Lundvall (1988) in the collective work on Technology and Economic Theory (Dosi et al., 1988). 11

12 production and trade as well as the institutional characteristics reflect patterns that were established several decades, if not a century ago. Techno-globalism, national systems of innovation and innovation policy Recent work by scholars has contributed to a specification of the scope and depth of globalisation in the field of innovation. Globalisation of technology has been separated into three different categories; international exploitation of technology, technological collaboration and generation of technology; and each of these have been carefully empirically mapped. The result is that the most pertinent and the most rapidly growing form of globalisation is exploitation abroad of technologies generated in the home country. There is substantial growth in technological collaboration aiming at getting access to the relative strongholds abroad. The frequency and the growth of global creation of new technology where multinational firms locate their development of new products and processes abroad remains relatively low as compared to the other two forms. The scholars conclude that national systems of innovation become more rather than less important in this context and they demonstrate that these become more and more specific in terms of their technological specialisation. They also conclude that the agenda for active innovation policy is extended rather than made obsolete by these developments (Archibugi and Michie, 1997) The performance of a national system will reflect two types of matching problems or two different forms of synergy. First, the system may match more or less well with the global context and, second, its different components may match more or less well with each other. Some ten years ago the Japanese innovation system appeared to be the one that matched especially well the global context, while today there is a tendency to see the US system as the one that interacts most successfully with the global dynamics. It is important to note that in both cases the internal synergy is all but perfect. The Japanese university system was weak in its contribution to basic science and it gave too little room for new ventures. The US system for human resource development is in many respects quite deplorable until recently most schools in the Mecca of ICT Silicon Valley - could not afford to buy computers to their students. The lack of broad participation of employees in US firms reflect insufficient training and lack of mutual commitment. A development strategy based on an innovation system approach would start by analysing all parts of the economy that contribute to competence building and innovation. And especially it would focus on the linkages and synergies between the parts that form the system as a whole. To have excellent universities and good academic training is of little relevance, if the private sector has neither direct nor indirect links to the university system. If firms have great difficulties to form networks and to co-operate 12

13 in the production and use of knowledge it may be of little use to stimulate the competence building at the level of the single firm. The old management concept of SWOT-analysis (Strengths, Weaknesses, Opportunities and Threats) can be invoked here. Opportunities and threats relate to the actual and potential matching with the global development, while strengths and weaknesses will include the location of strong clusters as well as missing links in the system. Currently it is especially important to take into account the very rapid change in the global environment and, therefore, elements of technology (and social) foresight may be helpful to locate the need for breaking up old relationships and establish new ones. In the context of the globalising learning economy the crucial elements and linkages in the innovation systems are those that have an impact on the learning capability of individuals, organisations and regions. So far the studies of national systems of innovation have given too little emphasis to the subsystem related to human resource development. This includes the formal education and training, the labour market dynamics and the organisation of knowledge creation and learning within firms and in networks. This subsystem will be confronted with very strong needs for social invention in the near future in all national systems and quite a lot of the peculiarities of national systems are rooted in this sub-system and, as we shall see in the next section, there is a special need to integrate policy efforts around this sub system. On the need to integrate policies promoting competence building and innovation The basic hypothesis a speed up of the rate of change and learning calls for integrating narrow perspectives and strategies As we have seen, there is now growing agreement that knowledge is at the very core of economic development. This is, for instance, reflected in OECD-publications referring to the knowledge-based economy (OECD 1996; Foray and Lundvall 1996). A related but alternative concept that we have promoted here is the learning economy. It includes the hypothesis that during the last decades an acceleration of both knowledge creation and knowledge destruction has taken place. This new context of accelerating change calls for new strategies at the level of the firm, the region, the nation state and the transnational cooperation. It also requires a rethinking of industrial relations and the role of trade unions. While knowledge production and policy making through decades have been characterised by growing specialisation and more narrow fields of responsibilities, the learning economy calls for lateral thinking and for a integration of separate perspectives and strategies. In this paper, we will focus on the need for integrating organisational change, labour market dynamics and innovation at the level of the firm and on the implications for development strategies. To begin with, we present the major concepts and elements of the learning economy. 13

14 Defining the learning economy In the present context we define learning as the acquisition of competences and skills that make the learning agent be it an individual or an organisation - more successful in pursuing his/its own goals. The choice of definition reflects that it is especially important to make the distinction between information and knowledge in the current information society era. Know-how and not least skills in selecting and using information - grows in importance as information becomes more complex and abundant. It plays a key role in all activities in the economic sphere. What distinguishes the succesful businessmen from their more mediocre colleagues is know-how, or personal knowledge, for instance in the shape of experience based capabilities to interpret and give meaning to emerging complex patterns and to act purposefully on the basis of this insight. Know-who has also become increasingly important. The general trend towards a more composite knowledge base where a new product typically has to combine elements rooted in many technologies, while each technology is rooted in several different scientific disciplines, makes it crucial to have access to many different sources of knowledge. Know-who involves information about who knows what and who knows to do what. But it also involves the social capability to co-operate and communicate with different kinds of people and experts. This one aspect of the move toward a Network Economy. Normally we think about know-how as personal and individual. But it can be embedded also in regions and organisations (Arrow, 1994). The shared routines, the common codes for communication and the formation of social relationships within teams may be regarded as different modes of embodying know-how into collective units. The distinction between tacit and explicit knowledge is important, because tacitness implies that it is not possible to separate the knowledge from its carrier (either an individual or an organisation). Tacit knowledge can be accessed only by hiring skilled people or through merger with other organisations. It cannot be transferred and sold as separate items in the market. In the learning economy, where the pace of change is high, tacit elements remain at the core of individual as well as collective knowledge. Since codification is costly it is most adequate to embark upon it when there is a high degree of continuity in the problems to be coped with. The radical development of information and communication technologies has an equivocal impact on the codification of tacit knowledge. On the one hand it gives stronger incentives and more effective procedures for codification. On the other hand the very growth in the amount of information made accessible to economic agents, increases the demand for skills in selecting and using information intelligently. The major impact of the information technology revolution is, however, that it speeds up the process of change in the economy. For this and other reasons, experience based learning tends to become even more important in the new economy than it was before. 14

15 Protecting and widening the knowledge base of the firm The competitive advantage of a firm is rooted in a set of competences not easily imitated by potential competitors. Elements of collective tacit knowledge are thus at the very core of the competitiveness of the firm. The tacit knowledge embodied in individuals may easily disappear in fluid labour markets while codified knowledge may be more easily copied by outsiders. Intellectual property rights such as patents represent one way to limit the access of competitors to the core competences of the firm. They play different roles in different sectors but on average the move toward a learning economy tends to make them less adequate at least as the core of knowledge management strategies. As the speed of change accelerates, it becomes more important for the firm to get access to new sources of knowledge (through recruitment, internal learning and networking) than to hinder others to get access to its own competences. This is why patents are increasingly used as chips for knowledge trading between competing and collaborating firms rather than just as instruments of secrecy. Learning is a social process based on trust and social capital Know-how is typically learnt in something similar to apprenticeship-relationships where the apprentice follows his master and relies upon him as his trustworthy authority (Polanyi, 1958/1978, p.53 et passim). Know-who is learnt in social practise and some of it is 'learnt' in specialised education environments. Communities of engineers and experts are kept together by re-unions of alumnae and by professional societies giving the participant access to know-how trading with colleagues (Carter, 1989). It also develops in day-to-day dealings with customers, sub-contractors and independent institutes. The learning economy needs a lot of trust in order to be successful. And as Kenneth Arrow has pointed out 'trust cannot be bought: and if it could be bought it would have no value whatsoever' (Arrow, 1971). The fundamental role of trust raises strong doubts about how to interpret the standard assumption in economic theory that the most efficient economy is one where individuals act as economic men who calculate the outcomes of all alternatives in order to select the one which is best for themselves. In the learning economy the importance of the ethical dimension and social capital increases enormously. Little can be learnt and information cannot be used effectively in a society where there is little trust. This is the background for one of the basic inherent contradictions in the learning economy that we will adress below. Building learning organisations and integrating strategies of competence building at the level of the firm In what follows we will refer to new research results about the implementation of the learning economy in Denmark. We will give a picture of the dominating trends that is 15

16 more positive than the one based on studies of the US and the UK, where the emphasis is on negative impact on working conditions in terms of instability, insecurity and stress. We believe that it is important to recognise that there are different ways to handle the challenges of the globalising learning economy. We would even go as far as arguing that the Scandinavian ways will prove to be more sustainable than the ones predominating in the Anglo-saxon countries. Our research shows that there is a strong synergy between the introduction of new forms of organisation and the performance and innovative capacity of the firm (Lundvall, 1999 and Lundvall&Nielsen, 1999). Establishing the firm as a learning organisation characterised by decentralised responsibility, team work, circulation of employees between departments and investment in training has a positive impact on a series of performance variables. Flexible firms are characterised by higher productivity, by higher rates of growth and stability in terms of employment and they are more innovative in terms of new products. Our research also shows that success in terms of innovation is even greater when such a strategy is combined with active networking in relation to customers, suppliers and knowledge institutions. But we also find that, so far, there is only a small minority of all firms (10-15%) that have introduced the major traits of the learning organisation. There is an enormous unexploited reserve of economic competitiveness, especially in manufacturing and the business service sectors. Our conclusion is that a new kind of integrated competence building strategy is needed and that such a strategy should take into account how to combine the three different major sources of competence building: Internal competence building, hiring and firing and network positioning (see the diagram above). Firms differ in how strongly they emphasise each of these elements both between and within national innovation systems. Japanese firms have emphasised internal competence building while most hi-tech firms in Silicon Valley depend on learning through high inter-firm mobility of employees within the industrial district. Hewlett Packard is one US-firm that has given strong emphasis to internal competence building but it is now moving toward a compromise strategy with more openness to hiring experienced employees from other firms. In Denmark the institutional set-up of the 16

17 training system and the labour market supports networking firms and high mobility in the labour market, making it attractive for firms to locate in industrial districts. There is no single optimal strategy in this respect. Under all circumstances, it is important when designing public training and labour market reforms to be aware of the behaviour of firms in this respect and to counterbalance the needs of the firms to social needs. The aim of reform should be a context where firms contribute to competence building without undermining social cohesion in the system as a whole. Industrial relations and the role of trade unions in the learning economy When Danish managers were asked what factors stimulated or hampered the movement toward learning organisations many of them referred to shop stewards (tillidsmænd) as a positive factor and only a small minority mentioned them as raising barriers to organisational change. This indicates that trade unions at the central and local level may be a positive factor when firms need to cope with the new challenges of the learning economy. The presence of strong organised labour may be regarded as a positive factor in global competition - especially if it is combined with mutually respected social contract. Giving workers and their representatives the right incentives to participate positively in building learning organisations may be a question of creating a minimum of security in processes of restructuring in Denmark the collectively financed unemployment support system has played a key role in this respect. The support level, and its duration, has made it possible to combine high inter-firm mobility with a high degree of security among workers (in spite of an inter-firm mobility as high as in the US Danish workers express less worries of increased insecurity in their job situations than do workers in other European countries with much less labour mobility and more formal contractual security). This should be contrasted with the super-flexible Anglo-Saxon model where all or most of the costs of being flexible is covered by the individual. The fact that access to learning capability is what constitutes success among the members of trade unions should affect the priorities of the trade union movement. Agreements between business and labour on the development of new forms of work organisation and and skill development becomes more and more important for both parties. A special new responsibility which affects both sides is to cope with the growing tendency toward social exclusion and not least the exclusion of workers of foreign origin. In general, trade unions need to be prepared to develop new kinds of solidarity that focus on redistribution of learning capabilities. Management also should be forced to take on more responsibility for this problem. Our research shows a strong Mattheussyndrome in the human management strategy of most firms: It is primarily those with extensive training that are offered even more training within firms. It is tempting for 17

18 firms to focus skill upgrading on those who are rapid learners and leave the rest to public training programmes. Also in the field of industrial relations there is a need for reintegrating functions and responsibilities. Traditional interests in terms of pay, working time and job security must be linked to, and assessed in relation to, competence building and the distribution of learning capabilities. The challenge of the Learning Economy and the need for a new type of policy coordination As pointed out in the introduction to this section, there is a growing consensus on the need to focus on long term competence building in firms and in society as a whole. At the same time, the prevailing institutional set up and global competition tend to give predominance to short term financial objectives in policy making. At the institutional level this is reflected in the fact that ministries of finance have become the only agency taking on a responsibility for co-ordinating the many specialised area policies. Area specific ministries tend to identify with their own customers and take little interest in global objectives of society. The concept the learning economy has its roots in an analysis of globalisation, technical innovation and industrial dynamics (Lundvall and Johnson 1994; Lundvall and Borràs 1999). But the concept also implies a new perspective on a broad set of policies including social policy, labour market policy, education policy, industrial policy, energy policy, environmental policy and science and technology policy. Specifically, the concept calls for new national development strategies with coordination across these policy areas. Social and distributional policies need to focus more strongly on the distribution and redistribution of learning capabilities. It becomes increasingly costly and difficult to redistribute welfare, ex post, in a society with an uneven distribution of competence. Therefore there is a need for stronger emphasis on a new new deal where weak learners (regions as well as individuals) are given privileged access to competence upgrading. The effectiveness of labour market institutions and policy has so far been judged mainly from a static allocation perspective. There is a need to shift the perspective and to focus on how the labour market supports competence building at the individual level and at the level of firms. This implies, for instance, that some dimensions of flexibility and mobility are more productive than others and that there may be third roads different from from Anglo-Saxon maximum flexibility and Mediterranean contractual job security cf. for the Danish model characterised by a unique combination of relative income security, high participation and mobility rates. Education and training policy needs to build institutions that promote simultaneously general and specific competences, learning capability and life-long learning. This points 18

19 toward a new educational and training methods that combine individual learning plans with collective problem-oriented styles of learning. A real commitment among employers, employees and policy makers to life-long learning with a strong interaction between schools and practise-based learning is necessary. Industrial policy needs to include an adjustment to each other of competition policy and policies aiming at developing learning organisations and competence building networks. Intensified competition may stimulate superficial change rather than competence building if not combined with organisational change and new forms of inter-firm collaboration. Energy and environment policies need to take into account their impact on competence building in the economy. Science and technology policy needs to support incremental innovation and the upgrading of competence in traditional industries as well as the formation and growth of high technology industries. For instance, the reallocation of academically trained workers toward small and medium sized firms is a key also to the formation of networks with universities and other knowledge institutions. These area specific policies need to be brought together and attuned into a common strategy. In the learning economy it is highly problematic to leave policy co-ordination exclusively to ministries of finance and to central banks their visions of the world are necessarily biased toward the monetary dimension of the economy and thereby toward the short term, and they do not include the fact that many area specific policies affect learning and innovation in many parts of the economy. In concluding the analysis of the Danish innovation system we proposed the establishhment of a High Level Council on Innovation and Competence Building with the Prime Minister as its chairman and with at least as much political weight as the Ministry of Finance and the Central Bank. Such a new institution would have as one of its strategic responsibilities to develop a common vision for how to cope with the challenges of the globalising learning economy. The basis of such a vision must be both a better understanding of the distinct national system of competence building and innovation and of the global context in which it has to operate. In the framework of such an understanding international bench-marking becomes a meaningful support to plicy learning at the national level (Lundvall and Tomlinson 2000). 19

20 An analytical framework for policy learning The discussion above points to a need for a new analytical framework for analyzing development strategies. The present knowledge about development mechanisms and the present institutional capability do not justify a means-ends, rational choice approach in policy making. What is needed is rather a continued process of policy learning. In fact, policy learning may be seen as an integrated part of the globalizing learning economy. It can take different forms, for example: - Forming visions about sustainable development and clarifying the value premises of development policy. - Focus on institution building that supports the production and reproduction of social capital and locating and diffusing international, regional and local good practises in this field. - Stimulating, or at least allowing, regional and local experiments in policy areas in need of reform. - Developing new methods to evaluate the ourcomes of such experiments that take into account learning effects. - Analysing and comparing systemic features and critically important indicators in a form for intelligent benchmarking across regions, organisations and nations (Lundvall and Tomlinson 2000). - Developing new fora for democratic participation in the design and implementation of development strategies. - Establishing new regional international forms of collaboration aiming at enhancing the experience building from participation in international organizations and regional and local communities. These different forms for policy learning need to be combined with a systematic surveying of the changing global environment and of changes in the systemic features of the national economy. Contradictions in the globalizing learning economy The vulnerability of development strategies Even the most intelligent and well informed national strategy is vulnerable in the present era of rapid change. Japan and Asian NIS have experienced how what was generally looked upon as miracles suddenly turned into what the same experts defined as failures and crises. The fact that the capitalist market economy has been so widely diffused in the world makes the global economic system even more instable. Traditional sectors that might function as automatic stabilisers in a capitalist crises have become much smaller than they were in the world depresssion in the 30 s. The transformation of public activities into market related services may also contributes to the increasing risk for local and general crises. 20

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