Innovation, ennovation and
firm-level productivity growth: a
new Schumpeterian elaboration
applicable in a development
context
Dr Samuel Mwaura
Hunter Centre for Entrepreneurship
Samuel.mwaura@strath.ac.uk
Overview
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Research problems/ paradoxes
Gaps in innovation research
Dimensions of knowledge capital
Innovation vs. Ennovation
Link to productivity growth
Research problem
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Interest in the contribution of firms to economic development;
especially the link between entrepreneurship and economic
development, firm performance in LDCs
•
Early GEM studies ‘surprisingly’ found a U-Shaped relationship
with very high levels of entrepreneurship in poor countries – no
convincing explanation/ theory yet
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Innovation conventionally recognised as the key driver of growth
both the macro-level and at the firm and industry levels
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Intuitive, but no convincing theory or empirical evidence, despite
large surveys, e.g. Community Innovation Survey
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The situation in developing countries inadequately understood.
Little R&D, high imitation/adaption, but lots of ingenuity and new
products in LDC contexts, especially by SMEs, yet low growth
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What is the relationship between innovation and productivity
growth?
Innovation Research:
Schumpeter
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Schumpeter: invention different from innovation
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Invention is basic scientific discovery.
Innovation entails: new products, new methods
of production, new sources of supply, the
exploitation of new markets, new ways to
organise business (e.g. Taylorization).
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New combinations of factors of production in
kind, i.e. qualitative changes in the production
function, must produce changes in the output.
Hence, development and not mere growth.
Innovation Research:
Schumpeter
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However… Innovation is ‘any doing things differently in
the realm of economic life’; quite general and vague
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Schumpeter Mark II – focus on R&D in large firms.
A clear shift from his Mark I emphasis on “carrying out”
new combinations by entrepreneurs, to the “trying out” by
large firms.
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Based on observations rather than theory. Mark I in early
20th Century Europe (1911), Mark II in large corporations
in America.
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Ruttan (1959) - Schumpeter did not advance innovation
theory at all.
Innovation Research:
Knowledge capital
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Innovation research prioritised ‘technological
innovation proper’ (Archibugi, 1988)
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So, R&D investments = knowledge capital
Assumed R&D always leads to new products
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Fitted well within “capital accumulation” and the
production function (productivity and growth
accounting framework)
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However… Thomas Edison is said to have
tested 1,600 different filament materials before
finding his carbon filament solution (Scherer,
1986).
Innovation Research:
Knowledge capital
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Is all this useful knowledge capital that
contributes to actual production/ productivity?
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‘Swedish paradox’, high investments in R&D
little growth (Audretsch and Keilbach, 2008;
Ejermo and Kander, 2006)
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Thus, R&D can be said to produce:
 Purposed knowledge – the solution sought
 Serendipitous knowledge – incidental
discoveries
 Mere chaff
Innovation Research:
Knowledge capital
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Besides R&D not producing useful knowledge, useful
knowledge may not implemented
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“Real options” to exploit in the future (Bloom and Van
Reenen, 2002)
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Hoarded knowledge not likely to be used
Nokia - 4,000 market ready intellectual properties but
unused (Hossain, 2012)
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Other problems with R&D and patents:
 Non-use of the patents system (Carlsson and Fridh,
2002; Raustiala and Sprigman, 2006)
 Duplication of efforts across firms (Dasgupta and
Stiglitz, 1980; Loury, 1979; Temin, 1979).
 “waiting games” (Dasgupta, 1988) and “inventing
around” existing patents (Mansfield et al. 1981)
Innovation Research:
knowledge capital
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For small firms in particular…
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Knowledge spill-over theory – new firms (spinoffs) exploiting knowledge developed by large
R&D intensive firms (Acs et al., 2009)
For example, the semi-conductor and Bell Labs;
Nokia-Finland Innovation Mill (Hossain, 2012)
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Knowledge comes from different sources
(Roper et al., 2008)
Open innovation (Chesbrough, 2003; Dahlander
and Gann 2003)
Innovation Research
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Back to the big question: What is innovation and
how does it contribute to economic
performance?
Oslo Manual 1997 – technological innovation
proper – R&D, high-tech industries
Crepon, Duguet, and Mairesse (CDM), 1998:
Knowledge capital exploited in production is
observable as shares of new products in firm
sales.
• Therefore, knowledge production before
production proper (CDM, 1998)
 R&D = innovation inputs
 New products sales = Knowledge capital=
innovation outputs
Innovation Research
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Oslo Manual 2005 – innovation happens
everywhere – large firms, small firms, services,
high-tech, low-tech, even governments
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New focus: Innovation is about implementation
– not just pursuit of novelty through R&D
However, innovation = implemented innovation
What is innovation again?
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Back to CDM (1998)
Innovation inputs (R&D) → innovation outputs
(knowledge capital, i.e. new products sales
share) → productivity growth (through
knowledge capital accumulation)
Innovation Research
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However, very little of knowledge capital,
proxied by new products sales shares, is
accounted for by R&D (Mairesse and Mohnen,
2002)
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Various sources of knowledge, e.g networks,
not just R&D (Roper et al., 2008; Love and
Roper, 1999), open innovation (Chesbrough,
2003; Dahlander and Gann 2003)
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Therefore R&D + other sources = total
knowledge capital
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Implement this knowledge capital, you get
innovation outputs (New products sales share).
Innovation Research
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However, high sales share a poor proxy for
knowledge capital as one piece of knowledge,
one new product, can account for even 100% of
sales
What then is knowledge capital and innovation
outputs?
 R&D = Innovation inputs
 Knowledge from R&D = Innovation outputs
 Conversion success (Extent of new products
sold) = Innovation outputs’ outputs
 Contribution to productivity = Innovation
outputs’ outputs’ outputs
• Serious equivocation issues
Innovation Research:
knowledge capital
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Besides, again, very little of new products sales
shares is accounted for by R&D (Mairesse and
Mohnen, 2002)
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In fact, for the vast majority of small firms, the
introduction of new products is something that
‘just happens’ (Vermeulen et al., 2005)
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In developing countries, (small) firms churn out
new products all the time with little R&D,
whether imitations or basic ingenuity/ creativity.
Innovation Research:
knowledge capital
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In LDCs, unable to employ the conventional constructs of
innovation such as R&D investments and “new to the
market/ new to the world” originations, anything new at
the firm level is considered as innovation (Mytelka, 2000;
van Dijk and Sandee, 2002).
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Methodologically, without R&D inputs, the structural CDM
model cannot work in developing countries; new products
do not derive from R&D.
Besides, since high new products sales shares may be
from high sales of one new item, that may even be an
imitation, sales shares a poor proxy of knowledge capital
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Innovation research hamstrung by a “certain degree of
‘fuzziness’ with respect to basic concepts” (Fagerberg,
2004)
Rethinking knowledge:
Three dimensions
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Knowledge assemblage: the magnitude and
substance of what is known.
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A collection of “modules of knowledge”.
Each module of knowledge is produced, i.e. discovered,
only once (fixed costs, but no marginal costs except for
transmission).
Different modules have different levels of substance,
e.g. General Purpose Technology has a higher
substance than a solution to a minor bug
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Knowledge lore-range: how many people are
proficiently knowledgeable about a given module
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Knowledge mileage: the extent to which a given
module of knowledge is employed in actual
production
Rethinking knowledge:
Three dimensions
Rethinking knowledge:
Three dimensions
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Since capital stock refers to capital employed in
production, with intangible knowledge, it is the
increasing the mileage of a particular module of
knowledge, and not increasing the assemblage
of knowledge, that is equivalent to increasing
physical capital stock
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Merely increasing the assemblage, through
R&D, e.g. Nokia’s hoard, or increasing the lorerange through education, without employing the
knowledge in production yields no output
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Stocks of knowledge capital vs stacks of
knowledge capital
Rethinking knowledge:
Three dimensions
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Developing countries - different scenarios:
 High mileage, and therefore low marginal
product, from old technologies
 Low lore-range, and therefore low mileage, in
new high substance knowledge (ICT, etc)
 Low contributions to new knowledge, and
therefore, no first-mover advantage/
technological leadership. Hence, low marginal
product by the time they join the technological
bandwagon
 Low mileage in new low substance modules of
knowledge (i.e. monopolistic competition). Highly
prodigal introduction of new(ish) products,
especially by SMEs
Innovation, ennovation and the
pedigree of productivity growth
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Knowledge is not innovation, since, as above
knowledge can be treated as a factor of
production (capital)
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Back to the original Schumpeterian insight
Economic development (productivity growth)
comes from “carrying out new combinations of
factors of production”
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From “novate” – simply make new
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Thus, the essence is that change happens in/ to
the firm’s production function. It is this that
effects a change in the output, hence growth
Innovation, ennovation and the
pedigree of productivity growth
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Early research assumed change is only from R&D,
so innovation = R&D
When this was not confirmed, investigate the
indirect impact of R&D on productivity, therefore
innovation inputs → outputs →outputs’ outputs
But we see, lots of changes ‘new combinations of
factors of production’ with no R&D or any
observable ‘knowledge’ inputs at all – the case with
many small firms in developing countries
We explain very little productivity growth
Alternative approach, try to explain ultimate output
change itself proceeding backwards
Innovation, ennovation and the
pedigree of productivity growth
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Productivity/ production growth is wholly
attributable to the aggregate of yet unidentified
changes in the inputs side. Growth is the
manifestation of these actual changes
Simulating Schumpeter, define, ennovation: the
occurrence of new combinations of factors of
production
Simply captures the occurrence of change. Unlike
innovation, no claim/ requirement that the firm/
entity in questions is the first to carry out this
change.
Shares of sales of new products  the extent to
which the firm has shifted production towards new
products
Innovation, ennovation and the pedigree of
productivity growth
The relationship between ennovation and
productivity growth
Implications
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Separation of the various concepts and constructs
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No need to consider sub-samples of innovators in research –
selection bias issues
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Inferencing extant studies, e.g. why R&D explains very little of
new products sales shares.
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Contributes to the growth accounting framework
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Unriddles the “Swedish paradox” – high marginal assemblage of
knowledge (through R&D), low mileage. Cf. Nokia
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Operationalisation problems remain, especially the mileage of
knowledge
Thank you.