Path Interdependence, Firm Innovation and Resilience: A Complex Adaptive Systems Perspective TRes Working Paper: Theoretical Framework Phil, Cooke, Gillian Bristow and Julie Porter Cardiff University Introduction The concept of resilience has become increasingly prominent in economic geography and regional studies as regional economies and societies struggle to respond and adapt to shocks and change. The concept is developing particular traction within evolutionary economic geography (EEG) where it resonates strongly with non-equilibrium and path-dependent notions of adaptive change (Martin, 2012). Indeed much recent work within EEG views the economic landscape as a ‘complex adaptive system’ (Martin and Sunley, 2006; p. 573) and asserts that major shocks exert a formative influence over how this landscape evolves and changes over time (Boschma and Martin, 2010; Simmie and Martin, 2010; Martin, 2012). This approach to economic change rejects neo-classical inspired notions of adjustment mechanisms towards any notion of equilibrium (Dawley et al, 2010). Instead in EEG, resilience is defined as the adaptive capacity of a local or regional economy or ‘the ability of the region’s industrial technological, labour force and institutional structures to adapt to the changing competitive, technological and market pressures and opportunities that confront its firms and workforce’ (Simmie and Martin, 2010; p. 30). Much of the emerging debate within evolutionary economic geography around resilience focuses upon the causal concepts of adaptation – the ability to respond to an economic shock with a movement back towards a pre-conceived development path, and adaptability – where a different kind of resilience emerges through opportunities or a decision to leave a path that may have proven successful in the past in favour of a new, related or alternative trajectory or niche (Dawley et al, 2010). This perspective suggests that the adaptive capabilities of a region’s economy are likely to depend upon the nature of the region’s pre-existing economy – in other words, adaptation and adaptability are likely to be path-dependent processes shaped by the region’s industrial legacy and the scope for re-orientating skills, resources and technologies inherited from that legacy (Martin, 2012). Path dependency helps us understand what shapes a region’s ability to respond to a system shock but is arguably less well equipped to help us understand the process of adaptability or what might cause a region’s endogenous functioning to renew or atrophy, or how regional competencies and specialisms may change and thus how ‘lock-in’ may be avoided (Boschma and Frenken, 2009). Indeed, path dependence at the regional level may explain stability but also system stagnation and inertia (Cooke, 2011). In seeking to understand the evolutionary trajectories of regions demonstrating capacities to transition to ‘green’ economic development paradigms, Cooke (2010; 1 2011) has drawn attention to the significant role played by instances of knowledge re-combination between firms. There is indeed a growing body of evidence indicating that fruitful eco-innovation increasingly occurs at the interfaces between firms, sectors and clusters where the cross-fertilisation of ideas may either produce new unforeseen innovations, or result in the application of old knowledge in new ways to tackle complex or wicked problems (e.g. automotive engineering to biofuels, or milk coolers to wind turbines). Such unforeseen innovations typically emerge from ‘revealed related variety’ or the ex post relatedness of a region’s economic sectors and their trajectories (Geels, 2007; Martin and Sunley, 2008). As such, this represents a form of co-evolution of paths, or ‘path interdependence’ (Liu, 2009; Cooke, 2011). Understanding path interdependence thus offers the potential to understand how regional economic development trajectories change and mutate. To date, however, there have been few empirical investigations into how these path interdependencies emerge from innovation, spin-offs and the rise of market niches at the micro or firm level. As such we have little knowledge as to how far they can effectively change the course of an industrial or development path and subsequently effect co-adaptation between firms, markets, technology, industry and institution (Liu, 2009). This is thus the principal focus for our research work which will seek to address two key questions: firstly, what shapes the capacities for knowledge recombination amongst particular firms, clusters and sectors in different contexts; and secondly, how do these micro-interdependencies relate to or help facilitate macro-outcomes in terms of regional resilience. Before proceeding with this empirical work however, we need a theoretically informed understanding of the concept of path interdependence and its evolution at the micro level. The purpose of this paper is thus to establish a conceptual framework for our subsequent work. Since path interdependency is a co-evolutionary study and emphasises the interactions between different entities and their environment, it fits well with complexity thinking which sees the human world as complex, unpredictable and dynamically linked to its environment on a range of temporal and spatial scales. As such, in this paper we explore the potential for complex adaptive systems analysis to facilitate an enriched understanding of how and where path interdependencies emerge through innovative knowledge recombinations. The paper is now organised as follows. The next section introduces the core elements of complex adaptive systems analysis and reviews its application and development to date in the EEG and regional innovation literature. The paper then proceeds to examine in more detail two of its key concepts – preadaptation and the adjacent possible. These concepts usefully take the evolutionary concept of ‘variety’ and the way in which it translates potential into system re-organisation through the evolution of novelty much further in analytical terms (Cooke, 2011). They do this by developing understanding of the creative process and how innovation proceeds in both a recombinant and incremental fashion. We conclude by outlining in brief our choice of case studies for the empirical investigation of these issues. Complex Adaptive Systems Analysis 2 Complexity theory considers that the world is composed of systems that are constantly adapting. Thus complexity arises from the inter-relationship, interaction and inter-connectivity of elements with a system and between a system and its environment. Complex adaptive systems are dynamic systems able to adapt and change within, or as part of, a changing environment. There is no dichotomy between a system and its environment in the sense that the system always adapts to a changing environment. Rather the system is closely linked with all other related systems making up an ecosystem. Within such a context, change is viewed in terms of co-evolution with all other related systems, rather than as adaptation to a separate and distinct environment (Cooke and Eriksson, 2011). In recent years, significant progress has been made in the EEG literature in applying complex adaptive systems thinking to regional economies and particularly regional innovation systems, notably with an evolutionary biology inflection rather than a physic-chemical systems model (Cooke, 2012). This has established that as complex adaptive systems, regional innovation systems are characterised by a number of key features. First, they are characterised by non-linear and nonequilibrium dynamics because of complex feedbacks and self-reinforcing interactions amongst components. The environment is constantly changing and as such the recursive nature of the algorithmic or evolutionary processes of variation, selection and replication never stops. Complex systems are thus always dynamic, always evolving, prone to crises and characterised by continual processes of adaptation and innovation (Arthur et al, 1997). In short, ‘in evolutionary systems, statis is a recipe for extinction’ (Beinhocker, 2007; p. 216). Second, they exhibit emergence in that they exhibit macro-level structures or patterns, characteristics of the system as a whole, that arise endogenously and spontaneously out of the micro-level interactions of agents and their environment. In effect, the whole is greater than the sum of its parts and applies to many every day experiences. As Beinhocker (2007; p. 167) observes, for example, ‘what we call a symphony is a pattern of sound that emerges out of the playing of individual instruments’. In regional terms, it can be interpreted as the tendency for macro-scale structures and dynamics (such as cities, industrial districts and clusters) to emerge spontaneously out of micro-scale behaviours of agents (such as firms, workers, consumers) (Martin and Sunley, forthcoming). Clusters, for example may be viewed as ‘emergent’ from the shared interest of firms in higher-order economic activity they could not achieve acting alone. This emergence may be characterised as having three orders or layers. The first order emergence is created by the economy in the region and is found in the people and firms (or entities) in the area. The second order emergence is created by the knowledge networks and the labour market that connect the regional entities and compose a configuration based on the level of connectedness of the entities. Third order emergence would be the cluster itself with the competitors becoming collaborators, co-locating and co-creating knowledge spillover and ‘buzz’ (Fornahl et al, 2010). Thirdly, and following on from the above, complex adaptive regional innovation systems are imbued with self-organising and co-evolutionary interactions among their constituent components and elements. They exhibit an adaptive capacity which enables them to re-arrange their internal structure and dynamics spontaneously, whether in response to changes in the external environment (e.g. external shocks), 3 or from within through co-evolutionary mechanisms or in response to ‘self-organised criticality’ (Martin and Sunley, 2007). As such they are autocatalytic (they drive their own growth) but in ways that cannot be foreseen. Each member of the population or entity in the system is continually searching for new ways of adapting to the environment. Thus knowledge about the environment and how it is changing is the key to self-organisation and the ability of entities to understand how and in what ways they need to adapt in order to survive (Cooke, 2012). What distinguishes economic and human systems from biological ones, is the role played by the deliberate acquisition of knowledge. Economic agents are pro-active as well as reactive in implementing novel plans to access new energy sources or increase exploitation of old ones. In economic self-organisation both physio-chemical and biological limits on economic development can be transcended. The decay of old investments can variously be planned for (through planned depreciation) and overlooked (depending on commitment levels to specialist organisational structures or market niches). In short, economic self-organisation brings immense complexity through acquired energy and acquired knowledge which in combination yield creativity in economic evolution (Foster, 1997). Creativity and innovation thus play an integral role in system dynamics and indeed, may be regarded as the ‘evolutionary fuel’ of complex systems (Cooke, 2012). These characteristics create an imperative to understand how knowledge is acquired, spread and transmitted in complex systems. This leads into to the fourth key characteristic of complex adaptive systems which is that they are not uniform and homogenous. Rather, they are characterised by an ontogenetic topology. This reflects the understanding that complex systems have a particular ‘fitness landscape’ that in visual terms represents a mountainous (or ontogenetic) terrain between peaks of high fitness (where entities are well-designed to fit the needs of their environment and from which all paths are downhill to lower fitness), and low fitness valleys (from which most paths lead uphill). These fitness landscapes may take various forms. They may be a rugged topography of hills and valleys, or sleek, or have variations in between. The sleeker the landscape, the more stable the system because there are fewer sources of perturbance and little opportunity for communication between system entities. The more rugged the landscape, the more conduits and tributaries that exist that act as communication lines between centres of energy or potentially interacting entities, and so the more unstable the system. This means it is more prone to collisions of economic and ecological activities or their sub-elements (Cooke, 2012). When such interactions are abundant, the system is said to be operating at the ‘edge of chaos’ or to be highly susceptible to system change or shocks (Kauffman, 1995; 2008). The greater the interactions between entities, the greater the likelihood of emergent properties and phenomena (Cooke, 2012). In essence, ‘too much structure creates gridlock…too little structure creates chaos’ (Brown & Eisenhardt, 1998; p. 14, cited in Baum & Silverman, 2001). If the system can remain in this chaotic mode, sustainable adaptive functioning can be achieved which supports learning, flexibility and adaptation amongst the system’s entities. Path dependence and interdependence 4 Complexity theory thus highlights ‘the tension between exploitation of knowledge gained (path dependence) and exploration of novel actions (path creation) and illustrates how innovation processes characterised by ‘edge of chaos’ behaviour balance these tensions, permitting adaptive functioning of technological-organisation systems’ (Baum and Silverman, 2001; p. 198). As such, complex adaptive system thinking also provides interesting insights into the nature and form of interactions that can occur and their resulting innovations. The system’s fitness landscape has certain constrained pathways which are known as ‘attractors’. These are the routine or ‘normal’ self-organised behaviours or interactions in the system between entities and with the system and its environment (such as cyclical or neighbourhood effects). These create normal path interactions that in economic systems we understand as path dependence and which emerge from routine related variety (Cooke, 2012). One variant of these interactions are ‘strange attractors’ where there is no a priori reason why such paths might coalesce and where unexpected combinations of pathways occur to produce innovative new pathways. As such strange attractors display ‘revealed relatedness’ rather than obvious relatedness. Furthermore, the more unlike or strange they are, the more radical the innovation conceived by the interdependent paths will be (Kauffman, 2008; Cooke, 2011). Cooke and Eriksson (2011) depict the outcome of strange attractors visually (Figure 1). This demonstrates a rugged system landscape where there are multiple fitness peaks or mountains (depicted by the triangles), and a range of paths between them. The higher the connectivity the more rugged the system becomes i.e. a system that has low connectivity will only have one peak. However, a system with high connectivity will have many peaks which is the case here. The catalyst for the intersection is the ‘blockage’. The blockage can represent different events such as an external (e.g. recessionary) shock to the system. At the point where the path runs into the blockage it can do four things: (1) end, (2) redirect temporarily and return to its path over time, (3) go in another direction, or (4) intersect with another path in the valley. The fourth scenario, where at least two paths intersect, results in path interdependence. However, not all paths are destined to intersect. Figure 1: 5 Source: Cooke & Eriksson, 2011 Preadaptation and the adjacent possible There are two main types of innovation that can result from the meeting of strange attractors: preadaptation and the adjacent possible. Preadaptation is rooted in evolutionary biology and is a type of technology transfer where an innovation from one industry setting is adapted for wholly different industry solutions in another. The adjacent possible is an incremental innovation that is closely related to an existing product and where a design effort must be effected to execute an innovative improvement (Cooke, 2011). This simple innovation becomes radical when it is recombined with existing resources (Kauffman, 2008). Complex adaptive systems thinking suggests that both types of innovation are more conducive to a region with related variety and connectedness as there is more potential technology transfer and recombination than in a specialised region. Kauffman (2008; p. 151) asserts ‘the more diverse the economic web, the easier is the creation of still further novelty’. Research Questions The application of complex adaptive systems thinking to regional economies and regional innovation systems thinking in particular is still in its infancy and as a result, there is a clear need for more detailed empirical work. This review of the existing literature suggests a number of key research questions require further testing through empirical research. Firstly, there are a set of questions around what factors shape the capacities for and likely success of knowledge recombination amongst particular firms, clusters and sectors, or how do different vectors of activity successfully combine and co-evolve in some places and contexts but not others? Do they, for instance, emerge in response to institutional or market developments (such as economic shocks) or are they largely endogenous self-organising processes (a product of individual 6 entrepreneurship and agency, or self-organised knowledge networks)? How important is related variety – does greater variety in the number of entities (firms, institutions and nodes for interaction) lead to greater potential for the creation of further novelty? What forms of knowledge recombination are emerging in practice, between what interfaces between sectors, and through what combination (or interdependence) of paths? And how is knowledge recombined? What role is played by preadaptation and/or the adjacent possible (i.e. how does innovation proceed – what role is played by chance or other factors in prompting key interactions, and how is preadaptation being exploited? What is the relative importance of endogenous system topology, or a resilience effect (or shock)? A second set of questions surround how these micro-interdependencies relate to or help facilitate macro-outcomes in terms of adaptive capacities and resilience for regions? How and in what ways do they help promote the renewal of regional development trajectories? Introduction to case studies We propose to address these questions through two UK based case studies. The first case is the diversified cluster in the North Wales region of Denbighshire that has high related variety with industries such as photonics, aerospace, solar energy and fibre optics. The second case is the specialised cluster in the East England region of North Suffolk that has low related variety with the main industry of telecommunications centred around British Telecommunications (BT) research and development centre. Both cases have experienced the shock of the recent recession. However, interesting questions surround whether and how they have responded and reacted differently to develop greater resilience. North Wales Since its inception in the 1950s, the North Wales cluster has evolved significantly to its current state. The original hub firm was Pilkington Glass which became specialised in photonics in the 1970s. As a result, spinoffs were created but unlike other areas that specialised in photonics, the spinoffs in North Wales retained their linkages with the hub firm creating the specialised cluster base. The aerospace sector was simultaneously growing in the region, having been embedded there since post-WW2. In the late 80s, through government emphasis on growing the sector, aerospace became a major economic contributor in North Wales (Cooke & Ehret, 2009). Around the same time, the Thales group acquired Pilkington Photonics, then the hub firm in the photonics clusters and part of the larger Pilkington Group which included Pilkington Glass. This acquisition led to increased linkages between people, firms, and the larger labour market in the photonics cluster and the growing aerospace agglomeration. The linkages were exacerbated by the Thales military and technology emphasis to the point where collaborations were created. Several years later, in the late-90s, Pilkington Group, along with Pilkington Photonics, which belonged to Thales, was acquired by the global conglomerate Qioptiq. Through this latest acquisition, the cluster formed more external linkages while also retaining the intra-regional linkages with the aerospace sector. Given the socio-economic transition that was experienced in the mid-2000s with an increased emphasis on a 7 post-hydrocarbon society, another path emerged, largely through regional University involvement, specialising in solar energy. Through this brief overview of the evolution of the cluster and the North Wales region, four key points can be drawn in relation to the theory. First, possibly due to the shock of external competition or the recession in the 80s1, the aerospace path and the photonics path intersected in the late 80s. Even though the technological relatedness between photonics and aerospace is obvious now, this was an innovative step at that time and exemplifies revealed related variety. Second, even with the higher resistance to external shocks provided by related variety in the region, the photonics path intersected the solar energy path 20 years after intersecting the aerospace path. This intersection was the result of the shock of competition and climate change. The resulting incremental innovations could be used as preadaptation in the future. Third, although aerospace and photonics are historically linked to the area, highly skilled labour market as well as the extensive knowledge networks, attributes of second-level emergence that affect third level emergence, in the region have evolved over time to provide a fertile area for industry and new path creation. Fourth, given the highly connected nature of this cluster, which is largely based around photonics, is it approaching the limits of the edge of chaos where too much connectivity stifles change? The level of connectivity is also mentioned in the fitness landscapes where the higher the connectivity the more mountains there are; however, if there are more mountains, it would be more difficult for the paths to meet. East England In comparison to the North Wales cluster, the East England cluster has evolved but not in the same, highly diversified, way. The East England cluster can be attributed to the 1960s relocation of the British Telecommunication research and commercial headquarters from Dollis Hill, London to Ipswich. This is the major hub firm in the region, the centre of the cluster and the attractor of other firms, both MNCs and SMEs, to the region. Over time, little has changed on the site in terms of what the focus of the innovation is: telecommunications. Due to this, the cluster is highly specialised in telecommunications. Nonetheless, this cluster has recovered from shocks such as privatisation of the industry (ie. sector specific), competitiveness, and previous recessions (ie. large external shocks) and has, despite the contradictions in the literature, still managed to flourish. Due to the high level of specialisation in this cluster, it is difficult to analyse this case in relation to the approach illustrated in figure 1 as there is only one path in the cluster making the intersection of paths impossible. Instead of concentrating on the path, this section will focus on the evolution of regional policy in regards to the cluster. One major difference between this specialised cluster and other diversified cluster is the role of regional governance. The East of England Development Agency (EEDA), greatly supports the cluster through collaborative policies, finance and networking. 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