The Competitiveness of Nations

in a Global Knowledge-Based Economy

Harry Hillman Chartrand

April 2002

Peter Phillips & George Khachatourians

DRAFT EDITION: The Biotechnology Revolution in Global Agriculture: Invention, Innovation and Investment in the Canola Sector.

CABI Publishing, 2001.

Chapter 5: The evolving industry

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1. Introduction

2. The actors

3. The patterns of interaction

4. Trust - the intangible factor

5. Outline for the section


Successful, sustainable innovation requires that the capacity to innovate be matched with an ability to take the results of any innovative process and position them in the marketplace in such a way as to capture a return that both compensates for the investment in the innovation and yields a positive return to the risk taker.  Those two different abilities do not always go together.  There has been extensive research in other countries and in other product areas to determine the elements of such a sustainable system.

The political economy literature has labeled this ‘national systems of innovation.’ Metcalfe (1995, 38) defines an NSI as comprising “that set of distinct institutions which jointly and individually contribute to the development and diffusion of new technology and which provides the framework within which governments form and implement policies to influence the innovation process.  As such it is a system of interconnected institutions to create, store and transfer the knowledge, skills and artifacts which define new technologies.”  Mowery and Oxley (1995, 80) point out that any definition must include more than the research actors, but also must include public programs intended to support technology adoption and diffusion and the array of laws and regulations that define intellectual property rights and manage the discovery, production and marketing systems.

The OECD (1992) points out that the first step in defining such a system empirically must be to locate the boundaries, the component institutions and the way in which they are linked.  Many institutions are involved, including private firms working individually or collectively, universities and other educational bodies, professional societies, government laboratories, private consultancies, industrial research associations and other collaborative ventures, and related and supporting industries.

The next challenge is to identify how the institutions are linked.  Metcalfe (1995, 40) argues that “in practice, connectivity is achieved via a variety of mechanisms.  Mobility of scientists and technologists in the labour market and collaboration agreements to develop technology are important formal mechanisms linking firms.  Links between firms and universities are often instituted through grants and contracts for research, especially in the transfer sciences,” such as plant breeding and computer science.  Those and others will be explored in this section of the study.

The combination of the actors and the connective structures makes up the innovation system and effectively determines the “absorptive capacity” of an economy to exploit either domestically developed or imported technologies (Moweiy and Oxley, 1995, 81).  This capacity includes a broad array of skills, reflecting the need to deal with both the explicit and the tacit components of the new technologies.


The Actors

As noted by the OECD (1992), there are many actors involved in a national system of innovation.  For the purposes of this study, they have been broken out into larger categories: the public sector, the private sector firms, the collaborative associations and the related and supporting institutions, including farmers, servicing and supporting industries and the people who cross-over the institutions, creating the fine web of tacit linkages that make the system work.

Firms, motivated by profit, are the key to a sustainable innovative sector.  Their search for market advantage creates an inexorable drive to invest and search for new processes, new products or new variety.  As they pursue new opportunities, they operate as innovative, fast growth enterprises; if the innovative effort matures, the firms will almost inexorably go through a variety of stages ranging from competitive firms to oligopolies to mature, often declining, firms (Table 5.1).  The more innovative the firms, the more tied or attracted they are to skilled labour pools or potential collaborators or competitors.  As the firms mature, their attachment to their research location can weaken, often to the extent that relocation is feasible.  For that reason, regions desiring to build sustainable industrial capacity are increasingly driven to support and nurture sustained innovation as a fundamental part of any targeted industry.

Metcalfe (1995, 41) notes that Malerba’s 1991 study of Italy identified two discrete, independent systems of innovation.  One, typified by the computer software industry, is based on flexible networks of small and medium-sized firms, often co-located in distinct industrial districts (such as Silicon Valley).  These firms exhibited both significant volatility and rapid growth.  The other type of system, which perhaps better reflects both the system in canola so far and likely all agri-food research, is based on the universities, public research laboratories, and large firms performing and commercializing R&D.  Metcalfe (1995, 40) further argues that, regardless of which model prevails, no institution can be or is self-contained in its technological activities.  All firms, large or small, have to rely on knowledge from other sources.  Systems that support a firm’s ability to access, absorb and use external knowledge can be critical to the growth of firms, sectors and regions.  This is especially so in the early stages of the development of a technology or whenever a technology has a rapidly changing knowledge base.  As shown in the previous section, this is clearly the case in canola development to date.

Although Metcalfe (1995, 42) hedges many of his conclusions about innovation systems, he firmly states that while firms are the primary actors in the generation of technology “their activities are supported by the accumulation of knowledge and skills in a complex milieu of other research and training institutions.”  At the core of this network are universities, which create fundamental knowledge and invest in “transfer sciences” (e.g. computer science, plant breeding), each one tied to identifiable technological activities while drawing on insights from a range of fundamental disciplines.  In addition, as discussed in chapters 4 and 7, universities educate and train the workers in these industries.  Universities therefore create new knowledge, act as repositories of the stock of knowledge and disseminate that knowledge both directly through commercialization efforts and indirectly through graduates (Metcalfe, 1995, 39).

Chapter 7 contains an examination of the critical role played by public research programs and agencies in the development of canola and in the development and use of transfer sciences such as plant breeding, genomics and other know-how technologies underpinning the innovative process in the canola sector.  Public research labs, however, are not the only public actors in the canola research effort.  A number of other development and regulatory agencies also have managed development of the industry through the regulatory process, using legal and policy mechanisms to moderate incentives, set standards and manage the processes of discovery, production and marketing.  All of those are critical elements in a successful innovation system.  A discussion and examination of those roles is left for section III of this research volume.

Other actors, including private consultancies, professional associations, industrial research collaborations and collective action groups all can, and in the canola case clearly do, play significant roles as bridging institutions between both industry and academe and between industry and markets.


The patterns of interaction

The second issue addressed in the following four chapters is how these actors operate and interact with others.  Zilberman, Yarkin and Heiman (1997) undertook a conceptual analysis of agricultural biotechnology, proposing a five-stage linear development process (discovery to marketing) that is consistent with the chain link innovation model if the knowledge links are removed (i.e. if the model is only looked at in two dimensions).  They then looked at the California biotechnology industry in search of different patterns of the division of responsibility between entities.

Taking that structure and applying it to the canola sector since the 1950s, one can trace an evolution of the leadership from public labs to private corporations.  Pattern one, representing the period between 1950 and 1985, was characterized by public agency leadership, through AAFC and NRC.  As discussed earlier, in this period the innovation system probably was reasonably represented by the linear model, as there was little collaboration beyond the core public agencies and a few universities.  Pattern two began to emerge in the 1970s as the not-for-profit Canola Council of Canada worked to expand the number of research actors.  Universities (Manitoba, Guelph, Alberta) began during this period to develop capacity to develop new canola varieties.  This pattern still mirrored pattern one, with a relatively linear development path and limited collaborations.  In both cases, after the varieties were registered, the seed was marketed to farmers through spot sales and farm output was purchased and processed or marketed by downstream companies that had little or no interest in the research system.

After 1985, three new patterns emerged.  Patterns three and four replaced patterns one and two, with corporations increasingly setting the objectives of the research programs and then conclusively taking over responsibility for the registration, multiplication and sale of the seeds to farmers.  Downstream, however, the system remained unchanged, with farm output continuing to be marketed by companies for the most part unrelated to the innovation system.  Pattern 5 represents a truly new departure from past experience.  Private corporations are increasingly assuming leadership and responsibility for all of the stages of product development.  This pattern reflects the dominant role of the agro-chemical and global seed companies in the breeding business in recent years.  Based on proprietary market assessments, these large firms undertake the discovery, development and registration steps either on their own or through tightly controlled collaborations where they establish the research objectives, pay for the research and assume ownership of the resulting products.  In many, but not all cases, firms have taken control right into the production and marketing stages, at times supplanting or absorbing traditional seed merchants and marketers.  These companies have developed or acquired seed marketing arms, offering seed to farmers often only on a closed-loop contract system (especially when the seed has some differentiated product attribute, such as modified oil properties), with the corporation buying back the farm product and either marketing or processing it itself.


Trust - the intangible factor

As Joseph Stiglitz, Chief Economist of the World Bank has noted (1999), “it has long been recognized that that a market system cannot operate solely on the basis of narrow self interest.  The information problems in market interactions offer many chances for opportunistic behavior.  Without some minimal amount of social trust and civil norms, social interaction would be reduced to a minimum of tentative and distrustful commodity trades.”  Arrow (1988), Putnam (1993) and Fukuyama (1995) and a wide variety of others have examined the role of norms, social institutions, social capital and trust in creating and sustaining markets.  Trust is not simply utilitarian economics.  It is based on common history, family ties and political institutions - in short, on a sense of community - which are based on many motivations, of which economics is only one.  This study will in a variety of places examine the history, institutions and communities that influenced the development of canola.  Although there is no econometric test to ascertain the degree of causality, we are convinced that trust is one of the most critical elements in the creation of knowledge based centres and industries.  This factor is examined in chapters 7, 8, 9 and 10.


Outline for the section

This section uses the ‘national systems of innovation’ structure, augmented by the ‘new’ institutional economics (NIE) to deal with the economics of institutions and institutional change.  Unlike traditional theory, NIE pays attention to the determinants and the evolution of different institutions and contracts over time.  This approach focuses primarily on the costs of alternative types of transactions.  In a great many instances in the marketplace, a simple exchange of goods and services at an agreed upon price is a low-cost transaction that provides the correct incentives for the buyer and sellers.  But transactions are seldom cost-free.  When the marketplace fails, then a market failure is said to exist and institutions evolve to overcome market failures.  Particular institutions tend to be best suited to govern particular types of transactions.  In chapter six, the theoretical dimensions of this approach will be discussed further and applied to the canola sector in Canada, with a particular focus on the role of collective institutions in furthering industry development.  The evolving role of the public sector is examined in chapter 7.  Chapter 8 is devoted to the rise to dominance of the private sector.  Chapter 9 contains analysis of the influence of other institutions - such as local suppliers, the labour market - and the idiosyncratic role of individual leaders on the location of activity.

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