Sunday 29 December 2013


13. Scripts
The notion of scripts is useful to make theories of knowledge, meaning and innovation more concrete, to connect them to practical action, and to clarify different levels of innovation.

A script is a network of connected nodes that represent component activities (in case of a practice) or notions (in case of a concept or theory), or variables (in a mathematical formula). Connections between nodes may indicate temporal order, causation, or logical inference.
The classic example is the script of a restaurant, with a sequence of nodes of entry, seating, selecting food, ordering, eating, paying and leaving. When self-service restaurants emerged, the order of nodes was changed into: entry, selection, paying, seating, eating, and leaving.

This had consequences not only for the order of nodes but also for their content. Selecting food from a menu now becomes selecting items of food from shelves and putting them on a tray.

In the brain, scripts are embodied in networks of neuronal connections and patterns of neuronal firing.

In perception, sense impressions are assimilated in one or more nodes in existing scripts, and thereby trigger the full scripts. Entering a restaurant I interpret what I see in terms of the restaurant script. If no scripts are triggered in which perceptions ‘fit’, they are ignored, or not even registered, and there fails to be perception.

Scripts can also be triggered internally, without perception, in thought. In dreams they yield an experience of seeing without looking, and they fracture in mental anarchy.

The script notion entails that perception is always already an interpretation, modelled here as assimilation into one or more scripts. When a slot is found in a script for the perception to fit in, the whole of the script is tentatively attributed to what is perceived, even when not all is perceived. In philosophy and psychology this is known as Gestalt.

This greatly helps identification and fast and coherent response to perception, which serves survival of the self. It also entails prejudice, invalid attribution. A gesture towards a pocket is falsely interpreted as the reach for a gun, and the innocent passer-by is shot. 

Scripts serve to identify an individual thing as having a place in one or more scripts. We recognize someone from a combination of features according to the script. In a restaurant I will expect a different chair from what I expect in a dentist’s clinic. What scripts are triggered depends on the context.

When a perception triggers several scripts at the same time, this can lead to tentative connections between them, in association, which may be strengthened or weakened in subsequent perception and action.

In the brain, this is embodied in changes of patterns of neuronal firing by changes of synaptic thresholds.

As a result, scripts serve to identify and make sense of perception but are also affected by it, in ‘novel combinations’ and shifts of concepts, yielding a recombination of nodes in novel scripts. How that may happen is discussed later, in an item on invention.

Scripts are nested, in scripts on different levels, with subscripts and superscripts. A restaurant script forms a node in a wider script of location, traffic, people going out, supply to the restaurant, etc. The node for payment, in the restaurant script, entails a number of alternative scripts of payment: cash, cheque, or card.

In innovation, the script notion serves to clarify different levels of innovation: novel ways of conducting actions in a node (a new subscript in the node), novel nodes (repertoires of subscripts), novel architectures (e.g. sequences) of nodes, and insertion in novel superscripts. The latter entails the use of a notion in novel contexts.

Monday 23 December 2013


12. Knowledge
Here I start a series on knowledge, learning and invention.

I adopt the constructivist view that we perceive, interpret and evaluate the world according to mental frameworks that in turn develop from interaction with the world. As a result, our ideas guide our actions but also develop from it.
Philosophically, this is related to pragmatism (going back to the ideas of e.g. John Dewey). Primarily, this is an attitude against dogma, a mentality of openness to surprise, plurality and change of ideas. It sees the knowing subject not as an autonomous, outside spectator taking an objective view of world, but as involved in it. Subject and object cannot be separated. We do not have objective knowledge of the world as it is beyond our ideas. Ideas are always preliminary and fallible, and adapt in the face of obstacles, misfits and novel opportunities.

That, I think, is also how entrepreneurs operate.
These views stand in contrast with, among other things, economic theory with its assumption that actions are based on prior, given knowledge and preferences.

This is important especially in innovation, where there is radical uncertainty: what may happen and what one may choose from are largely unknown prior to choice and arise from action after a choice is made. This yields a fundamental problem for the idea of rational choice to which economics is committed.
Another consequence is that since people develop their ideas along different paths of life, their ideas will differ to the extent that they developed in different circumstances. In other words, there is greater or lesser cognitive distance between them. I will discuss that notion in more detail later.

Now, if we cannot claim to know reality objectively, does the notion of reality still make sense? I think it does, a follows. Although we cannot know reality as it is in itself, it is reasonable to assume that there is a reality and that we develop our ideas from interaction with it. In that sense reality has a causal influence on our ideas, and our ideas ‘have something to do’ with reality. If in evolution the development of our ideas had not been adequate enough to the world for us to survive we would not be here.

The fact that different people view the world differently does not imply relativism in the sense that any idea is as good as any other and rational debate is impossible. On the contrary, precisely because we have no rock-bottom objective knowledge, the only chance we have for correcting our mistakes is debate with people who have learned to see the world differently. 

We cannot achieve truth in the old sense of some correspondence between basic ideas with items in reality, from which we construct knowledge. As a result, facts become problematic. They are always constructed. However, in debates between competing theoretical perspectives, one can often reasonably agree on what facts to accept, since the facts are more stable and reliable than theoretical speculation, even if they are not rock-bottom objective.
This yields the notion of truth as warranted assertability, which is a coherence theory of truth. We argue on the basis of everything we can muster that may be relevant: whatever facts we can agree on, even if only temporarily, alternative views and explanations, arguments of relevance, arguments of logic, and arguments of efficiency in reasoning. This yields no guarantee of agreement. There will remain rival views. But debate helps to reduce disagreement and to raise doubt.

Sunday 15 December 2013


11. Combinations of large and small

In view of opposite strengths and weaknesses of large and small firms, one should not choose between them but seek fruitful combinations of the two.

As I noted in the preceding item in this blog, when a new enterprise is successful and grows, more managerial control is needed, in the specification and delegation of tasks, in an increasingly complex division of labour, and some formal reporting and control. Then the need for the advantages of a larger firm size emerges. Leadership of the firm may need to be replaced, or the firm is taken over by a large firm.

However, large firms sometimes aim to revitalize themselves by taking over a small, more entrepreneurial company, and often that fails. Instead of vitalizing the large firm, the small firm is smothered in the inertia of the large one.

This reflects the fundamental difficulty to combine exploitation and exploration in a single organization. I will discuss that more extensively, and show how the two can build upon each other, later in this blog, when I discuss processes of learning, invention and innovation. Here I note that experience in exploitation can yield a useful basis for successful exploration based on relevant experience and knowledge, provided that it can wrench itself loose from the conservatism of what is established.

An avenue for this is the phenomenon of the spin-off. There, an employee with an original idea that is uncertain and is not seen to fit well in established perspectives, structures and procedures, steps out to develop the idea as an independent entrepreneur. This may be seen as a ‘betrayal’ by the parent firm, but that is a mistake. It is much better to see it as an opportunity, as follows.

Encourage the wayward employee to make the step, help him/her to compensate for weaknesses of the small firm, in providing specialist support or advice, provide venture capital, and promise the possibility of return to the company if the venture fails, as is by far the most likely outcome. In this way one creates several options.

In case of failure a daring and original worker is recovered for the firm: it is often not the worst employee who has the vision and courage to spin off, and after failure he/she has renewed motivation to make the best of the work inside the parent firm.

If the venture succeeds but the result turns out not to fit well in the portfolio of products and markets of the firm, or in its strategic vision of expansion, then its share in the spin-off can be sold at a profit.

If the venture succeeds and the result is attractive to the parent firm, and the small firm runs into its limitations to exploitation and expansion, and the need to make to transition to management, the innovator can be invited back into the parent company to lead or guide the further development of the innovation inside it. The risk of getting smothered in the large company is still there but is limited by the returning employees knowledge and experience with the company.  

This theoretical merit of spin-offs is amply confirmed in a large number of empirical studies that show that indeed spin-offs form a major motor of innovation.  

Sunday 8 December 2013


10. Dilemmas of small enterprise

The preceding items in this blog, plus further analysis, yield a number of dilemmas for small enterprise.

Especially small enterprises need to collaborate with outside partners, in view of the limited availability of inside specialities and support, which due to diseconomies of small scale could not be efficiently employed. On the other hand, many entrepreneurs have become self-employed because they wanted to be independent, and are often stubborn in their views and convictions, and indeed need to be, in order to persevere under the hardships and uncertainties of entrepreneurship. However, this is not conducive to collaboration. This problem may be mitigated by the use of judicious, skilful intermediaries or advisors.

Small enterprises need to collaborate but transaction costs are relatively high for them and for their partners, due to diseconomies of small scale there also. The latter may be mitigated by adequate documentation for outsiders to judge the enterprise.

There are a large variety of motives and ways of doing things in small enterprises, which requires custom made, tailored government regulations and schemes (e.g. in legal duties and restrictions, tax and subsidy schemes). On the other hand, due to diseconomies of scale in transaction costs that is too expensive. It may help to employ intermediaries (bookkeepers, banks) to add some differentiation. 

To avoid pressures of economies of scale, small enterprise can often best focus on niche markets with specialized products, but this increases their vulnerability due to limited diversification of risk. Some differentiation of products will help.

Due to personal involvement in the enterprise, in income, allocation of time, and sometimes housing, self-employed are highly motivation and willing to absorb setbacks, which is good, given the uncertainties of innovation, but this also makes many self-employed unwilling to take much risk, which hampers innovation. Hence few self-employed are innovative, but when they are they are very motivated and efficient in it.

As a ‘lone wolf’, an entrepreneur can make decisions fast, but this carries the danger of myopic, badly informed decisions. Listening more to the shop floor, engaging a trusted partner or employing an advisory board can mitigate this.

Due to direct contact between entrepreneur and shop floor, with direct supervision and involvement, there can be limited formal procedures of reporting and control. This saves costs and furthers flexibility. However, it entails much tacit knowledge, in the mind of the entrepreneur, which further increases transaction costs for outside partners and government, and makes the enterprise vulnerable to exit of the entrepreneur. This yields an additional argument for some documentation of knowledge, and an argument for timely involvement of a successor.

When a new enterprise is successful and grows, more management is needed, in the specification and delegation of tasks, in an increasingly complex division of labour, and some formal reporting and control, when the distance between the leadership and the shop floor increases. However, many entrepreneurs like to undertake new ventures better than managing going concerns. They can then sell the enterprise, in a management buy-out, and move elsewhere, in serial entrepreneurship.  When they do stay, and they have no aptitude for operational management, they should muster the wisdom to recognize their weaknesses and step down from leading the enterprise to adopt an advisory or inspirational role. Often this does not sit well in the psychology of the entrepreneur.

Monday 2 December 2013


9. Strengths and weaknesses of small Enterprise
 
As I indicated in an earlier item in this blog (item 4), small and large firms have opposite strengths and weaknesses. The strength of large business lies more in resources and their efficient use, and the strength of small business is more behavioural.

An obvious weakness of small business lies in (dis)economies of (small) scale. Those arise in all dimensions of enterprise: R&D, patenting, production facilities, purchasing, marketing and distribution, organization, transaction costs, risk diversification, and political influence.

In patenting there are fixed costs of the procedure, which are relatively high at small potential volumes of business. Also, the first time around the entrepreneur has to find his way through procedures.

In marketing and distribution there are economies of scale in the set-up or access of distribution systems, advertising and brand name.

In organization there is a staff lack due to the fact that full time specialized staff (e.g. for technical specialities, support, legal affairs, and marketing) are not sufficiently occupied at low volumes of business, so that those services have to be sourced outside.

In the preceding item in this blog I discussed effects of scale in transaction costs.

To the extent that the level of education of entrepreneur and enterprise is low, their capacity to absorb innovations developed elsewhere is limited. That sets back the diffusion of innovation that is in the interest of the firm, in order to keep up, and in the public interest, to achieve the diffusion of innovations that yields economic growth. 

An advantage of small firms lies in low costs of informal systems of supervision and control, because the entrepreneur often has direct visual control of the shop floor.

A related advantage lies in their potential for flexibility and specialty products. This is partly due also to direct contact between entrepreneur and customers. Flexibility is enhanced by speed of action, in the absence of a long chain of evaluation and decision making that arises in the deep hierarchies of large firms.

The isolated decision making of the entrepreneur also has the disadvantage of not seeing risks, but this may be covered by the use of an advisory board. As discussed in the preceding item, the fact that most knowledge, undocumented, is locked up as tacit knowledge in the mind of the entrepreneur increases transaction costs for outside partners. It also makes the enterprise vulnerable to the entrepreneur dropping out in accident, illness or sale of the venture.

The flexibility of operations and closeness to customers yields a competitive opportunity to focus on novelties or specialty products in niche markets. The small volumes of the latter yield less pressure to achieve economies of scale. However, concentration on few products in small markets limit the diversification of risk, enhancing the risk of default. Some differentiation of products, while maintaining coherence in a focus of specialized competence, may help here.

As noted in the previous item, the mix of the personal and the commercial yields a high commitment and willingness to absorb setbacks, needed especially under the uncertainties and vicissitudes of innovation. However, it may have an opposite, negative effect of discouraging risky ventures. 

The strong and weak points for innovation show up in empirical work. On the one hand small firms are less likely to engage in innovation, but when they do, they do so more effectively, faster and efficiently. 

Sunday 24 November 2013


8. Entrepreneurial motives

People become self-employed for a variety of motives, such as the following:
-          refuge from unemployment into self-employment due to economic crisis or discrimination in
       labour markets
-          independence and ‘doing one’s own thing’ as an aim in itself
-          desire to combine the personal with work
-          maintenance of small scale, escape from pressures for growth
-          unwillingness or inability to function under a hierarchy
-          ambition to pursue ideas that are not accepted in established firms
-          motivation to serve society according to one’s own convictions
-          thirst for profit, power or growth
-          answer to a ‘wake-up call’ from some personal crisis (illness, accident, divorce, bereavement)
-          an opportunity that happens to come along, in an inheritance, succession of a relative in a family
       firm, an offer of a partner to join, a facility that happens to become available.

 Different people become independents for different reasons, with different attitudes and ways of doing things. They can afford this to the extent that they or friends or family provide their own, private capital. This variety stands in contrast with larger firms, especially firms quoted on a stock exchange, who have to satisfy more uniform demands and expectations from capital markets.

The variety of motives and ways of doing things further increases the transaction costs that small firms impose on others. It also complicates government policy for small firms. While due to the idiosyncrasy of small firms a differentiated, custom-made approach, with tailored regulations and schemes is in order, precisely due to the small scale of the firms that is uneconomic.

Note that only some of the motives for self-employment are related to innovation. Some may well yield a highly traditional or even conservative venture. In fact, the great majority of self-employed (say 80 %) are hardly innovative. Novelty often goes no further than a new location for a traditional activity. 

Often, the only source of income is profit from the firm. As a result, motivation is strong. In bad times, independent entrepreneurs are more willing to absorb a cut in income than employees would be. Next to this advantage there is also a possible disadvantage here. For lack of a spread of risk (as is offered in capital markets) the entrepreneur may be more conservative, less willing to stake his source of income in risky projects. In fact, as already indicated, the majority of small business is traditional and wary of change.

The combination of private and commercial interests can yield problems. The bonds and emotions of family or partnership may yield a lock-in into relationships that are (no longer) viable, and in an excess of trust and informality, with too few explicit agreements, and an obstacle in expressing criticism. Such lack of openness can in fact lead to a breakdown of trust in the failure to achieve expectations that were left unclear and in misunderstandings that were left undiscussed.

Often, an entrepreneur is either technically or commercially oriented and inspired, and seldom both at the same time, while both orientations are needed for success. Hence one often sees teams of technical and commercial partners. A third and neglected dimension here is organizational ability, in particular the ability to collaborate with other firms.

By leaving innovation to entrepreneurs risk is privatized, left to entrepreneurs who undertake risk willingly. The alternative is to let government innovate, by which risk is socialized and imposed on a society that is largely risk-averse. That would not come off the ground.

 

 

Sunday 17 November 2013


7. Transaction costs

Transaction costs are costs of relations in general and markets in particular. They affect decisions to do things inside or outside the organization, and they affect the position of small relative to large firms. They are important for economics in general, but in innovation there are special features.

Between organizations there are transaction costs in different stages of  a relation: costs of contact and contract prior to a transaction and costs of control afterwards, in the execution of agreements.

Costs of contact are costs of searching for customers or suppliers and of judging their quality and reliability. Costs of contract are costs of coming to an agreement, whether formal, in a contract, or informal. Costs of control are costs of monitoring compliance, renegotiation, haggling, intermediation, and possibly litigation.

Costs of evaluation of quality vary between the following categories of products:
-          search goods: quality can be judged prior to use. Examples are cars, houses, appliances, etc.
-          experience goods: quality is judged during use. Examples are restaurants, performances,
       holidays, etc.
-          credence goods: even after use quality still cannot be judged. Examples are consultants, doctors,
       garages, etc. If one had the knowlwdge and skill to judge their work one would not have needed
       them in the first place.

Often there is a mix. Education is primarily a credence good: one can judge quality only later, in the practice of what is learned. However it is also an experience good in the skill and enthusisiasm of a teacher and conditions of class. Attempts are made to reduce transaction costs by turning it into a search good, by means of scores of graduation success and teacher evaluation. There is a danger here of reducing evaluation to what is readily measurable, even if the most important dimensions are difficult to measure.

In innovation transaction costs are particularly high due to the uncertainties of innovation. It is difficult to judge the quality and reliability of a product or a firm that is still under development, to specify contractual conditions under uncertain prospects, and to judge performance for which there are not yet any standards or benchmarks.  

An important point in the present context of comparing large and small firms is that there are economies of scale in transaction costs, both for a small firm and for others dealing with small firms. To judge a small firm and make agreements there are set-up costs (or threshold costs, see the preceding item in this blog on economies of scale) of a visit, acquaintance, evaluation and contracting that are relatively expensive when small volumes of business are involved. Furthermore, in small business much information is tacit, buried in the mind of the entrpreneur and not available in accessible documents, which are often available in larger firms. This is related to the condition that in small firms there is direct, visual control by the entrepreneur, so that costs of setting up and operating formal control systems may be saved. However, to judge the firm one needs to somehow pry the informal, tacit information from the entrepreneur, which is costly and imperpect.

For judging others, a small firm lacks the knowledge and expertise (technical, commercial and legal) for finding and judging opportunities and setting up agreements and monitoring. For this, it must employ third parties, who in their turn need to be judged, contracted and evaluated, which yields second order transaction costs.

Monday 11 November 2013


6. Economies of scale

 Economies of scale are important in economics in general and in innovation in particular, in view of the role of small firms in entrepreneurship.

There are three types of effects of size or quantity on efficiency (low cost): economies of scale, scope and experience.

Economies of scale are efficiencies due to ‘more of the same’: the quantity of production per unit of time.  There are several forms of it. One is engineering economies, or ‘pots and pans effect’, due to the fact that the content of a spherical container for production (a reactor in oil and chemical industries, a building, a bulbous vehicle), which determines production capacity, is proportional to the cube of the radius of the sphere r (r3), while costs are a function of the surface (material costs, weight and transport costs, loss of heat or cold by radiation, ….), which is proportional to the square of the radius (r2). As a result, the costs per unit production are proportional to the inverse of the radius (1/r).

A second economy of scale lies in specialization (as identified already by Adam Smith, with his example of the pin factory): with a larger volume it pays to break down a production process into steps of specialized activity (for labour or machinery) that can be performed more efficiently than when they need to be combined in one unit with more general capabilities. A qualification here is that more integrated work can offer advantages of intrinsic motivation of labour that can have a positive effect on efficiency, and programmable machinery yields more flexibility.

A third economy of scale lies in the efficient utilization of some capacity that is available only in ‘chunks’: units of production with a minimum size. This can be a machine or a worker. We find the latter, for example, in a shop where a minimum of one attendant is needed during opening time, regardless of the number and flow of customers. This is a threshold cost. As the volume of production increases, the utilization of threshold capacity increases. At some point additional capacity will be needed (or else customers will have to wait too long to get service, and queues will lengthen), but then labour can be employed part-time, only to cover peaks in demand. This economy of scale has been the cause of a steady decline of the number of small shops. We find the effect at any service point for customers (in retailing, recreation, health care, municipal services, fire brigade, etc.)

Economy of scope is efficiency due to the combination of different products using the same resources. The classic example is that of an orchard in which trees must be at sufficient distance for air and light, and space between them is utilized for grazing cattle. Another classic example is the salesman of coal in winter who sells ice-cream in summer. Another is the combination, in freighting, of different products in one ride. Sometimes different products complement each other technically, sometimes in combination they yield a portfolio of choice for customers, and sometimes they pool and thereby spread risks. A qualification here is that diversification into a variety of products may also lead to a loss of efficiency due to a loss of focus on so-called core competencies, diluting resources. An alternative is to reap the advantages of scope in collaboration between different firms with different focus.

Economy of experience is efficiency due to an accumulation of production volume in time, creating efficiency of learning by doing, in which expertise is honed, processes are streamlined and redundant cost elements are eliminated. This yields what is called a learning curve. A qualification here is that routinization in cumulative experience may also yield lock-in, with blindness to new opportunities or needs and an inability to change. For change one has to step onto the beginning of a new learning curve, at a high level of initial cost.  
 

Monday 4 November 2013

5. Entrepreneurship

With this item I start a series on entrepreneurship.

Entrepreneurship is essential for innovation, but what does it entail? In time, in the literature there have been various notions of it, as follows:

- risk taking
- configuring resources
- creative destruction
- novel combinations
- creating or entering new markets
- management
- inspiring people

Currently, the emphasis lies on the dimensions of innovation: risk taking, novel combinations, and new markets. The rest is seen as less a matter of entrepreneurship and more a matter of management.

A debate that goes back to Schumpeter concerns the questions whether small or large firms and perfect or imperfect competition most produce innovation. Schumpeter proposed that in early capitalism it was the small, independent outsider who produced innovation, while in later capitalism it was more the large firms that could sustain the specialized, knowledge intensive labour needed for high tech innovation, with large laboratories and deep pockets for the long slog of development.

Concerning competition an argument was that while it gives an incentive for innovation, long, costly and risky processes of development require a buffer of profit that can only arise under limited competition. Empirical research indeed indicates a curvilinear relationship: some competition has a positive but much competition a negative effect.

Concerning the issue of large versus small firms, the strength of large firms lies in resources of specialized knowledge, deep pockets, spread of risks across products and/or markets, market access and power, a longer-term perspective, and strategic action.

Weaknesses lie in conservatism, for several reasons. One is that decisions have to pass multiple levels, which slows down decision-making and increases the chance that innovative ideas will be voted down. Another is that with established products, and investments sunk in corresponding technologies and markets, large, established firms have an interest in halting or postponing innovations that cannibalise existing products and destroy existing competencies and investments. Also, because of their size and corresponding power of employment, economic leverage and lobbying in networks of supervisory boards and politicians, they can exert political power to achieve their ends. They have an interest and the capability to establish a focus of policy on incremental rather than radical innovation, to protect their investments, while they legitimise their actions by contributing to incremental innovation.

Paradoxically, small, independent outsiders are efficient in the innovation system because of their weakness in survival under failure. Failures are efficiently weeded out, while in large firms and government they may be propped up with subsidization from successful projects or from taxes, to protect the reputation of decision makers. Also, to the extent that they are not yet involved in existing markets, outsiders have no vested interests to protect, and decision-making is often up to the entrepreneur by him/herself.

To a large extent, the advantages of smaller firms are behavioural: in flexibility, fast decisions, motivation and willingness to sustain setbacks. I conclude that for radical innovation, the strength lies mostly in the smaller firm. I will dedicate a separate item to a further analysis of the strengths and weaknesses of small firms.

However, in view of the opposite strong and weak points of small and large firms, it is best to focus on their complementarity, seeking combinations that benefit the economy. Also, by decentralization into more autonomous units large firms can try to approach the advantages of small firms, and by collaborating in alliances and networks small firms can achieve some of the benefits of large size. The relative strengths of large and small firms also depend on the extent of economies of scale. I will dedicate the next item to that.

Saturday 26 October 2013


4. Types of innovation

In this item I discuss a few basic aspects of innovation.

Innovation has much to do with knowledge and learning, but it is not just technology. As recognized already by the innovation economist Joseph Schumpeter, there is innovation in products (goods and services), production processes, design, communication, organization, markets, and institutions. Here, ‘products’ include anything with added value. Services are products ‘that you cannot drop on your toes’, are more or less immaterial. Examples are trade, transport, financial services, care, education, information and communication, administration, etc.

While traditionally innovation was studied mostly in firms and markets, for some time now attention has been broadened to innovation in public or semi-public organizations of many kinds (health care, education, municipal services, etc.)

Innovation is part of a wider process of invention, innovation and the diffusion of innovations. Here, innovation is the activity of developing an invention into practice, in markets, and diffusion is the spread into and across areas of application, and there it yields economic growth. This is not to be seen as a purely linear succession of stages. Innovation and diffusion often elicit supplementary and secondary innovations.

There is a distinction between incremental innovation and radical, disruptive, competence destroying innovation or creative destruction. The latter was characterized by Schumpeter as novel combinations. The distinction is close to that between exploitation, defined as improvements within a basic logic or design, and exploration as breaking through them. The first entails stable perceptions, priorities, meanings, roles and division of labour, the second a break or shift of them. They entail require organizational environments and cultures, and are hard to combine within a single organization.

That is one reason why inter-organizational cooperation is important for innovation, in so-called open innovation, often between one firm (or more) focused on exploitation and one (or more) focused on exploration. An example is the pharmaceutical industry, with small firms developing new active substances or diagnostics and large pharmaceuticals carrying the result through clinical testing, regulatory approval, and large scale production and distribution under a brand name.

In innovation statistics attempts have increasingly been made to include the different dimensions of innovation. Thus, a distinction was made between new for the firm, new for the industry or market, and new for the world, in terms of number of products or share in turnover. Much used measures of innovation have been R&D and patents, since data are available from their registration, but they are input rather than an output measures, relating to invention rather than innovation. New products also are not a perfect measure since they do not by themselves say anything about success in the market.

Innovation policy at first was no more than technology and science policy, but gradually was broadened to include other dimensions, such as design, training and education, marketing, organization, and entrepreneurship.

Since innovation goes beyond invention and entails a host of other factors next to knowledge, it is not easy to prove the economic value of fundamental research, as policy makers demand. To prove it econometrically one would need data on all the other factors and the ways in which they enter a complex causal structure with different possible configurations.

Above all, innovation, especially radical innovation, carries a high risk of failure. As a rule of thumb, only one or two in ten projects achieve success. The few successes justify the cost of the many failures, and failures are not worthless because they increase insight, but this idea is hard to sell in a society that is risk-averse. That yields a major problem in debates on research policy.

Wednesday 23 October 2013


3. Value of innovation

 Concerning the value of innovation for society there is a pro-innovation bias, with the assumption, presumed self-evident, that innovation is beneficial. And often it is, in increasing material prosperity, health, etc. But it need not be.

There is also innovation in crime, terrorism, violence and arms races. The mafia is innovative. Politicians and leaders may be innovative in corruption and suppression.

Innovation is propelled by consumerism and propells it. Demands are stimulated that may seem artificial and may distract from higher values in life and society. In capitalist economies consumer demand is sacred, it is what drives value, but it is driven by advertising and hype. Innovation often pushes demand rather than being pulled by it.

For example, in electronic goods ever new functionalities, forms and features, bells and whistles, in software and hardware, are pushed onto the consumer. If you do not go along with buying the new hardware you will find that your old hardware is no longer supported in software and ancillary equipment (printers, routers), so you are forced to go along or drop out.

You may not like glut of electronic gadgetry for your kids, but if you don’t let them go along you condemn them to isolation and social ostracism.

In  my philosophy blog (items 110 and 111) I discuss the notion from the French philosopher Baudrillard that with new technologies of communication we are wandering into what he calls hyperreality and hyperidentity. A great deal of innovation lies in entertainment, chatter and hype. Those lead us into phantasy, distraction, emotion, mimicry of celebrities, conformism, crowding, opinions instead of facts, emotions instead of arguments, leading us away from realities and individual identities. 

Innovators such as Apple, Google, Facebook, and Twitter, claim, or take it for granted, that their innovations are for the good of scociety, enhancing contact and communication between people, thus furthering the sharing and spread of knowledge and friendship. It is a matter of debate whether that is the case. There are indications that it (also) yields withdrawal into groups of like-minded people, enhancing isolation and distrust with respect to other groups, thus reducing rather than enhancing tolerance and variety. They may feed and confirm rather than loosen conspiracy theories and hysteria.

However that may be, creativity, invention and innovation are part of the vitality of the human being. We find it in the drive towards artistic expression as well as in Nietzsche’s will to power, with a drive towards conquest, and in the earlier notion, in classical Greek philosophy, of thymos, the drive to manifest and deploy oneself. It is part of human drama and tragedy. Nature itself is the paragon of creative destruction. Would we want to stop innovation and take away the vitality of life and society? Perhaps we can curtail it here and there, or redirect it.

Tuesday 22 October 2013


2. My credentials

 I have a masters degree in mathematics (Leyden University 1967) and a PhD in econometrics (Erasmus University Rotterdam 1980). This blog is based on my career in teaching and research on innovation, first at an institute for policy research of small business, the last years as scientific director, and subsequently as a (full) professor at the universities of Groningen, Rotterdam and Tilburg, in the Netherlands.

On innovation and its organization I have published ten books, 200 scientifc articles and 100 articles in newspapers. Citations to my work can be found on www.scholar.google.com I have received three international prizes (Kapp prize, Gunnar Myrdal Prize and Schumpeter prize), and was elected member of the Netherlands Royal Academy of Arts and Sciences.

I acted as a member of a variety of advisory committees and councils, among others a government committee on technology policy, the Scientific Council for Government Policy (for an advisory report on innovation policy), an advisory council for a Max Planck Institute in Jena (Germany) and for an institute (CIRCLE) in Lund (Sweden), and as chairman of a peer review committee for two universities. I also was chairman of a supervisory council for an association of entrepreneurs in environmental innovation.

I served as a visiting professor at universities in a large number of European countries, and I have lectured for a variety of organizations in business and government.

The blog is largely based on a number of my publications, in particular the following:

Books:

A cognitive theory of the firm; Learning, governance and dynamic capabilities. Cheltenham UK:
Edward Elgar, 2009, Paperback 2010.

Inter-firm collaboration, learning and networks; An integrated approach, London: Routledge, 2004,
paperback.

Trust: forms, foundations, functions, failures and figures, Cheltenham: Edward Elgar, 2002, paperback 2003.

Learning and innovation in organizations and economies, Oxford: Oxford University Press, 2000,
paperback 2001.

Inter-firm alliances; Analysis and design, London: Routledge, 1999, hardcover and paperback.

Knowledge and learning in organizations. Part I: The fundamentals of embodied cognition. Part II:
Knowledge and learning in organizations. Edited volume, Cheltenham: Edward Elgar, 2006.

B. Nooteboom & E. Stam (eds.), Micro foundations for innovation policy, Amsterdam:
Amsterdam/Chicago University Press, 2008.


Key articles:

 V.A. Gilsing, B. Nooteboom, W.P.M. van Haverbeke, G.M. Duijsters, & A. v.d. Oord, Network embeddedness and the exploration of novel technologies: technological distance, betweenness centrality and density, Research Policy, 37 (2008), 1717-1731.

B. Nooteboom, W.P.M. van Haverbeke, G.M. Duijsters, V.A. Gilsing & A. v.d. Oord, Optimal cognitive distance and absorptive capacity, Research Policy, 36 (2007): 1016-1034. 

B. Nooteboom, Methodological interactionism: Theory and application to the firm and
to the building of trust, Review of Austrian Economics, 20 (2007): 137-153.

B. Nooteboom, Service value chains and effects of scale, Service Business, 1 (2007): 119-139.

V. A. Gilsing & B. Nooteboom, Exploration and exploitation in biotechnology, Research Policy, 35/1
(2006): 1-23.

V. A. Gilsing & B. Nooteboom, Density and strength of ties in innovation networks: An analysis of new
media and biotechnology, European Management Review, 2 (2005): 179-197.

S. Wuyts, M. Colombo, S. Dutta & B. Nooteboom, Empirical tests of optimal cognitive distance,
Journal of Economic Behaviour and Organization, 58/2 (2005): 277-302.

R. Klein Woolthuis, B. Hillebrand & B. Nooteboom, Trust, contract and relationship development,
Organization Studies, 26/6 (2005): 813-840.

I. Bogenrieder & B. Nooteboom, Learning groups: what types are there?, Organization Studies, 25
(2004)/2: 287-314.

B. Nooteboom, Competence and governance: How can they be combined?, Cambridge Journal of
Economics, 28(2004)/4: 505-526.

T. Klos & B. Nooteboom, Agent-based computational transaction cost economics, Journal of
Economic Dynamics and Control, 25 (2001): 503-526.

B. Nooteboom, Learning by interaction, absorptive capacity, cognitive distance and governance,
Journal of Managament and Governance, 4(2000): 69-92.

B. Nooteboom, Institutions and forms of co-ordination in innovation systems, Organization Studies,
21/5(2000): 915-939.

B. Nooteboom, Innovation and inter-firm linkages: New implications for policy, Research Policy,
(1999): 793-805.

B. Nooteboom, Innovation, learning and industrial organization, Cambrid­ge Journal of Economics,
23/2  (1999): 127-150.

B. Nooteboom, Innovation and diffusion in small business: Theory and empirical evidence, Small
Business Economics, 6 (1994): 327-347.

 

 

 

Monday 21 October 2013


1. Programme

 In this blog I aim to traverse the whole field of innovation, from definitions and forms, through antecedents, consequences, processes, organization, and networks, to business and government policy, and the political economy of innovation.

The blog is aimed at a wide, general audience. I will not take specialized knowledge for granted, avoiding technical terminology, and I will be sparse in footnotes and references to literature.

I look at both the competence side of innovation, in knowledge, skills, and technology, and the governance side, in managing risks and rivalry. In the innovation literature those two sides tend to be separated. Concerning governance there is transaction cost economics as a branch of economics, which is neglected in much of the management literature on innovation. However, it neglects some of the features recognized in that literature, such as radical uncertainty and the process nature of innovation. I also take an evolutionary view of innovation, as developed in neo-Schumpeterian economics. 

I take an interdisciplinary approach, employing insights from (different branches and schools of) economics, management science, sociology (especially concerning innovation networks), and cognitive science (concerning knowledge, learning and invention). Economics builds on rational choice, and the radical uncertainty of innovation yields an obstacle for treating it in those terms. 

Some of the deeper, underlying, more fundamental philosophical issues, concerning knowledge and truth, uncertainty, individual and society, ethics, stability and change, and creativity and art are treated in a philosophy blog (http://philosophyonthemove.blogspot.nl) that I started in July 2012 and continue to run in parallel to the present blog. 

As in the philosophy blog, I aim to present short pieces of text, of around 500 words, that can be read independently, in any order. However, they do build on each other, and I specify the connections for readers interested in them. 

I start with the customary distinction between invention, innovation and diffusion of innovations, between different fields of innovation (products, processes, markets, organization, institutions, ….), and different levels (incremental and radical) of innovation. I proceed with a discussion of entrepreneurship, and differences and complementarities between small and large firms, in competencies, outlook, motivation and conduct. Here one of the classic sources is the innovation economist Joseph Schumpeter.

Second, I consider knowledge, learning and invention. There, I use an embodied cognition view of knowledge and a pragmatist methodology (derived from American pragmatist philosophy). The crux of it is that views of the world are developed in interaction with it. Knowledge precedes action but is also formed in it. The underlying fundamental issues are treated in the philosophy blog.

Third, I consider organization: the role and functioning of organizations and networks, with due attention to issues of governance in combination with competence, and the underlying issues of power and dependence. The underlying philosophy of self and other, in collaboration and competition, is treated in the philosophy blog. In particular, this includes the nature and the working of trust. Concerning networks I consider the role of network structure and position for competence and governance.

Finally, I consider innovation policy and the political economy of innovation. This includes the consideration of institutions, societal systems in which organizations operate, and political processes. Here I employ a discussion of markets that is (or will be) included in the philosophy blog.

The blog allows for comments from readers, and I encourage readers to use that facility. I will respond to any comments made.