«Impact of the Types of Clusters on the Innovation Output and the Appropriation of Rents from Innovation»

Manuel Portugal Ferreira, Fernando Ribeiro Serra, Benny Kramer Costa, Emerson Maccari Antonio, Hergos Ritor Couto. «Impact of the Types of Clusters on the Innovation Output and the Appropriation of Rents from Innovation», Journal of Technology Management & Innovation, vol. 7, n.º 4, 2012.
See the references in the original publication of this article.

«Discussion and concluding remarks

»According to Schumpeter (1950) innovation results when different combinations of existing assets are found to have superior benefits and come to replace prior dominant combinations. Innovation is an for firms’ competitive ability and is the mechanism through which firms gain access to resources with (superior) positive future value, and to valuable new resource combinations that are specific to the firm and that it alone may exploit (McGrath, et al., 1996: 390). However, innovation is also becoming increasingly dependent on the interaction among independent firms that contribute with complementary resources (Breschi, 2000; Balbinot, et al., 2011). Because the knowledge needed for innovations is increasingly distributed across organizations and geographies, firms need to expand to access both idiosyncratic business- and idiosyncratic location-specific knowledge.

»Firms thus seek to access knowledge not yet held by locating in knowledge munificent clusters. However, not all clusters are alike and while some clusters may indeed favor knowledge access and innovations, other types of clusters do not. Why? Because the patterns of interaction among clustered firms, entrepreneurs and employees are not identical across all clusters. In addition, the institutional framework is also rather differentiated across clusters, as is the importance of dominant firms and governmental intervention.

»Innovation is increasingly a social phenomenon and not the outcome of individual actions and strategies by isolated firms (Breschi, 2000). Many innovations are actually the outcome of pooling together different resources and bits of knowledge. Thus, it is likely that firms’ ability to innovate is influenced by the spatial proximity to others, external sources of knowledge. However, the same dynamics that render the flows of knowledge among firms also makes it more difficult for the innovators to appropriate the rents from innovations. When relating to clusters and the co-location of firms in a region, the social and business interactions often give knowledge a quasi-public good nature.

»When dealing with industry clusters as particularly innovative environments due to the well-known proximity among firms in related and supporting industries, universities, research centers, and an array of other dedicated institutions, we need to truly understand how innovation occurs and why should clustered firms endeavor in R&D efforts. Certainly, as recently put forth by Ferreira, Serra and Maccari (2012) firms will only have an incentive to innovate if they are able to capture the rents from their innovations. Notwithstanding, we propose in this paper that different cluster types will render rather dissimilar prospects in two distinct matters: the innovation output and rent capture by firms in the cluster. The fact is that on occasion, the firms that will most likely capture the rents may even not be the innovators but rather other firms in the surroundings. That is most likely the case in Hub-and-spoke cluster, where the dominant firms are in better position to appropriate rents, but also in the state-anchored clusters, where it is the anchor firms that will probably capture those rents. These propositions are especially important for location decisions and call for a better assessment by managers of the regional configuration when deciding whether to locate, or not, in a given industry cluster.

»Our discussion on the impact of type of cluster does not diminish the importance of other factors that may be explored in future research. For example, we implicitly assumed that the innovator firm was able to exploit the innovation. However, it is possible that the innovator lacks the complementary assets (Teece, 1986, 1997) to do so and, in fact, to capture even a small share of the rents from its innovation it may need to collaborate with other firms, and share the rents. Examining how holding the complementary assets impacts on the appropriation of rents is a possible future research avenue and one that may involve employing the Resource-Based View of the firm (Barney, 1991).

»In many instances innovations are developed in collaborative efforts in clusters. Thus, firms collaborate to pool together essential complementary assets to develop and to exploit the innovations. The fact is that collaborative efforts may came at the cost of losing a share of the future rents from innovation. It is even possible that some firms gain a bargaining position if they hold crucial complementary assets. For example, the North American IBM held a dominant position because of its large sales network and financial capital, not due to its technological strength (Verspagen, 1999). Assessing how holding the complementary assets to exploit innovations may shed additional insights into our discussion.

»When advancing a set of propositions on who captures innovation rents we are implicitly assuming that either the innovators do not seek to protect their innovations, that they are not able to do so, or that the legal mechanisms (such as patenting) fall short of providing effective protection. For innovators to be able to capture the innovation rents the protection regime and mechanisms need to be effective and trustworthy (Teece, 1997, 1998, 2000). We thus need to understand each of these scenarios. For instance, small firms may not patent their innovations due to the costs involved.

»Firms may not patent when their inventions were developed through contract (which is likely to occur in some stateanchored clusters). And, more broadly, it is reasonable to suggest that clustered firms may not patent because patenting required making tacit, complex and systemic knowledge explicit which actually eases invent around behaviors and unintended knowledge transfers (Levin, et al., 1987; Teece, 2000). One of our core assumption in this regard is that the social and business interactions that characterize clusters also make it more difficult to keep secrecy of any innovation.

»Levin et al (1987), for example, argued that patents are not good protection mechanisms because of the ability of competitors to “invent around” them. Conversely, if the innovator firm is able to patent and effectively protect the knowledge, then the innovator will possibly be rewarded with rents. However, as Winter (1987) stated, patenting provides effective protection in only a few cases and industries (Levin, et al., 1987; Teece, 2000).

»For public policy makers our paper raises several issues that must be assessed. First, the need to understand which types of clusters may hold the benefits aimed at. Different types of clusters are likely to have different impact on the regional and national economy and the creation of jobs. Perhaps more important is to design and implement effective legal and regulatory norms that promote and protect innovations. Firms’ inability to capture the rents from their innovations may, in some instances, be the outcome of loose appropriability regimes, which may be changed by regulatory intervention. It is not rational to expect firms will devote substantial human, physical and financial resources to innovation if potential future rents steaming from their innovations are preempted by competitors or collaborators.

»For practitioners this paper highlights that it is important to assess the specific characteristics of the cluster before advancing in any irreversible location decision. It is crucial to understand the different dynamics that exist in the cluster and figure out ex ante the benefits and hazards of operating in the cluster, including in what concerns innovation output and the appropriation of rents from innovation. Managers also need to know in which type of cluster to locate to benefit the most of knowledge spillovers.

»In this paper we contribute to the debate on when innovator firms appropriate the benefits from innovation in a specific context: location in different types of industry clusters. While a majority of the extant research points to clusters being spots of particularly intense innovation activity due to the inter-firm networks that are formed among co-located firms, some challenges may exist. The current and dominant rationale is that firms increasingly need to access knowledge from other firms and that knowledge is increasingly a collaborative effort (Nagarajan and Mitchell, 1998; Rosenkopf and Nerkar, 2001). However, inter-firm relationships present difficulties associated to the flows of knowledge and the potential for dominant firms to reap the majority of the benefits from innovation. Hence, while co-located firms may be more innovative, and jointly they may have an advantage, the challenge remains: do innovator firms prefer to co-locate given the higher difficulty to appropriate the benefits from innovation? This paper intends to be a parsimonious contribution towards this debate.

»The analysis of the types of clusters and their impact on the appropriability of returns from innovation presents yet additional discussion to existing research. First, we need to understand whether the innovation output is always larger in all types of clusters; second, who actually endeavors in innovation efforts; third, who captures the rents. The specific characteristics of the cluster, the ties among firms, the flows of employees, the dominant firms, and the broad configuration of the cluster determines who is more likely to appropriate the returns from innovation. The clustering of firms raises appropriability concerns due to the same mechanism that may lead to the innovations themselves. It is thus likely that the specific characteristics of the locations and the patterns of interaction between individuals and firms are major determinants of both innovation output and the greater beneficiary from the innovations that are generated.»

Innovation Typologies
Thematic Readings

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