Copyright eContent Management Pty Ltd. Innovation: Management, policy & practice (2012) 14(1): 218.

Determinants of National Innovation Systems: Policy implications for developing countries

FRANK L BARTELS*, HINRICH VOSS+, SUMAN LEDERER* AND CHRISTOPHER BACHTROG*
*Strategic Research and Regional Analysis Unit, United Nations Industrial Development Organization, Vienna, Austria; +Centre for International Business University of Leeds, Leeds University Business School, University of Leeds, Leeds, UK The importance of National Innovation Systems (NIS) for the economic performance of a country is widely acknowledged. In order to close the development gap, it is crucial for developing countries to identify the degree to which knowledge institutions, governments and business corporations determine NIS and deduce relevant innovation policies from this. We model and estimate their relationship from a network perspective for NIS of 46 developed economies and emerging markets at the macro level using secondary data from a series of international measures. We nd that, while the structural dynamics of knowledge management, decision-making, governmentbusiness relations and the market are crucial to NIS behaviour, overall innovation in this context is dominated by market forces. This implies developing economies should focus on establishing an institutional environment that supports markets and market transactions which, subsequently, supports the domestic NIS and economic growth.

Keywords: National Innovation Systems; network determinants; performance indicators

hile recent research has emphasised the importance of National Innovation Systems or National Systems of Innovation (NIS/NSI)1 to the economic health of countries (Block & Keller 2008). The roots of the empirical work on NIS are found in investigations into the interactions between human capital, diffusion of technology and economic growth (Solow 1960; Nelson & Phelps 1966; Arrow 1996) and further back in terms of Marshallan industrial districts (Marshall 1920). Despite the wealth of conceptual and theoretical contributions, statistical assessments that use dynamic network analysis, structural equation modelling (SEM), and multiple regressions to model NIS are relatively few. This paper examines the phenomenon respective to the literature and provides a statistical framework analysis. It uses cross-sectional data of indices of competitiveness, technology, industrial performance and human development for 26 developed countries and 20 emerging markets economies (EMEs; see Appendix I).

The research attempts to identify the factors that actually depict NIS and establish how the constructs can be measured. The underlying assumption is that certain determinants of coherent and high performing NIS exist in developed economies and emerging markets and these determinants can provide valuable insights to policy for, and management of, NIS in developing countries with not so high-performing economies. Within the debate concerning the institutions or technology roots of economic growth (Nelson & Phelps 1966) NIS has become especially important in national policy since 1980 (European Commission 2004). This is reected not only in public policy support for small and mediumsized enterprises (SMEs) as sources of innovation (Audretsch 2004) but also by the Community Innovation Surveys of the EU2. NIS literature has expanded to cover multi-faceted dimensions in the economics of technology, industrial
2

Both these two phrasings appear consistently in the literature (see Lundvall 1995; Munk & Vintergaard 2004).

The EU Community Innovation Statistical Surveys have been conducted on a four yearly basis since 1993. The coverage has increased from 15 countries in 2000/2001 to 25 countries of the EU in 2008 (http://www. eurostatepp.eurostat.ec.europa.eu/portal/page/portal/ microdata/cis; accessed 21 June 2011).

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performance and competitiveness and innovation (including regional innovation systems, industrial dynamics and structural change). According to Asheim and Gertler (2005), innovative activities and the economic geographies that conform to the efciency and effectiveness of knowledge links are crucial to development. Though the dynamics of that knowledge and spatial concentration of economic relations are based on intellectual assets (Cohen et al. 2000). These concepts inform our research. NIS are prevalent in industrialised and emerging market economies. Nevertheless several developing countries aspire to increase the appreciation of innovation to develop their economies. (See African Union Summit 2007 on science and technology for Africas development). Therefore, empirical understanding of NIS in industrialised and emerging market economies carry signicant implications for developing countries (Bartels & Lederer 2009). The international business dimensions of NIS (e.g., technology transfer via licensing or foreign direct investment) are equally important; this, however, is beyond the scope of the paper. The paper is organised as follows. The seminal literature on NIS is reviewed in section current approaches to National Innovation Systems. A model of NIS for analysis is presented in section an approach to modelling NIS. In section methodology, we illustrate the approach used for identifying, standardising and analysing the data. Results of the factor and multiple regression analyses are presented in section analytical results and statistical signicance. The discussion of the results is presented in section factor interpretation. Section discussion of regression analysis concludes. CURRENT APPROACHES TO NATIONAL INNOVATION SYSTEMS The 1999 conference on National Innovations Systems, Industrial Dynamics and Innovation Policy (Danish Research Unit for Industrial Dynamics [DRUID] 1999) exposed at least eight dimensions of NIS. Within this broadening eld, attention has focused on conceptualisation and measurement issues (Sornn-Friese 2000; Carlsson et al. 2002; Freeman 2002). Furthermore, the

centrality of institutions (the rules of the game) to NIS has sharpened the search for an effective articulation of their qualitative roles and the inuence of organisational interrelationships. Herein, the distinction between institutions and organisations [following Patel & Pavitt (1994)] is crucial to understanding these interrelationships (Edquist & Johnson 1997). Nevertheless, empirical analysis of knowledge management in NIS continues to present challenges of conceptualisation and measurement (Hall & Mairesse 2006), because of complexities in NIS that arise from the geographical spatiality of rms, industrial agglomeration and territorial embeddedness (Amin & Cohendet 2005) and conuence of technology. Also, the precise nature of mechanisms and relationships between institutions and organisations are not readily tractable. With relatively fewer quantitative analyses empirical work on NIS is welcome, particularly on economies that are either underdeveloped or in the process of catching-up (Sornn-Friese 2000, p. 10). In using the NIS for strategising the industrial development of developing countries, the structural identication of underlying determinants is seen as a prerequisite for policy implications. Until recently, the main contributions have focused exclusively on NIS in industrialised countries and emerging economies3. With respect to developing countries, notwithstanding the utility of information on economic growth and differences in competitiveness among industrialised countries, the focus on advanced economy NIS should carry the injunction against adoption of Northern NIS characteristics without adaptation through local cultural and institutional lenses in the South (Arocena & Sutz 2000a). This is the overriding perspective of the contributions to The Handbook of Innovation Systems and Developing
3

A desk research survey of Innovation Surveys performed in 2008 by the authors indicated that only OECD and emerging markets as dened by the Institute of International Finance carried out Innovation Surveys. Exceptions from developing countries (non-OECD and non-EMEs) were: Tunisia, Slovakia, Algeria, for which the survey was planned to be undertaken in 2009.

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Countries (Lundvall et al. 2009) especially Joseph (2009), Barnard high Incentives et al. (2009) and Cimoli et al. low (2009). Elaborated as business syshigh tems and institutional frameworks for economic organisation (Hollingsworth & Boyer 1997), NIS are vital for the effective coordination of inter-organisational relations in which knowledge is the currency of exchange in techlow nological development (Lundvall 1995; Edquist & Johnson 1997). Lundvall (1998) contrasts NIS ineffective effective and neo-classical resource allocaInstitutional arrangements tion perspectives using the three Policies dimensions of: choice-learning, allocation-innovation and instiFIGURE 1: A TAXONOMY OF NIS tutions. Herein, norms, trust, rational action and authority At a macro-level, given social embeddedness determine the content and style of NIS. Hence, national systems of innovation have strong and reciprocating interactions in economic struchistorical roots, which tend to persist over long tures, and recognising the conuence of culture, periods. Technological innovation is country- economic behaviour and technological exchange, specic and rooted in national systems of innova- Bjrnskov and Svendsen (2002) use extent of tion. (Vertova 1998, p. 445). This view, afrmed decentralisation and social capital to delineate the by Ungler and Zagler (2000), calls for a holistic economic performance of Scandinavia. In conapproach to modelling NIS. Industrialization of trast, Asheim and Coenen (2004), and Munk and innovation is the salient ingredient in the growth of Vintergaard (2004), propose a taxonomy at clusthe modern economy (Vania 2004) and develop- ter level in which the knowledge base, the organing countries in particular must access and develop isational nature, institutional characteristics and new technologies to avoid the low side of the bifur- involvence in innovation are the four dimencation in cross-country income distribution (Barro sions of classication. The earlier taxonomy of Braadland and Ekeland (2002), based on skills 1998; Durlauf & Quah 1998, Figure 1). At a meta-level of analysis, Archibugi and and the extent to which innovation is systemic, Iammarino (1999) develop a taxonomy of the classies the rm level constituency of NIS with globalisation of innovation with categories, the metric skilled workers (or engineering denactions and forms as the dimensions, and indi- sity). Kaiser and Prange (2004) propose a terricate that global techno-scientic collaboration is torial conguration for NIS, wherein regulatory performed by the constituencies of NIS namely policies and spatiality constitute the dimensions. These taxonomies highlight the dynamics universities, public research centres, national and international rms. These also constitute and externalities of knowledge with formal and the actors in Leydesdorff (2001, p. 1) neo- informal organisational characteristics; as well evolutionary model of a triple helix of university as direct and indirect involvement in processes industrygovernment relations. This model with of innovation on one hand. On the other hand, functional and institutional dimensions reects these taxonomies bring into relief the complex dynamics composed of sub-dynamics like the core architecture of NIS.
Capacities

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market forces, political power, institutional control, social movements, technological trajectories and regimes. The operations (therefore) can be expected to be nested and interacting (Etzkowitz & Leydesdorff 2000, p. 113). In this context transorganisational knowledge generation and diffusion moderated by institutions is deemed the NIS capability and NIS capacity is to be the strength of links in the network between supply and market factors, communication infrastructures, education/training, and the macro-economic and regulatory contexts (OECD 1999). Importantly, the structure of the network matters to the evolution of NIS (Carley 2003). As efciencies and effectiveness of technological change are encapsulated by NIS, it is important to recognise four basic notions. First, translating innovation into systemic competitive economic performance is a function of stable close relationships between economic agents (Richardson 1972). Secondly, the relationships are contextualised by non-market interactions (Lundvall 1985; Williamson 1985). Thirdly, the relationships and interactions are differentially contoured by the specicities of national institutional rules of game and subject to frictions (Edquist & Johnson 1997). Fourthly, differences in stocks

of industrial knowledge, and the way they are managed in policy terms affect the quality of the relationships (Soete & Stephan 2004). The four notions are captured by Fagerberg and Srholec (2008) as four capabilities of the quality of governance, the characteristics of the political system, the development of the innovation system, and the extent to which the economy is open. These notions are reected in the statistical model presented in Figure 2. The social system of institutional arrangements, resource capabilities, and proprietary functional capabilities also circumscribe the NIS (Van de Ven 1993). With this perspective Park and Park (2003, p. 403) dene NIS as the structural and functional proles of a nation that determine its innovative capability and economic performance. They point to the signicant correlation between R&D and industrial structure and indicate that resource capabilities are empirically signicant to NIS operations. Wijnberg (1994, p. 316) uses a content rich structure conductperformance model to dene the kind of NIS that facilitates industrial development. Thus, resource capacities or structure, institutional arrangements or conduct, and proprietary functional capabilities or performance constitute

1: Structural dynamics of knowledge management 2: Structural dynamics of decision-making Behavioural dynamics of NIS

3: Structural dynamics of government-business relations 4: Structural dynamics of the market

Policies
FIGURE 2: A RECURSIVE MODEL OF NIS

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the NIS. Wijnbergs (1994, p. 318) denition of NIS is a set of policies that inuence the structural characteristics, the dominant type of innovation in particular industries, the risk-taking propensity of enterprises in these industries, and the selection environment in which these industries develop. Audretsch et al. (2004) show how the selection environment is signicantly inuenced by the spatial proximity of universities, the type of science and the number of learners. The advantages of proximity enable dynamic exchange of capabilities at the rm level to be sustained and feed into the NIS. In relation to this, Farina and Preissl (1999) depict a taxonomy with the dimensions privatepublic and knowledge generationknowledge application, and point out that resource capacities of NIS are relatively less important than the proprietary functional capability. They conclude the success of innovation is increasingly dependent on functions that are not R&D, like organisational re-adjustments, training of personnel, design of prototypes and procedural blue-prints, market research, availability of venture capital, integration of existing equipment and stocks of knowledge with new knowledge inputs (Farina & Preissl, 1999, ch. 6, p. 24). The role of NIS in developing countries development and developing country NIS literature do not depart radically from the ideas above (Edquist 2001; Intarakumnerd et al. 2002). Arocena and Sutz (2000b, pp. 5859) draw attention to the four main aspects of the NIS concept as an expost concept; one that carries a normative weight; and is relational; as well as being path dependent and evolutionary and is therefore a policy subject. The interesting normative aspect for developing countries is that there are some general good ways and some ways that appear to be better than others and that it is important to avoid copying or just following the latest policy fashion. The role of the rm in NIS is determined by the relationship between size, market shares and R&D intensities, all of which are positively correlated with innovation (Hall & Mairesse 2006). It is important to acknowledge that the relationships between variables mediated by actors within a NIS, constitute ultimately a dynamic social network analysis problem in which the quality

of relationships inuences the viability of the NIS (Agapitova 2005). Dynamic social networks with embedded trust routines lead to important roles in rms and clusters knowledge creation processes (Malmberg & Power 2005, p. 425). Lorenzen (2005) addresses this issue through knowledge, proximity and co-ordination that leads to the creation of economic value. From the dynamic social network analysis perspective, NIS should be seen in multi-modal and multi-plex terms of a matrix of people, knowledge resources, events and tasks (Carley 2003). Given the above approaches to NIS, institutional dynamics and growth accounting, and considering that the evolution of technological change-generating activities and technical knowledge are key inuences on economic competitiveness, we suggest a denition of NIS as the envelope of conforming policies as well as private and public organisations, their distributed institutional relations, and their coherent social and capital formations, that determine the vector of technological change, learning and application in the national economy. AN APPROACH TO MODELLING NIS Based on the previous literature review, we depict in Figure 1 a taxonomy of NIS in which the framework of policies surrounds and infuses the internal elements of (resource) capacities, (market and non-market) incentives, and institutional arrangements (rules of game). Clearly, combinations of factors can result in NIS outputs that vary across different levels of analysis (from rm level to global-level) and across different national economies. For our purpose, NIS is dynamic and operable at national level where its output translates into economic performance. Economic performance is here circumscribed as behavioural dynamics in order to capture more than purely gross domestic product measurement. These three dimensions can be transformed into operationlisable constructs with the behavioural dynamics at its core. We posit that the behavioural dynamics of NIS are determined by four independent underlying constructs. NIS are highly complex and dynamic. They show path dependency and demonstrate persistent

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structures due to the institutional set-up within the particular country. NIS are further characterised by social interactions that create learning, irreversibility and non-linear outcomes (Niosi et al. 1993; Lundvall 1998; Nooteboom 1999). Based on these considerations, four independent structural dynamic constructs were formed associated with: knowledge management, decisionmaking, governmentbusiness relations, and the market. The terms structural and dynamics were imported from the literature of non-linear dynamical systems of social networks (Freeman 2000; Skvoretz & Faust 2002). This imparts the sense of complexity and dynamism, and enduring structural properties to NIS, which quantitative factor and multiple regression analyses should disclose. The rst independent construct structural dynamics of knowledge management acknowledges the central role of systemic knowledge building and its distribution to industrialisation. According to Hall and Mairesse (2006, p. 10), knowledge management comprises routines used to acquire new knowledge, and to rearrange and diffuse existing knowledge. The human element is crucial in this process as is the absorptive capacity of the organisation (Cohen & Levinthal 1989). The construct therefore encapsulates knowledge as interactions between data, information, education and human capital responses to the challenges of productivity. These interactions involve ascribing purpose to data to translate it into information; and assigning value to information thus transforming it into knowledge. This construct goes beyond the concept of competencies (Patel & Pavitt 1994), to reect the input variables used to measure NIS by Nasierowski and Arcelus (1999). The second construct structural dynamics of decision-making reects cultures consequences and captures the institutional rules of game regarding how economic actors engage with regulatory policies (Hofstede 1991; Kaiser & Prange 2004). It also reects patterns of interactions peculiar to agents within a national institutional set-up (Sornn-Friese 2000, p. 4). The third construct structural dynamics of governmentbusiness relations captures public

and private interactions with respect to government technology policy, and the extent to which governmentindustry relations are subject to transaction costs. This construct reects Etzkowitz and Leydesdorff s (2000) overlap of government and industry in their triple helix model of NIS, as well as non-market relationships (Sornn-Friese 2000, p. 4). Fourthly, the construct structural dynamics of the market captures incentives and markets as signalling mechanisms that reect Porters (1990) view of industry competition and demographic characteristics. These four constructs together form our hypothesis: The development of NIS is depicted by a series of variables which are inuenced signicantly by the factors structural dynamics of knowledge management, structural dynamics of decision making, structural dynamics of governmentbusiness relations and structural dynamics of the market. METHODOLOGY We investigate the recursive structural relationships of the factors using factor analysis and multiple regression. Factor analysis is employed to distill the key variables from the literature and to conrm the constructs. Multiple regression analysis is then employed to establish the importance of the constructs. Interrelations (non-recursive) of the four constructs 14 are not investigated here. Guided by the literature, the rst approach towards the creation of an analysis model was the selection of appropriate variables for the constructs 14 and the dependent variable Behavioural dynamics of NIS. This was followed by focused scrutiny by each author separately to remove redundant variables. To ensure data consistency and reliability, countries with the most complete sets of data for the years 20002002 were selected. This left us with a set of 46 countries, comprised of developed (26) and emerging market economies (20). We selected 210 variables from the IMD (2003), World Economic Forum (2000), the World Bank (2003) and the UN (UNCTAD 2003; UNDP 2003; UNIDO 2002/2003; UNIDO 2004) to construct the new index.

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Using the literature survey as a guide to array the measurement variables over the ve constructs of our NIS, the model is constituted as follows: the Behavioural dynamics of NIS is measured by 77 variables, knowledge management by 49 variables, decision-making structures by 27 variables, governmentbusiness relations by 18 variables and market by 39 variables. Overall the model depicts 133 variables on the independent side and 77 variables on the dependent side. The variables chosen have different scales (Likert scales, absolute gures, percentages) and are problematic to compare and use directly. They were therefore normalised for comparability, using the Wilson et al. (2003) normalisation method. To reduce the magnitude of data for the model, while still taking into account the complexity of NIS, a principle component factor analysis was conducted on the variable sets respectively. Through this procedure, a reduced number of components factors could be extracted, accounting for most of the variance in the data. These can be regarded as the most inuential factors, or determinants, and are made up of sets of, or single, variables. Their factor scores were then saved for regression analysis, in which their correlation with one dependant variable in our case Behavioural dynamics of NIS is assessed. This one dependant variable was obtained by factor analysing the 77 variables of this construct; only one factor could be extracted. This constitutes the second hypothesis that from these variables one factor can be extracted which describes the behavioural dynamics of NIS. This one factor was termed Technological competitiveness. This is due to the fact that the factor inuences variables of technological competitiveness with factor loadings high above 0. Thus a model with 25 factors in four sets on the independent side was created, determining one factor on the dependant side. This constitutes our measure for dimensions of NIS at macro level. For reasons of space, the factor loadings on variables are not presented. Numbers, variance expanded, tests of signicance and Cronbachs alpha are summarised in Table 1.

ANALYTICAL RESULTS AND STATISTICAL SIGNIFICANCE The pattern matrix produced by SPSS software version 11.0.1 was used to analyse the results of factor analysis represented in Table 1. Not included is the dependent construct Behavioural dynamics of NIS, which comprises one factor depicting 35 variables that accounted for most of the variance on the dependent side. High factor loadings on underlying variables (latent variable or factors) indicate a good factor structure and high correlation between the factor and each variable. We conclude, as do Velicer and Fava (1998) that our sample size, constrained by data availability, is not of concern. The set of variables, inuenced by the single factor technological competitiveness, has a Cronbachs of 0.9693 (standardised at 0.9861) and is deemed very reliable (Bryman & Cramer 1990, p. 71). This single factor accounts for 39.1% of the total variation in the data. The factor Technological competitiveness correlates, above 0.900, on the following variables: technological sophistication (0.942); computers in use per 100 people (0.924); overall pollution regulations (0.919) and GNI/Capita (PPP) (0.906). Results indicate that it accounts for at least 81% of the variation of these four variables. This factor represents our construct of behavioural dynamics of NIS. The aforementioned four variables, which are inuenced signicantly by the factor, have signicant explanatory power in dening our understanding of the dependent variable. The extracted factor structure of the model, summarised in Table 1, shows that the factor solutions are meaningful and robust. According to the KaiserMeyerOlkin test (KMO), which measures partial correlation among variables, all the independent factor structures arguably have sampling adequacy. Constructs 2 and 3 are meaningful and signicant whereas constructs 1 and 4 have low KMO values and are theoretically meaningful but not statistically signicant (Comrey 1973; Kim & Mueller 1978). The average communalities range 0.7860.852, which exceed the 0.7 minimum recommended by MacCallum et al. (1999) for sample size not to have a detrimental effect on parameter estimates. The four sets of independent factors are responsible for

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TABLE 1: FACTOR ANALYSIS AND RELIABILITY TEST RESULTS DEPENDENT VARIABLE: NIS TECHNOLOGICAL
COMPETITIVENESS

Factor name

No. of Mean Percentage KMO Bartletts test NonStand. variables commuof variance redundant Cronbachs nalities explained by F residuals alpha 83.4% 45.7 12.1 7.4 5.8 4.3 3.2 2.8 2.1 82.8% 61.7 8.0 5.1 4.2 3.8 77.6% 56.1 10.2 5.7 5.6 84.6% 49.2 8.4 6.4 5.2 4.7 4.0 3.9 2.8 0.9375 0.8503 0.9574 0.8999 0.3442, 2 = 130.794, df = 900 0.9839 0.9482 0.7482 146 (12.0%) .

1. Structural dynamics of knowledge management F11 Techno-managerial and 12 innovation competence 8 F12 Educational system effectiveness F13 Orientation to informatics1 4 1 F14 Internet-based supplier relations 1 F15 Adult illiteracy F16 Overall productivity vector 1 1 F17 Higher education achievement F18 Government-enterprise 1 investment ratio of GDP 2. Structural dynamics of decision-making 7 F21 Robust juridical autonomy F22 Cultural adaptability 2 F23 Political incoherence 3 F24 Policy incapacity 3 F25 Trust in courts 1 3. Structural dynamics of government business relations 12 F31 Regulatory stringency F32 Lack of admin. barriers 2 F33 Export orientation 1 1 F34 Private bank ownership 4. Structural dynamics of the market F41 Sophisticated market 14 forces 3 F42 Exchange rate uctuation F43 Overall poverty 2 F44 Atomistic market 1 F45 Access to external nance 1 F46 Demographic constraints 3 F47 Fiscal burden to companies 3 F48 Real growth in retail sales 1

0.844

0.818

0.847, 2 = 1477.6***, 58 (16.0%) df = 351

0.786

0.844, 2 = 688.2***, 48 (31.0%) df = 153

0.7885 0.8445

0.9774 0.88194 0.9815

0.852

0.5243, 2 = 646.598, 79 (10.0%) df = 741

0.62215 0.66416

1 F13 is highly over determined and loads on the variables as follows: Email (0.833); tertiary students in science/mathematics (0.778); internet for information (0.728); and licensing technology (0.667). Although, its standardised Cronbachs is low but reliability is 0.7482 when item tertiary students in science/mathematics is deleted. 2 The KMO measure of sampling adequacy is 0.344 when the variables with negative Eigenvalues (which do not account for variance) are removed. 3 Not signicant. 4 Standardised Cronbachs is low but is 0.8819 if item exchange rate stability variable is deleted. 5 Standardised Cronbachs is low but is 0.6220 if item population over 65 years variable is deleted. 6 Standardised Cronbachs is low but is 0.6640 if item average corporate tax rate variable is deleted. ***p < 0.001.

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between 78 and 85% of the total variation in the data. Importantly, the non-redundant residuals, from the reproduced correlation matrices, range from 10 to 31%. This implies that, with respect to independent constructs 14, only 12% of the data variation is accounted for by variables other than those on which our extracted factors F11F18 load. Similarly, only 16% of the variation lies outside that captured by factors F21F25; 31% regarding F31F34; and 10% regarding F41F48 respectively. The reliabilities of the variables inuenced by the extracted factors are high. Therefore, we are condent of good recovery of population factors signalling the generalisability of our nding, and in using the factors scores as independent variables in regression. The regression results are presented in Table 2. Seven regression models illustrate the determinants of NIS. Models 14 consider the independent factors in each of the four constructs separately. Models 5, 6 and 7 consider the combinations of independent factors as 1 + 2 + 3; 2 + 3 + 4; and 1 + 2 + 3 + 4, respectively. Results indicate that factors are statistically and theoretically meaningful. FACTOR INTERPRETATION Statistical indicators of factor analysis show that constructs 1 and 4 are not statistically signicant, although they are of high theoretical signicance. Taking this into consideration, the discussion starts out by addressing factors two and three. As shown in Table 1, institutional arrangements incorporating norms, trust, and the autonomy of legal outcomes on the one hand and capacities involving ability to meet regulation and absence of administrative restraints on the other hand are signicant factors in NIS. Concerning structural dynamics of decision making, Robust juridical autonomy (F21) and Cultural adaptability of policies (F22) seem to be the main determinants of how the Rules of the game are constructed and negotiated. The analysis indicates that these two factors together account for 69.7% of the variation in Structural dynamics of institutional decision making. Looking at the distribution of the variance explained it can be stated that Robust juridical autonomy, for example institutions not

being prone to coercive governmental administrative regulations, is the main variable determining institutional decision-making procedures. Regarding governmentbusiness relations, Regulatory stringency (F31) and Lack of administrative barriers (F32) show the highest correlations. These two factors concern elements of the political environment such as the protection of material and intellectual property rights as well as minor bureaucratic efforts associated with establishing a business, registering patents and the like. Together these two account for 66.3% of the variance in the construct. The factors of the two constructs also reect the triple helix of NIS as constituted by Leydesdorff (2001). With respect to Structural dynamics of decision making and Structural dynamics of governmentbusiness relations as determining the behaviour of NIS, principal component analysis presents an explicit differentiation between the two. The theoretically meaningful constructs Structural dynamics of knowledge management and Structural dynamics of the market are constituted by the following factors: In the former, Techno-managerial and innovation competence (F11) and Educational system effectiveness (F12) account for 57.8% of the variation in the data reinforcing the importance of managerial skills and the quality of human resources as indicators for knowledge management. The factors Sophisticated market forces (F41) and Exchange rate uctuation (F42) together explain 57.6% of variation in Structural dynamics of the market. It is argued that the former reects the balance of high-, low-tech dimensions and the Porter (1990) diamond components that characterise demand and supply factor conditions, while the later reects the ability to transact. From the results of this factor analysis, a series of relevant conclusions can be drawn. The most eminent nding is that knowledge and its management and the education system, juridical autonomy of institutions (not subject to capture or lobbying), clear regulations and low red-tape as well as sophisticated markets and investment (as a function of exchange rate) are major determinants of NIS. These results concur with the OECD

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TABLE 2: REGRESSION ANALYSIS RESULTS

F Factor name (1) (2) (3) (4) (5) (6) (7)

1. Structural dynamics of knowledge management F11 Techno-managerial and 0.697 innovation competence (17.190)*** F12 Educational system 0.188 effectiveness (5.097)*** F13 Orientation to informatics 0.198 (5.724)*** F14 Internet-based supplier 0.036 relations (1.070) F15 Adults illiteracy 0.155 (4.386)*** F16 Overall productivity vector 0.061 (1.780) F17 Higher education 0.041 achievement (1.179) F18 Governmentbusiness 0.139 investment ratio of GDP (3.649)*** 2. Structural dynamics of decision-making F21 Robust juridical autonomy F22 Cultural adaptability F23 Political incoherence F24 Policy incapacity F25 Trust in courts

0.678 (7.400)*** 0.120 (2.723)* 0.213 (4.255)*** 0.006 (1.85) 0.139 (3.147)** 0.028 (0.654) 0.038 (1.095) 0.218 (4.244)*** 0.109 (0.883) 0.012 (0.206) 0.012 (0.236) 0.167 (1.771) 0.022 (0.511) 0.019 (0.136) 0.055 (0.776) 0.054 (1.081) 0.091 (1.988)

0.120 (0.653) 0.052 (0.896) 0.105 (1.663) 0.002 (0.047) 0.015 (0.247) 0.189 (1.769) 0.046 (1.190) 0.104 (1.585) 0.005 (0.033) 0.021 (0.292) 0.030 (0.529) 0.006 (0.044) 0.024 (0.387) 0.289 (1.437) 0.103 (1.159) 0.021 (0.386) 0.089 (1.696) 0.833 (2.891)** 0.097 (1.436) 0.083 (1.585)

0.653 (12.514)*** 0.101 (2.146)* 0.097 (1.950) 0.413 (7.369)*** 0.051 (1.126)

0.035 (0.275) 0.055 (0.828) 0.027 (0.458) 0.070 (0.498) 0.039 (0.618) 0.075 (0.399) 0.112 (1.377) 0.022 (0.415) 0.070 (1.702) 0.905 (4.634)*** 0.047 (1.095) 0.004 (1.095)

3. Structural dynamics of governmentbusiness relation F31 Regulatory stringency 0.876 (12.753)*** F32 Lack of administrative barriers F33 Export orientation F34 Private bank ownership 0.087 (1.210) 0.066 (0.999) 0.049 (0.784)

4. Structural dynamics of the market F41 Sophisticated market forces F42 Exchange rate uctuation F43 Overall poverty F44 Atomistic market F45 Access to external nance

0.822*** (24.686) 0.020 (0.725) 0.013 (0.453) 0.124 (4.317)*** 0.017 (0.604)

0.121 0.117 (2.963)** (2.235)* 0.005 (0.124) 0.001 (0.018) (Continued)

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TABLE 2: CONTINUED
F Factor name (1) 0.951 1.958 37 109.298 (2) 0.916 1.872 40 99.684 (3) 0.823 1.629 41 53.479 (4) 0.205*** (6.248) 0.049 (1.743) 0.008 (0.271) 0.966 1.797 37 163.125

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(5) 0.969 1.967 28 82.940

(6) 0.200 (0.217)** 0.009 (0.217) 0.030 (0.508) 0.965 2.083 28 74.767

(7) 0.124 (1.716) 0.055 (0.947) 0.096 (1.379) 0.974 0.2103 20 68.322

F46 Demographic constraints F47 Fiscal burden to companies F48 Real growth in retail sales Adjusted R2 DurbinWatson df F

*p 0.05; **p 0.01; ***p 0.001; t-stats in parentheses.

(1999) which points to NIS being increasingly reliant on The science base and Networking and collaboration among rms. Regarding the role of government and policy, our ndings conrm NIS to be inuenced by framework conditions that are conducive to a supportive tax and regulatory environment and policies in order to remove more specic barriers to innovation in the business sector and increase synergies between public and private investment in innovation (OECD 1999, pp. 1011). Concerning measures for policy, Building an innovation culture is reected by the factor Cultural adaptability (F22). Further it is argued that competitive markets force rms to innovate more rapidly. The results of our research agree with Vinding (2006) and Lhuillery (2006) who conclude that high human capital, high knowledge diffusion and dynamic capabilities are correlated positively with innovation. It is cogent to mention the characteristic of the factor Export orientation (F33) as it reects the FDI and international business aspect of NIS in the sense that rms must have rm specic ownership advantages (Dunning 2000) idiosyncratic to the rm (not readily replicated by others), in order to effectively penetrate foreign markets. Export orientation helps to improve competitive aspect of NIS by enabling rms to learn from overseas partners. DISCUSSION OF REGRESSION ANALYSIS The results of our analysis are now used to explain which of the construct 14 factors inuence the dependent construct behavioural dynamics of

NIS represented by Technological competitiveness in what way. In our rst regression model, all the factors representing the construct of Structural dynamics of knowledge management are signicant determinants of NIS technological competitiveness, except for those related to internet, productivity and higher education achievement. Techno-managerial and innovation competence and Educational system effectiveness have the largest coefcients. Interestingly, it is not higher education per se but the effectiveness of the whole of the educational system that is crucial. This indicates that the quality of education is a more signicant determinant of NIS than the quantity of enrolments. Furthermore, Adult illiteracy has a signicant adverse relation to NIS technological competitiveness. This is a crucial nding in that policy for Enhancing technology diffusion cannot be effective in the face of workplace illiteracy in increasingly knowledge-based organisations that need to use their internal capacity to seize market and technological opportunities (OECD 1999, pp. 911). Looking at the second regression model, all factors representing the construct Structural dynamics of decision-making are signicant, with two exceptions. Political incoherence (F23) and Trust in courts (F25) do not show correlation with countries technological competitiveness. The factor Policy incapacity on the other hand, has a considerable negative effect on NIS. This is not surprising as policy frames all elements of NIS. Furthermore, it has to be acknowledged

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that, bearing in mind the network aspects of innovative clusters and the geographical economics of location, the ability to co-ordinate multi-faceted elements is vital to the overall capability of the system. This is especially important at the interfaces of NIS elements where networks come into contact. The statistical signicance of Robust juridical autonomy (F21), Cultural adaptability (F22) and Policy incapacity (F24) reects the changing view on the political economy of industrial innovation towards a behavioural orientation rather than a purely economic one. This change has been accompanied by a shift in the nature of innovation from conventional rationalism to a non-linear perspective which, although inuenced by bounded rationality, implies that a NIS has to be capable of adaptive learning in the aggregate (Daneke 1998, p. 105). With cultural adaptability this task is achievable. However, policy incapacity inhibits the benets of NIS (knowhow, speed and trust) that otherwise would arise from the fact that networks offer a highly feasible means of utilising and enhancing such intangible assets as tacit knowledge and technological innovation (Powell 1990, p. 322). The issue of centrality [which individuals (elements) are best connected to others or have most inuence] and connectivity [whether and how individuals (elements) are connected to one another through the network], (Newman 2003, p. 169) is embedded in the Structural dynamics of decision-making. Regression model number three indicates the key determinant of NIS technological competitiveness to be Regulatory stringency (F31). Regulatory stringency is correlated with increasing technological capabilities in NIS (Rock 2002). This reects the ability to meet higher resolution standards by the industry component of NIS, through comprehensively prioritised, well-calibrated and sequenced policies that deal with the regulatory regime for businesses (OECD 2002). The fourth regression-modelling approach shows that Sophisticated market forces (F41) positively determine NIS technological competitiveness whilst Atomistic markets (F44) and Demographic constraints (F46) are negatively correlated. This is in keeping with the market relations view of NIS as a knowledge-intensive

system of production (Belussi 1999; Hkanson 2005). Notwithstanding innovation by SMEs, atomistic markets are detrimental rstly because of the economies of scale required for sustained innovative activities and secondly weak incentives associated with appropriating full economic returns from investing in the risks and transaction costs of innovation (Love & Roper 2004). Thirdly, Atomistic markets, in terms of high labour exibilities and deregulation, undermine the incentives for rms to invest in knowledge. Michie and Sheehan (2003, p. 123) nd that labour exibility practices encouraged by labour market deregulation are negatively correlated with innovation. This reects concerns that policies which drive markets to atomistic conditions of perfection have detrimental effects from a Schumpeterian perspective, since they discourage product and process innovation (Kleinknecht 1998, p. 387). Given our results, it is not surprising to nd that, in terms of NIS contributing to growth, productivity and competitiveness, there is no strong evidence that more deregulated labour and product markets are among the factors allowing for U.S. growth (Simonazzi 2003, p. 647). Regarding the correlation coefcients of Demographic constraints (F46) with NIS technological competitiveness, it is not surprising that the factor is negatively correlated with the underlying variable population over 65 years but positively correlated with the underlying variable population under 15 years. The negative correlation with NIS technological competitiveness therefore underpins the assumption drawn from experience that knowledge, especially in its tacit form, is embedded in a demographic prole that favours younger rather than older generations. An over-aged population also limits differentiation within the market for innovative goods and services, as the innovationdependent growth or survival of particular rms is still regulated by economic and demographic constraints in the urban or regional marketplace (Batten 1982, p. 449). The underlying constructs individually are signicant determinants of NIS technological competitiveness and support our model. The explanatory powers of the regressions are high

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without problems of autocorrelation as our DurbinWatson statistics lie within 1.5 and 2.5. After regressing each construct separately, the research determines how the various combination of the constructs changes results concerning the signicance of their inuence on NIS technological competitiveness. In this respect, Table 2 shows regression model ve of the structural dynamics of knowledge management, decision-making and governmentbusiness relation renders the later two constructs insignicant. The sixth regression model in which NIS technological competitiveness is regressed upon by the last three constructs shows a similar result. Again the determinants Decision making and Governmentbusiness relations do not signicantly correlate with the dependent factor. Finally, when all four independent constructs are regressed, only construct number four (structural dynamics of the market) remains signicant, although the factor Demographic constraints loses its inuence. Our results carry implications for the policy framework that cradles NIS and the resource allocation decisions that government must execute. While the structural dynamics of knowledge management, decision-making, governmentbusiness relations and the market are signicant individually; together they appear overwhelmed by the signicance of the market. This resonates with the dynamics of competition in industries and markets. This perspective shows that technological competitiveness and performance are determined by the innovation orientation of national industry clusters (Furman et al. 2002; Bartels & Lederer 2009). The leading implication is that, with the highest number of signicant factors, the industrial organisation of knowledge its production and its management is of crucial importance to NIS. The (effective and efcient) behavioural dynamics of NIS, manifest as technological competitiveness, translated into economic performance through the transformational (or value-adding) and transactional (or trading) functions at the level of the rm (Dunning 2003), are practical and evolutionary. This behaviour of NIS is realised rstly through science and technology which is supported by government funding;

and an educated orientation to the purpose and value of information as an indispensable asset in the increasingly knowledge-based economy (Antonelli 1999). Secondly, it is achieved through the market mechanism characterised by publicprivate relationships that moderate, and resist (when necessary), the trend towards market perfection; and which recognises both government failures to produce public goods and market failures in allocative efciencies. These two determinants of NIS behaviour knowledge and markets concern the capacities and incentives dimensions in the four dimensional taxonomy of NIS (see Figure 1). While individually decision-making and governmentbusiness relations are signicant to NIS behaviour they lose their explanatory power when associated with the factors of the constructs, the structural dynamics of knowledge management or the market. We believe it would be misleading to assume that, because of the signicance and explanatory power of the market relative to other determinants, institutions (rules of game and decisionmaking) and publicprivate partnerships do not matter per se. Rather human capital, that encapsulates accumulation of knowledge and the market expressions of social capital are more important (Piazza-Georgi 2002). While government should get out of business it should be in the business of fostering innovation. The role of government in conforming, and managing, the policies that cradle NIS, especially those related to knowledge and the proper functioning of markets in particular markets for knowledge is vital (Tassey 2004). Our analysis suggests that the structural dynamics of knowledge management, decisionmaking, governmentbusiness relations and the markets are interdependent determinants of NIS behaviour. These components interact in complex ways that are dominated by the market in terms of the logic of competition. CONCLUDING REMARKS This paper has sought to add to empirical and practical perspectives on NIS by examining the congurative elements of NIS and looking at structural determinants by developing new constructs based on various data sources. Identifying

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determinants of NIS behaviour can support policy making on innovation and economic growth in developing countries. We constructed a model of NIS behavioural dynamics and used factor analysis to disclose deep metrics of the model. Our results are broadly consistent with the literature. However, the overwhelming signicance of markets suggests that the national innovative capacity perspective (Furman et al. 2002) is useful in guiding policy. In the absence of sufcient policy capacity and capability to inuence all the elements of construct 14, resource constrained developing countries would be better off concentrating on ensuring that markets work properly with respect to increasing sophistication of supply and demand, industry rivalry, and related and supporting industries (Porter 1990). Measures in this direction have to be taken to improve domestic innovation. However, this does not imply complete deregulation and laissez-faire policies with respect to markets. For resource constrained countries it would be facile to give the impression here that this is an easy option in policy design and implementation. For developing countries willing to devote resources to longterm economic performance on the back of a well-articulated NIS, all four structural determinants of NIS technological competitiveness need policy attention and support. The priority and sequencing suggested by regressing models for a particular country would need to be a function of local conditions and the relative strengths and deciencies of national technological capacities, institutional arrangements and incentives of NIS. However, the 14 variables of sophisticated market force would need primary attention from policy makers in developing countries. Further research is necessary in several aspects. First, the country and year basis for analysis needs to be broadened notwithstanding the lack of data from developing countries that militates against this. Analysis on a meso-level would be welcome. A micro-level approach would not compromise on over determination and could focus on individual sectors and rms. This would enhance the ability to form NIS-clusters between countries at similar stages of development and therefore potential complementarities among NIS. Secondly, the

non-recursive linear structural relations between the independent constructs and their representative factors could be analysed, using a SEM approach with national and/or micro-level data provided a sufcient number of cases is available. Thirdly, given the taxonomy presented in Figure 1, a judicious combination of clusters and factor analysis would allow a mapping of country NIS according to these axes. Finally, the role of knowledge arbitrageurs and venture capitalist needs to be incorporated into the triple helix model of NIS. ACKNOWLEDGEMENT The views expressed herein are those of the author(s) and do not necessarily reect the views of the United Nations Industrial Development Organization (as provided for in Administrative Circular UNIDO=DA=PS=AC.69 of 17 December 1990). References
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APPENDIX I 46 COUNTRIES USED FOR THE FACTOR AND REGRESSION ANALYSES Argentina, Australia, Austria, Belgium, Brazil, Luxembourg, Malaysia, Mexico, Netherlands, Canada, Chile, Hong Kong, PR China, New Zealand, Norway, Philippines, Poland, Colombia, Czech Republic, Denmark, Finland, Portugal, Russia, Singapore, Slovenia, South France, Germany, Greece, Hungary, Iceland, Africa, Spain, Sweden, Switzerland, Taiwan, India, Indonesia, Israel, Italy, Japan, Korea, Thailand, Turkey, UK, USA, Venezuela.

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Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.