Systems of

Innovation
BY CHARLES EDQUIST
LEAD PAPER PRESENTED AT THE DRUID CONFERENCE, AALBORG, JUNE 12-15, 2001, UNDER THEME F:
‘NATIONAL SYSTEMS OF INNOVATION, INSTITUTIONS AND PUBLIC POLICIES’

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 What is SI?

System of innovation
 All important economic, social, political, organizational, and other
factors that influence the development, diffusion, and use of
innovations. (Edquist 1997: 14)
 SI approach is about the:
 Determinants of innovations
 Not about their consequences (in terms of growth, quantity of
employment, working conditions, etc.)
 Identify all those important determining factors – which can also be
called activities in SIs or functions of SIs

System of Innovation (SI) refers to all the important factors that influence the development, diffusion, and use of
innovations.
The SI approach is focused on identifying the determinants of innovations rather than their consequences in terms of
growth, quantity of employment, or working conditions. The activities or functions of SIs can also be referred to as
determining factors. Here are some examples of the determining factors in SIs:

1. Research and development (R&D): The level of investment in R&D and the quality of research facilities can influence
the development of new innovations. For example, countries with strong R&D capabilities, such as Japan and the United
States, have been able to develop advanced technologies like smartphones and electric vehicles.

2. Human capital: The education and skills of the workforce can also be a determining factor in the development of
innovations. Countries with high levels of education, such as Finland and South Korea, have been able to develop
innovative industries like telecommunications and biotechnology.

3. Institutional frameworks: The presence of strong institutions, such as legal and regulatory frameworks, can also be
important in promoting innovation. For example, countries with strong intellectual property laws, like the United States and
Japan, have been able to protect the intellectual property rights of innovators and encourage further innovation.

4. Entrepreneurship: The presence of a culture of entrepreneurship and risk-taking can also be a determining factor in
innovation. Countries with a high level of entrepreneurial activity, such as Israel and the United States, have been able to
develop innovative startups and new industries.

5. Collaboration: Collaboration between industry, academia, and government can also be important in promoting
innovation. For example, countries with strong public-private partnerships, such as Germany and Sweden, have been
able to develop innovative technologies like renewable energy and smart grids.

Overall, the determining factors in SIs are varied and complex, and can involve a range of economic, social, political, and
organizational factors. Understanding these factors and how they interact with each other can be critical in promoting
innovation and economic growth.

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 Development of the theory

 Expression NIS in written form by Freeman (1987)

 Two major books
 Nelson (1993): National systems of innovation: A comparative study
 Lundvall (1992): National systems of innovation: Towards a theory of
innovation and interactive learning

The concept of National Systems of Innovation (NSI) was first introduced by Christopher Freeman in his 1987
book "Technology and Economic Performance: Lessons from Japan". Freeman's work was a major
contribution to the development of the NSI theory, as he argued that national innovation systems were critical
to understanding the competitiveness and economic success of countries.

Following Freeman's work, two major books were published that further developed the NSI theory.

The first was "National Systems of Innovation: A Comparative Study" by Richard Nelson in 1993. Nelson's
book expanded on Freeman's work and provided a more comprehensive framework for understanding NSIs.
Nelson argued that NSIs are comprised of various institutions, organizations, and individuals that work
together to create, diffuse, and use innovations in a given country.

The second major book was "National Systems of Innovation: Towards a Theory of Innovation and Interactive
Learning" by Bengt-Åke Lundvall in 1992. Lundvall's work built on Freeman and Nelson's contributions and
proposed a new framework for understanding NSIs. Lundvall emphasized the importance of interactive
learning and knowledge diffusion in NSIs, arguing that innovation is not just the result of individual creativity
but also a social process that involves collaboration and interaction between various actors.

Together, Freeman, Nelson, and Lundvall's work contributed to the development of the NSI theory and helped
to establish it as an important framework for understanding the innovation and competitiveness of nations. The
NSI theory has since been further developed and expanded upon by other scholars, and continues to be an
important area of research in economics and innovation studies.

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 Strengths of SI Approach

Rapid spread of the approach

 Places innovation and learning at the centre of focus
 Adopts holistic and interdisciplinary approach
 Employs historical and evolutionary perspective; makes the notion of
optimality irrelevant; but what can be done?
 Emphasises interdependence and non-linearity
 Encompasses both product and process innovations
 Emphasizes the role of institutions

 Some weaknesses related to conceptual diffuseness; boundaries and

lack of formality; it is at best an approach, conceptual framework
rather than thoery

The Systems of Innovation (SI) approach has several strengths that make it a useful framework for studying innovation and
economic development. Some of these strengths are:

1. Places innovation and learning at the center of focus: The SI approach focuses on understanding how innovations are created,
diffused, and utilized within a given system. This places innovation and learning at the center of the analysis, which is critical for
understanding how economies grow and develop over time.

2. Adopts a holistic and interdisciplinary approach: The SI approach takes a broad and interdisciplinary view of innovation,
encompassing economic, social, political, and institutional factors. This enables a more comprehensive analysis of innovation
processes and their impact on economic development.

3. Employs a historical and evolutionary perspective: The SI approach recognizes that innovation is a long-term and evolutionary
process that is shaped by historical factors and path dependencies. This enables a deeper understanding of the dynamics of
innovation and their impact on economic development.

4. Emphasizes interdependence and non-linearity: The SI approach emphasizes the interdependence and non-linear nature of
innovation processes, highlighting the importance of feedback loops, network effects, and path dependencies in shaping innovation
trajectories.

5. Encompasses both product and process innovations: The SI approach recognizes that innovation encompasses both product and
process innovations, and that these are often interdependent. This enables a more comprehensive understanding of innovation and
its impact on economic development.

6. Emphasizes the role of institutions: The SI approach recognizes that institutions play a critical role in shaping innovation
processes and outcomes. This includes both formal institutions, such as intellectual property rights and regulatory frameworks, and
informal institutions, such as cultural norms and social networks.

For example, the SI approach has been used to study the development of the semiconductor industry in the United States, which
was characterized by close collaboration between industry, academia, and government, as well as strong institutional frameworks
for protecting intellectual property. The SI approach has also been used to study the development of the biotechnology industry in
Denmark, which was characterized by a strong culture of entrepreneurship and a focus on collaborative innovation.

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 Systems and Systems Analysis

What is a system? A system consists of two kinds of constituents:

 Components and relations between those components
 Reason behind the choice of components and relations to constitute
the system; they form a whole.
 It must be possible to discriminate the system in relation to the rest of the
world; i.e., it must be possible to identify the boundaries of the system.
Though only in exceptional cases is the system closed.
 The system has function

A system is a collection of components and the relationships between those components that form a whole, with a reason
behind the choice of components and relations that constitute the system. It is important to be able to identify the
boundaries of the system in relation to the rest of the world, even though the system is usually not completely closed.

Systems analysis is a method for understanding the behavior of complex systems by examining the relationships between
their components. It involves breaking down a system into its component parts and analyzing the interactions between
those parts to understand how the system as a whole functions. This can involve the use of mathematical models,
simulations, and other tools to explore the behavior of the system under different conditions and to identify areas where
improvements can be made.

Systems analysis can be applied to a wide range of systems, from biological systems to social systems to technological
systems. For example, it can be used to analyze the interactions between different parts of a manufacturing process to
identify ways to increase efficiency and reduce waste. It can also be used to analyze the interactions between different
stakeholders in a political system to identify ways to improve governance and decision-making.

One of the key advantages of systems analysis is its ability to help identify the underlying causes of problems within a
system. By examining the relationships between different components, it is possible to identify areas where changes can
be made to improve the overall functioning of the system. Additionally, systems analysis can help identify areas where
there may be unintended consequences of changes to the system, allowing for more informed decision-making.

Overall, systems analysis is a powerful tool for understanding the behavior of complex systems and identifying areas for
improvement. By breaking down a system into its component parts and examining the interactions between those parts, it
is possible to gain a deeper understanding of how the system functions and how it can be improved.

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 Components of Systems of Innovation (SIs)

 Organizations and institutions to be the main components of systems

of innovation.
 Organizations are formal structures with an explicit purpose, and they
are consciously created (Edquist and Johnson 1997: 47). They are
players or actors. Like firms, univ, public agencies etc.
 Institutions are sets of common habits, routines, established practices,
rules, or laws that regulate the relations and interactions between
individuals, groups and organizations (Edquist and Johnson 1997: 46).
They are the rules of the game; patent laws

Defining organization and institutions: No consensus

Systems of Innovation can be quite different from each other, e.g., with
regard to specialisation of production, resources spent on R&D, etc.

The components of systems of innovation (SIs) include:

1. Organizations: Formal structures that have a specific purpose and are consciously created. They are the players or actors within the
system. Examples of organizations within an SI can include firms, universities, research institutes, and public agencies.

2. Institutions: Sets of common habits, routines, established practices, rules, or laws that regulate the relations and interactions between
individuals, groups, and organizations. They are the rules of the game that govern the behavior of the actors within the system. Examples of
institutions within an SI can include patent laws, regulatory frameworks, and cultural norms.

3. Networks: The relationships and interactions between the organizations and institutions within the system. These relationships can be
formal or informal and can include collaborations, partnerships, and knowledge-sharing arrangements. Examples of networks within an SI
can include industry clusters, innovation hubs, and research consortia.

4. Knowledge and technology: The knowledge and technology that are generated, transferred, and used within the system. This can include
both scientific and technological knowledge, as well as knowledge related to business models, marketing strategies, and other aspects of
innovation. Examples of knowledge and technology within an SI can include patents, academic research, and best practices within an
industry.

5. Policies and governance: The policies and governance frameworks that shape and guide the behavior of the actors within the system.
This can include policies related to R&D funding, intellectual property rights, and regulations related to environmental and social issues.
Examples of policies and governance within an SI can include government funding for research, tax incentives for innovation, and
regulatory frameworks for emerging technologies.

Overall, the components of SIs are interconnected and interdependent, and they work together to shape the overall innovation ecosystem
within a particular country or region. While SIs can vary widely in terms of their specialization, resources, and institutional frameworks, they
all share these fundamental components that are critical to the success of innovation.

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 Relations between organisations and institutions
 Organisations are strongly influenced and shaped by institutions
 Organisations can be said to be ‘embedded’ in an institutional
environment or set of rules
 Institutions are also ‘embedded’ in organisations
 Reciprocity
 Some organisations directly create institutions
 Interactions between different institutions
 Interaction may be market or non-market
 Concept of interaction includes competition, transactional, networking
 The relationship are important

The relations between organizations and institutions are an important aspect of the Systems of Innovation approach. Here are some points to
explain the relationship between organizations and institutions:

- Organizations are strongly influenced and shaped by institutions: Institutions provide the rules and norms that organizations must follow.
The way organizations operate, their goals, and their strategies are often shaped by the institutional environment in which they operate.

- Organizations can be said to be 'embedded' in an institutional environment or set of rules: The institutional environment in which an
organization operates affects its behavior and outcomes. An organization cannot be understood independently of its institutional context.

- Institutions are also 'embedded' in organizations: Organizations can create, shape, and change institutions. For example, a firm might lobby
for changes to patent laws to protect its intellectual property rights.

- Reciprocity: There is a reciprocal relationship between organizations and institutions. Institutions provide the rules for organizations, but
organizations can also shape and change institutions.

- Some organizations directly create institutions: For example, industry associations or standards-setting organizations can create new
institutions or rules to govern an industry.

- Interactions between different institutions: Institutions interact with each other, creating complex institutional environments. For example, a
university might have relationships with government funding agencies, research consortia, and industry associations, each with their own set
of rules and norms.

- Interaction may be market or non-market: Interactions between organizations and institutions can take place in market or non-market
contexts. For example, a firm might interact with a research consortium in a non-market context to develop new technologies.

- Concept of interaction includes competition, transactional, networking: The relationship between organizations and institutions can take
different forms, including competition, transactional interactions (e.g. contracts), or networking (e.g. collaborations or alliances).

Overall, the relationships between organizations and institutions are complex and reciprocal, shaping the behavior and outcomes of both.
Understanding these relationships is key to understanding the dynamics of innovation systems.

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 The Main Functions of SIs

 At one level the most important function - i.e. the ‘overall function’ - in an SI is, of
course, to produce, diffuse and use innovations

 At a more specific level it is a question of focusing upon things that influence the
development, diffusion and use of innovations. That are determinants of innovation

 Liu and White (2000) focus upon the ‘activities’ in the systems as:
 Research (basic, developmental, engineering)
 Implementation (manufacturing)
 End-use (customers of the product or process outputs)
 Linkage (bringing together complementary knowledge)
 Education. (Liu and White 2000: 6-7,)
“These activities extend beyond the R&D system, including important inputs to research
activity as well as the use of research outputs.” (Liu and White 2000: 7)

uts from other parts of the economy and society such as education, culture, and government policies. The main functions of SIs can be
summarized as follows:

1. Entrepreneurial activity: This function refers to the process of identifying new opportunities and bringing innovative ideas to the market.

2. Knowledge development: This function involves the creation and dissemination of knowledge, including basic research, applied
research, and engineering.

3. Knowledge diffusion and use: This function involves the spread of knowledge and the application of new ideas by businesses,
consumers, and other actors.

4. Institutional support: This function refers to the role of government and other institutions in supporting innovation, through policies,
regulations, and funding.

5. Linkages and networking: This function involves the creation of networks and linkages between different actors in the innovation
system, including firms, universities, and research institutions.

6. Learning and training: This function involves the development of skills and capabilities among workers, managers, and other actors in
the innovation system.

These functions are interdependent and interact with each other in complex ways. The success of an SI depends on the effective
coordination and alignment of these functions, and the development of a supportive institutional framework.

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 Activities (Edquist, 2010)
 Provision of R&D
 Competence building
 Formation of new product market
 Articulation of quality requirements based on demand side for new
products
 Creating and changing organizations needed for new fields of
innovation
 Networking
 Creating and changing institutions
 Incubating activities
 Financing innovation
 Provision of consultancy

To add to the previous answer:

These activities identified by Edquist (2010) can be seen as more specific functions that contribute to the overall function of producing, diffusing,
and using innovations within an SI. Here are some additional explanations and examples for each activity:

- Provision of R&D: This activity involves conducting research and development to create new knowledge and technologies. Examples include
universities, research institutes, and R&D departments of firms.
- Competence building: This activity involves developing and improving the skills, knowledge, and abilities of individuals and organizations
involved in innovation. Examples include training programs, internships, and knowledge-sharing networks.
- Formation of new product market: This activity involves creating a market for new products or technologies. Examples include marketing and
advertising campaigns, product demonstrations, and trade shows.
- Articulation of quality requirements based on demand side for new products: This activity involves understanding and addressing the needs and
preferences of customers and users of new products or technologies. Examples include user surveys, market research, and focus groups.
- Creating and changing organizations needed for new fields of innovation: This activity involves creating or changing organizations to facilitate
innovation in new fields. Examples include technology clusters, incubators, and innovation hubs.
- Networking: This activity involves building and maintaining relationships between individuals and organizations involved in innovation. Examples
include conferences, workshops, and industry associations.
- Creating and changing institutions: This activity involves creating or changing formal and informal rules, norms, and regulations that govern
innovation. Examples include patent laws, intellectual property rights, and standards.
- Incubating activities: This activity involves providing support and resources to early-stage innovations to help them grow and become
successful. Examples include seed funding, mentoring, and access to facilities.
- Financing innovation: This activity involves providing funding for innovation activities, such as R&D and commercialization. Examples include
venture capital, angel investors, and government grants.
- Provision of consultancy: This activity involves providing advice and expertise to organizations involved in innovation. Examples include
management consulting, legal services, and technical consulting.

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 Three kinds of learning in SI
approach
 Innovation
 R&D
 Competence building

Three kinds of learning in SI approach:

Innovation learning: This type of learning involves acquiring knowledge and skills necessary for developing new products, services
or processes. It involves learning by doing, experimentation and trial-and-error methods.

R&D learning: This type of learning involves acquiring knowledge and skills necessary for scientific research and development
activities. It involves formal training, education and collaboration with other researchers and institutions.

Competence building learning: This type of learning involves acquiring knowledge and skills necessary for improving the existing
products, services or processes. It involves continuous improvement, training and education of employees and feedback from
customers and suppliers.

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 Boundaries of SIs

 Spatial: Supranational, national and regional

 Sectoral

 Functional

The boundaries of SIs can be classified into three types:

Spatial boundaries: These refer to the geographical area where the SI operates. The spatial boundaries can be supranational, national or
regional.

Sectoral boundaries: These refer to the industry or sector where the SI operates. Each sector may have its own set of institutions,
policies, and practices that govern the innovation process.

Functional boundaries: These refer to the specific functions that the SI performs, such as research and development, financing, training,
and technology transfer.

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National Systems of Innovation

Sharp differences between various national system

 Institutional set-up

 Investment in R&D, and

 Performance

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