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Econ. Innov. New Techn., 2005, Vol. 14(12), JanuaryMarch, pp.

6382

SECTORAL SYSTEMS OF INNOVATION: A FRAMEWORK FOR LINKING INNOVATION TO THE KNOWLEDGE BASE, STRUCTURE AND DYNAMICS OF SECTORS
FRANCO MALERBA
CESPRI, Universit` L. Bocconi, Via Sarfatti 25, 20136 Milano, Italy a
(Received 1 August 2002; Revised 5 September 2003; In nal form 19 January 2004) This paper proposes a framework for examining factors that affect innovation in sectors: sectoral systems. Sectoral systems are based on three building blocks: knowledge and technologies, actors and networks, and institutions. In the rst part of this paper, the concept and the denition of a sectoral systems of innovation are presented. In the second part of the paper, the role of knowledge, actors and networks, and institutions in ve major sectoral systems is examined. Then the main focus moves to the analysis of the dynamics and transformation of sectoral systems. Finally, some general conclusions and directions for future research end the paper. Keywords: Innovation; Sectors; Networks; Institutions JEL Codes: 030; L10; L60

INTRODUCTION

The rate and type of innovation and the organization of innovative activities greatly differ across sectors. Various streams of research have tried to examine patterns and determinants. For the aim of the present paper one could identify three different approaches. One is the old tradition originally related to Schumpeterian themes. This tradition framed the issue in terms of what has been termed the market structure and innovation approach (Kamien and Schwartz, 1982). Here, the focus was on testing the relationship between the rate of innovation and rm size, on the one hand, and monopoly power, on the other. It is now widely acknowledged that the early results obtained within this framework suffered of, at least, two main limitations. First, they failed to recognise the mutual causation between innovation, market structure and rm size. Rather these variables are best thought as endogenously codetermined (Dasgupta and Stiglitz, 1980; Nelson and Winter, 1982). Second, starting from the empirical observation that the relevant relationships varied signicantly across industries, it was suggested that other factors, mainly linked to the nature of technology, are important explanatory variables of the sectoral patterns of innovation. Thus, even the insertion of very rough proxies of opportunity and appropriability conditions signicantly improves the performance
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ISSN 1043-8599 print; ISSN 1476-8364 online c 2005 Taylor & Francis Ltd DOI: 10.1080/1043859042000228688

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of econometric exercises performed in an otherwise conventional approach (Levin et al., 1985; Cohen and Levin, 1989). A second and more recent tradition takes into account the learning conditions and technological context in which innovation takes place in sectors. The notion of technological regime dates back to Nelson and Winter (1977, 1982) who have suggested that the dynamics of innovation and market structure is driven by processes of market selection and by the nature of technology, which differ greatly across sectors. Technological regimes set the boundaries of what can be achieved in rms problem solving activities and identify also the natural trajectories along which solutions to these problems can be found.1 After Nelson and Winter, various authors Gort and Klepper (1982), Levin et al., (1985), Cohen and Levin (1989) and Audretsch (1995) among others have pointed out that, more than rm size or demand, opportunity and appropriability conditions appear as the most relevant factors affecting the dynamics of market structure and innovation. The notion of technological regime provides a synthetic way of representing some of the most important economic properties of technologies and of the characteristics of the learning processes that are involved in innovative activities. Thus, it identies some fundamental structural conditions that contribute to dene competencies, incentives and dynamic properties of the innovative process. In this line of research, Malerba and Orsenigo (1990, 1993) have proposed that a technological regime is a particular combination of some fundamental properties of technologies: opportunity and appropriability conditions; degrees of cumulativeness of technological knowledge and characteristics of the relevant knowledge base. See also Breschi et al. (2000) for an empirical test of these propositions.2 The third line of research has focussed on the sources of innovation and the mechanisms of appropriability, which differ across sectors. Here, the main references are the work by Rosenberg (1976, 1982) on the various sources of technological change across a wide variety of sectors, Levin et al. (1987) on appropriability conditions, Nelson (1993) on universities, Mowery and Nelson (1999) on various industries, Pavitt (1984) on sectoral taxonomies of the sources of innovation and the appropriability mechanisms.3 This paper proposes a different but complementary framework that looks at the rate and type of innovation and at the organization of innovative activities in sectors: the sectoral system of innovation approach. This framework has been inspired by evolutionary theory and the innovation system approach. Evolutionary theory places dynamics, process and transformation at the centre of the analysis. Learning and knowledge are key elements in the change of the economic system. Boundedly rational agents act, learn and search in uncertain and changing environments. Relatedly, competencies correspond to specic ways of packaging knowledge about different things and have an intrinsic organisational content. Different agents know how to do different things in different ways. Evolutionary theory has placed emphasis on cognitive aspects such as beliefs, objectives and expectations, in turn affected by previous learning and experience
1 Nelson and Winter (1982) and Winter (1984) identify two different basic technological regimes according to the relevant knowledge base: an entrepreneurial regime in which the knowledge base is related to science and is non-cumulative and universal (thus facilitating the entry of new rms), and a routinized regime in which knowledge is more cumulative and internal to the industry (thus facilitating the innovation by established rms). 2 The notion of technological regime holds some relationship with the concepts of technological paradigms and trajectories, which capture the idea that technologies differ drastically and that their development retains a strong autonomous internal logic (Dosi, 1982, 1988). Also the bounds approach by Sutton (1998) bears some link to the notion of different learning contexts characterizing the various sectors, because it claims that the relationship between market structure and innovation is constrained by the specicity of the technology in terms of the diversity of possible technological trajectories available to rms and the productivity of R&D investments along each trajectory. 3 Pavitt taxonomy has been tremendously successful in empirical research and has guided also the identication of rms and countries advantages in innovation. Renements and enrichments of the taxonomy have been proposed in the succeeding decades. A very interesting work in this direction is that of Marsili (2001).

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and by the environment in which agents act (Nelson, 1995; Dosi, 1997; Metcalfe, 1998). Thus learning, knowledge and behaviour entail agents heterogeneity in experience, competencies and organisation, and their persistent differential performance. A central place in an evolutionary approach is occupied by three economic processes driving economic change: processes of variety creation in technologies, products, rms and organisations; processes of replication and processes of selection (Nelson, 1995; Metcalfe, 1998). In evolutionary theory, the environment and the conditions in which agents operate may differ drastically. Evolutionary theory stresses major differences in opportunity conditions related to science and technologies. The same holds for the knowledge base underpinning innovative activities, as well as for the institutional context. Thus the learning, behaviour and capabilities of agents are constrained and bounded by the technology, knowledge base and institutional context in which rms act. Heterogeneous rms facing similar technologies, searching around similar knowledge bases, undertaking similar production activities and embedded in the same institutional setting, share some common behavioural and organisational traits and develop a similar range of learning patterns, behaviour and organisational forms (Nelson and Winter, 1982). The other link of the sectoral system of innovation framework is with the innovation system literature, in which relationships and networks are key elements of the innovative and production processes (Edquist, 1997). The innovation system approach considers innovation as an interactive process among a wide variety of actors. It stresses the point that rms do not innovate in isolation: innovation is seen as a collective process. In the innovative process rms interact with other rms as well as with non-rm organizations (such as universities, research centres, government agencies, nancial institutions and so on). Their action is shaped by institutions (Lundvall, 1993; Carlsson, 1995; Edquist, 1997). This approach places a great deal of emphasis on an interdisciplinary approach, emphasises a historical perspective and puts learning as a key determinant of innovation (Edquist, 1997). In particular, the notion of sectoral systems of innovation complements other concepts such as national systems of innovation (more focussed on national boundaries and on non-rm organisations and institutions Freeman, 1987; Nelson, 1993; Lundvall, 1993), regional/local innovation systems (more focussed on the region Cooke et al., 1997) and technological systems (focussed on specic technologies and not on sectors) (Hughes, 1984; Callon, 1992; Carlsson and Stankiewitz, 1995). In the rst part of this paper, the concept and denition of a sectoral system of innovation are presented (Sec. 2) and some general and methodological issues are discussed (Sec. 3). In the second part of the paper, the role of knowledge, actors and networks and institutions in ve major sectoral systems is examined (Sec. 4). Then the main focus moves to the analysis of the dynamics and transformation of sectoral systems (Sec. 5). Finally, some general conclusions and directions for future research end the paper (Sec. 6).

DEFINITION AND CONCEPTS

A sector is a set of activities which are unied by some related product groups for a given or emerging demand and which share some basic knowledge. In a sector, rms have commonalities and at the same time are heterogeneous. The key point is that innovation has relevant systemic features so that it is possible to advance the following denition. Sectoral systems of innovation have a knowledge base, technologies, inputs and a (potential or existing) demand. They are composed of a set of agents carrying out market and non-market interactions for the creation, development and diffusion of new sectoral products. These agents are individuals and organisations at various levels of aggregation, with specic learning processes, competencies,

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organisational structure, beliefs, goals and behaviours. They interact through processes of communication, exchange, cooperation, competition and command. Their interaction is shaped by institutions. A sectoral system undergoes processes of change and transformation through the coevolution of its various elements. Thus a sectoral system could be seen as composed by three main building blocks: knowledge and technology actors and networks institutions 2.1 Knowledge and Technologies

Any sector could be characterised by a specic knowledge base, technologies and inputs. In a dynamic way, the focus on knowledge and technology places the issue of sectoral boundaries at the centre of analysis. In sectors in which innovation is quite rapid, sectoral boundaries are not xed, but change over time. Knowledge and basic technologies constitute major constraints on the full range of diversity in the behaviour and organisation of rms. Links and complementarities among artefacts and activities also play a major role in dening the real boundaries of a sectoral system. These links and complementarities could be static (as inputoutput links are) or dynamic. Dynamic complementarities take into account interdependencies and feedbacks (both at the demand and at the production levels), are major sources of transformation and growth of sectoral systems, and may set in motion virtuous cycles of innovation and change. 2.2 Actors and Networks A sector is composed of heterogeneous agents that are organisations and individuals (e.g. consumers, entrepreneurs, scientists). Organisations may be rms (e.g. users, producers and input suppliers) and non-rm organisations (e.g. universities, nancial institutions, government agencies, trade-unions, or technical associations), including sub-units of larger organisations (e.g. R&D or production departments) and groups of organisations (e.g. industry associations). Agents are characterised by specic learning processes, competencies, beliefs, goals, organisational structures and behaviours. They interact through processes of communication, exchange, cooperation, competition and command. Within sectoral systems, heterogeneous agents are connected in various ways through market and non-market relationships. The types and structures of relationships and networks differ from sectoral system to sectoral system, as a consequence of the features of the knowledge base, the relevant learning processes, the basic technologies, the characteristics of demand, the key links and the dynamic complementarities. Thus in a sectoral system perspective, innovation is considered a process which involves systematic interactions among a wide variety of actors for the generation and exchange of knowledge relevant to innovation and its commercialisation. Interactions include market and non-market relations that are broader than the market for technological licensing and knowledge, interrm alliances, and formal networks of rms. Often their outcome is not adequately captured by our existing ways of measuring economic output. 2.3 Institutions

Agents cognition, actions and interactions are shaped by institutions, which include norms, routines, common habits, established practices, rules, laws, standards and so on. They may range from the ones that bind or impose enforcements on agents to the ones that are created by the interaction among agents (such as contracts); from more binding to less binding; from

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formal to informal (such as patent laws or specic regulations vs. traditions and conventions). A lot of institutions are national (such as the patent system), while others may be specic to sectoral systems, such as sectoral labour markets or sector-specic nancial institutions. In this respect, the relationships between national institutions and sectoral systems become quite important in several respects. First, national institutions such as the patent system, property rights or antitrust regulations have different effects on innovation in the different sectors. Second, the same institution may take on different features in different countries, and thus may affect innovation differently. Third, often the characteristics of national institutions favour sectors that t their specicities better. In other cases, national institutions may constrain the development of innovation in specic sectors and mismatches between national institutions and agents and sectoral ones may take place. Fourth, the relationship between national institutions and sectoral systems may sometimes go from the sector to the national level: the institutions of a sector, extremely important for a country in terms of employment, competitiveness or strategic relevance, may end up emerging as national (thus also becoming relevant for other sectors). But in the process of becoming national, they may change some of their original distinctive features. Demand is a key part of a sectoral system. The above mentioned focus on users and on institutions puts a different emphasis on the role of demand. Demand is made up of individual consumers, rms and public agencies, each characterised by knowledge, learning processes, competencies and goals, and affected by social factors and institutions. Thus, in a sectoral system demand is not seen as an aggregate set of similar buyers, but as composed of heterogeneous agents whose interactions with producers are shaped by institutions. The emergence and transformation of demand play a major role in the dynamics and evolution of sectoral systems. In general, the sectoral system of innovation framework highlights ve key points. First, it focuses on supply as well as demand and on markets in the innovation process. Second, it examines other types of agents in addition to rms. Third, it places considerable emphasis on non-market as well as market interactions. Fourth, it pays attention to institutions. Fifth, it does not consider sectoral boundaries as given and static, but it focuses on the process of transformation of the system.

SOME IMPLICATIONS OF THE SECTORAL SYSTEM OF INNOVATION FRAMEWORK

The discussion in Section 2 has some relevant implications. First, a sectoral system framework gives a specic meaning to the concept of the structure of a sector. Structure does not simply mean industrial concentration, vertical integration or diversication (as it has been in most contributions in industrial economics dealing with innovation). Rather structure relates to the links and relationships among agents, knowledge, products and technologies. For example, as far as agents are concerned, within sectoral systems heterogeneous agents are connected in various ways through market and non-market relationships. Some of these connections are captured by traditional analyses of industrial organisations which have examined agents involved in processes of exchange, competition and command (such as vertical integration). Formal cooperation, or informal interactions among rms, or between rms and non-rm organisations, have been examined in depth by the recent literature on tacit or explicit collusion, hybrid governance forms and formal R&D cooperation.4 Also the evolutionary approach and
4 This literature has analysed rms with certain market power, suppliers and users facing opportunistic behaviour or asset specicities in transaction, rms with similar knowledge and with appropriability and indivisibility problems in the R&D process.

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the innovation systems literature have paid considerable attention to the wide range of formal and informal interactions among rms. However, according to the perspectives, in uncertain and changing environments networks emerge not because agents are similar, but because they are different. Thus networks allow the access to, and the integration of, complementarities in knowledge, capabilities and specialisation (see Teubal, et al., 1991; Lundvall, 1993; Nelson, 1995; Edquist, 1997). Therefore, in a sectoral system of innovation framework the term structure refers also to networks. It has to be stressed that market and non-market relationships may involve not just rms, but also non-rm organisations. For example, universities and public research centres may be a source of innovation and change in several sectors, such as pharmaceuticals and biotechnology, information technology and telecommunications (Nelson and Rosenberg, 1993). The types and structures of relationships and networks differ from one sectoral system to another, as a consequence of the features of the knowledge base, the relevant learning processes, basic technologies, characteristics of demand, key links and dynamic complementarities. Second, the focus on actors and networks implies also that in a dynamic perspective a sectoral system is a collective emergent outcome of the interaction and coevolution of its various elements. This process involves technology, demand, knowledge base, learning processes, rms, non-rm organisations and institutions. Nelson (1994) and Metcalfe (1998) have discussed these processes at the general level. More broadly, for evolutionary theory aggregate phenomena are emergent properties of far from equilibrium interaction and have a meta-stable nature (Lane, 1993a, b). In a sectoral system perspective, these processes are sector-specic. Third, the focus on dynamics implies also that the transformation of existing sectoral systems and the emergence of new sectoral systems become a major part of the analysis. The emergence of new clusters that span over several sectors (such as internetsoftwaretelecom, biotechnologypharmaceutical or new materials) is a particularly interesting theme. Here, transformation means the integration and fusion of previously separated knowledge and technologies as well as new relations and dynamics among different types of users and consumers, rms with different specialisation and competencies, and non-rm organisations and institutions (all of them grounded in previously separated sectors). In terms of methodology, a key issue refers to the level of agents aggregation and to the geographical and product boundaries of sectoral systems. In terms of level of aggregation agents, the analysis may consider agents at lower or higher levels of aggregation compared to rms. So one may examine the individual rms sub-units, as well as groups of rms and of non-rm organisations. Flexibility has to be used in the choice of the unit of analysis, the variables to be examined and the level of details in the study to be conducted. In terms of geographical boundaries, national boundaries are not always the most appropriate ones for an examination of the structure, agents and dynamics of sectoral systems. Often the boundaries are local, and the sectoral specialisation denes the specialisation of the whole area. For example, machinery is concentrated in regional areas, traditional sectors dene the specialisation of industrial districts in Italy, sectoral specialisation and local agglomeration overlap in Route 128 (for minicomputers) and in Silicon Valley (for personal computers, software and microelectronics) (Saxenian, 1994). More often in a sectoral system, one may nd the coexistence of local, national and global boundaries: global for knowledge interaction; local for the labour market and national for some key institutions. In terms of products, sectoral systems may be delimited in different ways, depending on the goal of the analysis. So, sectors may be dened broadly (as in this paper): pharmaceuticals; chemicals; telecommunications; software and machine tools. This broad denition allows to emphasise interdependencies, linkages and transformations spanning over a wide range of products, actors and functions. However, in some other cases, a more disaggregated level may be used. In this case, one may nd the coexistence of quite different innovation systems

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within broadly dened sectors such as telecommunications or pharmaceuticals. In this case, one may use the term sector for the broad aggregations mentioned above, and the terms subsectors, product groups and product segments for more narrowly dened aggregations within broad sectors. Again, the aim of the analysis has to drive the delimitation of the sectoral system. Sometimes, it is necessary to analyse very broad sectoral systems, such as computer hardware and software. Other times it is not, as in the case of custom software. Particularly with respect to the emergence of new clusters such as softwareinternettelecommunications, new materials, and pharmaceuticalbiotechnology, a high level of aggregation is important if one has to identify interdependencies and linkages. In any case, the goal and the objectives of the analysis should dictate the appropriate level of aggregation. One nal remark has to be advanced about the impossibility of identifying an optimal structure and an optimal working for sectoral systems. In reality some coherence among the various elements of a sectoral system does occur and it develops over time as a result of both conscious design and unplanned processes. And mismatches among the various parts and variables of sectoral systems could be identied and eventually eliminated. But the actual coherence is far from being optimal. Sectoral systems may develop different features in different countries, and at different times. This is so because they emerge and develop in continuously changing environments, are characterized by path-dependent processes and are embedded in different socio-economic contexts. In general, sectoral systems may prove a useful tool for descriptive analyses of the innovation process in sectors; for the recognition of the factors affecting innovation; for studies of the relationship between innovation and the changing boundaries of sectors; for a full understanding of the short-term and long-term dynamics and transformation of sectors; for the identication of the factors affecting the international performance of rms and countries in the different sectors and for the development of new public policy indications.

4 A CHARACTERISATION OF SOME KEY SECTORAL SYSTEMS IN TERMS OF KNOWLEDGE, ACTORS, NETWORKS AND INSTITUTIONS This paper examines innovation in ve major sectors in Europe and in other advanced countries: pharmaceutical and biotechnology, telecommunication equipment and services, chemicals, software and machine tools. These sectors have been chosen because technological change is quite rapid and innovation plays a major role in fostering growth and in affecting the competitiveness of rms and countries. In addition, broad sectoral boundaries have been considered, so that linkages in the structure and interdependencies in the transformation processes spanning over a large set of products, actors and functions can be assessed. However, in the discussion sometimes a more disaggregated level has also been used in order to show that within the broadly dened sectors different innovation systems may coexist. The countries examined are mainly Europe and US, and whenever possible, some specic European countries has been mentioned. The following discussion draws from the more extensive results of the project Sectoral Systems in EuropeInnovation, Competitiveness and Growth (ESSY)5 and from Malerba (2004).
5 ESSY [Project nanced within the TSER Programme Contract No. SOE1-CT 98-1116] was a 3 year project conducted by 10 research centres in Europe CESPRI (Universita Bocconi), SPRU (University of Sussex), WZB (Berlin), S.S. SantAnna (Pisa), CRIC (Manchester University), CREII (Paris XIII), TEMA (Linkoping University), Pompeu Fabra (Barcelona), ISI (Karlsruhe) and IKE (Alborg University). It was supported by the European Union. I wish to thank the main participants in ESSY: R. OBrien (the EU ofcer responsible for the project), B. Coriat, G. Dosi, C. Edquist, S. Metcalfe, D. Soskice , W.E. Steinmueller, B. Dalum, W. Garcia, J. Wengel, F. Montobbio, S. Breschi, M. Harvey, F. Lissoni, M. McKelvey, L. Orsenigo, F. Pammolli, O. Weistein, L. DAdderio, G. Bottazzi, F. Cesaroni, N. Corrocher, P. Geoffron, L. Hommen, A. James, H. Kettler, M. Riccaboni, D. Rivaud-Danset, B. Tether.

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In the following section, each sectoral system has been examined according to the three broad dimensions discussed above: knowledge and technologies; actors and networks and institutions.

4.1

Pharmaceuticals and Biotechnology

In the pharmaceutical sectoral system, the knowledge base and the learning processes have greatly affected innovation and the organisation of innovative activities. In the early stages (18501945), the industry was close to chemicals, with little formal research until the 1930s and a major use of licenses. The following period (1945early 1980s) was characterised by the introduction of the random screening of natural and chemically derived compounds. This led to an explosion of R&D. A few blockbusters were discovered in every period: each one had high growth. The advent of molecular biology since the 1980s led to a new learning regime based on molecular genetics and DNA technology, with two research processes: one concerning cospecialised technologies and the other generic technologies. Nowadays, no individual rm can gain control of more than a subset of the search space. Innovation increasingly depend on strong scientic capabilities and on the ability to interact with science and scientic institutions in order to explore the search space (Henderson et al., 1999; McKelvey et al., 2004). The change in the knowledge base discussed above has led to a different organisation of innovative activity within and across rms. Division of labour has taken place between new biotechnology rms (NBFs) which lacked experience in clinical testing and established companies that (with time) adopted molecular biology. Networks of collaborative relations (facilitated by the science base and by the abstract and codied nature of knowledge generated by the NBF) emerged in the sector. Further, mergers and acquisitions allowed established rms to obtain complementary knowledge for the development of innovative products. As of now, the pharmaceuticalbiotechnology sectoral system has a structure of innovative actors which includes large rms, NBFs, small rms and individuals (such as scientists or NBF entrepreneurs). In addition, a very rich set of non-rm organisations and institutions greatly affect innovation, ranging from universities to public and private research organisations, the nancial system and venture capital, the legal system and IPR. Demand channelled through agencies, physicians and the health system, and institutions such as regulation played a signicant role in the diffusion of new drugs. Nowadays, no individual rm can hope to gain control of more than a subset of the search space. Even, the innovativeness and competitiveness of the largest pharmaceutical rms depend on strong scientic capabilities and on the ability to interact on the one hand with science and scientic institutions (in order to explore such a complex space) and on the other with specialised innovative rms (in order to develop new products) (McKelvey et al., 2004). Summing up: in pharmaceuticals and biotechnology, a wide variety of science and engineering elds are relevant important roles in renewing the search space. Universities, venture capital and national health systems play a major role in the innovative process. There are several relevant actors: large rms; small rms and NBFs. An extensive division of labour through networks is present. NBFs have entered the sector, competing as well as cooperating with (or being bought up by) the established large pharmaceutical rms. In this sector, demand and institutions (such as regulation, IPR and national health systems) affect the innovation process.

P. Caracostas, D. Mowery, R. Nelson, F. Onida, S. Torrisi, F. Gianfrate, B. Lamborghini, E. Hoffman, V. Maglia and D. Speroni commented the nal papers of the ESSY project during the nal Conference at Bocconi University. All the supporting papers of the whole project Sectoral Systems in Europe the Working Papers ESSY can be downloaded from the ESSY website at http://www.cespri.it/ricerca/es wp.htm.

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4.2

Chemicals

In chemicals learning processes based on formal search processes have been present since the beginning of the history of the industry with the diffusion of the syntheticdyestuff model (which introduced a scientic base to innovation), and later on with the development of organic chemistry (related to the understanding of the chemical structure of new molecules and the possibility of exploiting economies of scope in knowledge for the development of different organic products). This has led to the presence of rms with large R&D departments (some of which have been active since the beginning of the industry) and to a greater role for universities and other scientic organizations. Changes in knowledge and learning processes have been accompanied by the development of new products which were quite different from previous ones, and by the emergence of different actors and organisations. For example, the second major change in the industry, polymer chemistry (1920s), based upon the idea that materials consist of long chains of molecules polymers linked together by chemical bounds led to the development of materials by design, in which the scientic understanding of chemical composites is the base for different product applications. Polymer chemistry provided a common technological base for developing applications and product differentiation in ve distinct markets: plastics, bres, rubbers, surface coatings and adhesives. The other major change in the industry, the development of chemical engineering and the concept of unit operation (1915) broke down chemical processes into a limited number of basic components, common to many product lines. This development became the general purpose technology of the chemical sector. It allowed the separation of process innovation from product innovation: process innovation became a commodity that could be traded. In general, one could claim that these changes led to a transformation of rms learning processes away from trial and error procedures to a science-based approach to industrial research. The advances in chemical disciplines such as polymer chemistry and chemical engineering have created the base for greater codicability of knowledge. At the same time rms behaviour has enhanced the transferability of chemical technologies. Separability and transferability made possible the transaction of technology in the chemical industry and the emergence of new markets for engineering and process design services for chemical plants. This type of knowledge base has implied that internal R&D has been complemented by external links and knowledge. Nowadays in chemicals innovation requires the interaction between R&D capabilities and external sources of scientic and technological knowledge (Arora et al., 1999; Cesaroni et al., 2004). In chemicals, the structure of the sectoral system has been centred around large rms, which have been the major source of innovation over a long period of time. Large R&D expenditures, economies of scale and scope (Chandler, 1990), cumulativeness of technical advance and commercialisation capabilities have given these rms major innovative and commercial advantages (Arora et al., 1999). The changes in the knowledge base discussed above have affected the types of actors and networks. As mentioned previously, with the diffusion of the syntheticdyestuff model, rms scaled up their R&D departments and the role of universities increased. The introduction of polymer chemistry (1920s) affected the structure of the industry because knowledge about the characteristics of different market segments became important so that rms had to develop extensive linkages with downstream markets. The other major change related to the development of chemical engineering, and the concept of unit of operation led to an increasing division of labour between chemical companies and technology suppliers, with the rise of the specialised engineering rms (SEFs), which developed vertical links with chemical companies. In this period, university research continued to be important for the development of innovations, and links between university and industry increased. In addition, advances in chemical disciplines and the separability of knowledge increased the transferability of chemical technologies. Thus, there has been a greater role for licensing also

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by large rms, which in turn increased knowledge diffusion. It must be noted that large rms also licensed process technology and that SEFs did not develop radically new processes. Rather, they acted as independent licensors of technology on behalf of other rms. The increasing reliance on external links for complementary scientic and technological knowledge has led to the emergence of networks of three types: interrms, universityindustry and userproducers in specialty segments. However, the relevant networks have changed in relation with the type of knowledge base. In the syntheticdyestuff model, rms developed links with universities and with users. In polymer chemistry and with the diffusion of chemical engineering, networks between producers and users, industryuniversity networks, and vertical networks between chemical companies and engineering contractors have been common, with the use of mergers and acquisitions to related and unrelated sectors in order to acquire capabilities (Cesaroni et al., 2004). In general, however, the inventive capacity of rms within a country depends heavily upon the strength of the underlying universities and public research organizations. Institutions have played a critical role concerning two different situations: the restructuring processes and patent policy. Concerning industrys restructuring processes, in the past (during and after WWI) national governments allowed or promoted the creations of cartels and national giants. Germany and Great Britain are clear example in this direction.6 Both in Britain and in Germany different trade associations and alliances among rms emerged. In Britain, the chemical industry organised itself into theAssociation of Chemical Manufacturers. In Germany, the eight largest dye producers formed a quasi-cartel. Since the 1980s, the chemical industry has entered a new phase of restructuring, in which public policy has played a role as well. In this period, governments have managed the restructuring process to a good extent, especially in France and Italy. The second important role of institutions in chemicals is related to patent policies, especially relevant to small rms. Indeed, proper forms of intellectual property rights and sufciently strong patent protection supported the activity of smaller technology-based rms. In turn, this created the bases for a division of labour between technology suppliers and users, and allowed the development of markets for technology. This pattern was particularly evident in US, where patent protection was properly dened. By contrast, European markets for technology are far from being developed. This requires policy support for intellectual property rights. Summing up: the chemicals sectoral system is characterised by the continuity in innovativeness by large multinational rms through R&D, economies of scale, scope, cumulativeness of advance and commercialisation capabilities. Firms internal R&D has been complemented by external links and by the capability of absorbing external scientic and technological knowledge. 4.3 Telecommunication Equipment and Services In telecommunications equipment and services, the knowledge base has been quite diversied because the sectoral system encompasses xed communications, mobile phones, internet and other services. All these product groups present different features, but they are related technologies in some way or another. Moreover, this broad sectoral system has been recently affected by processes of convergence between information and communication technologies and between ICT and broadcasting-audio-visual technologies. Until the advent of the internet, the telecom

6 While in Germany the presence of chemical trade associations made it easier to create a link between the government and the individual rms, in Britain the absence of such associations imposed a deeper intervention by state authorities. The British state reorganised the chemical industry (traditionally independent of the government) to supply chemicals for war needs. As a consequence of this forced co-ordination, the leaders of the largest chemical rms came to know one another.

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service industry did not experience major technological and market discontinuities. With the internet and its open network architecture, modular components and distributed intelligence, both the knowledge base and the types of actors and competencies have changed signicantly. The process of convergence has generated the entry of several new actors coming from various previously separated industries, each one emphasizing different sets of competencies. For example, in telecommunication equipment and networks rms may range from incumbent telecom equipment suppliers and incumbent network operators, to new entrant telecom operators, cable TV operators and alternative network providers. In internet services, rms may range from internet service providers to internet content providers, e-commerce companies, and software and internet specialised consulting companies. Specialised competencies and specic knowledge have increasingly become a key asset for rms survival and growth. Even more important in the new telecom environment is the combination of existing and new competencies software programming, network management and content provision which traditionally belonged to different companies (Corrocher, 2002). Networks among a variety of actors (not only rms, but also standard-setting organisations and research organisations) are relevant.7 Demand plays a key role in innovation not just in terms of userproducer interaction, but also in terms of emerging characteristics. This is particularly true in the internet services sector, where the changing requirements of the nal users from standardised services like internet access and e-mails, to more complex applications such as intranets, extranets and platforms for electronic commerce have stimulated rms to upgrade the quality of services (Edquist, 2004). Regulation, liberalisation/privatisation and standards have played a key role in the organisation and performance of the sector. They had major effects on the behaviour of incumbents and have transformed the structure of the industry. In summary, in telecommunication equipment and services a convergence of different technologies, demand and industries has taken place. This required processes of knowledge integration by the actors in the sectors. This convergence has been associated with the creation of a wide variety of different specialised and integrated actors, ranging from large equipment producers to new service rms. In this broad sector, innovation is very much affected by standards, the institutional setting and the processes of privatisation and liberalisation.

4.4

Software

The software sectoral system has a quite differentiated knowledge base, with extended complementarities. Here, knowledge refers both to the control of the operations of the computer system providing the platform for the different functionalities and to the software employing these functionalities. However, the boundaries between operating systems and application software are becoming blurred, because of the dynamics of the inward (from software designers to the denition of system resources) and outward (from system level software to the user interface) integration of software functions (Steinmueller, 2004). The strength of the forces favouring the creation of generic platforms (and therefore favouring internationally dominant platform suppliers) is moderated by other forces: the continuing need for variety generation in the organisations producing the sub-systems (that allow these platforms to be customised); the potential for new methods for platform creation (based upon the use of the internet as a tool for collaborative innovation and the distribution of software products); the identication of emerging areas where dominance in platform creation remains contestable (such as embedded software); the identication of areas of the software industry that remain in a pre-dominant
7

For example networks played a role in the case of GSM (Hommen and Manninen, 2002).

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design state of variety generation (such as multimedia software). Much of the innovative challenge of the software industry, therefore, involves design innovation, not only in the basic operations of the information processing machine dened by software, but also in the very conceptualisation of the information that needs to be processed. Nowadays, the three broad software product groups (global package, situated software and middleware software) require different types of knowledge and learning processes. Global package software is characterised by search for generic solutions, experience as a major input for innovation and a key role of process innovation. Situated and embedded software on the other hand has knowledge related to specic contexts and specialised purposes. Middleware software and integrated software solutions such as product data managers (PDM) and enterprise resource planning (ERP) aim to reach many users but focus on situated specic applications (Mowery, 1996; Torrisi, 1998; Steinmueller, 2004). In software, the changing knowledge base and the blurring boundaries between operation systems and application software have created an evolving division of labour among users, platform developers and specialised software vendors, and a further tension between horizontal integration and specialisation. The historical role of computer producers has largely been displaced by a division of labour between software and hardware platform producers, which is governed by the needs of the other as well as by the aim to preserve market positions. The sectoral system of innovation in software, however, is incomplete without the addition of companies that utilise these platforms to deliver enterprise-critical applications. Many of these applications continue to be self-produced by organisations that use the tools provided as part of the platform or available from the development tools markets. This process, however, is creating a market for specialised software producers whose outputs are aimed at the customisation of the needs of a particular class of users. IPRs play a major role in strengthening appropriability, but have been greatly affected by the emerging open source movement. In addition, standards play a major role. Standard development organisations, country and industry consortia, and standards setting alliances are very important. Networks of users also play an increasingly important function. Users also often gather around user mailing lists: these are used as vehicles to test and compare the performance and capabilities of competing software products (Steinmueller, 2004). In summary: software has a highly differentiated knowledge base in which the context of application is relevant. This has created several different and distinctive product groups. The role of large computer suppliers in developing integrated hardware and software systems has been displaced by a lot of specialised software companies innovating either in package software or in customised software. Userproducer interaction, global and local networks and high mobility of skilled human capital are present. The role of the university has become important in the open source domain. IPR, standards and standard setting alliances play a major role in innovation, diffusion and competition. 4.5 Machine Tools

In machine tools innovation is incremental and now also increasingly systemic. Knowledge about applications is very important: therefore userproducer relationships as well as partnerships with customers are common. The knowledge base is embodied in skilled personnel with applied technical qualications on the shop oor level and in design engineers with a long-term employment in the company. Internal training (particularly apprenticeship) is quite relevant. In small rms, R&D is not done extensively and R&D cooperation is not common. The sector is characterised by national differences in the structure of demand which have in turn led to international differences in the rate and direction of technical change. Recently, however, the knowledge base has shifted from purely mechanical to mechanical as well as microelectronic

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and information intensive, with increasing codication and an increasing use of formal R&D. Products have increasingly been modularised and standardised. A key role is also played by information ows about components among producers of different inputs and technologies, such as lasers, materials or measurement and control devices (Mazzoleni, 1999; Wengel and Shapira, 2004). Firms are highly specialised, and often focused on specic vertical segments. Networks here differ from country to country, because the types of products and the different users and demand structures have led to different innovation systems. In any case, local nancial organisations and vertical links with users play a major role. Organisations and networks engaged in technology transfer in a broad sense have developed. Market mechanisms increasingly show up in previously non-market relationships, such as the cooperation in industrial/professional associations, or special customersupplier interactions. And publicprivate industry consortia increasingly complement the latter (Wengel and Shapira, 2004). Internal and regional labour markets and local institutions (e.g. local banks) play a major role in inuencing the international advantages of specic areas. Trust-based, close relationships at the regional level have over a long time ensured sufcient nancing of the innovation and expansion plans of family businesses in Germany and Italy. The consequence has been that other more risky or expensive ways were rarely used and more radical changes seldom took place. In Germany, vocational training has greatly fostered the development of skills in the machine tools industry. Fairly stable employment conditions and company employment strategies (internal labour markets) formed the background for cumulative knowledge building and incremental innovations. Standards have a long tradition not only with respect to health and safety but also with respect to economies of scale. They built a basis for the share of development tasks between the machine tool makers and the suppliers of components and periphery equipment. This adds again to a predominantly incremental innovation regime. The EU machine directive was fundamental for the realisation of a common market, particularly in the machine tool industry (Wengel and Shapira, 2004). In summary, in machine tools an application-specic knowledge base has been associated with rms specialisation. Here userproducer interaction, local networks of innovators and in-house experienced human capital are key factors for innovation. However, recently products are increasingly being modularised and standardised and suppliers of components are increasingly involved in innovation. 4.6 What are the Main General Conclusions on the Role of Knowledge, Actors and Networks and Institutions? From the previous discussion, one general conclusion which can be drawn is that knowledge at the base of innovative activities has been tremendously different from sector to sector. The knowledge base has changed over time and has affected the boundaries and structure of sectoral systems. In general, in several sectors a rich, multidisciplinary and multi-source knowledge base and a rapid technological change have implied a great heterogeneity of actors. In addition to rms within a sector, some actors have proven particularly important for innovation. In particular, suppliers and users have become relevant in the organisation of innovative activities. Suppliers and users have also affected the boundaries of sectoral systems by greatly affecting sectoral linkages and interdependencies. Demand has often proven important in several respects: a major cause in the redenition of the boundaries of a sectoral system; a stimulus for innovation and a factor shaping the organisation of innovative and production activities. In addition, the emergence of new demand or the transformation of existing demand has been one of the major elements of change in sectoral systems over time. Often universities have played a key role in basic research and human capital formation. In biotechnology and software, they

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have also been a source of start-ups and even innovation. In these sectors, new actors such as venture capital have emerged over time. In all the sectors examined, institutions have played a major role in affecting the rate of technological change, the organisation of innovative activity and the performance of sectoral systems. Each sector, however, has seen the presence of a different set of relevant institutions. Some of these institutions are national and are present in all the sectors (and in all European countries). Other institutions are sector-specic (i.e. they are present only in one sector). In some cases, the relevant institutions in a sector have been the outcome of the interplay between sectoral and national variables (Casper and Soskice, 2004; Coriat and Weinstein, 2004).

5 THE DYNAMICS AND TRANSFORMATION OF SECTORAL SYSTEMS The dynamics and transformation of sectoral systems are the result of several different processes. At a very general level, it is possible to identify two basic evolutionary processes variety creation and selection (Nelson, 1995; Metcalfe, 1998). Processes of variety creation in products, technologies, rms, institutions as well as strategies and behaviour may be related to entry, R&D, innovation and so on. These mechanisms interact at various levels. For example, the emergence and growth of new sectoral institutions and organisations such as new specialised departments within universities and new scientic, technological and educational elds increase variety and can be associated with the emergence of new technologies and new knowledge (Rosenberg and Nelson, 1993). This is the case of the chemical industry with the emergence of new departments and engineering degrees in universities in response to new technological developments in industry (Arora et al., 1999). The creation of new agents both new rms and non-rm organizations is particularly important for the dynamics of sectoral systems. For example, new rms bring a variety of approaches, specialisation and knowledge in the innovation and production processes. They contribute to the major changes in the population of agents and to the transformation of technologies and products in a sector. As examined by Audretsch (1996) and Geroski (1995) among others, the role of new rms differs drastically from sector to sector (in terms of entry rates, composition and origin), and thus has quite different effects on the features of sectoral systems and their degree of change. Sectoral differences in the level and type of entry seem to be closely related to differences in the knowledge base, in the level, diffusion and distribution of competencies and in the presence of non-rm organisations (such as universities and venture capital) and institutions (such as regulations or labour markets) (Geroski, 1995; Audretsch, 1996; Malerba and Orsenigo, 1999). Processes of selection play the key role of reducing heterogeneity in terms of rms, products, activities, technologies, and so on. In addition to market selection, in several sectoral systems non-market selection processes are also at work (as in the cases of the involvement of the military, the health system and so on). In general, selection affects the growth and decline of the various groups of agents and the range of viable behaviours and organizations in a sectoral system (Metcalfe, 1998). Change and transformation in sectoral systems is the result of the coevolution of various elements: technology, knowledge base, learning, demand, rms, non-rm organisations and institutions. Nelson (1994) and Metcalfe (1998) have discussed these processes by focusing specically on the interaction between technology, industrial structure, institutions and demand. In sectoral systems, changes in the knowledge base or in demand have affected the characteristics of the actors, the organisation of R&D and of the innovative process, the type of networks, the structure of the market and the relevant institutions. All these variables

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have in turn led to further modications in the technology, the knowledge base, demand and so on. These processes are sector-specic. For example, just looking at three elements such as technology, demand and rms, in sectors characterised by a system product and consumers with a quite homogeneous demand, coevolution leads to the emergence of a dominant design and industrial concentration (Klepper, 1996). However, in sectors with either a heterogeneous demand, or competing technologies with lock-ins, or network externalities and standards, specialised products and a more fragmented market structure may emerge. Often coevolution is related to path-dependent processes (David, 1985; Arthur, 1988). Here local learning, interaction among agents and networks may generate increasing returns and irreversibilities that may lock sectoral systems into inferior technologies. The cases of sectors with competing technologies such as nuclear energy (Cowan, 1990), cars (and their power sources Foreman and Peck, 1996), metallurgy (ferrous casting Foray and Grubler, 1990) and multimedia (VCR Cusumano, 1991) are interesting examples of path-dependent processes. Recent work such as Mowery and Nelson (1999) on the long-term evolution of sectors such as semiconductors, computers, software, pharmaceuticals and biotechnology, chemicals, medical devices and machinery show that these coevolutionary processes clearly differ among sectors. The example of the computer industry is a case in point: its long-term development cannot just be described in terms of sales growth and the introduction over time of radically new products (such as the minicomputer, the microcomputer and the computer networks) with different features and demand. Rather, in this sector complementarities between changes in components and changes in computer systems and coevolution among technology, demand, institutions and rms organisation and strategies have characterised the whole history of the industry (Bresnahan and Malerba, 1999). The transformation of sectors may also be related to the emergence of new clusters that span over several sectors, such as internetsoftwaretelecom, biotechnologypharmaceuticals and new materials. Here, transformation means the integration and fusion of previously separated knowledge and technologies as well as new relations and dynamics among different types of users and consumers, rms with different specialisation and competencies, and non-rm organisations and institutions (all of them grounded in previously separated sectors). In pharmaceuticals, changes in the knowledge base and in the relevant learning processes of rms have induced deep transformations in the behaviour and structure of the agents and in their relationships with each other. The specic ways these transformations have occurred across countries have been profoundly different, due to the details of the institutional structure of each country. For example, the nature of the process of drug discovery and drug development had an important impact on the patterns of competition and on market structure. In turn market competition and market structure were dependent on the strategies and fortunes of individual companies, which were linked to different national contexts and international performance. Firms had diverse reactions in order to try to increase their t and to survive in their particular environment. These environments kept changing, not least due to innovations and choices made by all the constituent competitors. However, while these environments previously could be said to be national, now the dening characteristics are increasingly international. Product approval regulations inserted an incentive for more innovative strategies, at least for those rms and countries which had the capabilities to invest in the new technologies. Similarly, weak patent protection induced imitative strategies, but this effect was much less important for rms and countries which had developed strong technological and scientic capabilities (for example Germany until the advent of the molecular biology revolution). Conversely, the introduction of stronger patent protection might have contributed to the practical disappearance of the Italian industry, which was until the mid-1970s one the most successful producer of generics. A nal example is the molecular biology revolution which by creating new competencies and

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a new technological regime, induced deep changes in the incentive structures within rms, universities, etc. In this process of adaptation and change, different dynamic processes lead to differential patterns of competition and performance (McKelvey et al., 2004). Also in chemicals processes of coevolution of technology, demand, markets, agents and institutions have been present. One interesting example of coevolutionary process in chemicals is related to the environmental issue. The chemical industry has often been accused of having considerable responsibility for pollution, and chemical rms, before others, have been highly committed to solve environmental problems. Some signicant accidents (e.g. Seveso, Bhopal) have contributed to generate a widespread suspicion against chemical rms and the industry as a whole. This greater attention paid by consumers to pollution and environmental problems resulted in three different, but related consequences. First, all developed countries have observed the rise of new markets for environmentally-safe, less pollutant products. Second, governments have paid greater attention to pollution, and have subsequently tried to impose regulations and dene appropriate control measures, in order to reduce waste production and pollution. Third, as a consequence of both forces, chemical rms have had to develop and adopt new production technologies (environmental technologies and green processes), and new products (e.g., less polluting solvents and paints). Moreover, rigid environmental standards and strong public pressure have had a positive inuence on the environmental innovations of chemical rms. Indeed, another consequence of the growing attention to environmental issues has been the birth of an intermediate market for environmental technologies and engineering services related to environmental technologies. Similarly to the birth of SEFs providing process technologies in chemicals, new environmentally-related SEFs have started to operate (especially in US), and a new market for environmental technologies and engineering services is about to emerge (Arduini and Cesaroni, 2001). In telecom equipment and services the early separation of the radio spectrum for use in one-way broadcasting and two-way telephony has given rise to the oligopolistic structure of the industry that persisted for quite a long time (Dalum and Villumsen, 2002). The convergence rst within ICT and then between ICT and broadcasting-audio-visual, together with the emergence of internet, has originated a more uid market structure with a lot of different actors with different specialisation and capabilities, and new types of users. This in turn has greatly expanded the boundaries of the sector by creating new segments and new opportunities, and also national differences in the organisation of innovation. Moreover, the emergence of the internet has generated more pressure in favour of open standards and has led to the rise of new actors such as ISPs and content providers. In software, since the early 1980s, the spread of networked computing, embedded software, the internet, the development of open system architectures and open source, and the growth of web-based network computing has led to the decline of large computer producers as developers of integrated hardware and software systems, to the emergence of numerous specialised software companies innovative either in package software, or in customised software, and to an increasing role of the university in open source. This in turn has led to the expansion and growth of several software product groups, each of which has different types of products, rms and capabilities. Moreover, software distribution has also changed accordingly, from licensing agreements in the early days, to the rise of independent software vendors, to price discount for package software, and (with the diffusion of the CD-ROM and the internet) to shareware and freeware (the latter is particularly relevant with Linux) (Steinmueller, 2004). In enterprise software higher demand for integration by user organisations has reinforced the role of existing actors (i.e. large producers of standardised integrated software solutions) as well as has created scope for new actors (i.e. systems integrators, specialised niche applications producers and software implementation consultants) (DAdderio, 2001). The increasingly generic nature of large systems has also introduced a greater need for customisation whereby customer knowledge and

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requirements (expressed by global or industry-specic user group associations) have become an important source of input into the development of new or revised modules, with user groups attempting to directly inuence the shaping of a system. In response to the increasing need for customisation, large software producers are pursuing a higher level of internal specialisation by creating sub-units that address a specic market segment and compete for resources with other units. In machine tools a major driving force for coevolutionary processes is the demand from advanced customer sectors, namely automotive, aeronautics and defence. Incremental innovation has remained dominant, some internationalisation of production has taken place, and userproducer relationships have become more market driven. A coevolutionary process can be observed in the context of technological developments, namely in electronics but also with respect to new materials. Electronic devices have an increasing share of the value of machine tools. IT technologies (PC, operating systems and internet) often determine technical solutions on how to control machine tools and on how to integrate them in company production systems. As a consequence, besides electrical engineers, computer scientists have partly replaced mechanical engineers in the design departments of machine tool manufacturers and brought with them other ways of working. Some rms have followed strategies of outsourcing or separating such units. On the shop-oor level a related change in required qualications has taken place. New apprenticeships have developed, others have disappeared. Links to basic research are now looked for and patenting has been growing strongly in recent years.

6 THE CHALLENGES AHEAD This paper has proposed a framework for examining factors that affect innovation in sectors: sectoral systems. Sectoral systems are based on three building blocks: knowledge and technologies, actors and networks, and institutions. On that basis it has examined several sectors in terms of both their basic features and their dynamics and transformation. The sectoral system framework can be very useful for research on the international performance of countries in specic sectors. One can claim that in several sectoral systems differences between Europe, US and Japan in the sources of knowledge, types and competencies of actors, networks and institutions have greatly affected countries international performance and that the lack of success of some European countries in some sectors has been due to problems and deciencies in their sectoral systems. Even within the sectors in which Europe does not fare well, those European countries that specialise in product groups with products, knowledge and institutional requirements that match their specic institutional framework are successful (see for example the analysis in Coriat et al., 2004). Also for technology and innovation policy a sectoral system of innovation approach may prove useful. A sectoral system approach provides the identication of system failures and the related variables which should be policy targets. Sectoral analyses should focus on systemic features in relation to knowledge and boundaries, heterogeneity of actors and networks, institutions and transformation through coevolutionary processes. As a consequence, the understanding of these dimensions becomes a prerequisite for any policy addressed to a specic sector. Given the major differences among sectoral systems, the impact of general or horizontal policies may drastically differ across sectors, because the channels and ways policies have their effects differ from sector to sector. For example, networks and non-rm organisations have different relevance in different sectors. Therefore, policies affecting networks or non-rm organizations such as transfer agencies have to take these differences into account. In addition, a sectoral system framework emphasises that for fostering innovation and diffusion in a sector,

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technology and innovation policies may not be enough. A wide range of other policies may be necessary. Innovation and technology policy could be supplemented by other types of policies (such as science policy, industrial policy, policies related to standards and IPR and competition policy). This point highlights also the importance of the interdependencies, links and feedbacks among all of these policies, and their combined effects on the dynamics and transformation of sectors (see for example the analysis by Edquist et al., 2004).

Acknowledgements Parts of this paper draw from Malerba (2004) which has a much longer and detailed discussion of the sectors examined. I thank two anonymous referees for helpful comments.

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